‘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.

ZY NILESH SHAH Man­ag­ing Di­rec­tor, Ko­tak AMC

Glob­ally, in­ter­est rates are sta­bil­is­ing. So, there is no pres­sure on In­dian in­ter­est rates from a global point of view

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