Expert view: Chockalingam Narayanan, Head Equities – PMS and AIF at ICICI Prudential AMC, says in the current environment, he favours value over growth, current earnings over distant earnings, and asset-heavy businesses over asset-light businesses. In an interview with Mint, Narayanan said IT stocks are not outright contra bets, as it remains to be seen how their business models adapt to AI. Discussing foreign capital flows, Narayanan said FII (foreign institutional investor) selling is not a rejection of India’s structural story but rather part of asset allocation, currency, and relative valuation. Edited excerpts:
Q1FY27 earnings came better than anticipated, but can the trend sustain amid elevated oil prices?
We believe higher oil prices do not necessarily translate to earnings growth being impacted across the universe. What changes is the composition of earnings growth.
At the aggregate Nifty 500 level, we have seen double-digit earnings growth of 12-13% YoY in Q1FY27, but if one looks deeper, there will be clear winners and losers.
Commodity producers, such as metals producers, tend to benefit from higher commodity prices, while commodity consumers, such as autos and other input-intensive businesses, have seen margin pressure.
Therefore, the current market environment calls for greater differentiation. We tend to prefer businesses with strong balance sheets, resilient earnings, and pricing power.
How is the market positioned for the next six months? Is there value in the market?
In the recent past, India has relatively underperformed global markets. However, there is no uniformity in terms of valuation.
We have moved from an environment where almost everything was working (2021-2024) to one where earnings visibility, balance sheet strength, cash flows, and valuations are likely to differentiate winners from losers.
The opportunity is there, but it needs to be approached selectively. The near term is likely to be a period where stock selection will matter more.
AI trade is still hot even as concerns over stretched valuations rise. Is the lack of AI trade in India a negative?
For India, the immediate concern is the impact of AI on the traditional IT services business model.
If AI drives greater automation and changes how technology services are delivered, it could put pressure on pricing and, over time, on the terminal growth assumptions of some IT companies.
In the near term, enterprises may delay discretionary technology spending as they reassess investment priorities. However, in the medium- to long-term, AI is expected to drive a new technology investment cycle centred on cloud migration, data engineering, cybersecurity, AI implementation, and platform modernisation.
Indian IT companies with deep client relationships, proven execution capabilities, and the capability to move up the value chain may have the potential to monetise AI-led opportunities.
Similarly, as this ecosystem is being built, certain players are likely to benefit from participating in the build-out of data centres, energy infrastructure, etc., and they stand to gain depending on their responsiveness to this demand.
In other sectors, particularly where companies can use AI to their advantage, sales velocity can get a leg up for those who adopt it earlier than their peers.
In summary, the impact is likely to be varied and nuanced. As an economy, we can benefit from this in the medium- to long-term, though there is uncertainty about who the winners and losers will be.
Why are India’s favourable growth-inflation dynamics not attracting foreign investors?
FII flows need to be viewed in the context of relative attractiveness rather than absolute fundamentals.
Last year, there was earnings buoyancy in markets like Korea, Taiwan, Japan, Singapore, Malaysia, etc., on account of the pick-up in AI-related capex spending, due to which they saw a huge upgrade in earnings.
This led to FII interest in some of these markets. At this same time, while India’s long-term macro fundamentals remain strong, be it demographics, domestic demand, or the broader growth trajectory, we did see weaker earnings growth on a relative basis (not absolute) alongside some valuation premium acting as a headwind.
As earnings growth improves and with India’s valuation premium to emerging markets moderating, we believe FIIs will come back, but it is difficult to time the move. So we would not interpret FII selling as a rejection of India’s structural story, but it was more a part of asset allocation, currency, and relative valuation.
What sectors could lead the next leg of the rally? Should we consider taking contra bets on IT?
In the current environment, we favour value over growth, current earnings over distant earnings, and asset-heavy businesses over asset-light businesses.
That makes areas such as metals, cement, textiles and auto ancillaries interesting from a bottom-up perspective.
On IT, we would distinguish between near-term earnings risk and long-term valuation risk. IT stocks have already corrected significantly, and near-term earnings expectations may now be more realistic.
So, IT is not an outright contra bet, but we need greater comfort on how their business models are likely to adapt to AI before becoming structurally bullish.
What should be our strategy for the mid and small-caps? Do you believe prevailing fundamentals can support a sustained rally in them?
At ICICI Pru Alternates, our preference is for fundamentally resilient smaller companies that are leaders in their respective industries, have an economic moat, and have the potential to graduate into much larger businesses.
We are willing to look at companies going through temporary business-cycle challenges or special situations. Our positioning is more stock-specific rather than playing a broad-based mid and small-cap rally.
In a market where valuations across several segments remain elevated, what are the kinds of contrarian opportunities you are seeing today?
A cheap valuation by itself is not a contrarian thesis. For us, the starting point is always the business.
We evaluate each business on whether there is a foreseeable path to earnings recovery, whether the balance sheet is resilient enough, whether the business has sufficient moats or a margin of safety, whether the management is allocating capital efficiently, and so on.
The focus is to assess the catalysts for the business economics to improve.
After a strong re-rating in many small- and mid-cap stocks, where are you still finding attractive opportunities?
Within the small- and mid-cap space, we aim to identify fundamentally resilient companies that are among the leaders in their industries, have an economic moat, and have a long runway for growth.
As to whether there are opportunities or not, we believe the space is wide enough, specifically for small-caps, where reasonable opportunities can be identified.
We look at resilience in earnings growth and improvement in return ratios as key characteristics for businesses to transition into scaled-up market leaders.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
