Nifty valuations are reasonable: Sanjay Kumar

Interview with Head of Investments, PNB MetLife

India’s valuations are reasonable from a medium to long term perspective, given the country’s growth prospects, says Sanjay Kumar, head of investments at insurer PNB MetLife. A manager of assets worth Rs 12,000 crore, he shares his investment outlook with Samie Modak. Edited excerpts:

What is your take on the country’s economic prospects?

India is poised for solid growth over the next couple of years. The growth is coming on a very low base. Second, there are many projects which have been awarded but the delivery or execution hasn’t been there. These will pick up over the next couple of quarters. You have a declining inflation scenario, falling interest rates and low oil prices. All these will transform into a major consumption story for India.

The market is highly optimistic on corporate earnings growth. Do you share that?

The consensus estimates is high double-digit growth in earnings (for this financial year). Profits in the past few years have been depressed and to that extent, a sharp bounce-back is possible. So, even if the recovery is back-ended, I think the market will take that into its stride and start looking at 2016-17.

How do valuations look?

The market had this feeling of disappointment. A major concern was that things were not moving on the ground. At this point of time, the Nifty valuations are reasonable, not overvalued if one considers India’s medium and long-term growth story.

Which sectors look the most attractive?

We are quite positive on banks. They are a strong play on consumption and on financial savings. We are expecting an increase in financial savings. We also like automobiles, a play on a falling interest rate, improved consumer sentiment and low oil prices. We are positive on the (information) technology sector, given recovery in the US.

On which sectors do you remain underweight?

We are positive but underweight on the consumer sector, given the valuations. Not so positive on real estate. We are underweight on telecom, given the competition scenario and high (spectrum)auction prices.

What will be the impact of a US rate increase on the Indian market?

There could be temporary turmoil in the financial market when the US raises interest rates. But I don’t see major fund outflows from here. India is more comfortably placed when compared to a year before. The current account deficit and foreign exchange position is much better. India is one of the favoured of investment destinations, given the strong fundamentals and the growth orientation, compared to most other emerging markets. Large economies such as Japan and Europe are still having quantitative easing. So, that will contribute to inflows.

Do you expect domestic flows to remain strong?

Domestic flows, led by mutual funds, will continue to remain strong. In the insurance sector, Life Insurance Corporation is a very big player. Its investment decisions depend on a lot of factors, including divestments. We could see inflows from private sector insurers, as redemptions are expected to be lower compared to last year.

What key reforms do you expect from the Union government?

The government is trying to make India a better destination to do business. The recent measures like online auction of coal mines or online tracking of projects and clearances are good moves. Passage of the mining and insurance Bills are positives. There is no specific economic reform we're looking for but we want the reform process to be continuous.

What are your expectations on monetary easing?

The latest policy review was in line with market expectations. The Reserve Bank of India (RBI) has cited lack of transmission (of its rate cuts, by banks) and upside risk to inflation due to unseasonal rain.  We will need to look at four key parameters. First, inflation in general and food inflation in particular. Second, the transmission by banks. Third, supply-side measures and further reforms by the government. Fourth, of course, is  monetary action by the US Federal Reserve. If these factors are supportive, we expect one more rate cut in 2015.

Outlook on the debt market?

The latest RBI policy review was, more or less, accommodative. Also, the net issuances (by the government) this year will be less compared to last year. So, broadly, we expect the 10-year government security to remain in the range of 7.7-7.9 per cent for some time. Depending on the incoming data, we can see small rallies.