Equities not the only game in town: Vetri Subramaniam

What is your assessment of fixed income versus equities?
For too long, equity has benefited from the theory that there is no alternative to equity to earn a reasonable return, because debt was not giving you anything. Now that the US 10-year bond gives 3.6% and the India 10-year yields 7.3%, fixed income for the first time in many years has started to become a reasonable alternative. Due to this, there will be some reallocation of money between equities and bonds.

So, would you prefer fixed income over equities?
While India is much better than the rest of the world, it will not be a great year for growth. In terms of forward earnings, various estimates put it at 17% for March 2024, roughly giving a PE (price to earnings) multiple of 18 times and an earnings yield of 5.5 times. Valuations have derated from where they were one year ago but they are still above the long-term average. They are not very attractive. The needle is favouring bonds over equities. Also, if inflation can be brought down to 4%, it again is attractive for bonds. So, there are reasonable alternatives in the fixed-income domain and equities are not the only game in town today.

What are the themes that you are betting on these days?
The real way to look for opportunities is to spot areas where there is a combination of bad news, and some degree of margin of comfort in business. These are in segments that have an external focus like IT, pharma, global commodity business, where there are opportunities at a stock, sector and geography level. Our thought process over the next few days based on how prices behave is to look at IT as an opportunity. The sector has seen derating while the medium-term story is intact. The other place is pharmaceuticals, where valuations give comfort and companies’ return on capital is improving. Financials are more mid-cycle. The big chunk of performance has come in CY22, but selectively there could be opportunities there, where the risk-reward matrix is favourable. In many of the domestic structural growth stories, the valuations are quite challenging, though we can see 5-10 year growth opportunities.

In core consumer and durables, we find valuations being challenging as the growth is well known and we do not get any advantage.

Many of the consumer internet companies that came up with IPOs have been beaten down sharply. Do you find value there?
The bigger issue is that business models of consumer internet companies are still evolving, something which we felt when their IPOs came. Broadly speaking, we are sensing a flux in business strategies of these companies. They are still experimenting and consistency is still evolving. We own small positions, but we are waiting for stabilization of business models.