With the stock market at a record high, is the risk-reward ratio no longer in favour of the investors?
We are still positive on the Indian equity markets from the long-term perspective, if the growth opportunity and key catalysts remain intact. We believe investors should view the ongoing market correction and volatility in the context of the sharp up-move the Indian markets have seen in the past 12-15 months. Following such moves, market consolidation is not surprising and is often healthy for the market as a whole. In our opinion, the risk-reward ratio continues to be favourable for long-term equity investors.

Has the current earnings season delivered on expectations?
The ongoing earnings season has had its share of positive and negative surprises. But overall, it seems to be delivering on expectations. So far, the revenue growth has been broadly in line with expectations at about 8% for Nifty, but profitability growth has exceeded expectations at 6% year-on-year. There have been positive surprises in the discretionary consumption sectors like jewellery, cement and consumer electronics, which have reported better numbers than expected. Even in the consumer universe, volume growth has been better than anticipated as the impact of demonetisation seems to be fading. We have also seen some strong results in auto and financials, whereas large pharma companies have disappointed.

GST rates are finally in place. Are there any factors that have taken you by surprise?
While the expectation was that GST could be inflationary, the announced rates suggest it is likely to reduce inflation. Most primary articles and food categories have been assigned lower tax rates, which would reduce CPI inflation. Most of the rates are largely in line with what was anticipated. However, building materials, five-star hotels, detergents, hair creams, ayurvedic products and multiplexes have been assigned higher than expected tax rates. There have been a few positive surprises like cigarettes, SUVs and coal.

Which themes or sectors do you expect to do well over the next 3-5 years?
We are positive on the banking and financial services sector in general, and the housing finance and insurance sectors in particular. Some of the key themes we find attractive for the next three to five years are: financial savings moving from physical to financial assets, shift from unorganised sector to the organised, and plays benefiting from structural changes in rural India.

Do large-caps make more sense at current levels or do you think mid-caps still hold more potential?
Mid- and small-caps as a category have had a dream run over the past 3-4 years. Over 2014-16, the CNX Midcap 100 Index has posted 21.2% CAGR returns, while the large-cap CNX Nifty Index has posted only 9.1% returns. As the earnings trajectory for large-cap gains traction, the large-cap performance could revert to the mean. Going forward, in the medium term the risk-reward seems more favourable for large-caps, given the expectation of earnings revival and the valuation differential between large-caps and midcaps. Nonetheless, the long-term potential for mid-caps remains strong since the probability of finding fast-growing and emerg ing companies is higher in this category.

Is the buzz around realty stocks justified? Mutual funds have shunned this segment for some time now. Is that likely to change?
The real estate sector has seen some key developments in recent times. These include the implementation of the Real Estate Regulatory Authority (RERA), the push for affordable housing, and issuance of government sops like the Pradhan Mantri Awas Yojana. Successful implementation of RERA should be a key positive for large organised real estate companies as it would allow them to gain market share from the unorganised segment. While there are structural positives for the sector, in the near term it is witnessing oversupply in most of the key markets, due to the subdued demand over the past few years. It could take another 4-5 quarters, or more, for demand and supply in the sector to reach equilibrium. Moreover, given the poor corporate governance standards in this sector, our advise for investors is to choose and stick to quality companies that have proven track records.

Is the long -term structural story for IT firms intact or should investors moderate return expectations?
Indian IT services companies are going through a major transition as their legacy business is being challenged by newer technologies in the digital era. The legacy business is witnessing major changes on two fronts—pricing and automation. As a result of this, both volumes and pricing are under pressure. These issues are reflected in Nasscom’s revenue guidance, which has been steadily declining for several years, and stands at 6-10% for 2017-18, down from a high of 13-15% in 2014-15. Though the digital vertical is growing rapidly, for many Indian IT services companies, its contribution to overall revenue is still low, and hence, not enough to negate the pressure from the legacy vertical. In the long term, many of the key Indian IT firms should be able to successfully transition their business models, but in the near to medium term, growth could continue to be challenged for most companies in the sector.

 29 May 2017, 07:58 AM