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Dec 11, 2017 03:46 PM IST | Source: CNBC-TV18

Disruptor vs disrupted is the theme for 2018: Nilesh Shah

In an interview with CNBC-TV18, Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company spoke about his reading of the market and his outlook from the side-lines of the Kotak Securities Midcap Conference 2017.

CNBC TV18 @moneycontrolcom

In an interview with CNBC-TV18, Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company spoke about his reading of the market and his outlook from the side-lines of the Kotak Securities Midcap Conference 2017.

Below is the verbatim transcript of the interview.

Mangalam: The midcap index itself is up for about 40 percent this year. Individual stocks have more than doubled. Despite that, what kind of interest are you seeing in the midcap space? Valuations notwithstanding, how are investors approaching this space now?

A: We are seeing two trends from investor point of view, one which is in minority is looking at the past performance and coming into midcaps. There is second which is looking at the longer-term trend of midcaps outperforming largercaps in creating better value over a period of time despite volatility. Fortunately, for us, this set of investors are in maturity, they know that midcaps can create greater value over a period of time if you can spot the right opportunity, back the right management and this Kotak Securities Midcap Conference is bringing together that set of investors with more than 25 midcap companies. Hopefully, their confluence over the next two days will create a better environment to understand midcap companies.

Sumaira: are any of your participants in the conference also discussing the bitcoin move?

A: Yes, there is tremendous amount of interest in bitcoin and I have to regret saying that since I am 48 years old, I am eminently disqualified on commenting on bitcoins. But I have one more suggestion, instead of entering in bitcoin at USD 200 billion marketcap, why not we create indicoin. We have computational skills to develop bitcoin equivalent programme for indicoin. We have more than 40 crore internet users, we can create circular trading among us and excite all non-Indians to participate in indicoin and make this one dollar to USD 20,000 and create a USD 500 billion marketcap and hock it off to all non-Indians. So that they can have their indicoins and we can have their dollars.

Sumaira: As far as investing itself is concerned, how are investors approaching midcaps as against largecaps? What are key differences when you do research as far as the midcap company is concerned versus a largecap? A lot of data is available in the largecap space, so how is that different?

A: As you correctly mentioned, the information asymmetric between a largecap and midcap varies and which is where this kind of midcap conference becomes very important. It gives a platform for more than 25 midcap companies to meet more than 200 investors.

Second, in midcap there will be higher volatility, it will be either because of market movement or even because of business movement. A midcap company’s ability to absorb business cyclicality is far lower than a largecap company and which is why it is extremely important for investors to get in touch with midcap management and develop the confidence that these managements will create value over a period of time.

In largecap, there is lots of information available, there is lots of historical background available but when everything is in price and you buy it, your returns get restricted or moderated. In midcaps, you have the opportunity of backing your conviction, trusting your management, doing your homework and be ahead of others in terms of information advantage and that is where you end up making more money. This conference is a platform, where we allow midcap companies to interact with investors and vice versa.

Sumaira: It is soon going go to be the beginning of a new year, we have the Fed rate meet which is this week perhaps there is expectation of a rate hike and of course domestically we have these state elections, which are ongoing. So in that backdrop, which are the top themes that you are backing?

A: One big theme which is worth banking not only in next year but in years to come is disruptor versus disrupted. We are seeing technology and other forces creating disruption in business environment and sooner than later, it will start getting reflected into markets as well. In every single company, in every single sector, you will have to ensure that you are on the side of disruptor rather than disrupted not that every single disruptor company will be able to give you return but if you are in that side where bulk of the companies are disruptor, your chances of outperforming market increases significantly compared to investing in those companies whose businesses are getting disrupted. So the big theme for 2018 and onwards will be disruptor versus disrupted.

Mangalam: Which name is seeing a maximum amount of traction? If you could tell us the sector, disrupting versus disruptor, you have a whole host of companies coming in, you have Kwality, you have Varun Beverages, Waterbase, Dollar Industries, Gujarat Heavy Chemicals Ltd (GHCL), which one is seeing the maximum interest?

A: I cannot talk about the companies but today disruption is not restricted to one sector. In financial services, fintechs are disrupting existing business models of banks, insurance companies, mutual funds (MFs). In manufacturing, 3D artificial intelligence is disrupting traditional modes of manufacturing. In services, robotics is disrupting human way of providing services. So there is no sector which is outside the influence of technological and other forces of disruption. One will have to be very careful in evaluating future environment to business because when we are paying 20 times forward earning, clearly, we are taking into account next 20 years cash flow and if disruption is not going to be absorbed by the company then they may not remain in existence over that period of time. So it is not sector specific, company specific, it is across and in your portfolio you need to have companies and management which is cognisant to disruptions unleashed in future and which are taking appropriate steps to ride on the wave of disruption rather than remaining subdued and getting disrupted.
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