FY26 profit growth hinges on revenue trajectory: UTI AMC CIO Subramaniam

Economic growth is likely to improve in the second half of 2024-25 (FY25) due to an increase in government expenditure, says VETRI SUBRAMANIAM, chief investment officer of UTI Asset Management Company (AMC). In an interview with Abhishek Kumar, Subramaniam says cash transfers to citizens by state governments can also contribute to consumption growth. Edited excerpts:

 

What are your expectations from the upcoming Budget?

 

We expect fiscal consolidation to continue, with the Budget targeting a fiscal deficit of 4.5 per cent in 2025-26 (FY26). The government will likely prioritise capital expenditure (capex), in line with its recent strategy. We expect key priority areas outlined in the Budget, including employment and skilling, energy security, and innovation, to remain at the forefront as these issues require multi-year attention and interventions.

 

There may not be any major changes in direct taxation, given that simplification has already been carried out in recent years. There could be tinkering to the slabs or rates at the lower end of the income-tax brackets for individuals.

 

When do you expect earnings growth to pick up again after a weak first half in FY25?

 

We expect economic growth to improve going forward. This will be driven by an increase in government spending in the second half of the financial year, including capex. Further, states are increasingly providing direct transfers to their residents, which are recurring in nature. This will also add some buoyancy to consumer spending. Credit growth has softened considerably due to regulatory interventions.

 

A turnaround in credit growth is key to a broader pick-up in spending, investment, and earnings. A pick-up in top-line growth is imperative for earnings delivery in FY26. Nominal gross domestic product growth has been running at less than 10 per cent for six of the last seven quarters, posing a challenge to the forecast of mid-teen growth in profits.

 

What’s your take on valuations? Are there pockets where you see value?

 

Largecap valuations are above the long-term average but still within the range of what we would consider fair value. Valuations are very high in the mid and smallcap segments of the market. The aggregate valuations in the mid and smallcap sectors are not only at a premium to their historical averages but also higher than largecaps. It is one thing for individual companies to stand out relative to the mean, but having the aggregate valuations trade at such levels poses a significant risk to future returns.

 

At the sector level, I find valuations in industrials to be quite challenging. On the other hand, valuations in the banking, financial services and insurance space are quite reasonable.

 

Are you making any sectoral shifts in your portfolios?

 

All our funds have distinct investment strategies, and hence the sector positioning varies from fund to fund. One common understanding in the investment team is that this is a time to be wary of narrative stocks, where the valuations are disconnected from the underlying business fundamentals and prospects.

 

Should investors consider raising their equity allocation? Which funds are best suited right now?

 

At UTI, we maintain an equity valuation indicator. The index, based on largecap stocks, is currently in the fair value zone and has not signalled the need to increase equity allocation. This indicator was in the ‘decrease equity allocation’ zone a few months ago.

 

On the fixed-income side, we find the current carry to be attractive in a high-quality portfolio with a duration of three to five years. Currently, hybrid funds are well-positioned, taking into account the prevailing valuations in equity and fixed income. However, for investors with a lower risk appetite, the equity savings fund is a better option due to its lower net equity exposure.

 

UTI Mutual Fund’s first launch this year is a quantitative (quant) fund. Do you see the factor-based model as a right fit for the present market condition?

 

Quant investing covers a wide range of investment approaches. For the UTI Quant Fund, we employ a proprietary factor allocation model to dynamically assign weights to four key factors — momentum, quality, low volatility, and value — to create an all-weather strategy. We began using a quant approach based on factors in our Multi Asset Allocation Fund in 2022, and the Factor Allocation Model builds on this experience.