Valuations in Indian markets have become reasonable: Mirae's CIO Surana

Having nearly 30 years of experience, Neelesh Surana is a seasoned hand in the equity markets. This may explain why he seems unfazed by the recent downturn in the Indian equity markets. At a time when most investors appear tense, Surana perceives the corrections as "healthy" and an opportunity for long-term investors to enter the market at "favourable levels".

Presently, Surana is the Chief Investment Officer (CIO) at Mirae Asset Investment Managers (India), where he oversees two funds - Mirae Asset ELSS Tax Saver Fund and the Mirae Asset Large & Midcap Fund - managing assets worth Rs 63,000 crore.

In this interview, he shares his views on current valuations and explains why the premium in Indian equity markets is justified. He also discusses the reasons behind the underperformance of the Mirae Asset Large & Mid Cap Fund and expresses his optimism for banking stocks.

With the ongoing downturn, do you think valuations have become attractive?

Yes, with the ongoing correction, valuations in Indian equity markets have become more reasonable, though not overly cheap. Historically, Indian markets have traded at a premium compared to global peers, which still holds. In our opinion, some premium is justified given India's strong long-term growth prospects for the next two decades, structurally lower cost of capital and relatively low market volatility arising from robust local flows.

The recent correction, which followed a period of almost 19 months without significant drawdowns, has primarily been driven by FII selling in response to global macroeconomic factors and weaker-than-expected corporate results for Q2 FY25. This correction is viewed as healthy and should be considered an opportunity for long-term investors to enter at more favourable levels. While valuations may not be at rock-bottom levels, they are attractive enough to invest through lumpsum. But, SIP (systematic investment plan) commitment should continue.

How would you summarise your investment philosophy? How has it evolved over time?

Our investment philosophy has remained consistent, anchored on two core tenets. First is portfolio construction, where we believe in diversifying across sectors and stocks to reduce risk while maximising risk-adjusted returns. Second is our stock selection approach, which focuses on three critical aspects. One, we invest in companies with strong competitive advantages, demonstrated by a return on capital employed (ROCE) of approximately 15 per cent and growth potential exceeding nominal GDP growth. Two, for management analysis, we assess track record, corporate governance and strategy execution capability. Third, regarding valuation, we aim to buy quality companies at reasonable prices, ensuring a margin of safety.

What are some fundamental portfolio construction aspects every investor should be aware of?

Understanding asset allocation and correlation is key. Low correlation among assets helps manage risk, and exposure to different sectors or asset classes can smooth out the impact of downturns in any area. In this context, balanced advantage or multi-asset funds are good choices for long-term investment. Similarly, while diversifying across mutual funds, selecting managers with different styles is important.

Overall, investors should follow a well-crafted asset allocation with equal weight to equities. Often, the action required is 'nothing', i.e. simply following a well-disciplined asset allocation with planned diversification.

What are your criteria for selling? When should an investor exit a stock?

Our investment decisions are primarily bottom-up, and selling or switching stocks is based on a reassessment of their intrinsic value versus market price.

We consider selling under three conditions. The first is when the market price of a stock significantly exceeds its intrinsic value. In this case, we reassess the position and may sell, especially if there's little upside left.

Second is when the underlying assumptions about a company's future prospects change (e.g., a deterioration in its competitive position, management issues or a shift in industry dynamics). In such cases, we reassess the investment and may decide to exit. Lastly, suppose there's a significant valuation discrepancy between stocks within the same sector. In that case, we may choose to sell a stock that has become too expensive relative to its peers, reallocating the funds to more attractively priced opportunities. A disciplined approach to both sides of the equation can help ensure that portfolios stay aligned with long-term objectives.

The Mirae Asset Large & Mid Cap Fund has faced underperformance over the past two years. What are the reasons and way forward?

The underperformance can be attributed to sectoral shifts and a few stock-specific factors that did not materialise as expected. Errors of omission were evident in a few high-valued sectors like industrials, defence, etc.

Regarding stocks not doing well, most of these errors, in our view, are "quotational" i.e., in names where the underlying business is facing temporary challenges, and would mean revert as these have sustainable competitive advantages. The way forward involves maintaining a focus on fundamental strengths, as the market correction presents a potential opportunity to build positions in a few areas that were missed earlier.

Banking stocks continue to make up a significant portion of your top holdings, more so than many of your peers. With potential rate cuts on the horizon, what is your near-term outlook for this sector?

While potential rate cuts are a factor to monitor, they are not the sole determinant for the Banking sector. The two key aspects to monitor are asset quality and margins. While there are some concerns about asset quality in the unsecured loan space, large private banks have generally managed this well. We believe that large private banks, which have a strong market position and healthy balance sheets, remain attractively valued and will continue to perform well despite short-term rate fluctuations. Their stable earnings and growth potential justify the large allocation in our portfolio, with active weight (i.e., above the benchmark) at 3-4 percentage points.

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