Base case for Indian eco strong; like cap goods: Kotak Mah AMC

According to him capital goods is another space that did not participate but going forward could be derivative of investment cycle revival.

Another space that did not participate but could be a derivative of invest cycle revival is capital goods  - it could see strength going forward.

The house is currently underweight on both the IT and pharma story, says Krishanan. Indian IT according to him is going through a transition and pharma is a bottom-up story. However, one should not paint the entire pharma space with one brush but be selective. The US FDA audit story seems to be behind them, thinks Krishnan.

When asked why the house had reduced weightage in the NBFCs space in their funds, he says although they have been the darling of market in the past the rerating is already done and from now on should be tracked on their earnings growth strong.Below is the verbatim transcript of Harish Krishnan’s interview to Sonia Shenoy & Anuj Singhal on CNBC-TV18. Sonia: What do you think the tenure could be say over the next three to six months? Will this bullish trend continue in Indian equities? A: We clearly had a fantastic run as far as market are concerned over the last six months or so. Our belief is over the course of the next three to six months we will unfortunately be beset with global volatility. Every almost on a yearly basis over the last four or five years we have had this global shock coming in for one or two months that and all the global markets tend to be correlated. We have been going through this phase where correlations have been pretty low. We reckon that global volatility might rise and there are n-number of factors globally it could be the US elections, it could be US freight rate hike cycle. It could be some data points coming in from China. Our sense is that while there is potential for volatility to increase our bottom up base case scenario for the Indian equity and the Indian economy continues to remain strong. We are at the start of a strong recovery as far as the economy is concerned. It is going to be driven by consumption primarily and to a certain extent infrastructure and the investment per se. Our sense is that while there is a potential for near-term elevated volatility, as long as one can drive through it there is definitely a lot more money to be made as far as Indian equities is concerned. Anuj: Where do you see these opportunities? This market has had two big legs - financials and consumption, whether it is via auto, cements, even staples for that matter. Do you see both these legs still continuing to do well for the market? Your fund actually has a lot of exposure to these spaces? A: From overall market perspective clearly where we are positioned is playing on the consumption side through auto, auto ancillary, consumer discretionary, home building. That is a big space which we think over the last two to three years has kind of on the economy or on the ground levels seemed to have hit some kind of the slow growth per se but we think that home building can be a interesting segment to capture a lot of the consumption both with respect to good monsoon as well as with respect to the 7th pay commission payouts that are coming though. The other segment is cement, which is one area that has done exceedingly well. We think another segment which hasn’t really participated significantly in this rally but which is also derivative of the investment cycle revival is going to be the capital good cycle. By and large, we think that as a space which has not yet participated and that could be area where there can be further strength as far as the overall capital good cycle is concerned.Anuj: The other top pick in your fund of course, has been Infosys in some of your funds. In fact, in a couple of funds, your arbitrage fund it is the top holding as well. Do you get a sense that the worst is getting over for a stock like Infosys or do you see more derating? And more importantly, now that the stock has corrected 22 percent, has it presented another buying opportunity here? A: Clearly, on certain metrics, for example, if we look at enterprise value (EV) to earnings before interest, taxes, depreciation and amortisation (EBITDA), another 5 percent from here and we would be at levels seen in 2008-2009. So, while one can argue that valuations have come to a very reasonable level, the underlying factor as far as the near-term growth is concerned is that there are a lot of question marks with respect to the guidance, with respect to the client engagement levels, we have seen some amount of disappointment with regards to execution in Q1. But if you are a pure value investor and if you have got a medium-term horizon, this presents a nice attractive zone for stocks like what you mentioned. Of course, one must also understand that the entire IT services space is going through a significant shift in terms of their business model. Client spending have moved dramatically from a typical ADM model to something which is more on the cloud or on the digital space that they are spending where ticket sizes are far smaller. You are getting more bang for the buck as far as the client is concerned. So, that is a transition phase wherein the Indian IT services are therefore missing out on a lot of this action. But our reckoning is as this transition phase ends, you are going to see a lot more revenue coming as far as downstream services like Indian IT services are concerned. But it could be another 2-3 years down the line for that to really pick up steam from.Sonia: The other pocket I wanted to ask you about was non banking financial companies (NBCFs) because I noticed in your Kotak Arbitrage Fund you have reduced weightage in names like Shriram Transport Finance, Indiabull Housing Finance and SKS Microfinance. Do you think that the best of the juice is now already out of these stocks?A: As far as NBFCs are concerned they have been the recent darling’s of the markets over the last six months or so and possibly right so because of the fall in interest rates. Clearly, from a valuation perspective the best of re-rating in our opinion is done and therefore they should now be tracking more as far as how their earnings growth story continues from here as well.So, we have to be lot more selective as far as NBFCs are concerned across our portfolios. We don’t think that most of them are in a bubble zone as yet. Most of them are customer facing franchises that we own which are difficult businesses to run and execute. Therefore, we think multiples are reasonable in that context but clearly from a huge amount of re-rating that they have seen we think over the next course of say a year or so they should be more in terms of earning compounders rather than re-rating plus earnings compounders that we have seen over the last year or so.Anuj: What about pharmaceutical names? You have couple of them in your portfolio and truth be told they have outperformed the rest of the pack especially in the recent times Sun Pharmaceutical and Aurobindo Pharma. Does it remain a stock specific story and do you see more gains for these names?A: Pharma as you rightly know is any which case a bottom up story. It is very hard to paint the entire space with the same stroke. Within that of course pharma as an overall space has corrected quite sharply over the course of the year or so. Also one should not forget that if you look at US Generic companies they have fallen quite significantly and they have de-rated quite massively over the course of the last year or so.As far as pharma the broader story is concerned I think we are having two or three key headwinds. One is of course what we have seen as far as the USFDA orders are concerned and I think that the worst of the USFDA orders is behind us. The second headwind clearly, is in terms of the pace of approvals. Clearly, in terms of number of approvals they are growing many fold and while it is generally good news for a lot of companies that get the approvals per se supply and demand means that the more the number of players in that particular molecule the faster the price erosion. That in our sense is getting impacted for a lot of incumbent US Generic players which are there in India.The third one is the US consumers are consolidating quite strongly be it both as far as the retail pharmacy are concerned also as far as the insurers are concerned. You are facing headwinds of some serious nature especially after five years of glorious returns and glorious performance by pharma companies. One needs to look at in context of all of these. Yes the near-term underperformance is quite starking both technology and pharma and therefore they are starting to appear into the value zone. However, both of these at this point of time are by and large underweight in our portfolios. Selectively, we have certain bets on both technology as well as pharmaceuticals.