Don't add into defence, infra; get into these 2 sectors instead: Sunil Subramaniam

Sunil Subramaniam, MD & CEO, Sundaram Mutual, says “the infra play has got a little stretch in valuation. It is time for consumption to pick up. Because so far, whatever consumption has picked up has been premium consumption – be it premium housing, cars with prices over Rs 7 lakh. I think the mass consumption is yet to pick up. Come election year with liquidity floating in the market, this festival season numbers will also come in. It is a delayed festival season with Diwali coming only mid-November.”

Where are your investments, apart from Sundaram Mutual Funds?
Nothing apart from Sundaram Mutual Funds. Everything is in Sundaram.

They say, never put all eggs in one basket.
No, it is not one basket. We have a diversified portfolio of 24 schemes there.

How are the markets looking? It has just been a week where markets have ignored all the bad news which came on the geopolitical front.
The reason for that is global capital liquidity at about $28 trillion, it is still looking for best places to park money. We are not directly connected with this particular conflict except for maybe an impact on the price of oil. But that is something which will affect the entire world. When there is liquidity, what do they do with their money? You cannot keep it in cash. That is why it is trying to find its levels and India as usual.

Our growth rate has not been affected by any of the conflicts. Except for the global financial crisis, whether it was Covid, whether it was the Ukraine-Russia war or the latest Israel-Palestine conflict, our economy has been stable at 6-7% GDP growth rate because we are an insular, domestic-oriented economy. We are attempting to grow. Our exports are only 2% of the world's exports. We are a very self-sustaining insular economy. If you want to break out of this 6% growth mode, we have to become more international. That is probably not going to happen right now because of the situation the world is in. But at least we are assured of that 6%.

When things go bad, somewhere domestically, we are still able to generate that GDP growth. I think that is a very big comfort zone to an FII. I would say that domestically also, what has happened is that the SIP book has now crossed Rs 16,000 crore. So, fund managers are getting money. Most mutual funds do not try to keep more than 5%, maybe 5-7% in cash and hence, any money that comes in, you have got to buy. When you see corrections happening because there is a panic reaction, there is always buying support coming in because fund managers are getting money from investors. Ultimately, the answer to your question is that there is liquidity heading towards the Indian market, whether from inside India or from outside India. That is the reason we are not overreacting to the bad news.

There is a lot of hullabaloo in defence and railways. How much of that is just hot air?
I would not use an extreme term such as hot air, but I think that yes, I do feel that they have gone a bit ahead of their self in that sense because it is a general aura of infra and these things are going to get a huge orderbook and all of that. But the key thing is the market. They do not have clarity on which companies are actually going to back the order. So, the market is buying up everything in that space and they are tending to get in an overvaluation space because ultimately when the orders get executed, only a few of these companies will get it. The rest of them are going to see a correction.

Second part is you are still trading on order book expectation. That will turn to order book conversion but it still does not convert to EPS. The point is that only when the order gets executed, the payments happen and reflect the earnings. If you are going to see an extended period of time, where if you take from a price to earnings or even a price to book perspective, these are going to look richly valued. Yes, ultimately, the company gets the order and will deliver its profits, will deliver and it will justify the price.

But there has got to be a lot of shake-up in that segment. I would rather stay away for incremental allocations into defence and infra-related areas for the immediate present period.

I would like to draw your attention to what is happening in the bond market. Last week, the bond market shot up and today it is not reacting to the inflation data. Isn’t it strange that inflation has come down but there is no reaction in the bond market whatsoever?
No, why should the market react to a short-term inflation management? What is the reason for the inflation coming down? The government has got stocks in its FCI godown. It is an election month and in India they are releasing the stocks, they are managing the inflation. It is not anything for a longer term yield perspective. I do not think the bond market needs to react to these inflation data number one.

Second, bond markets just like equity markets are forward looking. The data which has already come, is already history. It has already happened. What is the way forward? Now you are seeing that for the Rabi crop, 50% of the reservoirs in the south are full of water. So will there be enough sowing? Is inflation going to spike in January, February, when those harvests come out?

I do not think that is a short-term drop in inflation. I think what really happened was that there was a bit of a release of stocks in the market to keep prices under abeyance, given that this is an election season. I am with the bond market that does not jump to these things and assumes that yields are going to drop off. Just wait for the actual data for food inflation to come through.

Also, we still have the oil hangover. The oil price, Israel-Hamas conflict, Iran being a player there, how is that going to play out with the winter coming in? Already, OPEC had indicated a three and a half million barrel shortfall. Oil price trends over the next month and two will have more impact on the bond yields than just domestic inflation numbers. A lot of factors are at play. I am not surprised that the bonds have not responded to the temporary inflation numbers.

Give us some sector ideas, if not stocks.
Sure. The infra play has got a little stretch in valuation. It is time for consumption to pick up. Because so far, whatever consumption has picked up has been premium consumption – be it premium housing, cars with prices over Rs 7 lakh. I think the mass consumption is yet to pick up. Come election year with liquidity floating in the market, this festival season numbers will also come in. It is a delayed festival season with Diwali coming only mid-November.

These numbers will be reflected in the next quarter's earnings. Those will show a healthy trend. Consumption is due for a pick-up. It has room to go up. So that is my number one pick.

The second pick continues to be the banking pack because while NIMs may not expand, the loan book growth will compensate for the fact that NIMs are not going to further expand too much. So price into quantity, loan book growth into the NIMs will lead to higher profit reported from the thing. So I continue to remain strong in banking and financial services. These two will be my two prime sectoral picks at this point in time.