ICICI Pru AMC's Rajat Chandak sees value in software & 2 more sectors

From a broader perspective, we continue to see value in areas like software where valuations remain reasonable relative to long-term growth potential, says Rajat Chandak.

Expert View: For investors looking to deploy funds amid signs of recovery in the Indian stock market, Rajat Chandak, Senior Fund Manager, ICICI Prudential AMC, shared his top bets. In this email interaction with Saloni Goel, Chandak said that investment decisions should always be driven by the quality of individual businesses rather than broad sectoral views. That said, from a broader perspective, he finds value in software, precision engineering and wires & cables. Edited excerpts:

 

Indian markets are significantly influenced by crude oil prices. How are you assessing their implications for inflation and corporate earnings in FY27? 

Inflation has witnessed a slight uptick in recent months. However, the current situation remains highly dynamic, and the eventual impact will largely depend on how the geopolitical environment evolves. We have already seen crude oil prices spike on account of escalating tensions, only to retreat as the situation de-escalated. Therefore, it is premature to draw definitive conclusions based on the current movement in oil prices.

 

A moderate level of inflation is generally healthy for economic growth, as it reflects underlying demand in the economy. At this stage, I do not believe the recent rise in crude prices is likely to have a meaningful impact on overall corporate earnings for FY27. While certain sectors, particularly oil and gas, could experience a more direct impact, the broader earnings outlook remains largely intact for now.

 

The major part of the Q1 earnings season is behind us. Has it changed your preference between large-caps, mid-caps and small-caps? 

Overall, the earnings trend has been quite broad-based. Earnings from mid and smallcap companies have been particularly strong, reflecting healthy business momentum and continued execution. Large-cap companies have also delivered results that are slightly ahead of expectations, which is encouraging. In terms of preferences, the results reinforce the importance of remaining focused on businesses with strong fundamentals, healthy earnings visibility and sustainable growth prospects, irrespective of market capitalisation.

 

Are you seeing earnings growth broaden beyond financials, or is the market still relying on a handful of sectors? 

The earnings momentum is certainly extending beyond the financial sector. While financials are still expected to remain one of the key contributors to earnings growth in FY27, we are also witnessing healthy earnings performance across several other sectors.

 

There have been a few pockets where earnings have fallen short of expectations, largely due to commodity-led cost pressures. But even in many of these cases, the outlook for the coming quarters appears to be improving. 

 

If someone were deploying fresh money today, where would you advise caution and where do you still see value? 

Investment decisions should always be driven by the quality of individual businesses rather than broad sectoral views. Even within the same sector, there will be companies that continue to create long-term value, while others may struggle due to weaker business models or execution challenges. 

 

From a broader perspective, we continue to see value in areas like software where valuations remain reasonable relative to long-term growth potential. The wires and cables segment also looks interesting, supported by a strong demand outlook and structural growth drivers. Also, precision engineering companies, particularly manufacturers and exporters of specialised components is likely to do well over the medium term.

 

ICICI Prudential Flexicap Fund has been among the top performers in its category over the last 3-5 years. What investment decisions or portfolio characteristics have contributed most to this outperformance? 

One of the key contributors to the fund's performance has been the focus on identifying fundamentally strong businesses with sustainable growth prospects and holding them with conviction over the long term. The fund has also benefitted from taking differentiated portfolio positions (high active share) relative to the benchmark. We have remained disciplined in our investment approach and allowed the underlying businesses to create value over time. Additionally, low portfolio turnover and selective rotation into emerging opportunities have collectively contributed to the fund’s outperformance.

 

How much cash do you hold in your portfolio/scheme and when do you plan to deploy it? 

Typically, our cash allocation remains in the range of 2–4 per cent, primarily to meet liquidity and operational requirements.

 

In the auto space, where do you see better opportunities today—two-wheelers, passenger vehicles, commercial vehicles, or auto ancillaries? 

We believe the broader auto space looks attractive. The sector has faced some profitability pressure over the past few quarters, primarily due to higher commodity prices. However, these cost pressures tend to get passed on over time, and as commodity prices stabilise, margins are likely to improve gradually.

 

While each segment has its own growth drivers, valuations across several auto companies remain attractive relative to their long-term earnings potential. We continue to find opportunities across the ecosystem with our preference being driven by the quality of individual businesses, their competitive positioning and their ability to deliver sustainable earnings growth.

 

Retail participation in equities has surged over the past few years. What are the biggest mistakes you're seeing first-time investors make? 

Very often, new investors tend to focus on short term market movements and may get influenced by recent outperformers or the prevailing market trend. What is often overlooked is the aspect that equity investing is a long term journey. During this journey, there will be phases of market correction or pronounced volatility, all of which are temporary in nature. One should not react to these but instead focus on the purpose of the investment.

 

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