Valuations high; focus on stock picking: Investec Capital

In an interview to CNBC-TV18 Mukul Kochhar, Head of Institutional Sales (India) at Investec Capital Services shared his reading and outlook on the market.

The valuation of our market is currently the most expensive compared to other global markets. However, if one were to focus on individual stocks then there are enough good picks, he said.

Below is the verbatim transcript of Mukul Kochhar’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.

Ekta: We have seen a global markets rallied probably on better growth prospects, in that context how do you think Indian markets are currently fairing?

A: India is rallying along side that, there is less risk aversion, people are talking about less tail risk and India is participating in that rally. You have to remember that relative to other emerging markets (EM) our currency has been more stable tool, so while local returns are good translated into dollar returns India markets have outperformed other EM peers a well.

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Mukul Kochhar

Head - Institutional Sales (India)|Investec Capital Services

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Ekta: Do you think that there is headroom for growth or valuations probably stand in the way now?

A: Valuations in India are expensive. They have always been expensive in the context of declining rates in India, declining cost of equity in India. Valuations now if you compare across markets, they are the highest globally of any major markets. India is an expensive market but what that implies is that going forward one will have to temper return expectations. You probably are talking about maybe 10-year bond yield of 6-7 percent plus 4 to 5 roughly 11 percent return versus 15 percent, which Indian markets typically are used to. So, that essentially means going forward you would probably get lower returns. Valuations are high, but you basically focus on stock picking. There are enough stocks that you can get even in this environment.

Prashant: Do you believe that earnings have bottomed out, they might now pick up from here very strongly, I mean for example Financial Year 18 earnings expectation stand in between 17-18 percent growth, so there might be amiss there but the bulk of the downgrades is behind?

A: We do not sort of project earnings for the index per se, but Nifty will deliver roughly 10 percent earnings growth this year and consensus is projecting roughly 18-20 percent next year. After a couple of years of tepid growth and earnings downgrades, I am less concerned about earnings growth going forward. Reason is that you will have couple of sectors that will fire. Heavy weights sectors like banking will at some time be over with NPA provisioning, so earnings growth will come through. So, even though FY18 may stand to be downgraded a notch maybe 4-5 percent, this expectation should get pushed over to 19. So, in the next 2-3 years, I expect you will get one very good year, I do not know whether that is going to be FY18 or not so I am less concerned about earnings downgrade right now. I know the street is more focused on that at this point.

For full discussion, watch video...