'Valuation remains a challenge for the Indian market'

Summary: A year ago, SBI Mutual Fund’s Dinesh Balachandran was far more defensive. Today, he sees a more balanced market shaped by improving earnings and stock‑specific opportunities. In this interview, he discusses why his philosophy has evolved from pure value to a three‑pillar framework, how he adjusted cash and sector exposure through the correction and why he is now taking bolder, conviction‑driven calls as growth visibility strengthens.

A year ago, Dinesh Balachandran was far more defensive about the markets than he is today. The Head - Investments at SBI Mutual Fund, who oversees six schemes managing over Rs 1.55 lakh crore, admits valuations still pose challenges, but also sees the tide turning. “Looking ahead, the market appears to have a more balanced setup,” he says, pointing to stock-specific opportunities and signs of improvement in earnings growth.

Over the years, his investment philosophy has evolved from being purely value-driven to what he calls a “triangle”—weighing valuation, business longevity and management quality in equal measure. Whether steering the five-star-rated SBI Contra Fund or the SBI ELSS Tax Saver Fund, Balachandran’s approach remains steady: disciplined when others chase momentum and flexible enough to recognise when the market mood has shifted from fear to opportunity. Below is the edited transcript of our conversation with him.

We’re in a phase where earnings momentum and valuations seem to be moving in opposite directions. How do you read this market — is it more opportunity or more risk right now?

What’s interesting is that I was actually more pessimistic about the market a year ago than I am today. When I think about this whole valuation vs earnings growth conundrum, it was much more acute 12 to 15 months ago. At that time, valuations were frothy across the spectrum and earnings growth was beginning to decelerate meaningfully. The most worrying aspect was that market participants didn’t seem to be paying much attention to this deterioration in earnings growth. That, for me, was a far more concerning sign. To that extent, I was much more defensive 12 months ago.

What has changed over the past year? When I look at valuations, yes, they still pose a meaningful challenge. But what we’re now witnessing is definitely more opportunities emerging from a stock-specific perspective. While many mid-cap and small-cap stocks still look expensive, from a bottom-up lens, there are certainly more opportunities. More importantly, in many companies and sectors, the deceleration in earnings growth now appears to be fully factored in, and you can actually argue that things might improve going forward. So, looking ahead, the market appears to have a more balanced setup; you can point to certain sectors showing positive acceleration in growth, while others may still languish. But overall, it feels far more symmetric compared to last year, when the picture was lopsided on the negative side.

How would you describe your investment style today? Has it evolved from being purely value-driven to something more flexible, perhaps combining valuation discipline with an understanding of market psychology and business longevity?

This is something that has definitely evolved over time. It’s not just today. When I look back, I’d say that in the early part of my career, I placed, in my opinion, too much emphasis on valuation alone. Over time, it has evolved to what I now think of as a triangle—you essentially have to assess the longevity of the business model, the competence of the management team, and the valuation. In an ideal world, you’d want the perfect combination of all three, but since we don’t live in one, you have to make compromises along the way.

If I compare myself with my peers in the industry, I probably still place greater emphasis on valuation than most. But yes, I’ve also become much more conscious about the longevity of the business model and the quality of management. So, that balance has evolved meaningfully over time.

Contrarian investing thrives on discomfort, buying what others avoid. In today’s market of broad optimism and rich valuations, what kind of discomfort are you willing to own?

If I think about the last 12 months and what we’ve actually done in the funds I manage, we took a very significant cash call wherever possible. For example, in the Contra fund, the cash levels rose sharply, up to the maximum allowed within our framework, because we were quite uncomfortable with what we were seeing then. Even in the Balanced Advantage fund, which follows a dynamic asset allocation framework, our equity exposure went below 30 per cent, which has now moved up to around 60 per cent.

So yes, valuation is still a challenge for the Indian market, but there are definitely more opportunities emerging from a stock-specific perspective. Where you have clear earnings visibility, valuations look stretched and less comfortable. But elsewhere, if you take a slightly longer-term view, there’s valuation comfort and a potential to make decent, if not spectacular returns. In a way, it feels better today than it did 12 to 15 months ago.

Historically, value tends to shine after policy or rate inflection points. With FY26 shaping up as an earnings catch-up year, do you see the environment turning back in favour of value, or has market structure tilted toward growth?

To some extent, the distinction between value and growth is a bit artificial. At the end of the day, you obviously want earnings growth, and that's the whole point of investing in equities; otherwise, we'd all be investing in fixed income. The idea behind equity investing is to capture earnings growth, but with a margin of safety, which means you don't want to overpay. So ideally, you want growth, but with that cushion of valuation comfort.

That's why, when I think about the Contra fund, I don't view it as a pure value fund. Value, as a factor, is an inherent subset of it, but there's much more to the strategy than just buying cheap stocks. It's a far more holistic approach.

Now, let's talk about the market from a style perspective, where companies are categorised as growth-oriented or value-oriented. I'd say that as growth begins to pick up in the economy, there could be a tilt back towards the value style. So, if I were to generalise, I'd say the balance seems to be shifting, at the margin, back in favour of value.

Around October last year, your Balanced Advantage fund’s equity exposure was close to 30 per cent, and you gradually increased it as markets corrected and visibility improved early this year. What typically guides that shift for the fund?

In a Balanced Advantage fund, we essentially rely on three pillars that guide the asset allocation framework: valuation, sentiment and the near-term earnings outlook.

When it comes to valuation, we make two key adjustments. First, we apply a cyclical adjustment because many sectors are inherently cyclical. If you simply use the last 12-month or next 12-month price-to-earnings ratio, you risk misjudging these businesses, since their earnings can be volatile. So, we smooth earnings across an entire economic cycle—this is where the Shiller P/E concept comes in. Second, we assess valuations on a relative basis, equity versus fixed income, rather than in isolation. So, it’s a relative valuation exercise rather than declaring equities as outright cheap or expensive.

The second pillar is sentiment. We track this through an in-house sentiment index that measures investor behaviour across various factors—the range varies from euphoria and greed on one end to fear and panic on the other. We find sentiment to be mean-reverting by nature.

The third component is the near-term earnings outlook. Now, last year, across all three parameters—valuation, sentiment and earnings outlook, the framework was flashing red. Valuations were stretched; markets were more expensive 90 per cent of the time historically. The sentiment index was around +0.8 on our -1 to +1 scale, which typically signals caution. And the earnings picture was weakening, with visible deceleration. So, all these factors together warranted a low equity allocation.

Fast forward to this year, around March, things began to improve. Bond yields fell meaningfully, making equities relatively more attractive. We also saw a broad-based price correction, making valuations more reasonable. Sentiment, which was extremely euphoric earlier, normalised closer to neutral levels. While the earnings outlook remained somewhat mixed, the combination of better valuations and improved sentiment justified increasing equity exposure.

So, we raised allocation when the risk-reward turned more favourable. Broadly, our goal for the Balanced Advantage fund is twofold: to deliver returns higher than fixed deposits over any rolling three-year period and to do so with significantly lower volatility than peers or benchmarks. Thankfully, by operating in a counter-cyclical manner, we’ve been able to achieve both.

Some of the recent IPOs saw strong institutional demand and fairly expensive pricing. What gives you the conviction to invest with such pricing?

This is where, even personally, I feel I’ve evolved over time. Going back to that triangle I mentioned earlier, you have to think about the business model, how robust it is and what the longevity of growth looks like. Then you evaluate the management team on how competent and capable they are of creating new growth avenues. The advantage of a good management team is that they can generate opportunities that don’t exist today, simply because of their skill set. That’s something worth paying close attention to.

And then, of course, the third component is valuation. Now, what’s happening with a lot of new-age companies is that they’re still in the growth or capital investment phase. As a result, their reported profits are low, which makes their valuations look optically expensive. But I think it’s too simplistic to look at that number and conclude, “Oh, this is overpriced.” You have to factor in the other two elements, the business model and management quality, because they matter equally.

I’ve seen a lot of social-media commentary around some of these IPOs, and I feel it’s not that straightforward. Even for someone like me, who places a high emphasis on margin of safety, the key point is this: don’t be overly influenced by just one factor. A company can evolve meaningfully over time, and you have to keep that in mind when assessing its current pricing.

The SBI Contra fund’s long-term performance remains impressive, but recent one-year and YTD (year-to-date) returns have trailed the benchmark. What have been the key drivers of this short-term phase, and have you made any notable portfolio adjustments in response?

That’s a very relevant question. In mid-to-late last year, we were getting quite uncomfortable with market valuations. That’s why we significantly increased the fund’s cash levels. Additionally, within the invested portion of the portfolio, we shifted heavily towards defensive sectors.

Traditionally, when you think of defensive sectors, the obvious ones are IT, pharma, and consumer. Our idea was to stay parked in these areas until better opportunities emerged. On top of that, we reduced position sizes across holdings because we were uncomfortable taking concentrated bets. So effectively, the portfolio wasn’t taking any strong directional calls; our thinking was to stay cautious until the storm passed.

Now, looking back over the last 12 months, that caution on markets was probably justified; the market hasn’t done much, either up or down. However, the irony is that the defensive sectors, where we took refuge, have actually underperformed the broader market. IT, pharma and consumer have all lagged, which has weighed on the fund’s relative performance.

Even within the portfolio, some of our individual stock picks played out reasonably well, but because our position sizes were small, they didn’t translate into meaningful outperformance. So, while our calls were directionally right in some cases, the impact was muted.

Now, in response, I feel more comfortable with the opportunities available than I did 12 months ago. That means I’m willing to take more active calls and increase weights in the names where conviction is higher. We’re also beginning to take more sector-level calls, unlike last year when we were largely defensive.

Ultimately, it comes down to conviction. Today, I have greater conviction in specific themes and companies, and we’re no longer hiding in defensive sectors just for safety’s sake. It’s better to take a stand on ideas you believe in than to hide in so-called defensive zones.

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