Tata Mutual Fund expects a compounded annual growth rate (CAGR) of 10-12 per cent in Nifty EPS over the next three years and a plus or minus 5 per cent from the current level of 18 per cent for this year amid intense volatility.

Rahul Singh, Chief Investment Officer (Equities), Tata MF, said the valuation discipline has returned to market after a gap of almost 10 years as the availability of easy money is getting squeezed out.

The catching up of value investing is good for fund managers with opportunities across market capitalisation in different sectors. As the market gets broad based, there are interesting opportunities in the mid- and small-cap space, he said. The disconnect between the economic growth and market growth will narrow down with the rise in GDP, he added.

Stable macro parameters, lower interlinkages with the global economy, revival of the investment cycle and India’s gradual emergence as a new sourcing hub are important factors which can drive above-par GDP growth (6 per cent) and earnings growth (15 per cent) over the next two-three years. The investment cycle revival is spread across traditional corporate sector (metals/cement), renewables, import substitution and real estate. This comes after a long period of under-investment and balance sheet repair in corporate as well as banking sector, said Singh.

Advantage India

The building blocks are in place in terms of tax cuts and production-linked incentive scheme which together with the changing geopolitical landscape provides India the opportunity to establish its manufacturing and export base compared to its Asian neighbours. It is therefore not entirely surprising that these factors have led India’s valuation premium over other emerging markets to reach a historical high of 70 per cent over China, he said.

The premium should fall below 50 per cent as Chinese economy starts reviving and this will lead to fresh fund flows from foreign investors, Singh added.

Banks shine

Banking sector has started to get its due with all the three levers of profit growth firing, including credit growth, margin expansion and lower credit costs. Significant re-rating has happened last year, but there can be more in the second-tier, mid-size and PSU banks if the trends sustain.

A new non-performing loan-cycle takes time to develop (assuming no external shocks) and generally happens after two-three years of strong growth, he added.

IT services growth looks set to slowdown from the heady 15-20 per cent growth in revenue to 5-10 per cent in the next fiscal. Margin pressures will ease but the present valuations still imply some caution, as IT budgets for this year get scaled down across hi-tech, retail and EU regions.

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