Vetri Subramaniam, head of equities, Religare Mutual Fund, tells Dipta Joshi and Neha Pandey that while valuations are a challenge, he is bullish on the domestic consumption space. Edited excerpts:
What are your views on the first quarter results?
This result season has clearly been a soft one, both on revenue and margin fronts. It has been full of surprises on the downside, while the upside has been largely related with banking. Other than this, there has been weakness in a large section. If you look at the earnings growth trajectory that was built for financial year 2010-11, it has been downgraded.
Would you say the first quarter results are an indication of what can be expected during the year?
No single data point is good enough to take a call. But it does give a view about the trend. The trend as far as earnings are concerned was predicted in September-October 2009, when the peak earnings per share for the Sensex was estimated at Rs 1,070. Since then, the earnings have only been downgraded.
Which sectors should a retail investor look at?
Retail investors should look at mutual funds that have a good history. Broadly, while valuations are a challenge, we are excited about the domestic consumption space, a fairly wide theme. Both income and spending are growing with the economy. As the discretionary share of income grows, servicing needs of companies are likely to grow faster. The consumption theme touches fast moving consumer goods, healthcare, education, travel, tourism, media, entertainment, and so on.
We think there is scope in these sectors over the next three to five years, even though their valuations are not cheap. Secondly, as savings grow with high pay, financial services and banking space will see a rise in profits.
What sectors should one avoid?
We have been negative on the material sector for a while now. The reasons are more global than local. We were also reasonably cautious on capital goods and infrastructure for the most of last year. Incrementally, we have been neutral towards construction and capital goods sectors. Companies in these sectors have underperformed and their valuations have eased off.
What is your take on divestment of public sector undertakings (PSUs)? Should investors put their money into these?
We participate in follow-on public offers (FPOs) and initial public offers only if they make sense. We have not participated in many of these despite having a PSU fund, because we didn’t find the prices right. But I think the theme per se has a lot of leg. These companies are fundamentally and financially very strong and have an advantage over their private sector counterparts. They have a far more aggressive investment plan over the next five years. This stems from two things — they were not adversely impacted by the financial meltdown because they were never leveraged, and they are also cash surplus.
An investor needs to take a call if he wants to buy at the price offered. Don’t buy these companies just because they are big. Some of the FPOs today are 15 per cent below their issue price. Some others are 20 per cent above their price. So, this decision should be taken on a case-to-case basis.
What should be an investor’s strategy for the next one to two years?
I believe we need to do away with the ‘one to two years barrier’ and look at, may be, a 10 to 20 years horizon, because this is the period over which you are actually investing. The one-year tax break, which I think makes investors put money only for a shorter span, should be removed. If you have the inclination and time, you should invest in stocks over a long term. Otherwise, mutual funds are a good bet.
