Bullish on niche midcap IT cos, white goods space: Kotak MF

Midcap companies have broadly fared better than their large cap counters in the current earnings season so far, Nilesh Shah, Managing Director, Kotak Mahindra Asset Management tells CNBC-TV18.Shah is not upbeat on FMCG companies as he sees rural distress and competition from unlisted players hurting margins. He is more bullish on consumer durables because of the juicy discounts being offered by e-commerce companies and likelihood of increased demand from the Seventh Pay Commission report when it takes effect.He is bullish on the IT sector, but more on niche midcap IT players which focus on newer segments.Though global liquidity situation is comforting, given ECB's hint at monetary easing and China's decision to cut rates, Shah does not expect huge FII inflows into India immediately. He says domestic fund inflows and corporate earnings will determine near term trend.Shah is bullish on private sector banks and NBFCs despite competition from small banks. He says the opportunities in the financial services space is so huge that these players will be able to generate huge profits even if at lower margins.Below is the verbatim transcript of Nilesh Shah's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What is your sense, is there a lot of strength that we should take from the fact that there is global liquidity or do you think the earnings season is giving you a sense that we will be cautious? A: I think it is going to be mixed. If we look at earnings season, the largecap stocks results have been either below expectation or inline with expectations whereas the midcaps have delivered results which are either above expectations or inline with expectations. Even in the defensive sector like IT, midcap seems to have delivered results which are better than expectations compared to largecaps. So, earnings season has been strong for the midcaps and slightly weaker on the largecaps. However, on the global side, we are seeing now returning back to the liquidity. The European Union (EU), European Central Bank (ECB) is talking about quantitative easing (QE), China has been releasing liquidity – they have cut their interest rate six times since November. Now, all these things will also put a pressure on Fed in terms of when to raise the rates. So, overall global liquidity is supportive for Indian market and the result season has been a mixed bag. Sonia: The management of Asian Paints indicated that demand conditions continue to remain very subdued and they don’t see recovery anytime soon. How do you play this consumption story now? A: Within consumption story, we have to look at two things. One, the rural India courtesy the slightly below average monsoon as well as the unseasonal rain of the last time has been under fair amount of stress. It is expected that the rural economy and the FMCG companies which are focused on rural market probably are not going to have a good time. The second thing is the competition from unlisted players. We have seen in recent times, a severe competition from unlisted players which is hitting the margins as well as the volume growth. So, on the consumption sector while there is overall bullishness, it is far more stock specific keeping in mind the rural distress and the competition from the unlisted segment. Latha: We got very good numbers from Symphony, is it that consumer durables is a play at all? A: Definitely consumer durables seem to be the silver lining among the dark clouds if you can say that. One, there has been a fair amount of discounting going on by ecommerce companies which ultimately gets passed on to the consumers but does not hit the white good companies bottomline. Second, there is also hope that there will be wage revision happening for the central government employees, state government employees and public sector enterprises employees. This should result into more robust demand for the white goods. Last Diwali again was slightly below average in terms of white goods consumption. Even if this Diwali maintains a normal trend, we will see a year-on-year (Y-o-Y) growth which will be fantastic. So, put all things together the white goods segment today looks fairly bright vis-à-vis other consumer staples.  _PAGEBREAK_Sonia: One space that has been doing well this time is the midcap IT space. We have had good numbers coming in from the likes of KPIT Technology, MindTree, etc. Is this a space that you like and you would recommend buying into? A: Definitely we are bullish IT sector as a whole. In the largecap space, valuations have become fairly large and in order to generate return for the shareholders, they have to create multiple times small midcap companies. Many midcap companies are even today available in single digit valuation and hence if they can maintain their growth level, certainly they become very attractive from an investment point of view. The other advantage which midcap IT companies are now getting in is that there are certain sectors like cloud computing or digital where midcap companies have certain inherent advantages in terms of their nimbleness and speed. So, this combination is also helping them grow at faster pace compared to the largecap counterparts. So, definitely one should look at niche IT companies which are specialising especially in the newer segments. Latha: Bharti Airtel results just announced, looks like the revenue is better than what the street was expecting and as are the margins; marginally better than what the street was expecting. Idea Cellular was not in a similar boat but both of them are showing a stress of competition and the inability to price data very high. What is your view generally on telecom? A: Definitely this is one sector where there is imminent entry of big players and that is going to keep most of the existing players on tenterhooks. They would not like to take the pricing higher to give opportunity for the new player. Clearly the competitive intensity in this sector will remain high and probably from a shareholder point of view it is better to wait out and see how the competition settles in and then participate in respective stocks. Sonia: Overnight we have had the big global cue with the Chinese Central Bank stimulating the economy and before that we had comments coming in from the European Central Bank (ECB) where they expect to give more stimulus as well. With so much liquidity getting pumped into the system one would have expected a big up move today but that didn’t play out. Do you think that it is a growth worry that will scare the markets now or do you think liquidity will be benign enough for this market to move up higher? A: Today our market is driven not necessarily by just foreign money; it is also driven by domestic money. In the month of August and September, foreigners were net sellers and yet the market remained kind of supportive. In October foreigners have become net buyers and now the domestic money is also flowing in. So, my feeling is that, yes, the announcements of Chinese Central Bank or the ECB, they are supportive for global liquidity but that does not necessarily mean that we start receiving money from today onwards. It just points to a future direction where there is a higher likelihood of foreigners being buyers rather than sellers. So, our market is going to be driven by flows from domestic investors right now rather than foreign investors and it is also going to be driven by how the result season pans out. As I mentioned earlier, the midcap result season has been let us say above expectation whereas the largecap results have been below expectations. Latha: Banks, which ones would you like? DCB got punished because they tried to face up to the small bank and payment banks competition but everybody has got to do that. Would you buy banks now at all or would you fear that there is a definite coming fall in margins? A: I think it is still worth being overweight private sector banks and NBFCs. Generally for an economy to grow, the banking sector has to grow at almost twice the pace. We are at a stage where still a large part of the population may have access to the bank accounts but they don’t have access to the full fledged banking services. Even a simple thing like private banking is only reaching to a small fraction of the society rather percolating down to all the levels. We believe the banking sector especially the private sector and NBFCs will be in a position to face the competition, they will be able to reduce their margin and yet generate higher profitability for their shareholders. So, not withstanding the current talk about payment bank and small bank hitting the margin of the established players, we still think that growth opportunity is so huge that private sector banks and NBFCs remain an overweight.