'Mkt to consolidate with upward bias; be company-specific'

Below is the verbatim transcript of Kenneth Andrade’s interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy

Latha: What is the sense in the market itself, do you think that most of the good news has been juiced out and at least for the remaining part of 2014 we won’t see too much fireworks?

A: The last one year markets have been fairly in favour of the investor and you have got fairly high double digit gains out there. Largely valuations are fair at this point in time and there is a fair amount of execution that needs to be done to get profitability growth upwards. So that is the process that is going to take its time. So yes it will be good if markets actually consolidate themselves around these levels before an earnings kick in in 2015-2016 before we can see some structural gains for an extremely long period of time.

Sonia: You have significantly raised stake in two sectors, in engineering and in autos but these are stocks that have already run-up considerably in the last 6-12 months. Are these still sectors that one should accumulate into now or do you think you should move money elsewhere?

A: If you just look at the constituents of those two segments that we have raised exposure to, what we prefer to buy into our industries or our companies which do not have significant amount of leverage and where we see execution risks are reasonably low. So in discretionary spends that is one part of the industry that we think we will see near term gains that would come through.

The other in terms of engineering and capital goods space, there will be incremental capex on the ground and that should help the balance sheet of these companies, P&L accounts as well as stock should consolidate and give fair amount of returns from here.

Latha: When is the economy turning around, should we look at the fabulous sales that Hero and Honda posted on Dhanteras day as a signal of the economy turning around or are these just good products that would get sold anyway? When are you actually looking at earnings upgrades coming in?

A: 2013 is when the economy actually bottomed out. 2014 we got a new government in power and there has been reasonable amount of initiatives taken by this government to actually make sure that the base will hold. To expect the economy to actually have a hockey stick kind of recovery after a sluggish three-four years I think it is not right to expect that at least in the near term. So let us see if the market consolidates itself, let corporates get their balance sheets into place, let the banking system actually recapitalise itself and 2016 and 2017 should be reasonably interesting years as far as earnings are concerned.

Sonia: The oil and gas sector is not in your top five sector holdings right now but last year you had exposure of more than 6-7 percent in that, have you booked profits in oil and gas?

A: Historically we have had reasonable amount of exposure to the gas sector or distribution space and we have taken some money off the table.

In the other part of the market it is fairly regulated and government has got significant amount of control out there. So it is not really a free market economy that you are actually operating in. So that is one of the reasons why we have not been significantly overweight on that particular space.

Latha: Where should one look for big returns or outsized market breaking returns? What are the parameters to identify the outperformers?

A: What currently the market lacks is essentially category leadership or stock leadership. So it is very difficult to identify one company that is going to actually pull this market through or a category that is actually going to pull this market through. In 2005-2008 you had the entire investment economy that led the markets. If you step backwards to the turn of the century you had IT that held through the entire environment.

As the situation stands we don’t see that kind of category leadership that exists on the ground for the market. So if you have to build that into a portfolio strategy I would rather still go extremely company specific but that is going to be a significant challenge when you run large size portfolios. But near term that has to be done. Hopefully participate with the market till you identify the category leadership and then actually ride with it. I don’t think that category is actually showing up to give you some significant amount of alpha on the ground at this point in time. Companies might be able to do it but when you run large portfolios it is going to be reasonably tough.

Latha: How is the trend looking here on, will you continue to have this big outperformance from midcaps?

A: I think you are looking at it from a point to point basis. So if you take from an all time low to right now yes these indices have given you market beating returns. But if you look at it from an entire cycle perspective they have gone down that dramatically before they have actually bounced back. So to put it differently these indices have come back and a lot of these companies have come back from bankruptcy kind of valuations to market level valuations which is what the market is essentially displaying at this point in time.

There is no significant valuation arbitrage from industry to industry perspective, there is no significant valuation arbitrage even from company to company specific. So if you have to build it forward any investor has to take execution risk on his portfolio and make sure that the company actually executes and has more market share and higher cash flow and disproportionate profitability within the sector itself.