‘We are bullish on large IT companies'

In a highly volatile market it's tough to manage assets that are too compact in size. The small base will have to cope with sharp falls if investment calls go wrong. But Quantum Mutual Fund has so far managed to overcome some of the tough phases in the market, delivering returns superior to the broad market. In an interview with Business Line, Mr I. V. Subramaniam , Chief Investment Officer, Quantum Mutual Fund talks about the way forward for the equity market and why Quantum thinks there could be a better year ahead.

Excerpts from the interview:

A while ago, you had said that the Sensex would go to 31,000 in 2012. Do you still hold this view?

We are still confident of the number. By June next year we expect to see this kind of number. It may get postponed by a few months, but we are confident it will be there next year.

Our logic is simple. India's earning growth is going up continuously. That comes from the background of sustainable economic growth of 6.5 per cent, though right now it's closer to 8 per cent.

We are looking at inflation of six per cent and, assuming that there is no serious dent in margins, earnings growth will be 12-13 per cent.

For the better-managed companies, it will be in the 15-16 per cent band. If you apply a fair PE ratio to that, markets can inch up to the level we have predicted.

If you look at consensus earnings growth for next two years, by FY-13 the expected Sensex EPS is 1399. If you apply a multiple of 18-20 times, you will find that a 26,000-30,000 range is quite possible.

With the global recession continuing, what is the outlook for the IT sector?

We are bullish on the IT sector because our logic is simple: if the recession continues in the West then cost-cutting will be a theme for large companies. The top managements will look out for opportunities to bring down costs and if that is to happen, IT will play a critical role.

If it takes $80-100 per hour in Western countries to develop a piece of software, the same software can be created in India at $30. Hence, it makes immense sense to offshore work to India. Like any of the previous crises, the reason for outsourcing or offshoring is highly valid because of the cost arbitrage. Therefore, we see lot of opportunities.

The second thing that happens during a recession is that companies stop doing business or go for consolidation. In 2008, consolidation happened in the banking and financial service industry. Today's economic slowdown throws up a lot of opportunities in a variety of the sectors.

For instance, it could be metals and banking. While in the process of consolidation, companies need to bring their IT systems together and that creates new opportunities.While selecting IT stocks, we look out for liquidity and prefer large companies.

Do you see a turnaround ahead for capital goods companies?

If you look at the CMIE data, even now on a month-on-month basis, a lot of orders are bagged by companies.

There are many entrepreneurs who still want to spend on capex and to invest. What happened in the last year is that government projects in the power, road construction and airport sectors witnessed a slowdown.

It is essentially due to policy decisions that these orders are not moving. So you may see a slowdown in those kinds of projects but corporate capex is based on business confidence and the outlook on the future.There could be some delay but I think it will all come back. We saw a capex cycle in the 1990s, and a slowdown between 1997 and 2002. So, we don't see much risk to the current slowdown.

The cycle can turn overnight. For example, oil price declines will change the outlook for most of the people. Or, if government is able to address some of the corruption-related issues, it can change the investment attitude overnight.

In fund management we will always look at valuations and currently stocks from the engineering space are lot more attractive, but one should have patience.

What is the outlook for interest sensitive sectors like auto and banks?

In automobiles there are two kinds of segments. One is commercial vehicles and then there are the four-wheelers and two-wheelers.

Clearly, in two-wheelers, we don't see much problem because of interest rate.

Public transport across India is pathetic except in key metros. Job opportunities are increasing not only in the metros also expanding in other smaller cities.

So, people have to be able to move about cost effectively. If you consider that logic, we will look out for buying opportunities in two-wheelers. The bottleneck we see is lack of petrol bunks in certain areas in the country.

As far as four-wheelers go, people generally only delay buying hem. They do not permanently postpone it. Bear in mind the income levels are going up and so is the wage inflation and same is the case with agriculture minimum support price.

Therefore, the demand will only be postponed. But the interest rate impact will be felt in commercial segment.

If some companies are postponing capex expansion, that will impact the commercial segment. The recent stoppage of mining activities will have a cascading impact even in this space. So, in automobiles some stocks are looking cheap and others expensive.

In the banking space, we think it's more cyclical. Higher interest rates will put pressure for some more quarters.

So for, say, six months, the deposits cost may go up faster than their ability to lend at matching rates. After six months it will be readjusted.

Fixed deposits rates will go down faster and improve margins. So we don't have any issue with bank fundamentals.

We think public sector banks, which have taken more severe beating than private banks, look interesting. But when we buy banks we look at the ones with good asset quality.

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