Mistry exit may not hit Tata stocks; like banks, cement: KotakMF

The alpha managers at Kotak Mutual Fund are bullish on sectors such as banking, consumer discretionary, cement and specialty chemicals. They believe the storm brewing at Tata Sons is unlikely to affect group companies' stocks in the medium-to-long term.Sharing his views with CNBC-TV18, Harish Krishnan, Senior Vice-president and Equity Fund Manager at Kotak Mutual Fund said most of the Tata Group companies are well-run professionally and independently. In the interim, some deleveraging that some of the group companies are attempting may be impacted due to Cyrus Mistry's abrupt and unprecedented ouster as Chairman. In medium-to-long term shareholders patience will pay out, Krishnan said.Moving on to banking sector, Krishnan said the fund house believes that financials will be growth driver for markets, adding, retail-oriented financial and corporate banks are at an interesting point. He expects such banking companies to take part in corporate lending growth cycle beginning FY18.He believes the country's cement story is also well poised for a growth as the equation between incremental supply and incremental demand has changed. He said cement companies will benefit from the upcycle and the sector is likely to remain in a sweet spot for the next 2-3 years.Pankaj Tibrewal, Senior Vice-president and Equity Fund Manager, Kotak Mutual Fund, said consumer discretionary sector will show a good growth going ahead. He is extremely bullish on specialty chemicals segment and asserted the sector is going through fundamental changes. Most global agricultural players are shifting sourcing to India which will benefit Indian firms, he said. As India are just a small part of global pie, companies in the segment have got a good runway for growth, Tibrewal said.Below is the verbatim transcript of Harish Krishnan and Pankaj Tibrewal's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: I was just looking at your Kotak 50 Fund and good returns, 3 year returns of 18.7 percent and 5 year returns of about close to 15 percent, lot of banks in your top holdings HDFC Bank, IndusInd Bank, ICICI, Axis do you think this space remains the leadership space going forward as well?Krishnan: Yes, we clearly do believe that financials will be performers in the growth story ahead. Clearly, India is an underpenetrated market as far as various financial metrics are concerned. Clearly, as far as the retail oriented franchises are concerned it really is a compounding story, which we have seen in the last 4-5 years continuing over the next 3-4 years.As far as corporate banks are concerns I think they have come at a very interesting juncture at this point of time wherein the previous cycle problems of NPA are slowly starting to get addressed and in a few cases also starting to see some kind of resolution and then hopefully from FY18 onwards these are the franchises which will also take part in the growth cycle as far as the corporate lending is concerned, so to us that seems like a very interesting play for the overall macro story of India.Sonia: I was just going through your Kotak Emerging Equity Fund and what phenomenal return some of the stocks have given you names like Whirlpool sitting at new highs, SRF and the icing on the cake has to be V-Guard that stock is up 20 percent in just two trading sessions post numbers. Is this a theme that you would continue playing?Tibrewal: I think consumption discretionary is one theme which we are extremely positive on and the themes come from the fact that if you look at our per capita GDP it is about USD 1,600-1,700 currently and our research shows that any economy which moves above USD 2,000 on per capita income there is explosion in various categories, whether it be a consumer white good company or apparel as a category or various other categories like autos, auto ancillary so on and so forth.Our belief is that over the next 2-3 years even if we compound at 9-10 percent on the per capita GDP, we would reach that USD 2,000 mark in the next 2-3 years and hence you could see various categories showing exponential growth and hence we believe that is the category to be in. The valuations have moved up no doubt about it, but only valuation should not be a cause for selling of the stocks tills the earning momentum keeps pace, so we are keeping our position intact and hopefully these sectors should give us great return going forward as well.Anuj: The other stock that done well for you is SRF and this entire space has come back after a long time. What’s the story here and do you still back it?Tibrewal: Clearly if you look at speciality chemical as a sector there are some fundamental changes which are happening in the sector. Primarily if you look at the way the Chinese manufacturers are ramping down their production led by environmental issues. I think most of the agro players you speak globally are shifting a part of their sourcing base to India and clearly few of the guys which you see in our portfolios are the clear beneficiaries out of it and also just keep in mind that the global chemical market is a very, very large piece and the Indian producers per se are small or a very tiny part of that entire global piece, so the runway for growth is huge for all these speciality guys from the Indian industry and hence we believe that you need to back at least 2-3 guys who are very favourable on return on capital, who are throwing cash a lot on their balance sheets and well poised for a long term growth.Sonia: I wanted to ask you about the big story of the day which is the ousting of Cyrus Mistry from Tata Sons. You have invested and you do invest in a lot of the Tata Group stocks. Do you see growth of verticals or subsidiaries of the Tata Group suffering because of such a big exit or do you think it is going to be business as usual, because most of these companies are really well oiled machines?Krishnan: I think almost all of them are professionally well run, have very strong leadership team and are hoping for value creation over medium to long term perspective. In the interim of course there were a few companies within the Tata Group, where we were seeing some signs of significant deleveraging which was happening.Possibly in the interim we might see a delay in few of such transactions happening, but I would recur that by and large the overall management teams within the entire group is incredibly strong and their focus on value creation over the medium to long run will payoff for shareholders.Anuj: Talking about your other infra and economy related funds, which has done 3 years return of 31 percent and two themes stand out cement and gas stocks IGL in particular. In both these cases do you think there is enough steam left?Krishnan: Clearly, we don’t think that if you are talking of 2-3 year kind of a medium term horizon the cement is still extremely well poised. If we talk about incremental supply to incremental demand equation clearly over the last 3-4 years we were in a situation where the incremental supply was far more than the incremental demand and that has definitely changed its trajectory over the course of the next 2-3 years at least.Secondly, you are seeing consolidation within the sector which would be a proxy for pricing power and therefore it should show through in terms of well run producers trying to make the most of the up cycle as well. Clearly from a cement perspective yes they have run up, in fact most of the market has run up, but clearly from a 2-3 years kind of a perspective in our opinion have a very sweet spot still left in them as far as the sector is concern.With regards to the gas retailing clearly I think that is an area of focus. In fact, the theme that we run internally is basically green India. Clearly there is a lot of focus by the current government in terms of be it signing to the Paris treaty or the convention as well as in trying to improve renewable and clearly gas is a far better play as far as the mix of the various energy consumption is concern. So clearly we are playing this through almost all the gas related names within the fund and that to us is a sunrise industry wherein you have very strong network already in place.You have got a tailwind of government regulation which is trying to increase consumption at the retail end and you have got newer licences also being given out, so I there is both growth as well as very strong return metrics both working in your favour and therefore we back this entire theme of Green India with a special focus on gas retailing name as well as with respect to some capital goods names which are into the emission control space.Sonia: Wanted your thoughts on how to approach some of these private sector banks, maybe some of the corporate facing banks over the next 6-12 months, because ICICI Bank has been the biggest leader over the last couple of weeks or so and in your emerging equity fund you made a lot of money in names like IndusInd Bank. Do you see a lot more scope in the private sector space over the next 1-2 years?Tibrewal: Clearly for the last few years our core position have been and we have been positive on private sector retail oriented banks, but at the current juncture as Harish said in his opening remark that corporate bank especially on the private sector are well poised. Over the last few months the resolutions which we have been seeing either on the one very large corporate or one steel sector minimum import price (MIP) and everything bodes well somewhere for these private sector corporate lenders.Also we believe that the valuations in some of them are at cyclical lows and hence over the next 12-18 months there could be an opportunity to make money in the private corporate lenders.Anuj: Just wanted one thought on your former company Infosys and of course you are shareholder as well. The stock moving closer to 52 week lows good opportunity to top up or are you sensing some bigger headwinds now?Krishnan: Clearly, the way we look at IT services as a whole is that as a fund house we are underweight across all our funds. Within the IT services we would wanting to back management who recognise that there is a problem upfront and are trying to address that by either going through new forms of businesses maybe a greater focuses on SAAS kind of business or cloud kind of a business or to focus on greater levers of automation which can help them in the margins and we think the companies like the one that you mentioned are at least making the right sound byte.Now with respect to valuations if you look at metric for example on the basis of EV to EBITDA certain companies are very close to the lows that they made in 2008. Clearly, yes from a cyclical perspective if business were to bounce back these are excellent franchises to bet on from a 1-2 year perspective, but our sense is that a lot of these headwinds are going to take some more time to resolve and therefore one needs to be a patient investor to really get into these kinds of franchises at this point of time.