Q3 show a positive surprise; like auto anc, pvt banks: Kotak UK

Among auto, he is upbeat on ancillary space on the basis of his assumption that the GST rollou twill shrink the unorganised market.

He prefers to defer any opinion on information technology till clarity emerges on visa and reimbursement changes by Trump and leans more towards domestic-focussed pharmaceuticals over those facing regulatory and generic pricing pressures.Below is the verbatim transcript of Nitin Jain’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Anuj: We have seen FIIs selling coming down and over the last couple of days first indications of some kind of buying also trickling in. Do you get a sense that our market could run up from here even if it has already rallied quite a bit from the lows?A: I think the FIIs has been pruning some exposure to India but now that pruning is almost done so the numbers could look much more saner and maybe some inflows can start coming in. But, that said, the market has rallied 10 percent from the lows and we are into the big event of Budget. So, markets may take a bit of a breather, but yes if it were to come down we will see continued support from domestic investors in particular and maybe finally a bit of a support from even international investors coming back.Sonia: What is your own view on the Indian market and what kind of investments it could get in from FII investors over the next say three to six months? A: I think the FII investors has always been positive on India. He just wants a bit more clarity on what is happening post demonetisation and in the expectation towards goods and services tax (GST), then there is this change of the treaties which will happen effective March end this year. So, there is some clarity that the international investor is looking at both from an economic growth perspective and from a taxation perspective. Clearly, as I said the big overweight that India used to be in many portfolios maybe looks like has been reduced to a certain extent. So, they would look to buyback as India starts having more certainty of earnings outcome. We have been positively surprised by the results so far. It is not as if we have been surprised in one segment of the market. We have been positively surprise in banking, in private banking space broadly so far. We have been surprised positively on the consumer discretionary space which we thought would be hit. We have been surprised positively even in cement and now yesterday microfinance. So, there are many buckets where we have seen positive surprises in the result season so far. If that continues in the course of the year then at least the earning story that so far has been benign us can come back.Anuj: Two pockets which have seen phenomenal rally over the last quarter –metals so what is your view on that and NBFCs which have made a strong comeback?A: On metals I hope that we are not making the top. We are reluctant buyers of metal stocks as we speak. We have been very underweight that space. We missed the entire rally so, my hope is that we don’t make the top. I think there is a very strong rally in the metals space. The earnings estimate clearly will be surpassed because clearly the analyst are significantly behind in their numbers of assumptions from where the current metal prices are. So, that space could have some more legs, but as I said we missed the rallies so I am not expert there at all and we just hoping that we are not making top in that segment. On NBFCs our view is more sanguine. I think there has been a very strong rally, but we see some structural challenges for NBFCs going forward. We don’t think that they will enjoy this similar kind of price multiples that they were enjoying till very recently. So, I think there is going to be some moderation in some expectations from our side on NBFC model. We still prefer the private banking space as compared to NBFCs. So, they have had a decent rally from the bottom, but it should be looked in context of how much did they fall. They fell very sharply, so there has been some bounce back, but structurally as I said we believe there are some headwinds which are creeping in the models Sonia: You said that you have been positively surprised in banking, cement and NBFCs in this quarter. We haven’t got the auto numbers just yet only a few of them have come through the likes of TVS Motor and we have seen some surprises there on the upside as well. Is this a space that you would back?A: This is a space that we are invested as a combination of both original equipment manufacturer (OEM) and auto ancillaries, more in the auto ancillaries that we have overweight in. We clearly believe that the auto story is here to stay, but in this current quarter we may see numbers which could be not as good as what the other sectors have so far delivered. TVS could be exceptional there. I think Maruti Suzuki clearly will be also exception, but others could see some headwinds of growth. Some of the segments continue in the current month. But that said the longer term story in autos remain positive. But, as I said we are more in the auto ancillary space in our exposure. We see no challenge there, in fact we see possible gains in the replacement market from unorganised to organised shift which has got some aid from demonetisation and GST will further aid that shift into organised payers. So, we are hoping that this process of shift from unorganised to organised continues in the auto ancillary and will benefit us. Anuj: Two problem points for market which of course in the past were two big legs of bull market IT and pharma. Your thoughts on this? Of course a lot stock specific but overall what is the call?A: I think the IT space is seeing clearly some headwinds and this bill introduction on the H1B or L1, L2, L3 minimum salaries or some changes is clearly a headwind. But then there is possible tailwind also of higher IT budget spending from hereon. The US markets is the principle supporter of IT Budgets for IT companies and we could see some support from there. I also believe that the street is so far been used to build price corrections or pricing pressures in the IT space if there is indeed issue of US visa related salary hikes which will come through. We could see some corresponding action on the pricing side on the positive side. That said at this stage the pressures are more than the tailwind, so we will look at more clarity from the US bill, the bill which has been reintroduced how that will impact IT companies. On the pharma side, the pressure continue from both the ends on the regulatory framework and on generic pricing. So, there is no letting down on that pressure so far. So, we will be cautious there. Valuations are in favour, so we are selectively looking at that sector. But traditionally we would be very overweight this sector, at this stage we are just around market rate and more so in the domestic exposed companies. So, we are closely watching that space because valuation is now looking in both sectors very attractive, but no change in stance we still remain a bit underweight.