ETMarkets Smart Talk | Two-year market consolidation may set stage for next bull run: UTI AMC’s Ajay Tyagi

After nearly two years of consolidation, Indian equities could be approaching an important inflection point, with a revival in earnings and more reasonable valuations potentially setting the stage for the next leg of the bull market.

Ajay Tyagi, President & Head-Equity at UTI AMC, believes the two key factors that have weighed on markets—high valuations and lacklustre earnings—are showing signs of resolution.

He expects a sustained recovery in earnings to be the key catalyst for markets, rather than a sharp valuation re-rating. Q1FY27 earnings, he said, were a positive surprise, while the impact of income-tax cuts and GST rationalisation on household incomes and consumption is also encouraging.


Tyagi, however, remains cautious on pockets of the mid- and small-cap universe, where valuations are above long-term averages. He sees large caps as relatively more attractive on valuations, while advocating selective, bottom-up stock-picking in the broader market. Edited Excerpts

Q) After falling in the 1H2026, Indian market is showing signs of stability. How are your reading into the market?

A) The Indian markets have been consolidating for the last two years because of high valuations and lacklustre earnings.

We feel that both these factors will see a resolution in the coming quarters, which should set the Indian markets up much more favourably and lead them into the next bull phase.

Q) With valuations having moderated but still not looking outright cheap, should investors expect the next phase of returns to come more from earnings growth than from valuation re-rating?

A) You are right, valuations for the Indian markets are still not cheap. In fact, mid- and small-caps are trading at a premium to their long-term valuations.

In this context, the revival in earnings growth will be the key lever to move the markets higher.

Q) How are you assessing the earnings outlook for India post Q1 numbers? Are we finally at a point where earnings upgrades can become a meaningful market catalyst?

A) Q1 earnings were a positive surprise by any yardstick. This is notwithstanding the fact that the first half of this quarter was impacted by the West Asia conflict.

While revenues were a clear beat to analyst estimates, margins were soft on account of crude and commodity prices rising sharply, which, in our opinion, should even out in the coming quarters.

It does appear that income tax cuts and GST rationalisation are having a positive effect on household incomes, which in turn is rubbing off on consumer sentiment.

While we would wait for Q2 results to call it a trend, the signs are certainly encouraging.

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Q) FIIs are slowly turning around but what would it take for FIIs to return decisively to Indian equities? Is it valuations, earnings, the rupee, or a change in global asset allocation?

A) Let us look at each of these points one by one.

i) Valuations: While valuations are not cheap, they are certainly becoming attractive after the ongoing consolidation over the past two years.

ii) Earnings: After many quarters of tepid growth, Q1 FY27 has shown strong growth. If this trend continues for the coming quarters, it would certainly be a positive data point for FIIs.

iii) Rupee: Fundamentally speaking, the Indian Rupee is already undervalued on a Real Effective Exchange Rate (REER) basis and should therefore have downside protection. Further, the FCNR (Foreign Currency Non-Resident) deposits raised by Indian Banks are expected to touch around $70 billion, which gives the RBI enough ammunition to defend the rupee in the short term. Both these factors should help keep the rupee steady over the coming quarters.

iv) Global asset allocation: The last decade was clearly about US exceptionalism, with innovation-led economic expansion as well as strong earnings growth. This has led the US to be among the best performing markets over the last 10 years, thereby reducing the propensity to invest in emerging markets. It is therefore no surprise that flows into all emerging markets, including India, have been very tepid over the last many years. However, with massive capex being undertaken by US megacaps, things are getting overheated and markets there could witness a pause in their extraordinarily long bull run. We feel that this should lead to a revival in flows towards emerging markets and India should also benefit.

Q) India continues to command a premium over several emerging markets. How much of that premium is justified by India’s growth prospects, and where do you think the market is still pricing in too much optimism?

A) The Indian markets have traditionally traded at a premium to other emerging markets, mainly on account of the steady growth that the Indian economy has displayed, both in terms of magnitude and predictability.

Given India’s demographic advantage and the growth in per capita income from a low base, it is expected that the economy will continue to grow around 6 percent in real terms over the next decade as well.

In fact, when we look at the premium of Indian markets to other emerging markets on a price-to-book value multiple, this premium is slightly lower compared to the long-term average.

Q) Which sectors do you believe can deliver earnings growth above the broader market over the next 2-3 years?

A) We are bullish on the following sectors from a medium-term perspective:

i) Consumer Services and Durables: The overarching tailwind here is the growing per capita income of Indian households and their rising propensity to spend on discretionary items, which should lead to secular long-term growth in this sector. From a near-term perspective, the income tax cuts and GST cuts have also led to big savings for households, which has led to an increase in their disposable incomes, in turn spurring consumption. The payouts under the 8th Pay Commission, which should come next year, will be further supportive of consumption from a near- to medium-term perspective.

ii) Healthcare Services: This can be broken up into domestic and export opportunities. On the domestic side, we are witnessing increasing healthcare spending, which is leading to strong growth for pharmaceuticals, diagnostics and hospitals. The increasing penetration of health insurance is also helping drive this trend. On the export side, Indian companies are becoming partners to global pharma companies, right from drug discovery to manufacturing, with the China Plus One diversification helping these companies gain market share.

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Q) Do you see a rotation from expensive growth stocks towards more reasonably valued large caps as the dominant market theme?

A) Markets always reward growth, and that is why stocks that have the potential to show secular long-term expansion are always expensive.

However, when growth expectations don’t pan out, it leads to sharp derating. In the present context as well, one has to be sure about the quality and durability of growth of expensive stocks and avoid narratives that are not backed by convincing business models.

If indeed some of these stocks continue to deliver as per expectations, they will certainly continue to create value for shareholders.

Having said that, at a more generic level, large-caps are certainly trading at more attractive valuations compared to mid- and small-caps.

Q) Mid and small-caps have delivered strong returns over the longer term. How concerned are you about pockets of excess valuation and liquidity risk in this segment?

A) While mid and small-caps have certainly given strong returns over the last three and five years, they are presently trading at valuations higher than their long-term averages, and investors need to be cautious here.

While this doesn’t mean that investors should completely avoid stocks from mid- and small-caps, they certainly need to be selective.

An indiscriminate rally in mid- and small-caps, as we saw between 2020 and 2023, is unlikely in the near future.

Having said this, there are certainly some interesting business models in this part of the market and therefore investors should resort to bottom-up stock-picking.

Source: RBI

Disclaimer: The views expressed are the author’s own views and not necessarily those of UTI Asset Management Company Limited. All illustrations/ examples are purely meant for ease of understanding of the concepts and aid in planning by the investor.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)