Cycle of easy money-making over; see headwinds for IT: Kotak Mahindra AMC

Among capital goods, he highlighted how the government was looking to spend more on roads, railways and urban infrastructure and sees construction firms benefitting from government spending.

Shah sees no value in building materials. There was value in November and December, but they have all bounced back smartly and clearly there is no value now, he said.

On the aviation sector, he is waiting to study the developments. “Experience of investors have not been encouraging from this sector…one should not invest in a firm because other aspects have moved,” he added.

Below is the verbatim transcript of the interview.

Latha: Market at elevated level just before the earning season. Are you buying or keeping the powder dry?

A: We do not take cash call. We remain fully invested across our funds and yes, the flows have been very strong and market near all time high level, so it's a difficult task. For 24 years of my career I used to pray that foreign institutional investors (FIIs) should buy so that my investors can make money. Today my prayer is that FIIs should sell so that I can buy stocks cheap for my investors and get them money.

Sonia: What are you advising your investors to do now? What are the pockets that still look good?

A: We have been advocating our customers that the easy money making part of the market is over - that was there in November and December 2016. Now the hard part of making money in the market has come. There could be volatility in the market going ahead.

So, invest on a systematic investment plan basis, invest for a longer term duration, maintain asset allocation, spread bets across largecap, multicap, smallcap, midcap but do not invest in lump sum. Come through systematic investment and if there is volatility in the market, do not get dithered by it. Try to take advantage of it.

Latha: What would you look at sectorally? Is it going to start off with IT companies - avoid?

A: We are far more bottomup stock pickers rather than topdown sector pickers but within IT sector today you are seeing huge amount of headwinds, globally growth is slowing down, we are seeing IT companies still sitting on cash and not willing to return cash to the investors. We have seen global, when one large IT company decided to pay back to investors which had hitherto never declared dividend, suddenly this stock appreciated. So we expect IT companies to deliver something like that in order to boost up return on equity (RoE) and in-turn prices.

Sonia: Flesh out the theme of capital goods a bit more because everyone is talking about a turnaround in the capex cycle. We have not seen any great evidence of that just yet but stocks like Larsen and Toubro (L&T) are never the less at 52 week highs. What interests you here, in this pocket?

A: In the capital goods and industrial sectors, we are seeing that there are couple of trends which are working out. One, the government has the budgetary ability to spend money and their spending is more related to road sector which is going to be beneficial to construction companies. Second, it is going to be spent on railway which will benefit companies which are engaged in that sector and third thing could be related to urban infrastructure and smart cities and so on and so forth. So there is one segment of capital goods and industrials which is going to be benefited from the government spending, bulk of that is known and bulk of that is priced into the market.

The second segment is related to whole focus of government on affordable housing; lots of steps have been taken in Budget to push affordable housing in terms of increasing the definition of affordable housing from build-up area to carpet area, giving tax exemption, giving infrastructure status, giving interest and subvention to consumers, allowing Employees Provident Fund Organisation (EPFO) subscribers to take out 90 percent of their retirement corpus for buying house. All these things, w believe will create a push in the affordable housing segment and instead of buying real estate companies, which are developing affordable housing; they are far more focused on ancillary sectors which are going to benefit from the affordable housing boom; they are building material suppliers, they are cement makers, they are housing finance companies etc, so this we believe is the way to probably play the industrial and capital goods sector.

Latha: Cement stocks - haven't they gone up a goodish bit. Some of the stocks have gone up 60-70 percent in the cement space. Look at India Cements; it's up 78 percent year-to-date. Orient Paper and Industries, Prism Cement, Kakatiya Cements, J. K. Cement, all of them are up about 30-40 percent. Still value there?

A: There is no value in building material. There was value in November-December 2016 period where due to demonetisation everyone thought that there is an end to the building material companies. They have all bounced back very smartly from those levels and there is no value which is why we are taking a longer term call to invest into these companies. These companies have one big advantage that a lot of them were facing competition from unorganised sector, not much in cement but much more in building materials. These unorganised players who were not paying taxes properly, who were not paying minimum wages properly, they are all coming under pressure because of GST, because of demonetisation, because of legislation which makes payment of salaries in wages by way of cheque. So there will be a shift from unorganised sector to organised sector. Of course there will be consolidation in organised sector and there will be large companies emerging from there but by the time that happens the existing listed large midcap companies will benefit from this trend and they will be able to make money.

Sonia: You haven't been recommending spaces like aviation etc but wanted to know what your view is now because there are certain regulatory issues improving for the aviation space, crude has fallen quite a bit over a year. Is there any potential that you see in this area?

A: One thing we have to be constantly aware of is that we should not be investing into company because other things have moved and this thing hasn't moved. There is no point in investing on relative basis. You have to invest based on your understanding of this sector. Unfortunately for us, for the aviation sector, for a large part of our career, we were brought up on Warren Buffett's advice that if someone had shot down Wright Brothers so many investors would not have lost money in aviation sector - that's more on the light side but the reality is that in the aviation sector the experience of investors have not been very encouraging over past many years and yes, there are exciting changes happening in the aviation sector but we need to see it over a cycle before we can take an investment call. So maybe people who can understand aviation sector, it's a great buy for them. For us, we need to study it in detail.

Latha: Your top sector?

A: I would say bottom up approach rather than top down but within that I find mega trend developing on unorganised sector ceding market share to organised sector. Courtesy the brand consciousness, demonetisation and goods and service tax (GST) rollout - we will see this trend accelerating and there are host of companies in auto components, chemicals, speciality chemicals, textile, garments, building materials where this trend will be visible and over there valuation in some sectors have become expensive but if you can take a longer term view, you will get many winners from that trend.