Global Influences On India's Market: Amit Premchandani's Strategic Outlook

In a dynamic market environment, Amit Premchandani, Senior Vice President & Fund Manager – Equity at UTI AMC, provides valuable insights into emerging investment opportunities, sectoral preferences and robust risk management strategies. With a keen focus on valuation comfort, Amit explores the macroeconomic landscape, emphasising positive earning growth trajectories. He sheds light on promising sectors such as BFSI, consumer durables and healthcare, navigating short-term volatility. Additionally, he discusses UTI's long-term focus on digitisation trends and renewable energy, anticipating sustained growth opportunities. Gain valuable perspectives on global influences and UTI's meticulous risk management approach in this comprehensive interview.
 
Given the market fluctuations, where do you see emerging investment opportunities? 

As investors, we start by evaluating the comfort in terms of valuation and the earning growth trajectory in the macro environment. Currently, valuations are on the higher side of the historical range, particularly in small and mid-cap sectors, which are notably expensive. However, the overall macro environment, including earnings and the balance sheets of Indian corporates, is positive. Corporate balance sheets have significantly improved, with reduced leverage and banks showing strong indicators such as low slippage ratios and well-covered NPLs.

The sharp increase in the margin profile of corporate India has boosted the return on equity (ROE) of the broader market to over 15 per cent, a notable improvement from the lows of 10 per cent during COVID. However, a concern arises from the yield gap between equity markets' earning yields and GSEC yields, with GSEC offering higher yields.

On the positive side, India boasts well-governed, profitability-focused companies with a strong focus on cash flow generation and robust balance sheet strength. From a broader economic perspective, India's working-age population is still growing, providing long-term structural positive trends for the equity markets.

Are there specific sectors or asset classes that you find particularly promising at the moment?

From a sectoral standpoint, the BFSI sector offers valuation comfort. It has seen double-digit loan growth for two consecutive years, with robust asset quality and strong return profiles. Most banks are well-capitalised, providing a solid foundation for future growth. The market's overemphasis on short-term quarterly volatility and margins should be considered in this context.

In terms of managing the Value Opportunity Fund, I favour the consumer durable sector. Despite facing growth headwinds in recent years, this sector presents an opportunity due to relatively low penetration levels in various consumer durable categories compared to other emerging markets. Most companies in this sector maintain comfortable balance sheets and their margins, currently at cyclical lows, have the potential to improve. The subdued growth profile of the sector over the last two years is expected to experience a cyclical uptick.

Healthcare is another sector I am positive about. Healthcare expenditure as a percentage of GDP in India is currently low, around 3 per cent. I anticipate a structural increase in overall healthcare expenditure as a percentage of GDP, especially with the shift towards a more organised healthcare sector in India. Among companies, I find favour in categories focusing on domestic healthcare, pharma, or formulations, particularly those with a focus on chronic diseases. Domestic demand growth in this segment has been stable, and recent tailwinds include lower pressure on US generic prices due to supply challenges in the US, benefiting Indian players exporting to the US.

While the margin profile of pharma companies has improved in the last two quarters, it's essential to note that valuations are no longer cheap; they are now above average. Additionally, I hold a positive outlook on some diagnostic and hospital names.

Are there specific trends or developments that investors should keep an eye on?

We hold a generally positive outlook overall, with a focus on specific sectors such as BFSI, consumer durables and healthcare. Additionally, we observe a long-term trend in digitisation, anticipating more companies catering to the new generation economies to go public in the initial stages of their journey. While these companies may face profitability challenges due to growth investments, many have established contribution-positive models, ensuring positive unit economics for each product sold. The profits or contribution margins are then reinvested in customer acquisition for future growth, aligning with our long-term growth focus.

Another theme we are exploring is renewable energy, considering India's peak power deficit. With a history of peak power deficits, we anticipate that the demand for the power sector will exceed supply. Therefore, renewable energy presents itself as a long-term investment trend that we may consider for sustained growth.

What strategies does the company employ for risk management, especially in times of heightened uncertainty?

As a fund manager, my primary risk management tool is valuation, and I am particularly conscious of valuations in both sectors and individual stocks. Rather than relying solely on earnings-based multiples, we emphasise cash flows over accounting profits for a more robust hygiene check. Internally, we use a method called score alpha, categorising companies into different buckets based on operating cash flow consistency and return on capital employed (ROCE) performance.

Operating cash flow serves as a critical risk management and mitigation tool, guiding our portfolio construction across different funds. We implement internal sectoral limits to control sector allocations, along with stock limits tailored to various fund categories. Diversified funds, mid-cap funds, and small-cap funds each have specific stock limits.

Moreover, we set caps on the maximum percentage of the portfolio invested in the top ten stocks and have a minimum requirement for the number of stocks in portfolios. Our risk avoidance strategy extends to identifying companies with terminal risk, evaluating their ability to survive downturns. We are particularly cautious about companies' debt profiles, ensuring control over leverage, measured by metrics like net debt to equity or net debt to EBITDA.