The risk-reward ratio is still in favour of equities, but if you have ₹100 to invest, put ₹50-75 now, and wait for a correction or earnings to pick up, before you add the rest, said I V Subramaniam, Chief Investment Officer, Quantum Advisors, which runs Quantum Mutual Fund. In an interview with Prashant Mahesh, Subramanian says the actual fiscal deficit in India is more than it seems in reported numbers. Edited excerpts:

Moody’s has upgraded India’s sovereign rating to Baa2 from Baa3. What do you make of it?

The rating change is a testament to a few things which have played out since 2012-13. The first is the government’s commitment to fiscal consolidation. The Centre’s fiscal deficit has been reduced from 6% of GDP in 2012 to 3.5% of GDP in 2017. The Moody’s press release talks of other reforms — GST, bank recapitalisation and measure such as demonetisation and the use of Aadhaar for Direct Benefit Transfer in formalising the economy — as steps that will boost growth in the medium term and thus buffering the case for a rating upgrade. They do caution on India’s high debt-to-GDP ratio, which may increase in the next two years on account of slower growth, and problem areas fixed by Uday bonds, farm-loan waivers and bank re-cap. So, the actual fiscal deficit in India is larger than it seems in reported numbers. Hence, this rating upgrade now is surprising.

Nifty is trading at a PE of 26. Earnings growth has been flat for four years. What do you do at these high valuations?

If you look at the Sensex earnings growth, it has been flat, and for 2016-17, the number will be a tad lower than 2013-14. Right now, there are four years of no earnings, which has been now pushed beyond 2018. However, the markets continue to trade higher because of cash flows from domestic investors. Hence, the overall PE is high. The risk-reward ratio is still in favour of equities. You cannot time it. If you have ₹100 to invest, put ₹50-75 now, and wait for a correction or earnings to pick up. Then you can add the other ₹25.

Which themes are you looking at?

Consumer staples look expensive, but consumer discretionary valuations are reasonable. We have not participated in IPOs of insurance companies, but it is a interesting segment though nothing is cheap there. So, we will wait for some time. The bank recapitalisation package will take time to be implemented. Barring SBI, there is very little chance of any other bank making it to our buy list as they do not have a national footprint.

In autos, we are bullish on two wheelers. There is still a lot of growth left in these companies, as even now many cities have yet to build public transportation system. Valuations also look reasonable in that segment, and large companies have very good balance sheets.

Cement stocks look expensive in terms of valuations. Infra stocks are not cheap at the moment. We expect the government spending to happen, but they will spend money on roads, etc.

All three large companies we like in IT have the opportunity, capacity money and technology to invest. At PE of 12-14, they are good bets. IT services is a sticky business, and it is not easy to change an IT vendor, thus giving a company regular annuity. All the larger companies are taking steps to understand new digital technologies. Hence, I am not worried that all digital business will go to new smaller companies, and not to large companies. There are some attrition challenges.

Pharma, after the huge run-up in 2014-15, has corrected. There are challenges ahead in terms of US FDA, but the valuations make it attractive to take that kind of risk. We like companies that have domestic portfolio and also look at regulated markets. Not all FDA observations are difficult to handle. These are coming for last many years, and Indian companies are smart in handling them.

Domestic investors are pouring in money through mutual funds. Monthly collections through SIP are close to6,000 crore. Is this money there to stay?

I don’t think domestic investors have come to market expecting that they will have to wait before they see returns in the long term. They were probably told stories that stocks markets will do very well in the short term. So, if there is a correction, I think domestic investors will falter a little, will step back and be shy to invest again. That is something we have to test. Since the time domestic investors have invested, markets have only risen barring marginal corrections. One round of (big) correction will really test the thesis whether this SIP is long term or short term. So, that risk remains.

What is your biggest worry now?

Higher fiscal deficit is a worry for me. Oil prices are moving up. At some point, it will hurt us. RBI has warned of pressures on inflation. Last year, we had demonetisation, effect of that will be felt now in terms of supply chain. If supply chains got disturbed, demand for a lot of products will be higher than supply and inflation can go up. Fiscal deficit is low now, but if rural distress is higher than anticipated, the government will have to spend a lot more on rural. They will spend on NREGA, plus farm-loan waiver and anything else to strengthen rural India. All that means, fiscal deficit will go up.


‘If there is a correction, domestic investor will falter a little, will step back and be shy to invest again. Since the time domestic investors have invested, markets have only risen barring marginal corrections.’


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