“Currently, India isn’t a favourite among EMs (emerging markets) due to weak earnings, but once that reverses, FII (foreign institutional investor) sentiment should improve over the next 12 months,” he said.
Encouragingly, recent management commentaries and September-quarter earnings suggest we could finally see 1-2% earnings upgrades after nearly 18 months of stagnation, said Bhattacharya, who manages domestic equity funds worth ₹31,092 crore.
He’s been underweight on IT for quite some time, but now has a neutral stance, which is “a contrarian call”, and he hopes Edelweiss MF can “capture the potential upside in the sector” as earnings seem to be bottoming out, and the 12-month outlook looks more constructive.
Edited excerpts:
India has been among the worst-performing markets lately. So, beyond earnings growth, is there any other potential driver? Especially since the tariff issues have also weighed on the market.
Over the past 12 months, India has faced three major headwinds. First, an earnings downgrade cycle has been underway since June-July last year, resulting in a 12-13% erosion. Second, despite early optimism around Indo-US ties under (US President Donald) Trump, higher tariffs have become a macro drag, weighing on valuations. Third, India is viewed as an “anti-AI” trade, unlike North Asian markets seen as AI (artificial intelligence) plays, hurting its relative performance and appeal among FIIs.
It’s still early, but if earnings turn around, much of the global underperformance over the past year could well be reversed.
We’ve seen valuations stay quite expensive, and despite a year of underperformance, we’re already nearing fresh highs again. How do you see this playing out? If we hit new highs, won’t that make us even more expensive?
What’s often missed is that earnings have grown, too. In this context, around September 2024, the Nifty 50 traded at a 10-15% premium to its 10-year average. Today, after a year of time correction, it’s roughly at par, with the Nifty at around 20.5 times one-year forward earnings, in line with its long-term average. Similarly, midcaps, which earlier traded at a 25-30% premium, now stand closer to 10-15%.
Valuation excesses have eased, and earnings have risen over the past 12-18 months. If upgrades return, there’s still room for multiples to expand.
So you believe the fundamentals have been weak till now but are beginning to improve. If earnings start rising, do you expect FIIs to make a comeback?
Most institutions, including ours, are followers of earnings. If earnings recover, FIIs will likely turn positive on India. Another factor is the dollar: after a prolonged period of strength, expectations now point to gradual depreciation. Historically, that drives capital back to emerging markets. Currently, India isn’t a favourite among EMs due to weak earnings, but once that reverses, FII sentiment should improve over the next 12 months.
What’s the general sentiment you’re picking up from clients and distributors in your meetings? Is there still a sense of nervousness about where the market is headed, similar to a few months ago, or is confidence starting to return, along with expectations of a recovery ahead?
I’d call the mood guarded optimism. Over the past year, returns have been flat to negative, dampening sentiment. Distributors remind investors that equities don’t move in a straight line, but the lack of returns has been frustrating.
That said, optimism is building on the economic front. Government measures, including GST (goods and services tax) rationalisation, tax cuts, and rate reductions, should have a positive impact over time. Encouragingly, recent management commentaries and September-quarter earnings suggest we could finally see 1-2% earnings upgrades after nearly 18 months of stagnation.
Government measures, including GST rationalisation, tax cuts, and rate reductions, should have a positive impact over time.
When you said there could be an upside if there are earnings upgrades in the coming months, do you see the rally remaining narrow or becoming more broad-based?
We expect a broad-based recovery, though leaders will emerge. Those include consumer discretionary, supported by GST rationalisation, tax cuts (0.5–0.6% of GDP), and about 100 basis point rate cuts, boosting disposable income and festival spending; financials where credit growth has rebounded from 8-9% to about 11%, and if this trend continues, private banks and NBFCs could be in a sweet spot; plays on government capex spends. After last year’s policy paralysis, government decision-making has accelerated, driving fresh contract flows in defence, infrastructure, and railways.
Additionally, consumption could get a further lift from the upcoming pay commission and DA (Dearness Allowance) revision next year.
So, how do you go about picking companies based on this? Are you focusing on growth, value, or a combination of both?
Our approach is growth at a reasonable price, guided by our FAIR framework: Forensics: Financially clean companies with strong governance; Acceptable Price: Stocks offering at least 20% upside potential; Investment Style Agnostic: Bottom-up stock picking, not just macro calls; Robustness: Strong return metrics like ROE and ROIC.
You mentioned strong return ratios and government capex. With that in mind, how are you viewing the energy space? Renewables have been in the spotlight for a while. So, how do these opportunities look to you?
Most renewable companies we evaluate tend to be high on growth but low on returns, and those don’t make it to our list. A key criterion for us is that return ratios exceed the cost of capital, which in India is typically around 10-12%. In the renewable energy space, we remain highly selective, rather than spreading our investments broadly, focusing only on businesses that meet this threshold.
So, which sub-segment in the energy space excites you the most?
In the renewables sector, asset owners who build and operate projects are inherently capital-intensive. However, there’s a compelling opportunity in ancillary segments—companies that supply critical components such as bearings, parts, and other hardware. These businesses typically enjoy strong return ratios, high entry barriers, and well-established franchises, giving them a clear right to win (competitive advantage) in the value chain.
Have you completed the deployment phase, or are you holding back some capital to deploy once earnings start picking up?
We always keep some powder dry, ready to deploy when earnings momentum picks up. Our approach is to follow earnings upgrades, or what we call earnings resilience, and scale up positions in those areas. Currently, we’re aligned with sectors that are likely to see upgrades, and if the trend shifts over the next 6-12 months, we’ll rotate accordingly. Importantly, this rotation happens across sectors rather than moving from cash into a sector, ensuring we stay fully invested while optimizing allocations.
We always keep some powder dry, ready to deploy when earnings momentum picks up.
Are there any sectors that you are underweight on?
We currently maintain an underweight position in hard commodity-linked sectors such as oil and gas, as well as in utilities and telecom. In the pharmaceutical industry, our stance ranges from neutral to slightly underweight. These sectors primarily serve as funding sources for the overweight positions we discussed earlier.
You haven’t spoken about IT yet. What’s your view on that?
We had maintained an underweight position in IT for quite some time, but have now shifted to a neutral stance, adding gradually during periods of weakness. While near-term sentiment remains negative, earnings appear to be bottoming out, and the outlook over the next 12 months looks more constructive. It’s a contrarian call that may take time to play out, but we believe we are appropriately positioned to capture the potential upside in the sector.
There were concerns after the US tariff issue that many mutual funds were exposed to companies heavily dependent on the US for revenues. So how did you approach that? Did you trim exposure to such companies or exit them entirely from your portfolios?
We adopted a tactical underweight stance in select sectors, not exiting them entirely, but trimming exposure relative to benchmark weights. This approach helped cushion portfolios from the wave of negative headlines over the past three to six months, which, incidentally, has eased somewhat compared to a month ago. Looking ahead, we see a reasonable probability of a deal materializing, which could pave the way for better days. For example, in commercial vehicles, the US has already reduced tariffs from 50% to 25%. While we’ll monitor how this unfolds, our broader view is that this is a temporary phase that should eventually normalize.
