Amid concerns over the impact of the West Asia conflict on corporate earnings, Chirag Setalvad, head–equities at HDFC AMC, says the setback is likely to be short-lived and India remains well placed to deliver healthy earnings growth over the medium to long term. He tells Kushan Shah that while stock selection remains a challenge, there are opportunities in both large and small caps. Excerpts:
How do you assess the current state of the equity markets?
Large-cap stocks are reasonably valued, while mid- and small-caps continue to trade at a premium to their long-term averages. The Nifty is currently trading at around a 10% discount to its 10-year average P/E multiple. Since large caps account for nearly two-thirds of the market capitalisation, that segment appears fairly valued.
The remaining one-third of the market—mid- and small-cap stocks—is trading at an aggregate premium of 20-25% to historical averages. However, valuations are no longer as stretched as they were earlier. Following the recent price and time correction, valuations have become more reasonable. While stock selection remains challenging, there are opportunities across both large- and small-cap segments.
What are your expectations from the upcoming earnings season?
The first quarter of FY27 is likely to be a challenging one because of the impact of the West Asia conflict on raw material availability and prices. Most companies typically hold one to two months of raw material inventory, so the bulk of the impact will be reflected in Q1 results.
Companies are unlikely to pass on the entire increase in input costs, which could put pressure on margins. That said, the broader economy continues to show resilience. Government capital expenditure is expected to remain strong, private capex is steady and consumption is getting support from GST rationalisation, lower taxes and higher minimum wages.
Rural demand has already been healthy, and we are now seeing signs of improvement in urban demand, reflected in stronger credit growth and higher automobile sales. The upcoming pay commission should provide an additional boost to consumption. While the first quarter may be weak, India should still be able to deliver earnings growth of 12-15% over the medium to long term.
Do you expect foreign institutional investor (FII) inflows to improve in the near future?
FII ownership in Indian equities is currently at a multi-year low. Global investors typically look for either a compelling growth story or attractive valuations. For some time, India offered neither.
The global investment narrative was centred around artificial intelligence and its supply chain, where India had limited representation. At the same time, Indian market valuations had become expensive relative to both their own history and other global markets.
Both factors have changed. Valuations have moderated after the recent correction, making India more attractive on both an absolute and relative basis. Meanwhile, there are signs of fatigue in the AI-led rally, with concerns emerging over excessive investment and the sustainability of semiconductor valuations.
This could make India more attractive to global investors. However, if global markets witness a broader risk-off phase, FII outflows may first slow before meaningful inflows resume.
How do you view the IPO market over the next few quarters?
The pace of IPOs has slowed sharply over the past year, but activity is likely to pick up given the large pipeline of issues.
We remain highly selective and prefer companies with strong management, good long-term prospects and reasonable valuations. The quality of companies is generally not a concern; pricing remains the key determinant. Overall, investor appetite remains healthy and should support the IPO market.
Will SIP inflows continue to grow at the pace seen in recent years?
The industry’s SIP book has nearly tripled over the past five years. Growth may not remain as rapid, but we expect it to continue at a healthy pace.
SIPs tend to perform particularly well during periods of market volatility. Given the increased volatility witnessed in recent years, we expect systematic investments to remain strong.
How has the AMC utilised investment opportunities created by the recent correction?
We invest with a long-term perspective, focusing on good businesses available at reasonable valuations. Our bottom-up stock-picking approach does not change because of geopolitical events.
We viewed the correction triggered by the West Asia conflict as an opportunity to add stocks across sectors and market capitalisations where valuations had become attractive while the long-term business outlook remained intact.
Which new investment segments is HDFC AMC looking at?
There are areas where our presence is limited, such as AIFs, PMS and SIFs, and we are evaluating opportunities in these segments.
We also plan to strengthen our product portfolio by launching offerings in categories where we currently have limited presence, both in actively managed funds and in passive products such as ETFs and index funds.
Hybrid and passive funds have attracted strong inflows recently. Do you expect them to gain market share from active equity funds?
Over time, passive investing will play a larger role in India as markets become more mature and efficient, much like in the US and other developed markets.
However, India still has a large universe of listed companies, relatively limited research coverage of smaller companies, behavioural biases, market volatility and liquidity constraints. These factors continue to create opportunities for active managers to generate alpha, particularly in the mid- and small-cap segments.
Passive funds are likely to have a bigger role in large-cap investing, where markets are relatively more efficient.
There is also a cyclical element. Active funds tend to outperform during broad-based market rallies. When market performance is driven by a handful of heavyweight stocks, active funds often lag their benchmarks. Therefore, it would be premature to write off active equity funds.
Which sectors are you most positive on over the medium to long term?
We are finding attractive opportunities in financial services, supported by benign asset quality, improving credit growth, RBI’s regulatory easing and reasonable valuations.
We also like consumer staples because of improving urban consumption and relatively attractive valuations. The IT sector also looks interesting from a contrarian perspective after the correction in valuations.