SIP strategy best for current market conditions: Ajay Tyagi

"Economy is in good shape right now, so that is another positive. But we would conjecture that over the coming months and quarters, the market should ideally consolidate notwithstanding the strength in the economy, purely on account of significantly higher than long-term average valuation," says Ajay Tyagi, UTI AMC.


What do you make of the strength in the market? I mean all the triggers are playing out. A kind of a coalition but a strong one is in place. Things are looking fine. Volatility is subsided but market is just failing to give up any gains. Where is the market drawing its strength from? We just saw the SIP number again a fresh record high. Your thoughts on the environment?
I can only start by saying that we too are slightly baffled with what is happening in the market over the last few days. The election result, if anything, was not really as per expectations. It was certainly in a way the worst case that many pundits would have called out. But post Wednesday we have seen an amazing strength in the market. Let us talk about the positive factors first. The biggest positive obviously is the continuity of the government under Mr Modi, which basically means that some of the key policies which have got the support of Mr Modi will continue, so that is a big positive.

The negative obviously is what the media has been discussing and debating, which is that it is never too easy to run a coalition government. There will be pulls and pressures from different parties. We will see how it plays out. The nucleus, which is the BJP, is certainly stronger than what many of the previous coalition governments have witnessed prior to 2014, so that is also incrementally positive.

But yes, there would be some accommodation along the way. In this context, markets which were anyway looking expensive even before the election result came out are continuing to remain expensive, so that is the bit which is baffling for us.

Economy is in good shape right now, so that is another positive. But we would conjecture that over the coming months and quarters, the market should ideally consolidate notwithstanding the strength in the economy, purely on account of significantly higher than long-term average valuation.

What should investors do in this kind of market, continue the SIPs, of course, but if you are looking forward to deploying big money, should it be spread out? Is it not the right time to allocate big money on the kind of sense of miss out rally kind of feeling? What would you advise the investor fraternity?
I would say that investing under any kind of pressure, either the fear of missing out or the fear of pulling out because you feel that the markets will fall down further is never a good strategy. You started the conversation by talking about SIPs. I would say this is still the best way to go forward in this environment where markets certainly are looking expensive compared to their own historical averages.

Lump sum money should ideally wait. If you do get some corrections along the way, like we saw on the day when the results were out, that is typically the time when you should put some lump sum into play. But other than that, our advice to all kinds of investors would be, continue with your SIPs.

The most undervalued part of the market or area which is ignored and unloved and still provide good risk reward and which end of the market appears to be frothy now?
Yes, that is an interesting one and things have not changed at all in the last three to six months. The most attractive part of the market still remains the private sector banks. For some reason, they seem to be the most unloved. Although in terms of two things, their historical track record to keep asset quality under check, to maintain their NIMs and therefore ROAs is not something which has got challenged or compromised in the last couple of years.
So, from a fundamental perspective, the way they run their banks has not changed. The second thing is that you see credit penetration in India is still low and that has a massive penetration led growth in the coming years and therefore I would say even from a growth perspective and overall growth perspective, credit growth in India will remain strong.

If anything, it is our belief that private sector banks will continue to gain market share, maybe at a slower pace compared to what they did in the previous decade, but the fact remains that incrementally they would still gain market share which means that their growth should be slightly higher than the system credit growth, so that is the part of the market which we feel is attractive, is most unloved today and therefore the valuations are also a very favourable.

I would say while the overall theme of capex, investments in the economy, and therefore a lot of these industrial names are most loved.

But if you have a look at their valuations, then to my mind many of them are trading at valuations which are extremely unfavourable. I cannot recollect the last time when I saw industrials trading at valuations at which certain consumption names which have more sticky kind of growth outlook are trading at.

So, while people try to draw a parallel between now and the last time when the economy went into a capex cycle, I do want to remind everyone here that the last time we saw a revival in the capex economy, most of these names were trading at single digit to kind of mid-teen valuations. Today, most of these names are trading at valuations higher than 50 times, some of them even higher than 70 times. So, yes, there is a marked difference in terms of the valuations at the starting point. The outlook in terms of growth in this part of the economy is sound and I agree, but it is the valuations that one has to be cautious about.


There is also a sense in the market that going forward, in fact, the first file the Prime Minister has actually signed after taking office is in the agri and rural side and that is triggering a view that tier III, tier IV kind of creditors, irrigation plays; basically tier III, tier IV and rural is where the incremental money or the government's attention may go from here on and hence market is trying to find names there. How would you recommend is the best play to have a foot in the rural and smaller town kind of a demand play because the traditional play like two wheelers, etc, have already more than doubled in the last one-and-a-half years.
Let us break it up into two parts. I think I completely agree with you that given what the election outcomes have been, this government would try to look at areas which kind of tilted the voters slightly away from them. So, they would like to address pockets of rural India where they think that there has been distress, notwithstanding the fact that the economy has been doing well.

Now, to address that, there are many ways, like you said, maybe have a better push and a heightened push towards affordable housing that is one area and there are as you know many listed companies in the affordable housing space.

When that happens, there will obviously be a second order impact on the cement industry, the demand for cement should go up, the demand for cement anyway appears to be strong because of real estate cycle which right now is very strong in the middle of a big upcycle and also the fact that the government will continue pushing towards road infrastructure and so on.

I think cement could be another area and valuations within the cement sector are still fair. The other thing which everybody is guessing would be the consumption staple names, more money one way or the other in the hands of the mass population at large should trigger mass consumption and we know that consumption has been a very-very weak part of the economy over the last two years now and this includes both consumer staples, it also includes consumer durable.

So, hopefully, there the consumption should get triggered in the economy, mass consumption should get triggered in the economy, so that is another sector we can look at. Valuations here again are fair, they are not particularly cheap but they are still fair.


What are your thoughts on cement because cement has not done very well, I would say, some smallcap, midcap names may have done well on hopes of getting bought out. But in general, the space has remained in a broad range. And even I was surprised to look at the cement price, in the last 10 years are broadly in a very narrow range, they have not gone anywhere, because of overcapacity. Do you see in the next three-four years with increased government focus on infra continuing that this demand-supply mismatch may narrow and hence pricing power may come to this space and hence, their valuation may improve because EBITDA would improve.
It will be difficult to comment on the pricing bit. Like you said, a lot depends upon demand-supply and I have also noticed over the last couple of decades that cement is one area where the government feels very uncomfortable when prices start to move up.

Cement touches the lives of the ordinary man, it also impacts the IRRs of different projects whether in road construction or in general infrastructure construction.
So, I think I will not be betting on increase in cement prices, but it does appear that capacity utilisation of cement players across the country should increase. If real estate cycle continues, I think there will be more and more demand from that quarter. We spoke about affordable housing just now, we spoke about continued push by the government towards infrastructure creation. So, all of these factors augur very well for cement demand and you are right valuations for better part of the cement sector are still attractive, so this is one area where investors should do a deeper analysis.

A word on the pharma space. How to approach this space? The top five-six names have done very well in the last one year, but the view is that going into US elections, even though US is highly dependent on Indian pharma imports, some of the policies may become protective about their own pharma sector, etc, all of that so it may impact Indian sector on the stock market side. But the other part is the India dedicated or India focused pharma play which are showing very good growth but do not come cheap, how should one play the pharma entire pack right now, how are you going about it?
I would say that within pharmaceuticals there are businesses which are heavily linked towards the US market so these are players which predominantly derive their revenues from exports to the US generic market to European generics.

Now, this is a fairly commoditised part of overall pharmaceutical space. So, prices here can move viciously, there are
years when there is massive price erosion and therefore the profit margins of such players get impacted.

Over the last 12 months we have seen a fair bit of stability in prices of generics especially in the US market, that can continue for a few more quarters but if you track the prices of generics over the last 20 years you will realise that they follow a pattern, they follow a cycle, weak years of pricing are followed by strong years and vice versa.

So, I will not be too surprised if we see higher price competition in the US generics leading to margin pressure and therefore businesses which are dependent on US generics predominantly may also face some pressure down the line.
And you spoke about the US elections in any case which is a factor which may actually lead to softening of pricing on the generic side. The other part of the market is the domestic formulations. Now this is a more secular part of the market, pricing pressure does not hurt here as much.

As you rightly said, valuations here seem to be certainly higher than averages, but they are not preposterous so to speak.

So, one can still find strong businesses trading at or around fair valuations here. The third part of the pharmaceutical story is the CDMO part of the story, which many people are also linking up with China plus one. And there is growing evidence that big pharma globally is getting a nudge from their own governments to diversify, to run their supply chains slightly away from China into multiple other destinations.

India has been a strong destination for many of these big pharma companies. Many of the Indian companies have had relationships with these people over the decades, so that is the third growth driver and we feel that this is the one which is an incremental growth driver for Indian pharma companies and this too can actually have a strong growth outlook into the coming decade.