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Market is not overvalued: Sunil Subramaniam

Interview with chief executive officer, Sundaram Mutual

Ashley Coutinho  |  Mumbai 

Sunil Subramanian, CEO of Sundaram Mutual
Sunil Subramanian, CEO of Sundaram Mutual

Valuations in many sectors will be justified by the earnings growth outlook, says Sunil Subramaniam, chief executive officer, Sundaram Mutual. In an interview with Ashley Coutinho, he says the drop in commodity prices last year has not yet reflected in company earnings. Edited excerpts:

Do you think the market is overvalued?


We do not believe the market is overvalued, given the stage at which the economy is. While the valuations are higher than long-term averages, several sectors, such as capital goods, are still not fully reflecting the growth potential.  The market is still discounting 2016-17 earnings, but as the October earnings come through the focus will shift to 2017-18 earnings. One more year of earnings growth will be factored in, so you will see valuations in many sectors will be justified.

How do you see the July-September earnings panning out?

The drop in commodity prices last year has not yet been reflected in company earnings. That impact should start coming through this quarter. Broadly, commodity intensive and highly leveraged companies might show widening margins in the coming quarters. From April, 1 we had the marginal cost-based lending rate (MCLR) coming into play, which will lower interest costs for companies. So in the next two quarters rate sensitive and commodity intensive companies will show better profit margins. Thirdly, order books will receive a boost from festive demand.

What is your view on the economy?

The interest rate cut has shown that the Reserve Bank of India is shifting its focus towards growth. The rate cut will benefit rate sensitive sectors, especially during the coming festive season. The monsoon, and the rate cut will create increased demand. The goods and services tax can boost growth to 8.5 per cent.

The consumption boost led by the and the will drive the first leg of economic revival. The capital expenditure cycle will recover when consumption shoots up and the capacity gap narrows.

Mutual funds have remained net buyers of equities. Will the trend continue?

Growth in systematic investment plans is pegged at around Rs 4,000 crore per month. This means roughly Rs 50,000 crore is coming in with a 3-5 year horizon. Funds have been buying continually, which is why events like have not had much impact on the market.

What are the risks for flows?

flows will be sensitive to international news, the timing of the US interest rate hike and the outcome of the US elections. But the impact will be largely in large caps and large mid-caps. The US rate hike will be a positive in the long run as it will benefit India’s export prospects. Large caps may see a correction in the short term following the rate hike.

Japan and Europe are not showing any signs of recovery. While quantitative easing may be slowing down, the negative interest rate cycle means money will flow in search of higher returns. We expect India to be a significant beneficiary of allocation to emerging markets.

What is your advice to investors?

Investors should enter the market through mutual funds, not stocks. They should decide their allocation based on their risk appetite and age, and not valuations. Valuations reflect higher growth expectations, which we believe will play out. Also, investors need to avoid shifting money from mid-caps to large caps just going by valuations. In a growing economy, the smaller caps are likely to do better than mid-caps and large caps.

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Market is not overvalued: Sunil Subramaniam

Interview with chief executive officer, Sundaram Mutual

Interview with chief executive officer, Sundaram Mutual
Valuations in many sectors will be justified by the earnings growth outlook, says Sunil Subramaniam, chief executive officer, Sundaram Mutual. In an interview with Ashley Coutinho, he says the drop in commodity prices last year has not yet reflected in company earnings. Edited excerpts:

Do you think the market is overvalued?

We do not believe the market is overvalued, given the stage at which the economy is. While the valuations are higher than long-term averages, several sectors, such as capital goods, are still not fully reflecting the growth potential.  The market is still discounting 2016-17 earnings, but as the October earnings come through the focus will shift to 2017-18 earnings. One more year of earnings growth will be factored in, so you will see valuations in many sectors will be justified.

How do you see the July-September earnings panning out?

The drop in commodity prices last year has not yet been reflected in company earnings. That impact should start coming through this quarter. Broadly, commodity intensive and highly leveraged companies might show widening margins in the coming quarters. From April, 1 we had the marginal cost-based lending rate (MCLR) coming into play, which will lower interest costs for companies. So in the next two quarters rate sensitive and commodity intensive companies will show better profit margins. Thirdly, order books will receive a boost from festive demand.

What is your view on the economy?

The interest rate cut has shown that the Reserve Bank of India is shifting its focus towards growth. The rate cut will benefit rate sensitive sectors, especially during the coming festive season. The monsoon, and the rate cut will create increased demand. The goods and services tax can boost growth to 8.5 per cent.

The consumption boost led by the and the will drive the first leg of economic revival. The capital expenditure cycle will recover when consumption shoots up and the capacity gap narrows.

Mutual funds have remained net buyers of equities. Will the trend continue?

Growth in systematic investment plans is pegged at around Rs 4,000 crore per month. This means roughly Rs 50,000 crore is coming in with a 3-5 year horizon. Funds have been buying continually, which is why events like have not had much impact on the market.

What are the risks for flows?

flows will be sensitive to international news, the timing of the US interest rate hike and the outcome of the US elections. But the impact will be largely in large caps and large mid-caps. The US rate hike will be a positive in the long run as it will benefit India’s export prospects. Large caps may see a correction in the short term following the rate hike.

Japan and Europe are not showing any signs of recovery. While quantitative easing may be slowing down, the negative interest rate cycle means money will flow in search of higher returns. We expect India to be a significant beneficiary of allocation to emerging markets.

What is your advice to investors?

Investors should enter the market through mutual funds, not stocks. They should decide their allocation based on their risk appetite and age, and not valuations. Valuations reflect higher growth expectations, which we believe will play out. Also, investors need to avoid shifting money from mid-caps to large caps just going by valuations. In a growing economy, the smaller caps are likely to do better than mid-caps and large caps.
image
Business Standard
177 22

Market is not overvalued: Sunil Subramaniam

Interview with chief executive officer, Sundaram Mutual

Valuations in many sectors will be justified by the earnings growth outlook, says Sunil Subramaniam, chief executive officer, Sundaram Mutual. In an interview with Ashley Coutinho, he says the drop in commodity prices last year has not yet reflected in company earnings. Edited excerpts:

Do you think the market is overvalued?

We do not believe the market is overvalued, given the stage at which the economy is. While the valuations are higher than long-term averages, several sectors, such as capital goods, are still not fully reflecting the growth potential.  The market is still discounting 2016-17 earnings, but as the October earnings come through the focus will shift to 2017-18 earnings. One more year of earnings growth will be factored in, so you will see valuations in many sectors will be justified.

How do you see the July-September earnings panning out?

The drop in commodity prices last year has not yet been reflected in company earnings. That impact should start coming through this quarter. Broadly, commodity intensive and highly leveraged companies might show widening margins in the coming quarters. From April, 1 we had the marginal cost-based lending rate (MCLR) coming into play, which will lower interest costs for companies. So in the next two quarters rate sensitive and commodity intensive companies will show better profit margins. Thirdly, order books will receive a boost from festive demand.

What is your view on the economy?

The interest rate cut has shown that the Reserve Bank of India is shifting its focus towards growth. The rate cut will benefit rate sensitive sectors, especially during the coming festive season. The monsoon, and the rate cut will create increased demand. The goods and services tax can boost growth to 8.5 per cent.

The consumption boost led by the and the will drive the first leg of economic revival. The capital expenditure cycle will recover when consumption shoots up and the capacity gap narrows.

Mutual funds have remained net buyers of equities. Will the trend continue?

Growth in systematic investment plans is pegged at around Rs 4,000 crore per month. This means roughly Rs 50,000 crore is coming in with a 3-5 year horizon. Funds have been buying continually, which is why events like have not had much impact on the market.

What are the risks for flows?

flows will be sensitive to international news, the timing of the US interest rate hike and the outcome of the US elections. But the impact will be largely in large caps and large mid-caps. The US rate hike will be a positive in the long run as it will benefit India’s export prospects. Large caps may see a correction in the short term following the rate hike.

Japan and Europe are not showing any signs of recovery. While quantitative easing may be slowing down, the negative interest rate cycle means money will flow in search of higher returns. We expect India to be a significant beneficiary of allocation to emerging markets.

What is your advice to investors?

Investors should enter the market through mutual funds, not stocks. They should decide their allocation based on their risk appetite and age, and not valuations. Valuations reflect higher growth expectations, which we believe will play out. Also, investors need to avoid shifting money from mid-caps to large caps just going by valuations. In a growing economy, the smaller caps are likely to do better than mid-caps and large caps.

image
Business Standard
177 22

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