May 12, 2017 06:26 PM IST | Source: CNBC-TV18

Market not in bubble zone but pick stocks selectively: Nilesh Shah of Kotak Mah AMC

One could look at opportunities in spaces where the government is spending money from budgetary allocation, said Nilesh Shah of Kotak Mahindra Asset Management.

The Nifty at the last day of the trading week managed to hold on to its high of 9400 that it had scaled in the week. All the major indices hit record highs. Positive monsoon forecast, as well as the strong foreign institutional investor (FII) buying, aided market sentiment.

To know the way forward for the market and spaces that one could invest in CNBC-TV18 spoke to Nilesh Shah MD, Kotak Mahindra Asset Management and Ashwani Gujral

Shah says valuation wise the market is not in an expensive bubble zone yet but the stock selection and stock picking remains key. One needs to build an appropriate scenario.

One could look at opportunities in spaces where the government is spending money from budgetary allocation. Two, could be looking at operating leveraged stories and the third could businesses that are doing well because of the longer term trend of the shift in market share or business from the unorganised sector to the organised sector.

However, he advises caution on penny stocks, leveraged positions in futures and options by inexperienced people.

Talking about the banking issue- the divergence between the NPAs that the banks have reported and what the RBI is saying, he says in many of the private sector banks while the RBI’s assessment of NPA is higher than the management’s assessment, it is not that everything assessed by RBI will be written –off because they could be secured loans and one can enforce security to recovery loans.

On the earnings front, he says most of the numbers that are out tell us that effect of demonetisation is behind, consumer confidence is back and future looks better. However, the rollout of GST and its impact on businesses will need to be looked at.

Below is the transcript of the discussion.

Anuj: Right now what is good for the market, do you think this market needs to correct from here, are you deploying fresh money here because money is just pouring in and you have to do it, what is the call here now at these levels?

Shah: I have just returned from two days trip to Baroda in Ahmedabad and clearly my cousin brothers have started advising me which stocks to buy and how they will increase in value and they are turning out to be right. These are the typical signs where one can believe that markets have started becoming frothy. So, in the penny stocks definitely there is some amount of froth coming in. You have started seeing SMSs coming to you saying buy this stock, it will double by so and so day and so on and so forth.

There is probably also a demand for F&O leverage by inexperienced speculators. So, this is typically again a weak point in the market. So, I will advise caution on penny stocks, I will advise caution on leveraged positions in F&O by inexperienced people.

At the same time, I also returned from about 12 days trip to East Coast in US There I saw for the first time number of attendees in our meetings expanding from one or two to four or five.

Second, I saw higher appetite for a single country fund for India, like it exists for China. It doesn’t mean that money will start coming in tomorrow. However people are open and if we work hard, we should be able to get India dedicated money.

Third I saw family offices, endowment funds, fund of funds all gearing towards higher allocation to India provided they can pickup bottom up stocks. So, on a top-down basis on a 5-10 year view basis they all are extremely bullish on India. However, they need to be given appropriate stocks. It is almost like what Warren Buffett commented that

I am interested in India provided I can get a big deal.

So, in the short term there are pockets of markets especially in penny stocks and leveraged positions where there is need to be a little bit cautious.

In the longer end, we do see increased allocation from FII, provided we can provide them bottom-up opportunities.

Reema: How do we find these bottom-up stories now, how does one generate alpha? You told us about the stocks which we should perhaps avoid at these levels – the penny stocks, the leveraged stocks etc. Where does one deploy money then, what should be the approach to generate alpha now?

Shah: First we must accept that this is no longer the first-day batting pitch. It is the fifth-day pitch, so one will have to be cautious. You can’t be hitting every ball for four and six. You will have to place out your innings. So, do remember that pitch has changed. We still believe the opportunities there in the space where the government is spending money from budgetary allocation and hence there will be growth. Second, could be operating leveraged stories. Now there is enough liquidity in the banking system but credit growth has come down to a low level. Hence demand to some extent has been impacted. However companies are running their plants at 65-70 percent capacity utilisation, if over a period of time because of the banking liquidity and expanding credit growth demand picks up then the same plants will start running at 70-80 percent capacity utilisation.

The profit margin of 65 percent utilisation is substantially lower than what will be available at 80 percent utilisation. So, go for operating leverage companies.

Third, could be a bigger longer term trend which is visible today in the market and which I had talked earlier also – the shift of business or market share from unorganised sector to organised sector. Clearly brand consciousness of Indian consumers, demonetisation impacting trade payment channels and the likely rollout of GST, these are all factors which are increasing organised sectors market share vis-à-vis unorganised sectors market share.

So, you will have to build a scenario for future and invest. If your scenario building is correct then you can still make money in this market.

This market is similar to 2007 end or 2008 beginning where from 21000 markets indeed corrected substantially. However if you had picked up stocks in IT and pharma sector on a bottom up basis, they all outperformed the fall by a significant margin. So, stock selection is key, stock picking is key and you must now pay for the future by building appropriate scenario.

Anuj: You are sounding alarm bells here because a lot of people think maybe we are in a bit of an over exuberance, but not quite yet in 2007 and 2008 kind of zones, maybe more in 2003-2004 kind of zone.

Shah: Certainly I did not want to convey in terms of valuations. All I want to convey is that even in 2007-2008 high valuation which was substantially higher than today, stock picking delivered returns. The same scenario applies today also. So, I am not at all saying that we are in an expensive bubble zone.

Anuj: What did you make of the news flow on banks on Friday where there is some divergence between the non-performing assets (NPA), as declared by the banks and as recognised by the RBI, your thoughts on that?

Shah: One, servicing of the instrument or a loan vis-à-vis security of the instrumental loan is completely different. A loan can become NPA because it is not getting serviced properly. But it does not mean that it has to be written off provided you have appropriate security in your hand and more importantly you have ability to enforce it. So, my feeling is that in many of the private sector banks, while RBI\'s assessment of NPA is substantially higher than the management\'s assessment, it is not that everything assessed by RBI is going to be written off. These are secured loans and one can definitely enforce security to recover the loans.

I am sure all of you would have led WhatsApp message which is being circulated that the largest ever fire sale is going on in India Inc. and we have seen that once the assets get sold, it moves from weaker hand to stronger hand, then debt servicing does start happening. So, the truth lies somewhere in between what management has projected versus what RBI has assessed.

Reema: How have the earnings been for you so far? Has it been better than what you were anticipating and do the FY18 estimates look optimistic there or not?

Shah: One thing clearly the broad market numbers are getting vitiated by what one bank suddenly decides to provide in terms of NPA. For example, a large consumer durable company suddenly got classified as NPA in one of the banks. Now, this kind of one-off events does impact overall broad market earnings quite significantly.

We are more focused in our portfolios and here, so far, the earnings numbers which have come and the majority of them have already come, the numbers are more or less a little bit ahead of our expectations. The earnings are also pointing out clearly that the effect of demonetisation is now behind. Companies have recovered well. Consumer confidence has bounced bank and clearly, the future looks a little bit better. The management commentary is becoming a little bit positive.

Of course, everyone wants to put a caveat and the caveat for us going forward is the rollout of GST. While the government does mention that it will be revenue neutral, but within revenue neutrality, there could be a significant deviation in company-to-company and sector-to-sector. So, subject to an efficient rollout of GST not impacting businesses, managements have become more positive.

Anuj: The obvious question, is it still a buy on dips market or are you sensing first signs of correction?

Gujral: The question can be answered in many ways. Do I think it is a 500 point Nifty correction? No. Can it be a 100-150 point correction? That is possible. Can it be some sectors correct and others hold up, that is also possible. Like today, if you were in housing finance, it felt like a correction, but otherwise, Nifty was kind of flattish.

So, overall yes, it remains a buy on dips, but buy on dips to what level? 20-day moving average thereabouts, between 20 and 50, is a good place to buy. That is the equilibrium zone. So, if we get there the market would be again ripe for buying. As of today, given that upsides are difficult to come, it looks like we are not willing to go higher till we get back into the equilibrium zone.

Reema: Walk us through a few of your trading ideas that you have for next week.

Gujral: Given that I am not very positive on financials or NBFC and we have a bit of reason to have a sell-off, Yes Bank is a sell with a stop loss of Rs 1,520, target of Rs 1,460. Capital First is a sell with a sell of Rs 772, target of Rs 745. Punjab National Bank (PNB) is a sell with a stop loss of Rs 171, target of Rs 160.

The important thing is these are not long-term sells. So, maybe 3-5 sessions, you should be able to achieve some downside and that is the point of these calls.

Anuj: One more word on real estate because that had a big close on Friday as well. Is it still a buy?

Gujral: Real estate also remains a buy and it has been moving sideways for last 5-8 sessions so that also qualifies as a correction. What today has shown is that if the Nifty dips, this is one of the first places you look at, but obviously these stocks will also correct at some point, so yes they remain a buy. What kind of buy? I would much rather buy them at lower levels rather than once they have rallied 5-6 sessions. So, everything possibly needs to cool off a bit before you enter.

Anuj: What your thoughts on ICICI Bank at Rs 300 per share?

Gujral: Problem is that you are not getting the big money. Otherwise, the stock should have moved higher post its 10 percent type move, so I do not think it is a great stock if you want to make 50 percent. 15 percent maybe in three months, that is possible. So, keep a stop loss of Rs 280 and look for possible targets of about Rs 345 thereabouts. But overall, large stocks are having great difficult in moving because big money is not really coming in.

Reema: What is your view on TVS Motor Company and what would be the right time to enter the market. This week was great for all the two-wheelers. TVS Motors was, in particular, up about 5 percent. It has moved up nearly 75 percent in the last one year. What from here on? It is at levels of Rs 520 thereabout.

Gujral: From a short-term perspective, TVS Motors is great. But when you buy something from a one-year perspective, it better should have corrected maybe 10-15 percent before you enter. So, for the next 15, 20, 30 days, it looks good. Possibly, it can even hit Rs 580-600. Keep a stop loss around Rs 480. But from a one year perspective if you have to buy, stocks must correct to that 50-day moving averages which in the case of TVS Motors is around Rs 460-470. So, if you correct to those levels, then it becomes a longer-term buy.

Anuj: What is your view on Sun Pharmaceuticals at Rs 626?

Gujral: Everybody knows my view that these stocks are not in flavour. If you are that very long-term investor who can wait for the next bull market in Sun Pharma or in pharma, maybe three years down the line or five years down the line, maybe it is worthwhile, but if I were you, I would participate in the movers of today. So, you are not losing a whole lot of money.

If I were you, I would wait for this correction to get over, get long on housing finance and other NBFCs because that is the sector of this bull market. I do not think Sun Pharma will really make you rich. Even a long term which according to me should not be more than 1.5-2 years, so I think you will be better off trying to enter an outperformer.

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