Religare Mutual Fund, which manages more than Rs 11,342
crore, has raised exposure to information technology, mid-cap finance and
telecom firms, which are better insulated against high interest rates and its
impact on demand and profit margin, chief investment officer Vetri Subramaniam
said.
Engineering and utility companies are his contrarian bets,
while he prefers to stay away from real estate and banking stocks.
"Valuations are below average and provide a degree of
comfort for investing," he said, adding, "The market is almost 10%
cheaper than long-term averages. Now is the time to pick quality stocks."
Indian markets have fallen more than 18% since the beginning
of this year. According to ETIG Database, more than 1,600 stocks, among 2,500
actively-traded securities, are currently trading close to historical lows.
Even index front-liners in sectors such as banking, infrastructure, IT and
capital goods are trading 15-20% lower than their year-ago prices.
Subramaniam has increased allocation to TCS, Infosys
Technologies, NTPC, Power Grid Corp, BHEL and Bajaj Corp in several of his
funds. He, however, has stopped buying FMCG and healthcare stocks as a result
of steep valuations. Torrent Pharmaceuticals, HDFC Bank, ITC and Lupin are
among stocks where he is reducing exposure.
He is not comfortable investing in banking shares as he
expects non-performing assets of lenders to rise in coming quarters. Lower
sales volume and poor corporate governance are reasons for his aversion to real
estate stocks. He is bullish on telecom and IT as these sectors are fairly insulated
against inflation-induced erosion of market value.
"We're overweight on telecom because of healthy volume
growth and new customer additions. IT has seen a fair deal of valuation
compression over the past few months. But IT companies should do well on
account of steady order flows," he said.
He prefers well-managed companies with low debt, stable
operating margin, low capital requirement, that operate in non-competitive
spheres, with easy cash flows and trading at lower valuations because of negative
sectoral or market overhang. Market correction since the beginning of this year
has normalised stock valuations, he said.
"Valuations are supportive and we are finding
opportunities for stock picking However, headwinds persist. Sovereign debt
crisis in Europe, US slowdown and decline in corporate earnings are key areas
of concern," he said.
Consensus earnings for FY12 has come down 7% over the past
six months and is currently hovering at 15% levels. Apart from
inflation-related margin compression, Indian corporates are now staring at a
significant decline in demand, he said.
"Pressure on margin is very visible now...Consumer
demand for high-ticket price products has already come down over the past few
months," he said, adding, "The bigger concern now is drop in actual
volume or demand. We do not rule out several 'volume-cut' driven downgrades
over the next few quarters."
He believes that the Reserve Bank of India has come to the
last stages of rate hike cycle with the 25-basis point hike in policy rates on
Friday. However, he does not expect the central bank to cut rates anytime soon.
"We're nearing the end of rate hike cycle, but only when we see a
moderation in inflationary pressure and sluggishness in growth, we'll see the
RBI reducing rates," he said.
Apart from sagging corporate earnings and a general slowdown
in growth, European credit crisis and a slowdown in the US will also have a
direct bearing on Indian equities market, he said. "The extent of concern
about growth in developed economies has heightened considerably.
Looking at recent data, the odds of the US slipping back to
recession are quite high. A disorderly outcome in Europe can impact financial
markets the world over," he said.
Source: http://articles.economictimes.indiatimes.com/2011-09-19/news/30175969_1_valuations-vetri-subramaniam-religare-mutual-fund/2
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