Even at PE of 17, market is in a fair valuation zone: Ajay Tyagi

Global events such as Brexit might come and go but Indian equities will outshine among emerging markets, Ajay Tyagi, executive vice-president at UTI Mutual Fund, tells Hamsini Karthik, six months after assuming charge of its UTI Equity Fund scheme. Edited excerpts:

The Indian market is marginally in the green, thanks to global events such as Brexit. How much does this worry you?

There has hardly been a year where global macro events have not disturbed the markets. Brexit, which was until some time back a non-event, now seems like a big thing. Although these events can sentimentally impact us for a few months, they don’t fundamentally change anything much in India. Though, foreign institutional investor flow could remain tepid for a few months till people get a hang of Brexit.

Despite the past seven-eight years being bad for most economies around the globe, including India, we have seen a host of businesses across sectors generate economic value and wealth for investors. As long-term investors, it is our job to remain focused on finding such businesses, without getting distracted by global events.

But, the recent rally has been largely on hopes of an above-normal monsoon and earnings recovery.

Hopes for an above-average monsoon are still alive. As for earnings recovery, FY17 should be better than FY16, which was marred by factors like the asset quality review for banks, decline in the commodity sector, soft growth in the consumer sector and regulatory issues in the pharmaceutical sector. Hopefully, none of these factors should impact earnings in FY17. If so, there could also be a positive swing, due to the low-base effect.

At 17 times the Sensex PE (price to earnings ratio), how much more do Indian equities offer?

PE is a function of long-term growth and return on equity. The latter in emerging markets such as Brazil, Russia, Indonesia and South Africa have been lower than India, as their gross domestic product has a higher percentage of commodity-related businesses. India has a higher percentage of services and consumption-related businesses. So, India’s growth has been higher than many other emerging economies, which have led to premium valuations. Both these factors are not going to change over the next decade. If anything, India will be an outlier in the emerging world in terms of its growth outlook. Therefore, the Sensex at 16.5-17 times is still in a fair valuation zone, rather than an expensive one.

In your earlier interview to Business Standard, you had indicated some major rejig to UTI Equity Fund. How has this panned out?

The process is now complete. Private sector banks occupy the highest weight — 30 per cent of the total portfolio. We have exited from all public sector banks and replaced these with banks like IndusInd, YES Bank, Kotak Mahindra and HDFC Bank, where we see that the risk-reward (ratio) is favourable for long-term investors. Likewise, we are now overweight on the consumer and pharma sectors. Cadila, Torrent Pharma and Divi’s Laboratories have been included in the portfolio, apart from increasing the exposure in Sun Pharma and Lupin. We have also increased our position in ITC, now the top holding in the FMCG (fast moving consumer goods) sector.

How much incremental upside is likely from the 7th pay commission rollout?

It is a shot in the arm for consumption stocks, both discretionary and staples.

We have seen how a pay commission revision had boosted urban consumption in the past. Although this was a known event, the payouts and a good monsoon should drive volumes over the next 12 months for the consumer sector. This should also be beneficial for retail (meaning individual)-focused banks.

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