The Hindu Business Line : `Going by our P/Es, there is scope for further improvement'

MR PRASHANT JAIN, CIO of HDFC Mutual Fund, does not come across as a fund manager in a hurry. But behind that imperturbable stance is a heart that bleeds for equities.

More readily now, with stocks responding so well to increasing corporate profits. He, however, tends to temper the market's enthusiasm by suggesting that high risks do not necessarily lead to high returns.

"Strangely enough, investors have felt more comfortable buying stocks at higher prices", he says.

Excerpts:

How do you read the latest Budget?

A certain measure of continuity is evident. The underlying theme, as the Finance Minister said, is growth. Having said that, let me say that major policy initiatives are already there, a situation that somewhat dilutes the Budget's exact relevance.

A few key themes have driven successive Budgets, ones that would possibly continue to guide our policy makers in future. These include economic growth, infrastructure, fiscal issues and employment.

This Budget, as well as others in recent times, have embodied certain broad, constructive policies, and should be looked at from that perspective.

How would the leading sectors react to it?

Well, some areas would clearly benefit from the rise in disposable incomes as well as the planned expenditure on agriculture and infrastructure. Autos and consumer durables would do well on the back of higher spending. Cement would get a boost in the context of infrastructure development. The Budget is probably neutral for oil refining companies, while it may be a bit negative for marketing outfits in the short run. For software, tax exemptions have been retained, which is a positive sign for companies operating in that domain.

What are the issues that the Budget does not address?

A lot has been done already but more has to be done with regard to land reforms, labour reforms, urban infrastructure etc.

Tax compliance is generally still weak in India. There has to be some more simplification of indirect taxes. State-level reforms need to be pushed forward.

In other words, what has to be covered now would be the balance 20 per cent.

With regard to stocks, is there room for more upside?

The index is at around 6,500 or so and investors may well think this to be quite high. I would urge them not to look at it in absolute terms. P/E multiples are a better indicator and going by our P/Es, the India story is still strong. There is scope for further improvement.

In fact, one should remain adequately invested in equities.

Investors still do not understand equities well. Do you agree?

Despite heated discussions about stocks, certain sections of the market appear to hold coloured perceptions about investing in them. Equities are a rather simple asset class - hold them for 10 to 15 years and returns would be in line with the profits of the companies concerned.

If profits have gone up, say, 10 times, returns too would roughly increase in the same manner over this period. In the short or medium term, however, equities can confuse you greatly.

Mind you, it is not possible to predict the direction in which stocks would move if the holding period is short. Short periods would be most definitely marked by volatility.

Surprisingly, the average investor in this country is a long-term player when it comes to allocating money to real estate and gold. Not when the asset concerned is equity. He or she would then feel the urge to monitor prices every day!

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`Going by our P/Es, there is scope for further improvement'