Jan 09, 2017 05:30 PM IST | Source: CNBC-TV18

Demonetisation to impact Q3, Q4 earnings: Kotak MF

Going forward midcaps are likely to outperform the benchmarks and one can play the construction, pipes, agro-chemical only through midcaps investments, said Pankaj Tibrewal, Fund Manager, Kotak Mutual Fund.

Pankaj Tibrewal, Fund Manager, Kotak Mutual Fund is of the belief that the impact of cash crunch on account of demonetisation will reflect in the third and fourth quarter earnings of India Inc. However, the market is already trying to adjust to that through price corrections, says Tibrewal.

The fund would look to buy into segments where price corrections are warranted, rather than sell, Tibrewal said in an interview to CNBC-TV18.

Tibrewal manages the Kotak Emerging Equity Fund with an asset under management of  Rs 1,236 crore, which has given a return of 24 percent over five years and a return of 33.5 percent over three years and 13.5 percent over one year.

According to him, the house does not segregate between midcaps and largecaps but instead looks at the fundamentals of the companies and the space they operate in before making investments.

Going forward midcaps are likely to outperform the benchmarks and one can play the construction, pipes, agro-chemical only through midcaps, he adds.

The fund is upbeat on banking, capital goods, auto ancillary and infra as a theme. Within the capital goods space, they invest in early cycle plays linked to production. He is positive on cement although in the short term, the space would get impacted due to demonetisation. He expects a 5-7 percent increase in demand in the space going ahead. The space will continue to demand pricing power, believes Tibrewal.

From the banking space, the house prefers the retail-oriented private sector players and the small banks that have acquired licenses but would avoid microfinance space, he adds.

Small banks are well managed and would grow higher than PSU banks in the next 4-5 years, says Tibrewal.


Below is the transcript of Pankaj Tibrewal’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Latha: Midcaps itself have been a bit of a outperformer and some of them very large outperformers. Is the best over and now, is it time for caution?

A: Our view is that the debate of largecap versus midcap has been going on for quite some time now. But the way we assess business is basically on fundamentals. We do not segregate whether it is a largecap or it is a midcap. We see whether business has a potential of growing faster than some of the other opportunities available in the market, which are the spaces which are there. And if you really take a 3-5 year view, I believe that a large space which is dominated by midcaps, probably can outperform going forward as well. Because if you look at the BSE top-100, about more than 50 percent of the revenues of these companies are coming from outside India or non-INR.

And if you just move from BSE-100 to the rest of the next 200-300 companies, this proportion reduces very significantly. And we believe that if you want to ride the India story or the growth story and the changes which are happening in the domestic economy, you need to have some portion of your portfolio as individuals allocated to midcap funds. And we believe that a lot of sectors like maybe construction, maybe pipes, maybe bearings, maybe agro-chemicals can be only ridden by midcap companies, not largecap companies.

Anuj: The two clear themes in your portfolio in your Kotak Emerging Equities Fund have been banking and capital goods. Banking I can understand, but capital goods, are you bullish from these levels as well because the risk is what is happening in the economy with demonetisation and the capital expenditure (Capex) cycle getting pushed off. You thoughts on that?

A: Clearly, if you look at from a capital goods perspective, we are very positive on the early cycle plays which are linked more to production. We are not so positive on the late cycle plays linked to either Greenfields or the asset heavy plays. And in that, we believe that as the production and capacity utilisation starts improving, you will see this segment doing extremely well which is represented by palms, bearings and so and so forth. Also, in infrastructure, we are positive on cement. We believe that the near-term demonetisation impact would be a very short-term. But when we look at from a demand-supply perspective, the supply side is clearly for the next 3-4 years in favour of investors.

Even if demand grows at 5-6 percent, there will be enough pricing pressure in the hands of cement companies. And we have maintained this task for the last 1-1.5 years. So, overall if you look at the capital goods plus cement, that is the space we have been positive on. Financials, clearly, our preference lies for the private sector banks and some of the select non-banking finance companies (NBFC). We believe that any disruption creates major opportunities for a lot of stronger players and they emerge out more stronger. And hence our preference for retail oriented private sector banks.

Latha: Any interest at all in that small bank space? We saw many of them running. Bharat Financial Inclusion, Ujjivan Financial Services, Equitas Holdings, even RBL Bank will perhaps come in that category. But they are not quite NBFCs and they are not quite banks. How do you look at that space?

A: We have been positive on the small finance banks, the newly given licences to them, but we have, to a large extent avoided the microfinance institutions (MFI) space. We believe that space is where a lot of more riskier than some of the other options available in the financial space for us. But from a small finance bank, we believe that these banks have good management. They have the urge to grow and over the next 3-5 years, their growth rates will be far higher than some of the public sector oriented banks and hence, our preference towards some of the small finance banks.

Latha: Coming to the consumer category. Our note says that over consumer durables, you have only a 6.2 percent investment. But among your bigger investments is a stock like whirlpool. Basically, consumer durables, not as big as autos, but not as small as fast moving consumer goods (FMCG), the middle space.

A: In the near-term, obviously, there are pressures on consumption lead by demonetisation. But our view is that there are few positives which are clearly emerging out of the entire process. One, if you look at, there is a wealth distribution happening at the bottom of the pyramid. And this, are the people who have not the propensity to save. Probably the money which they are getting will be consumed over the next 5-8 months, we have to watch it out. The second is the formalisation impact. Post this demonetisation and the goods and services tax (GST) getting implemented at some point of time next year, you will see a large part of informal economy which have not been paying taxes and start losing market share or seeding market share to the organised guys. So, when we look at some of our investee companies, we believe that there is a large unorganised portion sitting in their industry and as some of them start losing market share, it moves on to some of our investee company or the organised players.

So, the formalisation effect is something which we are very excited about. And we believe the round two which is the GST implementation will throw a lot of opportunities for us as equity investors from the stock market perspective or investment perspective. So, hence, we are not changing our consumption bias stance. We are daily monitoring the data which is coming from ground and assessing how the things are. Situation at this point of time is quite fluid nonetheless and we are monitoring it very closely.

Anuj: Your fund has some auto ancillary names as well and they have done well. From here on, are you still backing that theme?

A: Clearly, this space is something which we are extremely excited upon. We believe that a lot of consolidation in this space has happened over the last 5-10 years and there are certain modes in this sector which the company possesses in many of these names which are a part of the portfolio. And we believe that we are at a very sweet spot in terms of auto, in terms of demand. What China was 10-15 years back, we are sitting today in per capita disposable income. What that will throw once we reach USD 2,000 is a large explosion in categories like apparels, like autos and so on and so forth. And hence, a clear corollary of that explosion in demand of autos will be the auto ancillaries. And some of them have become branded plays whether you talk about batteries, whether you talk about tyres, whether you talk about some of the other auto ancillaries. So we are excited about this space from a medium to long-term perspective.

Latha: What is the sense about earnings in general even for the companies under your coverage? Are you accepting earnings cut for the second half?

A: Because of the cash crunch lead by demonetisation, the economic activity has been impacted and that will get reflected in a lot of companies earnings when they report in January and somewhere to the extent in fourth quarter also. So, if you look at from a market perspective also, market is quite in advance and trying to adjust itself in terms of prices where they expect a sharp cut in earnings happening. And similarly, we also in some of the investee companies expect that this temporary phenomena will lead to some disruption in earnings. But if, in a lot of names we believe that there is a price correction which has been more than warranted we will be looking to buy in dips rather than selling in those names.

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