Downside limited, but cautious on mkt; Q2 nos bad: Kotak MF

Latha: A word on the general market mood. Is 7,740 proving to be a decent kind of support for the market? Are you a buyer on dips?

A: Market lacks triggers on either side. It's stuck in a small range. As far as our interest goes, we continue to place our bets on some of the areas where earnings growth is still a bit more visible than the overall market. Having said that we are not aggressively investing our inflows into the market; we are cautious in terms of investing. As we see more opportunities in case of volatility in the market, we would look at those opportunities. 

Sonia: You said the market is stuck in a lower range now but what about the lower end of this range. Do you see it hold the recent lows of 7,500 or is there a larger possibility of that lows breaking anytime soon?

A: It is difficult to predict short-term market movements. Having said that at lower levels there is definitely buying interest, the domestic institutions are getting decent inflows, Employees Provident Fund Organisation (EPFO) money is getting invested in the market at all levels. So I would say that after having corrected about 15 percent from the top, now valuations are more reasonable, so to that extent the downside should be limited in the market at this point in time.

Latha: What is the kind of flows that you are seeing for equities? Has it been as robust, any dissonance because of the Bihar election result, any increase in redemptions at all, any sense of disappointment from retailers?

A: Absolutely no change in the pace of redemptions, we are not seeing any redemption, I would say very minor. But yes, inflows have been a little bit patchy in the month of November but I will not call it a new trend. Maybe, it is because of the festivals and the holidays that we had in between, but if it continues, then obviously, that should cause some worry, but at this point of time, it continues to be more or less okay._PAGEBREAK_

Sonia: I was just going through some of your top holdings that you have in your funds and one of them is Infosys. That stock has been the talk of the town with the way it has fallen in this month gone by. Is there a degree of underperformance that could continue in Infosys or is this a good time to perhaps be accumulating that stock?

A: Without getting into stock specifics, clearly, the IT space has kind of disappointed investors in terms of the management commentary that has come out over the last few months. The second quarter results were also more or less in line or below market expectations. Given all this and the fact that globally the growth has been really scarce and the pricing pressure continues, we continue to believe that this sector is unlikely to really outperform the overall market, but there could be stock specific opportunities within this sector and that is what we are concentrating on.

Latha: Let me pick at some of the themes that evolved over late last week - the Seventh Pay Commission. Now, most of the numbers are out. As a stock investor, what would you play?

A: Clearly, the second quarter results were quite disappointing. At the bottomline, there was about a 2 percent year-on-year (YoY) decline, the topline revenue was weak, there was degrowth and this is a consecutive fourth quarter of degrowth in the topline. So, while there is some benefit because of expansion in gross margins that is not really flowing into bottomline because the companies are unable to hold on to the prices. So, to that extent, it was a disappointment.

Going forward, we believe that it is going to be a gradual recovery. We are not really seeing a great improvement in terms of overall earnings, but because of the favourable base that we will have from December quarter onwards, if you remember December-March quarter of last financial year were really bad, so to that extent, even if the next two quarters are average, because of the favourable base, it should look reasonable.

For the full year, we are looking at about 6 percent earnings growth now. This has been toned down quite a bit. At the beginning of the year, we were somewhere around low double digits. After having seen first half, now, we think that the full year growth is going to be about say 6 percent YoY. Even for that to be achieved, you will need about 15 percent growth in the second half on a YoY basis. So, clearly, I think the earnings momentum is still not picking up.

Latha: I was asking you, how you will play the Pay Commission numbers. Now, we know that it is about Rs 100,000 crore that will come in terms of arrears, in terms of pension and salaries in FY17. Is that going to be positive for any of the companies? Will it be negative for banks, because some brokerages are saying that will mean, perhaps, no more rate cuts from the Reserve Bank of India (RBI)? Generally, as a stock picker, what are you buying on this theme?

A: I think we were quite well-positioned for this urban consumption pick up. Already we are seeing some improvement in urban consumption, especially in passenger cars and some of the consumer discretionary demand and with the Seventh Pay Commission in place; this should see a little more pickup going forward. And the commodities continue to remain under pressure, which means that the gross margins will continue to remain healthy for this particular sector and accordingly, we are looking at automobiles, consumer discretionary, white goods, some of the banks which are really enablers for this demand to really kick-in in terms of retail focus. So, these are some of the areas where we are placing our bets today.

Sonia: What about the cement space? You have a big allocation to that sector as well and there are some news reports indicating that some of the non-coal mine auctions will begin soon, so there could be a lot of speeding up in activity in infrastructure, cement, etc. because of this. What do you think the long-term potential could be in the cement sector?

A: Cement is clearly one of the long-term bets that we have in our portfolio, the capacity additions have really dried up in the sector which means that any incremental demand that is going to come into the sector has to be serviced by the existing capacity. The cement business itself has got consolidated in the hands of maybe large 5-6 players. So, to that extent, in a scenario where raw material prices are under pressure and there is pricing power in the industry, which means that the profitability is going to remain quite consistent.

At the same time, we are also seeing improvement in demand that is coming from building of new roads as we have seen. The pace of road building has considerably increased over the last two years which was in the single digit km per day, now it has moved to about 23 km per day in terms of new roads. Similarly, we have seen activity in the mines area, whether it is coal mines, iron ore mines or some of the new mining approvals that you are talking about. So, clearly, the activity levels are picking up and we believe cement is going to be a great beneficiary from this activity level improvement in the overall economy.