Consumption on mend; these sectors will benefit: Emkay

The new year is going to herald the start of a consumption boom, thanks to robust government spending as well as with measures such as the implementation of the Pay Commission recommendations coming in, says Krishna Kumar Karwa, Managing Director of Emkay Global Financial Services.

In an interview with CNBC-TV18, Karwa said he would advise investors to take exposure to autos, affordable housing, cement and consumer durable sectors. "Rural and semi-urban India has been struggling but the Pay Commission implementation will revive them," he said.

For the full year, Emkay expects the market to rise 10-15 percent in 2016 but gains will be even more in midcaps.Below is the transcript of Krishna Kumar Karwa’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What does it look like now? Is this just the last week trading impulses that are leading the market towards Rs 7,900 or is it that you are seeing any green shoots in terms of earnings? How will the Q3 earnings pan out do you think?A: In financial markets, people do no trade just for the sake of trading. So, as far as the market movements, etc is concerned, they are a function of the financial fundamentals.As far as the green shoots are concerned, yes we had a very good festival season and we had our dealer conference last week and we could see that the festival sales were on a year-on-year (Y-o-Y) basis. There was a lot of improvement. The question is that whether it will sustain going forward and there I believe that next year going forward, the Seventh Pay Commission payouts, etc should be a good trigger for things to sustain as far the consumption is concerned.As far as government spending is concerned, it continues to be very robust as far as the infrastructure is concerned in roads or defence or railways, etc. So, it is just a question of private sector capital investments picking up, which probably will happen over the next 12-24 months.Sonia: So, how do you play this consumption theme now? Do you continue to stick with some of the auto names despite the valuations being quite high or do you look beyond to some fast-moving consumer goods (FMCG) names, paint companies?A: Not only the auto where the four-wheeler segment still seems to be doing well. The two-wheeler segment could currently on a very minimal growth, but maybe that could also improve. However, more than that, if you look at the fact is that the rural India and semi-urban India, that seems to be struggling and we believe that once this stimulus in the form of the Pay Commission payouts, etc. happen, that should revive the semi-urban India big time and there obviously, I would think that affordable housing segment should do well and as a follow up to that maybe the cement sector also should improve and also consumer durables, etc.So, it is not only the auto segment, I think it should be across the board where things will improve in the coming years.Latha: So, what are you working with in terms of earnings growth? I should ask you not just for Sensex and Nifty, because growth as you say is happening more in the midcaps. Is there a midcap 100 that you track or 50? What kind of earnings growth in that space?A: We do not have a midcap 100 or an index of midcap stocks because the spectrum is too wide in the midcap segment and it is more of a bottoms up kind of investment environment, which works as far as the midcap companies are concerned.So, I do not have any statistics to give you as far as the overall midcap growth is concerned. However, what we are seeing in midcaps is that wherever companies, corporates, etc have had a reasonable balance sheet, they have been able to grow very well and there, there is a lot of earnings expansion as well as price to earnings ratio (P/E) expansion which we have seen and which will continue to happen going forward.Sonia: Let us talk about some of the themes that the market is very interested in these days and one of them is pharmaceuticals. We have had two extremely strong listings today, both Alkem Lab and Dr Lal Pathlabs. How are you approaching this space and despite hefty valuations, do you see more interest here?A: Absolutely. I think more than these two listings today, the whole initial public offering (IPO) market is very buoyant and we have seen some of the recent listing including today’s listing where there have been very good gains, which clearly show that the appetite of Indian investors or rather investors as far as good quality IPOs are concerned at good valuations or reasonable valuations is very strong.My sense is that wherever the IPO etc, which are reasonably valued will see a good response and going forward also. As far as pharmaceutical is concerned, there has been a lot of challenges as far as the largecap pharmaceuticals are concerned in terms of the US Food and Drug Administration (FDA) issues many of those companies are having and that is a clear-cut challenge in the segment. Having said that, we believe that pharmaceutical is a space, which will continue to do well and attract investor interest.Latha: How are you approaching the entire finance space? What do you like? We have not seen private sector banks being favoured in the last few weeks. We have seen a decent amount of profit taking. Will non-banking finance companies (NBFCs) be a preference? Just your hierarchy of preferences?A: In the whole financial services space or financial space as such, obviously, our major interest, or rather where we favour is the private sector banks which have a very strong retail franchise where the challenges to their growth are minimal and not too many issues over there as far as their asset quality is concerned.So, among private sector banks, wherever there is a lot of exposure to corporate sector and there are expected to be some more challenges with some new regulations by Reserve Bank of India (RBI) in terms of 150 of corporates, the list is not out but there has to be some additional provisions for them also required.The whole private sector bank -- there seems to be a disconnect between few large ones who have a good retail franchise and the others who seem to be having a lot of corporate exposure. As far as public sector banks are concerned, again the same challenges as far as growth is concerned and the capital adequacy. So, there despite good valuations, attractive valuations in fact, but growth itself seems to be under pressure.As far as NBFCs are concerned, the housing finance companies continue to do well. So that is there and consumer durable financing companies also continue to do well. The challenges or the risks are to those NBFCs, which have a very high exposure to rural India where until and unless recovery happens, there could be challenges for them to grow as well as in their asset portfolio.Sonia: I did not get your view on the market itself. By the end of 2016, do you think the markets will be much higher than where they are currently?A: By definition, we are always positive, that is our job. And if you would have looked at in 2015 beginning of the year, all of us were so positive and the end result that the markets are down by some 8-10 percent. Having said that, the base impact would start playing in the coming year, we have had last two three quarters where earnings have been poor to pathetic. So, the base impact will play out positively. So, on an overall basis, we believe that the Nifty companies, etc should grow between 15 percent and 20 percent on an earnings basis and based on that we believe that the Nifty itself from here should give a 10-15 percent return.But I would like to add over here that if you look at statistics for the last 10-15 years, 50 percent of Nifty stocks tend to outperform the Nifty every year. So, it finally boils down to bottoms up investing even within the overall largecaps and midcaps as I said earlier is a clear-cut case of bottoms up.Latha: So, finally on the Nifty, what will the leading horses be?A:  We are supposed to talk stocks. I can possibly talk some of the sectors.Latha: Which sector in the Nifty?A: I believe the whole oil refining and marketing companies over there and including the biggest company over there, that should possibly be a sector which will do well.As far as auto is concerned, we continue to have a positive view on that segment and a dark horse could be on the infrastructure side once things pick up, then that should be a segment which would possibly give good returns.So, these are the three sectors we believe that should give you good returns in the next one year.