A level of 21000 looks sustainable on Sensex: Atul Kumar

The Sensex is trading at almost 24 times 12-month trailing earnings per share (EPS) and almost 19 times FY11E earnings. Do you see a case for market re-rating or sustaining these levels?
Markets in India have traded at 16-17x
P/E on an average. Given the estimates of
approximately Rs1,250 EPS for FY12, a level
of 21000 on Sensex looks sustainable.

After sometime, the markets will start factoring FY13 EPS. Given some growth in earnings, the numbers of FY13 are likely to be better than FY12, hence a higher Sensex figure is possible. However, this is not going to be a smooth ride, and volatility could exist since FII mood swings could drive prices, as they have done recently.

Domestic consumption had helped the companies last year. What would lead to corporate earnings growth in coming years?
Post the global financial crisis, fiscal measures and lower interest rates have encouraged domestic consumption.

This consumption is likely to grow in the future as well, given rising incomes and a younger working population. Going ahead, corporate capital expenditure and infrastructure are likely to accelerate given the shortage of capacity and infrastructure bottlenecks.

Which themes appear promising at these levels from a long-term perspective?
We broadly look at three themes to play the India story - domestic consumption, exports and infrastructure. While each one is interesting, one needs to look at individual companies, quality of earnings, credibility of management, and overall valuations before investing.

FII inflows have surged in September. What do you see driving the inflows, and do you expect the momentum to continue?
Yes, with markets back to high levels, there have been significant FII inflows during the past couple of weeks.

But it is difficult to take a call what they are going to do the next season. However, given the cheap availability of global money and waning of risk aversion, the outlook is optimistic towards greater inflows.

Also, considering that the India growth story is an ongoing bestseller, with growth in developed countries looking lean, and speculation that China might slow down as well, FII inflows should be expected to maintain.

Are there any negative triggers that you foresee on domestic and the global front that can spoil the party in the near term?
From an Indian perspective, overall inflation remains a risk. And though inflation is currently high, there is some hope that if monsoon keep up their good work, food inflation in specific could fall. Ironically though, there will always be a certain level of inflation in an economy like India which is growing at 8%+ levels Also, any upward movement in crude prices would also hurt Indian markets as it impacts trade deficit, fiscal deficit and inflation. Any untoward event in the global financial markets can change the sentiment.

The portfolio of your long-term equity fund is more aligned towards financials and IT services. What seems to be the driving factors for these holdings in the medium term?
As a part of our investment philosophy, we do not make sector calls. We make stock calls that lead to certain sector weights. And because of such stock calls, consumer discretionary, financials and IT are some of the bigger weights in the portfolio of the Quantum Long Term Equity Fund.

While many stocks in these sectors have run ahead of fundamentals, we are still seeing upside potential in some of them. However, this potential has reduced from the levels they were at, previously.

What do you look for in companies while making investment decisions in the stocks?
We follow a very disciplined investment process at Quantum. Our in-house research team continuously monitors a universe of stock ideas for investment. Any stock idea will make it to the scheme portfolio only if it meets our valuation criteria. We are bottom-up stock pickers; hence we do not make any macro calls for the purpose of scheme portfolio construction.

We are insensitive to the benchmark, and to the composition of the benchmark, you may, therefore, find wide deviations between our scheme portfolio weights and the weight of stocks in the benchmark.

Our investment criterion is value based. We look at the business of the company, the environment in which it operates, the credibility of the management and their long-term goals, and whether the financials of the company would be able to support the goals they have.

All in all, we look for companies that have good and sustainable business models, and are led by competent management teams. They should be fair to minority shareholders and should be trading at reasonable valuations.