Subramanian said the banking sector offers the best combination of valuations and earnings potential. He expects healthy balance sheets, sustained double-digit credit growth and profit expansion to support returns over the next few years, creating scope for both earnings growth and valuation expansion.
Calling banks his highest conviction sector, he added that if lenders deliver two to three years of double-digit credit growth and… higher-teens profit growth, current valuations provide room for earnings compounding and a re-rating.
Subramanian said the information technology (IT) sector continues to face uncertainty as companies assess the impact of artificial intelligence (AI) on their business models. However, he believes Indian IT services firms are well placed to benefit from the growing need for AI implementation across enterprises.
He noted that organisations will need technology integrators to migrate existing systems while maintaining business continuity.
He added that current valuations provide a margin of safety for investors. “If you are getting equities at valuations, which are only slightly costlier than bonds, with a scope for capital appreciation, which you don’t have in bonds, I would say it is a risk worth taking.”
On the large-cap versus mid-cap IT debate, Subramanian said he prefers a stock-specific approach rather than making broad sector calls. He noted that some mid-sized IT firms may face less pricing pressure than larger peers, but cautioned that aggressive acquisitions have increased balance sheet risks for several companies.
He added that investors should judge acquisitions based on whether returns on capital exceed the cost of capital rather than whether deals are earnings-per-share accretive.
Subramanian was also cautious on sectors such as defence, aerospace and transmission, where valuations have risen sharply. He said broad-based sector re-rating often reflects investors’ inability to differentiate between companies, increasing the risk of valuation errors.
He said that investors should identify companies that may not justify current valuations rather than assume the entire sector will continue to outperform.
Looking at the mutual fund industry, Subramanian said investor participation continues to rise, supported by regular investment through systematic investment plans (SIPs). He noted that the industry has expanded from around one crore unique investors to six crore over the past five to six years and still has significant room for growth among households with investible savings.
For the full interview, watch the accompanying video
