‘Market valuations are not very rich, though above mean’

In an environment where the economy is expected to clock good growth, it is logical for valuations to be on the higher side. In this context, the Sensex’s above-mean valuations do not look very expensive, says Pankaj Murarka, Head — Equity, Axis Mutual Fund. Edited excerpts from an interview:

The market seems to lack direction currently. What can trigger a definite movement?

We have to look at it in the context of where we’re coming from. The fact is that the economy has had a very sluggish growth over the last three years, and the market has had very sharp gains last year.

The new government has been on course in trying to accelerate growth. So, markets are in a consolidation phase given the movement they have had over the year. When we see a real uptick in the economy and improvement in corporate profitability, markets should take a direction.

Do you think valuations are expensive given the market’s gains and the lack of earnings growth?

True, valuation of the Sensex is above the mean that we have had over the last 15 years. But we are not very rich. In an environment where economic growth is going to improve over the next few years, it is very logical for valuations to be above mean; they are not very expensive in that sense.

Are you seeing any ground realities of the investment cycle picking up?

We clearly see significant improvement in the orders for the road sector. Likewise, we’re seeing momentum in renewable energy. In railway capex, things are yet on the drawing board but this should play out over the next one to two years; at the same time, there is also a good degree of ordering which will happen on the metro side for various cities. So yes, there are pockets of greenshoots.

We are in the early stages of revival in the capex cycle and over the course of the next one year we should be able to gain far more confidence in the improvement in the investment cycle.

Hasn’t a lot of this been factored into stock prices?

Well, in the capital goods sector, markets are valuing them at mid-cycle or peak-cycle earnings. So here at least, stock prices are ahead of the current fundamentals. But in my opinion, they are factoring in future potential of earnings.

What happens is that recovery surprises you on the upside. Our economy is going in the right direction.

There’s always a time lag in the translation of policies into ground realities. It will probably take a year more, but there’s no doubt it will happen.

What is your take on export-oriented sectors?

We still like the IT and healthcare sector as we think these companies will continue to deliver reasonable growth and they are very high quality globally competitive businesses.

As far as the other sectors are concerned, as we see improvement in the global economy, we should see some improvement.

Is the run over for consumer stocks?

The preference for consumer stocks is a global phenomenon. So, India is pretty much synchronised with what is happening with the other parts of the world. Consumer and consumer staple companies are as richly valued in other parts of the world as well.

How do you manage the mid-cap space, given the heady rush the entire set has had?

At the start of this rally, mid-caps were at around 40 per cent discount to large-caps. Now, they are at a 20 per cent premium. This has sent up a lot of stocks which have leveraged balance sheets or business models which are unsustainable.

We focus on businesses which have a sustainable competitive advantage. We look at the capability of the management to run the business. Finally, good corporate governance is essential.

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