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Time to reset economy

Last Updated : Aug 17, 2016 02:26 PM IST | Source: CNBC-TV18

One needs to have guts to take contrarian market bets: Emkay

The Indian market is likely to continue its upward trend for the next 2-3 years. Investors will have to rummage through the overpriced pockets in the market, says Krishna Kumar Karwa, MD & CEO of Emkay.

The current exuberance in the market is on back of global liquidity, says Prakash Kacholia, MD of Emkay Global. However, he adds that flows into India have been lower than what other Asian or emerging markets have been receiving.

The Indian market is likely to continue its upward trend for the next 2-3 years. Investors will have to rummage through the overpriced pockets in the market, says Krishna Kumar Karwa, MD & CEO of Emkay.

Like every year, Emkay Global is all set to organise the Emkay Confluence focus of which will be on domestic consumption.

India, which is banking on rural recovery, will see many opportunities on the consumption side. Kacholia further says: “You need to have guts to take contrarian bets in market.”

He has put his bets on two troubled sectors - pharmaceutical and public sector banks.

Karwa adds that investors also need to change the investing method now. “(With) kind of global liquidity and interest rates (negative), we have to reset the way of investing in companies,” he says.

The house currently advises investors to track sectors like housing finance, consumption and agro chemicals.

While no domestic threats are there for the market, Karwa believes that global liquidity could change the market course.

Below is the verbatim transcript of Prakash Kacholia & Krishna Kumar Karwa’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: This is on the eve of your big confluence, just tell us what were the themes you had in mind when you organised this?

Karwa: We planned this event in the month of May and at that point of time you had had a decent rally post the debacle of January, February etc. The sense that you had was after two years of continuous debacle on the monsoon front, the monsoons would be positive. It has turned out well. So, the way we designed the conference was that, we felt that post Q1 numbers and if the monsoon are decent then investors would be very keen to understand how things can pan out. What can be the delta as far as the economy is concerned. So, we focused more on domestic consumption stories to be part of our confluence.

Yes, at that point of time also there were question marks about what is going to happen on the Rexit front or whether the Reserve Bank of India (RBI) governor would be on/off etc. However, those events have played out. I don’t think so we have factored in the positive which would have happened post the goods and service tax (GST) legislation passing out. However, now there has been very good momentum based on global liquidity etc. The kind of response that we have got for the conference has been phenomenal.

We have almost 100 odd companies attending our conference over a two day period across market caps, across sectors and there would be more than 3,000 plus meetings, which will be conducted over a two-day period. The investors would be across mutual funds, foreign institutional investors (FIIs), domestic, family offices, banks, insurance companies etc. The excitement is very high to understand that okay there has been a decent rally. How things are expected to happen in terms of the actual ground improvement in the performances.

Sonia: We don’t get to hear your market view very often since we have you with us start off by telling us what phase do you think this market is in and what do you see as the trend for the market over the next 6-12 months?

Kacholia: After the change of the guard at the centre the markets have performed very well. I agree that as of now slight exuberance is there but it is more because of the liquidity flow. Post Brexit we have at least 2.8 billion foreign institutional investor (FII) flow into the country. This is a huge number. However, if you see the amount of money that has come into the emerging market Asian countries is 20 billion plus. So, we have received very little of it. I believe that the FII flow will continue and I personally believe that for next two to three years the markets will be good.

We as a house and the way our conference is also constructed, we are more bottoms up than top up. Index may go up and come down. It does effect what were we pick, or do bottoms up picking it does that. However, sometimes when you talk to a long-term investor he feels happy the markets have gone down. So, he gets an opportunity to buy. So, for us we look it at that way, when we want to pick up smallcaps stocks which will give you a very good return, can become multi baggers we look for such opportunities. However, as you asked I think markets will be good for next two to three years.

Latha: Let me pick up from what Prakash Kacholia has said that there is air of exuberance. Are you buying now at all? You have some very interesting themes like for instance doubling of rural incomes which the government is promising? On the basis of that even now are you a buyer in the market?

Karwa: There are pockets of segments where you can possibly say that stocks are overpriced etc. So, you have companies which are like 40 times earnings in the fast moving consumer goods (FMCG) space where you need to be careful or where non banking finance companies (NBFCs) have run up very aggressively in the last three to six months. So, no doubt the business models of such companies are very strong and robust but at what levels you enter is very important for you to make reasonable returns.

Having said that, I have always been a firm believer that at all points of time you have to keep on searching and you will find your bottoms up ideas to invest in. So, yes if you are asking me that do you have 8-10-12 ideas, 15 ideas that we can possibly invest in at current levels, yes there are many ideas that we believe that can over a next two-three years deliver good returns.

So, that is always there with us as Prakash Kacholia mentioned that we are always -- no doubt we take care or are cognisant of global and local macros but finally at the end of the day, it is all about bottoms up investing.

My sense is that with the kind of global liquidity and the low interest rates, which are floating in the system or other negative interest rates we have to reset the way we invest into companies because this is something which we have never ever seen, negative interest rates.

So, the whole idea about what are your return expectations, I think that itself for Indian investors they will have to reset in an environment where global interest rates being what they are and also local interest rates are coming off. So, here your return expectations from going forward if your G-sec bond yields etc are around 7.2, 7.1 etc then your expectations about what kind of returns you are expecting from your equity investments that has to be tempered with – that is one thing. Secondly, also in a global environment where growth is a challenge, so here we have a country, which is USD 2 trillion gross domestic product (GDP) growing at a 7-8 percent. So, I am sure there would be various companies, which would be available for investing opportunity.

Also I think investors now earlier when we used to invest in Indian companies, the base was that the company is not growing by 18-20 percent then it is not worth investing. That base itself is coming off now. If your companies are able to grow at 12-15 percent and even if the return ratios earlier you used to look at 20 percent plus kind of return ratios on return on equity (RoE) or return on capital (RoC) employed but now if the companies are able to do even a 15-16 percent return on capital employed, investors are happy to look at such companies, evaluate them and look at for investing. So, so many ideas which we still have.

Sonia: You were telling us about how the next 2-3 years would be good for equities. But the only problem is one cannot see where the leadership will come in from. The IT sector is under a cloud lately. Even in banks, recovery has been slightly patchy and spaces like public sector undertaking (PSU) banks, private banks are over-owned. So, where do you see the next leg of leadership emerge from?

Kacholia: India is harping a lot upon the rural and consumption story. And that is why we are having this agricultural conference on 19th morning where we have somebody from Niti Aayog, the CEO and Founder of Skymet, one agricultural expert. We need to understand whether we believe in the story, whether farmers will double their money or not in the next few years.

Consumption story is something which we believe that there will be a lot of opportunities available over there. Besides that, sometimes, you have to be very bold or have the guts when you take a contrarian view. For example, all these PSU banks which were hammered, lock stock barrel, 2-3 months back they were, after giving the worst result, if I am not wrong, after Punjab National Bank (PNB) declared its worst result, I do not think it moved a rupee down. There is a time one needs to understand whether you need to take a contrarian bet.

Sonia: Would you take a contrarian bet in PSU banks?

Kacholia: I have already taken a contrarian bet. In the same stand, if you see US 483 become a big noise for the pharmaceutical companies. If you see the pharmaceutical index, it is at November 2014 levels. We need to understand at what point you need to take a call or contrarian bet on the pharmaceutical stocks. You may not know which stock to buy, then you might as well go and put your money in the pharmaceutical index. There are pharmaceutical indexes seen running around the country.

Latha: You have given us two examples of buy in distress, buy in fear, PSU banks and pharmaceuticals. Would you be buying IT companies then? Yesterday, a big blow for Infosys and we just had a conversation whether Brexit will have more casualties.

Karwa: Yes, by definition, the IT companies etc -- if you see the kind cash that these companies generate and the valuations of many of these companies are reasonable. It is not that they are extremely expensive, etc. So, growth is a challenge.

The thing is that we feel the transformation that these companies have gone through in their last 15-20 years of existence and again they are going through a transformation. So, the trick would be which company to back at what point of time. So, who is ahead in the transformation curve? For some time, we had a feeling that Infosys, etc could be. And there was an exuberance beyond.

Yes, there have been hiccups, etc for the last one quarter, but I am sure, you will find the winner. The sheer size of such companies and the cash flows that these companies generate, we cannot ignore them and at the right time, you look to buy into them.

As far as IT companies also are concerned, there are so many of the small niche companies, which could possibly be the ones where at least the mid-market investors could possibly invest in and there we find that there are a lot of opportunities in some product companies, which could specifically be looked into also.

Latha: I wanted to ask you about this rural theme, which is going to be discussed, doubling of rural incomes as well as goods and services tax (GST). Give me some names. I am not saying that they are your buy recommendations or you have to give us any buy levels, but who would be beneficiaries of farm and income doubling? Who would be beneficiaries of GST now? We just uni-dimensionally play logistic stocks, but what is in your mind?

Kacholia: When you talk about rural consumption story going, the sector that needs to be seen is housing finance companies, you need to see two-wheelers, automobiles, you need to see all your consumption stories where it could be fast-moving consumer goods (FMCG). These are the stocks and sectors where one should be tracking. Then you have a lot of agricultural chemical stocks. If you see in our conference, the way we have also done it is that we have a lot of agricultural companies come in the same day. We have all the building sectors, companies come on the same day. So, the investors when they meet them, they get understanding of the whole sector at one shot, from morning till evening, you attend. So we have Rallis, we have Dhanuka, we have Sharda Cropchem, Coromandel. So, it helps you understand where is the spend. With the Seventh Pay Commission money going to come out, there is going to be a lot of spend on the rural side.

The other thing, of the last 4-5 years, there is a lot of new businesses that are getting listed. You have these airlines, you have the pathlabs, you have Advanced Enzyme. Like this, there are companies which I again want to harp upon is that there are a lot of companies which are in niche businesses. You have to identify those niche businesses in smallcap companies. You identify them, there is a good cash flow, good pedigree of management, I am sure they can become multi baggers.

Sonia: We have not seen any major correction in this market up until now this year which is peculiar. At worst, it has been about 5-7 percent. Do you think there is one correction that is overdue and what is the threat for the market now?

Kacholia: Liquidity is the only threat for the market. Correction will -- am sure none of us sitting over here wants a correction, as long as markets remain stable and performance keeps coming in, in the quarters because of good monsoons and rural demand or consumption, because we believe that India is more of a domestic consumption story. If that spans out and the policy is made by the government comes out in the right direction, I hope we do not have a correction. World market is also at all-time high, I doubt there will be too much of a correction.

Karwa: To add to what Prakash Kacholia mentioned, I think it is going to be, as what he said about liquidity, it is all going to be global reasons for the markets to correct. So, whether you have a US Fed rate hike or whether you have a Trump getting elected, those kind of an event -- Trump getting elected has its own repercussions, let us put it this way. That could be a reason for global markets to take a break and then maybe we could also be a part of that. So, it is all global. I do not think there are any local reasons to worry about.

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First Published on Aug 17, 2016 11:10 am
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