Mkts must consolidate at 18K-20K levels: Kotak Mah Cap

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Falguni Nayar , MD, Kotak Mahindra Capital feels that markets need to consolidate at 18000 - 20000 levels before going up. Overall, she expects the markets to be flattish, but is positive on selected space and stocks. There seems to be a fair amount of domestic liquidity; retail and PEs have picked up, she said. Nayar said that she has seen net FII outflows on PN-issues. The domestic fund flows are higher and are driving current performance, she said.

We could see more people moving out of foreign brokerages to Indian brokerages, she added. Nayar said that she seen enough P-note headroom for recent IPO issues such as Jyoti and Mundra .

There are no plans of listing Kotak Securities as a separate entity; she is not aware of plans for any IPO .

 

Excerpts from CNBC-TV18's exclusive interview with Falguni Nayar:

 

Q: One word on the market whether or not it is getting challenging to perform or out perform it right now?

 

A: I think Indian markets are very wide, there are lots of stocks, lots of sectors, lots of companies and there are always good buys and I don't think it's becoming challenging, but one doest need a larger width of coverage.

 

Brokerages need a large width of coverage, covering more sectors, more stocks and that is how one can be more effective.

 

Q: What is the Kotak view on the Indian market now from here on, going into 2008?

 

A: Our view is that market needs to consolidate around the current range, around 18,500-20,000 Sensex levels and then from there, move up. So our overall view is flattish, but within that we have differing views on different sectors and stocks.

 

Q: The key event for the market in the last few weeks was the entire P-Note episode, how are you feeling about the liquidity situation and what do you hear about the conversion of P-Notes participation into money coming into India?

 

A: We are seeing some amount of the FIIs letting go off their positions. Initially it was felt that they couldn't short and switch into new P-Note positions, they may not let of go off their positions. But we have seen net outflows by foreign funds. There is some amount of selling by FIIs, about USD 1.2 billion kind of net outflow.

 

What is interesting is, we are seeing a fair amount of domestic liquidity pick up. Domestic liquidity, as well as private equity investor continues to remain strong investors in a number of deals. So I think there is enough long-term interest in the Indian market and domestic liquidity is driving current performance.

 

Q: Do you think after this whole shut down on P-Notes and the move to registered FIIs, it will create a more level playing field between Indian brokers like you and some of the global brokers who were dominant players in the P-Note area?

 

A: I think it is definitely a very interesting development for us, because through access, the foreign brokers were also controlling the brokerage. Even if the investors wanted to pay us for our ideas and this was mostly the hedge funds, because the direct FIIs anyway deal with us, but they had to pay via a foreign broker and so there was that little lack of transparency on whether we were capturing all the business that was due to us.

 

So to the extent that more FIIs get directly registered and deal with us directly as a broker, it's great for Indian brokers. I am very positive about the development.

 

Q: We have seen a couple of instances of large teams from global brokerages heading out to join Indian outfits. Do you see more of that happening going forward, a lot of churn in the top teams from global brokerages migrating to Indian counterparts who can offer them significant stakes in the business?

 

A: Yes it's a current trend I keep hearing about in the market. I don't know, till it happens one never knows. But it could happen, it could be a trend because Indian brokerages have a level playing field now and also stock is an attractive compensation tool and these foreign firms, the teams want to move on to Indian firms and get pre-significant stock through ESOPs and that is how they are playing the game. So there could be more.

 

Q: Do you expect to see any change in the primary market environment though, because of these P-Note restrictions or do you think that area will remain more or less robust?

 

A: We were initially concerned that will there be new P-Notes available for new issuance, because they can only be done against cancellations. But given the current mood where there is certain amount of outflows by FIIs, we found that in recent issuances there is always capacity available for P-Notes. So it's not been an issue for primary issuances, there has been capacity available for most of the recent issues that we have just been through.

 

We were involved in Mundra, we were involved in Jyoti Labs and we found that there was enough P-Notes capacity available.

 

Q: What does the Kotak management think about the kind of valuations, which a lot of brokerages are getting? Are you tempted at all to see the securities business listing separately to unlock that kind of value or will it remain embedded in the listed Kotak Mahindra Capital?

 

A: I am not aware of any plans on that basis, but if there is value it doesn't really need to list, it will eventually be captured in the holding company. The value eventually will get captured, but I agree that a lot of brokerages are trading at very attractive valuations.

 

Q: How speedy is this entire process of transforming from the P-Note side into registered or regulated FII participation and are you getting a lot of calls to that extent, because money outflows have been concerning?

 

A: We are getting a lot of calls and I think lot of other people also will be active. My estimate is that huge number of direct FII registrations must be on the cards, although I don't know the number, but my estimate would be at least 200 or so registrations may be in the process.

 

Disclosures: It may be assumed that I have an interest in the stocks discussed today.