'Long-term outlook strong though valuations rich in short term'

Khemani said this will change the existing business model, and the publicly-traded market and ratings agencies will become more important, he added.Below is the transcript of Vikas Khemani’s interview to Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: So far, the trend has been positive, but now there is some paranoia that has crept into bullish trend. Would you be worried as well at this level or do you think there is nothing to suggest that this uptrend could get interrupted?A: It depends on what kind of view you take and the time horizon matters a lot. Obviously, markets have rallied sharply in the recent past and that definitely jitters people and given the valuations which we are right now having of the stocks specifically in the midcaps space. So, surely, stocks are by and large looking quite expensive and large part of that are driven by the surge of liquidity in the recent past. So, that determines right now the mood of the market.But having said that, one can never take a strong call on the liquidity from a shorter-term perspective. One thing is surely very clear that markets are in the right direction. Macro economic factors are improving, corporate earnings are improving, all the things which we were awaiting, goods and services tax (GST), reforms have happened, corporate bond market reforms today got announced. So, one by one lots of tickmarks are happening on the structural things which we have been awaiting for long. And that also reflects the overall macro mood of the market and inflows which are coming into the market.So, I would tend to think that shorter term it might look expensive, it might give a time correction or a value correction, one does not know, that will be determined by the liquidity. But overall, direction seems to be positive.Latha: What is the sense that you are getting about this whole bunch of announcements that came from the Reserve Bank of India (RBI). From a stock market investor point of view one thing we understood, you have to buy rating agency companies. But give us the net takeaway from the Edelweiss brains trust. What does it mean for listed stocks?A: You have been tracking this for a long time and the corporate bond market is waiting to happen for a long time. In the last couple of years, we have seen it is developing. We have seen a lot of corporate raising via public issuance of bonds. So, it is changing, but this one would probably accelerate it significantly. A large part of savers’ money was getting intermediate to the corporate through the banking channel. So, banking was the only way of intermediating the credit. This now takes away that one particular big channel out and say corporates can access the savers’ market directly and that will build a lot of efficiency for corporates in their borrowing. And the intermediation margin, which used to be there with banks would probably come down.So it is a very long trend, it is not a short-term trend, there is not going to be any significant implication on any particular segment in a shorter-term. But directionally, banks will have to rely less on lending to the corporates. Corporates would borrow from the markets. So, the business models will change. It will evolve. Rating agencies will become a lot more important. Public traded markets will become more important. You will see new business models in terms of when the corporates go bankrupt. How different agencies will come into play. So, it is a whole lot of activity, which will pan out and it is a very structural positive move from efficiency perspective.Latha: Is your banking analyst changing the net interest margins (NIM) calculations for FY17 or FY18 for any of the banks because it will be harder for them to get current account or anything? Immediately, is there any tweaking by your banking analysts?A: As I said, you cannot predict implications of any of these things in the shorter term. We will have to wait and watch, but there would be some implication. There will be some benefits also, so it is not that banks are going to be losing out of this process. In fact, banks will also benefit out of this whole process.So, I do not think one should rush in and say it is negative for banking sector at all. India is a huge market that is growing. When the public sector undertaking (PSU) banks are losing market share, probably that will be occupied by the bond space. So, we do not know how it will pan out. There will be a lot of still need for working capital loan, which is a huge market. Only banks can play a role in that. I do not think corporate bonds can play a big role in that.So India has a huge credit need still evolving and growing. So I do not think this is negative for the banking sector, this is definitely positive for overall economy, banking sector and corporate sector in general.Sonia: Yesterday, we were having a very interesting conversation with the top team of Motilal Oswal and they made a point where they stated that the India corporate profit to gross domestic product (GDP) is at the lowest percentage that we have seen in almost a decade at just about 3.9-4 percent. There is a lot of leg room on the upside for corporate profits as a percentage of GDP to go up. Is that your view as well and how much do you think the earnings or corporate profitability could rise over the next one year.A: It is a data point. If you ask me, is corporate profit ability subdued for the last 6-8 quarters, answer is very much yes. Earnings before interest, taxes, depreciation and amortisation (EBITDA) margins are one of the lowest margins in many years. So, definitely corporate profits have been subdued and you can look at in which ever ratio, corporate profitability to GDP, EBITDA margins, profit after tax (PAT) margins, return on equity (ROE), on all parameters, right now we are at a low of maybe 8-10 years. One of the big reasons has been we are coming out of a bad environment and as environment starts improving, as the growth comes, both operating leverage and financial leverage reflecting in terms of interest rates cutting down and volumes growing, you will start seeing profitability improving. Thereby improving all ratios whether it is return on capital employed (ROCE) ratio, ROE ratio, corporate profit to GDP ratio, they will all reflect. That is the whole India story to be very frank. So I do believe that as the corporate earnings start improving, as the economic growth starts coming, you will start seeing improvement in all the matrices we just spoke about.Latha: For the rest of 2016, are you looking at 9,100 the prevailing all-time high being conquerable? Will it be? What are your bets and which will be the leaders that look like buyable sectors?A: 9,000 is hardly few points away. It is 4-5 percent away. To be very frank, predicting kind of market in the short-term is difficult. Is there a possibility? I think there is a good possibility. It well depends on liquidity. As I said, everything is moving in the right direction unless something happens globally on the liquidity front which can derail for some time. Otherwise, we can definitely hit and the sectors, which will lead will be wherever the corporate earnings are continuing as we saw in this quarter. Banking and financial services sector continues to be at the helm of it and that will continue to drive that. Sectors such as automobiles, where we have seen numbers growing very well, so, wherever you are seeing earnings growth, they will continue to lead. I do not think there will be any new sector, which will start leading at this point in time because a key thing will be earnings growth and that will drive the index from here.