Indices weighed down by ‘tired business models’, says SBI MF’s Balachandran

The fatigue among index constituents is one reason investors are willing to pay up for new-age listings.

India’s equity benchmarks are weighed down by “tired business models” that no longer reflect future growth potential, according to Dinesh Balachandran, head of investments at SBI Mutual Fund.

SBI Mutual Fund manages assets in excess of Rs 12 lakh crore.

“Logically speaking, the index should look very different five to 10 years from now,” Balachandran said in an exclusive interview with Moneycontrol. “Many of the heavyweights today are tired businesses—IT services, large generic pharma companies, even consumer majors that haven’t reinvented themselves. These models are mature, and in some cases, vulnerable to disruption.”

Balachandran said he can’t see Indian IT services companies pivoting to AI or similar technologies in a meaningful way that would reinvent them, suggesting they’ve entered the mature phase of their business cycle. Similarly, large generic drug manufacturers have also reached maturity. “Indian generic manufacturers haven’t invested in R&D to develop anything new; in fact, they’ve pulled back, lacking the patience or will to pursue it.” That leaves them with a business model that, while successful in the past and backed by strong management, now looks increasingly tired, he said.

Despite that skepticism, some of these businesses still feature in the fund house’s portfolio. “For many heavyweights, conceptually I’m buying them only because of valuation comfort, not because I expect double-digit earnings growth for 10 years,” Balachandran said. “It’s really tough to underwrite that kind of future.”

The fatigue among index constituents is one reason investors are willing to pay up for new-age listings, he added. “Even smart guys are rushing into some IPOs because they feel at least there the future is bright,” he said.

Still, Balachandran has cautioned against chasing every deal. “For us, nothing is buy at any price. It all comes down to valuation,” he said, pointing to asset management as one sector that remains structurally attractive, albeit cyclical.
The fund house favours businesses with clear category dominance. “When one company is meaningfully ahead of its peers and able to sustain that, it’s a positive,” he said. “We’re inherently attracted to those models, but then the question is always: how much can you stretch on price?”

Balachandran also ruled out blindly accepting clearing prices in IPOs. “We don’t do IPOs at strike price. We have our limit—if the issue clears above that, we walk away. To just say ‘take whatever the clearing price is’ doesn’t make sense to us,” he said.

SBI MF has stayed away from several recent offerings despite buoyant investor appetite, citing both valuations and conviction gaps. This is despite SBI MF raking in the biggest share of the MF inflows month after month. “We’ve said no to some CDMO IPOs and to names in the renewable space. These are good companies, not junk, but we weren’t comfortable with valuations or with the business models,” he said.

On some of the most awaited IPOs such as Groww and PhysicsWallah expected to hit the market soon, Balachandran said their investment call will depend squarely on the valuations. He said the business models are impressive, but that alone will not be enough to decide whether SBI MF schemes will invest in them.

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