ETMarkets Smart Talk | Only 16% IPOs beat market returns; be selective, says Ajay Tyagi who follows Warren Buffett

Kshitij Anand: To begin with, I wish to start with the large occasion that befell — Price range 2026. How do you see the Price range by way of what the federal government may have accomplished? We noticed a knee-jerk response on Price range day, with the Sensex dropping 1,500 factors. Have been markets anticipating extra, and did the federal government under-deliver? What are your views on that?

Ajay Tyagi: So far as the Price range is worried, the expectation was that there would be some consumer-related push — that was the broad market expectation. Nonetheless, the federal government is strolling a tightrope. It has to maintain the fiscal deficit in examine and has already dedicated to score businesses and world buyers that it’ll adhere to the fiscal glide path. Which means that yearly, the deficit has to be decreased — even when the discount is small, it should be in that path.

One other level buyers could have ignored is that final yr, the federal government forewent a big chunk of income — first by lowering direct taxes, i.e., private revenue tax charges, and second, in October, by rationalising GST and successfully lowering oblique taxes. Each have been substantial measures.

So, it was prudent for the federal government to not increase spending and reverse the fiscal glide path. Whereas buyers on the road could have anticipated extra, a rational investor like us seen it as a welcome transfer. Maybe that’s the reason markets stabilised the very subsequent day.

Reside Occasions

Since we’re speaking about expectations, I need to additionally point out the upcoming eighth Pay Fee, for which the federal government will quickly need to make provisions. The payout is predicted to be vital. Due to this fact, it was solely prudent for the federal government to not decide to further measures after already implementing the tax cuts and with the Pay Fee obligations forward.

Kshitij Anand: We now have additionally seen a development the place every bit of unhealthy information — whether or not geopolitical considerations or different setbacks — is being absorbed fairly nicely by the market, with fast reversals. Do you see extra room for draw back from right here?
Ajay Tyagi: Our view is that there’s room for draw back, and that is purely based mostly on valuations. We analyse largecaps, midcaps, and smallcaps individually.There’s relative consolation in largecaps. Our evaluation means that whereas they’re costly, they don’t seem to be excessively so. Maybe one other 5% to 10% correction — both in worth or by time correction — may carry them again into a cushty zone.

Nonetheless, the identical can’t be stated for midcaps and smallcaps. They’re nonetheless buying and selling considerably above their long-term averages. Sure, there was some worth correction in smallcaps and a bit in midcaps, together with a while correction. However the actuality is that present valuations for each midcaps and smallcaps are greater than their earlier peaks during the last 15 years. I’m not even referring to their long-term averages — their valuations at present exceed their earlier highs.

This must right. I have no idea what kind it should take — whether or not it should be purely time correction or a mix of worth and time. Our evaluation is that it’ll possible be a mixture of each.

Due to this fact, we stay cautious on midcaps and smallcaps, even if mutual funds are sitting on money and any promoting within the market is seen as a shopping for alternative. I’ve been within the business for 26 years, and UTI has been current within the markets for 60 years. Our collective expertise means that each time valuations overshoot, they finally revert — however any interim technical help.

So sure, we might advise buyers to attend for higher entry factors in midcaps and smallcaps.

Kshitij Anand: A really fascinating level you talked about is the sort of cash that mutual funds are receiving — greater than ₹31,000 crore month after month. That’s phenomenal. Out of your perspective, how do you view this quantity?
Ajay Tyagi: To begin with, we should totally respect the truth that there was what we name the financialisation of financial savings. In our mother and father’ era, the go-to asset lessons have been gold, maybe actual property when there was a big lump sum to speculate, and inside monetary belongings, largely financial institution deposits or mounted deposits, or bonds issued by establishments like ICICI, IDBI, and even UTI.

That has modified considerably during the last 10–15 years. Traders are realising the significance of fairness funding. Due to this fact, mutual funds as an asset class are actually entrance and centre in each family. That’s level primary — that is structural and can proceed to develop.

We regularly study mutual fund penetration in India. To provide you a quantity, mutual fund belongings as a proportion of GDP are nonetheless round 20%. Within the US, the quantity is over 100%. I’m not suggesting that we are going to attain US ranges anytime quickly, however even the worldwide common is round 50% to 60%. So, we’re beneath the world common. Structurally, mutual funds will proceed to develop.

Nonetheless, there may be all the time a cyclical factor. You have got been within the markets lengthy sufficient to know that when markets carry out nicely, most buyers are inclined to be backward-looking. They have a look at returns from the final three to 5 years, get excited, and make investments extra. So, the surge in SIPs and total flows — stunning even us as mutual fund individuals — is partly because of this cyclical factor, with buyers extrapolating current robust returns into the following 5 years.

There may be some dip in these SIP numbers. I’d not be stunned by that, despite the fact that the structural development stays upward, albeit with some cyclicality alongside the way in which.

Kshitij Anand: Let me additionally get your perspective on sectors. We now have simply began 2026 — new beginnings — and the Price range has additionally been introduced, giving some path on how authorities insurance policies could play out over the following 12 months. Are there any sectors you’re looking at that would hog the limelight?
Ajay Tyagi: I’ll point out two sectors that we consider may present superb alternatives for buyers.

The primary is the consumption sector. There are two or three causes for this. The federal government is conscious that personal consumption expenditure (PCE) in India has been trending beneath par. Over the past 4 to 5 years, the heavy lifting for GDP progress has been accomplished by authorities spending on infrastructure. There was a powerful capex push in sure sectors, which has supported GDP progress.

Nonetheless, consumption progress has been comparatively weak. The federal government recognises this as a result of private consumption accounts for roughly 65% of India’s GDP. If that doesn’t choose up, progress turns into a problem.

To help this, we now have seen revenue tax cuts, which, give or take, have put about $11–12 billion into the fingers of households. GST rationalisation has added one other $20–23 billion. In whole, round $35 billion has been infused into family pockets. Within the context of a $4 trillion GDP, that’s near 1% — not an insignificant quantity.

We consider this could begin reflecting in improved consumption tendencies over the approaching quarters. Moreover, the upcoming Pay Fee — which happens each 10 years — is one other constructive issue. Traditionally, when Pay Fee payouts have reached households, the next 12 to 18 months have seen robust consumption tendencies.

Lastly, despite the fact that consumption is structural in India given our low per capita revenue, it’s also cyclical. The final three to 4 years have been comparatively weak for consumption. None of us consider India is totally penetrated in classes reminiscent of automobiles, two-wheelers, eating out, and comparable segments. These sectors nonetheless have an extended runway. From this comparatively weak base, we count on higher cyclical tendencies within the coming years. All these components mixed make us constructive on consumption.

The second sector could be extra controversial — you may increase an eyebrow — however we’re constructive on IT.

We spend appreciable time analysing whether or not AI will be web destructive or web constructive for the IT business. Our conclusion continues to be strengthened that AI will be web constructive over the medium to long run.

May it be disruptive within the brief run? Sure. However over time, it’s prone to be web constructive. Traditionally, each new expertise has initially disrupted IT companies gamers. When mainframes emerged within the Nineteen Sixties and 70s, individuals thought computing would exchange human involvement. In the course of the rise of distant infrastructure administration within the 2000s, there have been considerations that IT companies employees would not be wanted on-site. Round a decade in the past, when cloud computing gained traction, individuals questioned the necessity for on-premise software program and associated companies.

Nonetheless, historical past over the previous 60–70 years reveals that new applied sciences are inclined to be web additive, not dilutive. It’s incumbent upon IT companies firms to repeatedly prepare and retrain their workforce. This time, the main target should be on AI instruments.

The winners and losers will be decided by which firms are agile sufficient to coach their workforce and develop into AI-ready. However on an combination foundation, we’re constructive and are on the lookout for gamers who will be on the precise aspect of the AI revolution.

Kshitij Anand: The truth is, my subsequent query can also be round IT, and also you appear to be a contra purchaser at this time limit. AI as a key phrase is now prevalent throughout all sectors, not simply IT, but in addition in financials and manufacturing. Lately, we noticed information the place Charles Schwab tanked about 7%, and wealth administration corporations appear to be barely nervous about what may occur subsequent due to AI’s affect on taxation paperwork and associated areas. That is an evolving house, and I’m certain over time it should assist industries combine AI, leverage the expertise, and profit prospects. However how are you seeing it?
Ajay Tyagi: You have got raised a really topical query. Let me share my thought course of. I’m really stunned that persons are punishing IT firms for precisely what you simply talked about.

Who was dealing with tax filings earlier? Who was making ready authorized paperwork earlier? Let me lengthen that additional. Individuals say AI will do all the pieces and should eat into the roles of analysts, particularly mundane duties. I agree with that. However who have been the individuals doing this work earlier? On the decrease finish, it was attorneys, articled assistants working for tax consultants, younger CAs working for corporations, or junior analysts doing routine work.

Sure, AI could exchange a few of these roles. However is that web constructive or web destructive for expertise? These have been non-tech jobs being changed by expertise. Sooner or later, when you have to file taxes, you might not go to a marketing consultant — you might use software program as a substitute. That really expands the area of expertise somewhat than reduces it.

That’s the reason I am going again to historical past. Over the past 70 years, has technological evolution been web additive or web dilutive? It has constantly been web additive. That is one other occasion the place individuals could be changed by expertise, however each time expertise expands, the entire addressable market for IT companies will increase — it doesn’t shrink.

So, in a manner, the reply lies within the query itself. This may possible increase the entire addressable market for expertise firms and, due to this fact, for the IT companies corporations related to them.

Kshitij Anand: Allow us to additionally get some perspective on the opposite section. We now have mentioned largecaps, however what about mid and smallcaps? We now have seen some correction, however information suggests they’re nonetheless buying and selling above long-term averages. What’s your view?
Ajay Tyagi: You’re completely proper, and we fully concur with that view. They’re buying and selling at a premium — in actual fact, considerably above their long-term averages. It isn’t only a 10%, 15%, or 20% premium; in some instances, the premium is 40% to 50%. That’s what retains us cautious and considerably involved about this section of the market.

That’s the reason our recommendation to buyers has been to tilt towards largecap-oriented classes. It may be a pure largecap fund, a flexicap fund, or a large-and-midcap class — however with greater allocation to largecaps and decrease publicity to mid and smallcaps.

Whereas we consider largecaps could normalise inside this calendar yr, I stay sceptical about saying the identical for mid and smallcaps. The correction and consolidation there may take longer.

Kshitij Anand: Allow us to additionally discuss earnings. Since valuations are a priority, earnings kind a big a part of that equation. Do you assume the December quarter outcomes have given us confidence that earnings are enhancing? With the commerce deal and tariff modifications — initially at 50% and now decreased to 18% — it could not considerably enhance earnings, particularly after studying the high-quality print. How do you see the earnings cycle at this level? Is that one of many causes you consider there may be room for additional correction?
Ajay Tyagi: Earlier than I reply that, I need to add one clarification to my earlier level. Whereas we stay cautious about mid and smallcaps broadly, I don’t need to suggest that in a universe of, say, 400 mid and smallcap shares, there are not any worthwhile alternatives. There may be a few dozen firms that also supply beneficial risk-reward. Our job is to establish these. My remark was concerning the broader class.

Now, on earnings — India’s exports to the US account for barely beneath 2% of GDP. After we noticed the 50% tariff that lasted for about six months, we did some back-of-the-envelope calculations. The potential affect on GDP progress was round 40–50 foundation factors, and on earnings progress, maybe a few proportion factors.

So, it was not as if GDP or earnings have been going to be dramatically affected. Nonetheless, sentimentally, it was destructive. Traders have been puzzled, provided that India was seen as a detailed ally and a “China-plus-one” beneficiary. The uncertainty made it troublesome for buyers, and that partly explains the FII outflows we noticed between August and January.

Hopefully, that sentiment reverses now that the outlook is enhancing.

On earnings, I’d say we should always not get overly excited. If the 50% tariff didn’t derail progress meaningfully, then the discount to 18% can also be unlikely to create an enormous earnings windfall throughout industries. Nonetheless, aside from enhancing FII sentiment, it may assist restart the FDI cycle.

I do know of a number of corporates that had paused investments because of uncertainty about India-US relations. If that readability improves, FDI flows may resume, which might be constructive over the medium time period.

Kshitij Anand: Inconsistent coverage?
Ajay Tyagi: Precisely. Due to this fact, buyers have been cautious of placing in that $1 billion or $2 billion funding into the nation. As soon as that cycle restarts, it should undoubtedly have a elementary bearing on GDP progress and, due to this fact, earnings progress as nicely. So, all put collectively, this could definitely be constructive.

Now, however the tariff improve that we noticed and the next correction, even when this episode had by no means occurred, India was in any case going by an earnings slowdown in each FY25 and FY26, which is nearly to finish. We now have solely seen about 7% to eight% earnings progress in each these years.

You recognize that India’s long-term earnings progress is round 12%, broadly consistent with nominal GDP progress. Past the cyclical slowdown of the final couple of years, we count on a cyclical upswing. The explanations are just like what I discussed earlier — the federal government giving a fillip to consumption, and consumption being a big a part of the economic system. If consumption picks up, it will definitely percolates down into total earnings progress.

In any case, we’re taking a look at no less than 12% to 13% earnings progress within the upcoming yr, FY27. That’s our broader view. We count on higher earnings progress in comparison with the final two years, which have been definitely disappointing.

Kshitij Anand: One other theme that picked up final yr was IPOs. We noticed greater than 300 IPOs, together with SME IPOs — extra on the SME aspect and fewer on the principle board — however nonetheless over 100 main-board IPOs within the final calendar yr. How are you viewing this house now? Do you assume so many IPOs hitting the market is sweet for the business, or is it a phrase of warning?
Ajay Tyagi: That could be a very fascinating query, and I’m glad you requested it. I see super pleasure amongst retail buyers towards IPOs — and, fairly worryingly, towards SME board IPOs, which, for my part, is definitely a no-go space. Traders ought to be extraordinarily cautious about SME board IPOs.

Even IPOs on the principle exchanges ought to be approached with warning. Let me share some information. We repeatedly analyse IPO information. Earlier than that, let me consult with the Pareto precept — the 80-20 rule — which states that 80% of outcomes are pushed by 20% of things. In inventory markets, this holds true, and in IPO markets, it’s much more pronounced.

Only about 20% of IPOs find yourself creating significant wealth for buyers. We now have analysed information from 2000 onwards — yr by yr — taking a look at what number of IPOs have been launched and what returns they delivered over time. The info reveals that solely about 16% to 17% of IPOs have generated returns greater than total market returns. On condition that long-term market returns have been round 13–14%, that was our benchmark.

So, solely about 16–17% of IPOs have crushed that benchmark. That is information buyers ought to take note. They need to not make investments indiscriminately in all IPOs. Many are chasing itemizing good points, which I perceive, however that’s not how wealth is constantly created.

Now, to your query — is that this development good or unhealthy? I’d say it’s web constructive. Excessive-quality firms additionally come to market by IPOs. As an illustration, if an organization like Everlasting had not listed in India and had as a substitute gone to Nasdaq, it could have been unlucky as a result of home buyers wouldn’t have had the chance to take part in that enterprise. Equally, a number of robust firms have gone public in recent times.

So, the development is web constructive. What it requires is the power to separate the wheat from the chaff. Traders should not be indiscriminate; they should be very selective.

Kshitij Anand: I wished to get your perspective on FIIs as nicely. You probably did say that FIIs are type of coming again now, however net-net, they have been web sellers final yr. Hopefully, with the US deal coming by and the rupee additionally stabilising at this level round 90-ish, how are you seeing the FII image at this time limit?
Ajay Tyagi: Let me share some information first after which immediately reply to your query. FIIs began investing in India in 1992, when the markets opened up. Since then, FII possession of Indian equities has steadily elevated. It reached a peak of twenty-two% in 2021 — the very best degree of FII possession in Indian equities.

From 2021 till now, this quantity has declined to round 17% or 17.5%. The final time it was this low was in 2013. In case you recall, 2013 was the yr when Morgan Stanley categorised India as a part of the “Fragile 5.” Essentially, India was not performing nicely at the moment, and FIIs have been involved, in order that they decreased their publicity.

Right this moment, nevertheless, India is in a lot better form, but FII possession has fallen again to 17–17.5%, a degree final seen in 2013. After that interval, possession steadily rose yr after yr. This clearly signifies that FIIs have bought considerably. The truth is, India has not been a superb commerce for FIIs, not simply within the final yr however during the last two to 3 years.

The important thing takeaway is that India just isn’t over-owned by FIIs; it’s under-owned. That’s really comforting. When there isn’t a froth — whether or not in a inventory, a sector, or a rustic — it offers a level of consolation. India just isn’t presently a crowded commerce, and that’s constructive.

Secondly, as I discussed earlier, there was a sentiment-driven destructive affect when the India-US treaty didn’t materialise and India was subjected to a 50% tariff. China, as an illustration, confronted a 35% tariff, so India being greater than that was stunning. It created uncertainty, and plenty of buyers most well-liked to remain underweight.

A minimum of that a part of the difficulty has now been addressed. With valuations correcting and fundamentals doubtlessly enhancing, the case for India strengthens.

The third issue is earnings. As we mentioned earlier, earnings have been disappointing during the last couple of years. If earnings progress returns to development ranges, that would be the ultimate set off to carry FIIs again.

So, we could presently be at a cyclical low by way of FII possession, and we may doubtlessly see this possession rise once more towards earlier ranges.

Kshitij Anand: So, being under-owned at this level is definitely a comforting issue and maybe a cue buyers ought to be aware of. Additionally, what would be your recommendation to long-term buyers? There was a number of volatility, and plenty of new-age buyers have skilled it for the primary time. For somebody deploying cash in 2026, which started on a unstable word however is now stabilising, what would your recommendation be?
Ajay Tyagi: I contemplate Warren Buffett my guru. A lot of what I’ve realized within the markets comes from his teachings. I recall one in every of his one-line gems that modified my perspective on investing: “Markets are designed to switch wealth from the energetic investor to the affected person investor.”

My recommendation to buyers is that this: your persistence will be examined. There’ll be instances when you might really feel silly. However these are exactly the instances when persistence issues most — offered you’ve acted sensibly.

By wise, I imply not investing indiscriminately in each IPO, however preserving capital for the precise alternatives; not chasing sectors just because they’re trendy; and never promoting high quality companies like IT simply because it’s presently fashionable to say that AI will exchange all the pieces.

When you’ve got accomplished your elementary analysis nicely and are centered on long-term drivers, then persistence will be rewarded. This can be a enterprise the place EQ is usually extra essential than IQ.

There could be years when Indian markets ship destructive or flat returns. That doesn’t imply the Indian economic system has misplaced momentum or that fairness markets won’t ship 12–13% returns over time. Markets are cyclical. After just a few years of robust returns, it’s pure to count on just a few years of subdued efficiency.

So, my generic recommendation — and it’s maybe much more related at present — is to stay affected person and keep centered on the long run.

(Disclaimer: Suggestions, solutions, views, and opinions given by consultants are their very own. These don’t characterize the views of the Financial Instances)