‘Headwinds are now becoming tailwinds’
The economy will get a push from the govt, consumption and investment: Kotak AMC MD
Things are falling in line from a macro point of view, says Nilesh Shah, MD, Kotak Asset Management Company, in an interview with BusinessLine .He says valuations have become fair because of corrections. Excerpts:
What’s your view on market valuation at this juncture?
There might be value in a few sectors and stocks, but, on an average, the market is fairly priced. In January 2018, the market was at a premium to its 10-year historical price to book. On January 16, 2018, small-caps were at 33 per cent premium and large-caps were at 10 per cent premium. Today, we are just around the historical average.
There has been significant corrections in small- and mid-caps due to which valuations have become fair.
From a macro point of view, we think that things are falling in line. Now, oil prices have stabilised, interest rates are coming down, banking liquidity is tight but not significantly, FIIs (foreign institutional investors) are occasional not consistent sellers, IIP (index of industrial production) numbers are improving, inflation is under control...
Urban and rural consumption is largely fine. The investment cycle had been subdued over the past few years. But now, we see green shoots emerging. If earlier, the economy was pushed by government and consumption, now it will get pushed by government, consumption and investment. Earlier, the economy was moving on an upward slope, so even if we were running, it looked as if we were walking. But now we will move on a downward slope, so even if we are walking, it will look as if we are running. Headwinds are now becoming tailwinds.
What does this translate into as far as earnings are concerned as the base is going to be higher, lower inflation will impact revenue and the number of downgrades are also more?
In one part of the market, earnings growth has been consistent — FMCG, auto, private banks, domestic pharma, NBFCs, etc. In other parts, it has been fluctuating — public sector banks, corporate-focussed private sector banks, telecom, global exportoriented pharma and, once in a while, commodity companies.
We are coming to an end of the NPA write-off cycle for corporatefocussed banks; the RBI report is also pointing towards that. In telecom, there is no sight of the fight coming to an end, but at some point, they will rationalise prices. Also, some global commodity companies may start turning around.
So in FY18, telecom companies, corporate-focussed banks, global-focussed companies reported losses or muted profits. The earnings of these companies will stabilise in FY19 and jump in FY20. So, you will see that what was working against you in earnings due to these sectors will start working in your favour. We will see a massive jump in profitability of public sector banks, corporate-focussed private sector banks, generic pharma companies and, hopefully, telecom companies.
Isn’t growth in the NBFC sector going to come down?
Undoubtedly. The NBFC sector moved into the space vacated by the public sector banks under the PCA (Preventive Corrective Action) framework. Because there was so much of opportunity to lend, NBFCs expanded crazily. But with high growth came asset-liability constraints. And then the IF&FS credit event created scare in the minds of investors, and those credits started coming under pressure and got accentuated into asset-liability mismatch.
Now, NBFCs are entering into a consolidation phase from an equity point of view — where some of them will raise equity capital, some will raise longterm debt capital and some will slow down their disbursement. This combination will result in consolidation. This phase can last 12-24 months. So, slowdown will happen, but it will still be positive growth.
What is your outlook on interest rates?
From a long-term view, inflation will be averaging 4 per cent with the RBI’s steadfast resolve to control inflation. If inflation is 4 per cent, repo rate will be 4.5 per cent — it can’t be 6-6.5 per cent. And if repo rate is 4.5 cent, the 10year yield will be 5-5.5 per cent — it can’t be 7.5 per cent. So, the long-term direction of interest rates is on the softening side.
Also, today, the government spends the majority of its tax revenue on interest servicing. That doesn’t leave it with anything to spend on infrastructure or development work. This problem can be solved by lowering interest rate and increasing tax revenue. From a near-term point of view, the inflationary expectations were way ahead of actual inflation. Now, fortunately, that’s getting sorted out. Globally, interest rates are stabilising. So, there is no pressure on Indian interest rates from a global point of view.
If volatility continues, could there be outflows from mutual funds?
In December 2018, there was a large flow into ETFs (exchangetraded funds) and so your normal flows into MFs looked lower. The total MF flows were about ₹17,000 crore including ₹10,000 crore into ETFs. But people focussed on pure equity flows, not the total flows.
There is no doubt that there is some amount of slowdown in equity MFs. This is primarily driven by the anxiety of investors to wait out. The year 2018 did not given any good returns to investors, so there is some amount of anxiety. Second, there is anxiety among investors about the election scenario. And that’s why we are seeing many investors keeping cash to invest rather than continuing to invest. Our guess is that if there is a correction in the market, flows will come back. They are waiting for the right level to enter the market.
But the good part is that SIP flows have maintained their momentum; ₹8,000-plus crore is coming through SIPs, which is quite decent.
What is your outlook on oil prices?
In the long term, if India, China and Japan play their cards well, oil prices can remain subdued for a long period of time. Today, OPEC is able to curtail supply by taking a call that the future price of oil is going to be higher.
If I can give the impression in their mind that 15-20 years down the line, prices will be much lower than what it is today, they will start producing more oil and stop curtailing supply.
Globally, interest rates are stabilising. So, there is no pressure on Indian interest rates from a global point of view