Q&A: Vetri Subramaniam, Religare MF

'Current valuations at a reasonable level'

The corrections in equity markets have stoked positive sentiment, as fund managers are back to buying. Vetri Subramaniam, head of equity funds at Religare Mutual Fund, in an interview with Chandan Kishore Kant, says current valuation is close to long-term averages, a good time to enter equities as the prospect for returns is significant. Edited excerpts:

How do you read the equity markets?
The markets have come back in a comfort zone and are more attractive now. The current valuations are in sync with the 15-year average PE (price to earnings) muLtiple. The apparent takeaway is that when valuations are close to the long-term averages, prospects for future returns go up significantly. There are issues in terms of earnings forecast and there could be more downgrades, but with the current reasonable level of valuations, there are opportunities of stock picking.

So, are you back to buying?
Yes. We are gradually raising it. Rather, we are shifting preferences within the portfolio. Late last year, we had under-rated the financial sectors and had stopped buying stocks in the domestic consumption space, as they were too expensive and we were worried about the margin pressure. Now, we have started re-allocating money back to these sectors, as we feel some degree of corrections have come through in the banking space, with which we are a lot more comfortable.

So, for 2010-11 and 2011-12, what are your estimates of overall earnings growth?
For FY11, the consensus is around 28 per cent, as the three quarters have been pretty much in line with estimates. I think the overall year's growth will be 26-27 per cent. On FY12, the earnings growth should be 20 per cent. But, I think this needs to be cut to 15-16 per cent due to margin pressure.

In view of cut in earnings forecast this year, where do you see the markets?
Valuations are a better way to look at the market. Even if we presume that earnings have to be cut and growth is 15 per cent, that still means the market is trading at 15 times. It's not the cheapest valuation but is a reasonable level. But what kind of performance we can see in the next three-six months still remains a challenge, because we have got issues like inflation. Short-term returns are very hard to predict , but with valuation going back to 14-15 PE and over the next two-three years if we sustain earning growth of 14-15 per cent on a CAGR (compounded annual) basis, then as an equity investor, the prospects of reasonable returns are there, if one has a three-five year view. The next one or two quarters will be a challenge.

What issues do you foresee in the short term?
Manufacturing inflation is on the rise, which is worrisome. We expect a policy rate tightening of at least 50-75 basis points this year, which will push interest rates up. The third issue is that the last two years have seen growth coming on the back of government's excessive stimulus, which is not sustainable from the long-term perspective. We need to see that balance shift to investment, which will be more important in determining the returns from the markets one year down.

What should investors do?
What is important for an investor is if he buys at the right price, the prospect for future returns goes up correspondingly. So, from that point, I believe an investor is getting a fair price at these valuations.

What is the biggest negative in our economy?
We need to change our view to quality of growth. I think this nine per cent (GDP growth) fixation has been very harmful for us. Even seven-eight per cent growth in the global perspective is excellent, if inflation can be kept at four-five per cent.