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Last Updated : Oct 03, 2016 11:26 AM IST | Source: CNBC-TV18

Nilesh Shah explains: Why SIP is the best investing tool

Even as financial market professionals keep themselves busy predicting -- often without success -- how stock prices will behave in the future, Nilesh Shah, MD of Kotak Mahindra Asset Management Company, says retail investors have a simpler recourse to investing: systematic investment plans.

Even as financial market professionals keep themselves busy predicting -- often without success -- how stock prices will behave in the future, Nilesh Shah, MD of Kotak Mahindra Asset Management Company, says retail investors have a simpler recourse to investing: systematic investment plans.

"If you see our (analysts') track record in terms of predicting earnings, we have gone wrong, forget about the market," he told CNBC-TV18 in an interview.

An SIP, on the other hand, will allow investors to average their investments regularly and forget about worrying the market or timing it, Shah said. "If you look at the overall growth story, it continues to remain solid."

Still, for active stock pickers, Shah said one could back automobiles, private banks and IT companies only if they show proof of ability to transition to new-age business models.

Below is the verbatim transcript of Nilesh Shah’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Anuj: Is today still a good time to start a fresh Systematic Investment Plan (SIP)?

A: My answer remains the same, yesterday was a great day to start, today is a good to start, tomorrow is a good day to start. Whenever you have money you have to start an SIP.

Anuj: You won't worry about the recent market correction and the fact that the Foreign Institutional Investors (FII) inflows have ebbed a bit and that is clearly visible?

A: SIP is a tool to overcome all these questions. As Udayan Mukherjee was mentioning do we really know how to predict the future. If you see our track record in terms of predicting earnings we have gone wrong, forget about the market and an SIP is a tool which allows you to average in. So, yes there are certain concerns in the market in terms of valuation, liquidity, FII selling but at the end of the day if you look at the overall growth story it still continues to be pretty solid. I am sure if you pick up good stocks you will make money from this level as well.

Latha: Anything you want to speak about auto sales generally and Bajaj Auto in particular?

A: In the auto sales what we have seen is Onam season in Kerala automobile sales grew, I am sure in Ganpathi the numbers are not available but in terms of number of pandal and celebration probably auto sales would have grown. Durga puja based on what little talk we could have with people in Kolkata seems to have started on a good note. So, my guess is that this time the festival season will result into strong demand for automobiles. The sixth pay commission was in 2010. Six years is a good time to replace your old car or an old vehicle. So, my guess is that automobiles should continue to grow.

Anuj: Good companies are good stocks at 52 week lows as well. Infosys is a great company but is it a good stock right now as well?

A: A lot will depend upon what Infosys does in terms of going forward. Clearly as of today Indian IT sector is deriving bulk of its revenue from application maintenance, infrastructure management and a very little revenue from consulting, gaming, digital and those kind of things. Now, if Indian IT sector can move from this low end work to high end work then certainly they will be great pick at this point of time.

However, do we have confidence today that these companies are in the process of moving into that space. I don't think so, there is not enough visibility. Clearly, Indian companies have been created great blockbuster products like some of the western companies have created. We haven't created as much on the gaming side or application side as we should have created. WhatsApp gets billions of dollars of valuation based on number of Indians it has, majority number of Indians. Why can't an Indian company do that.

So, clearly the listed Indian IT companies will have to convince investors that they are moving into that space, they are moving into that area before markets will start giving them valuation.

Latha: What about the argument that the Indian markets look poised to rise but the earnings growth haven't yet happened. They are adequately reflected in a 8,700 index. Do you think the market will have a problem crossing the 9,000 considering that even second quarter earnings are not expected to be gung-ho?

A: The second quarter earnings will be a little bit subdued because of the good monsoon. Last year we really didn't have a good monsoon. So, there was no flooding, there was no stoppage of highways. There was no restriction on goods movement. But this time in many parts of India where we travelled by road there was restriction on goods movement either because roads have become bad or it was flooding.

So, my guess is that second quarter results will be subdued because of good monsoon and it is the third quarter and fourth quarter where people will be looking forward to acceleration in earnings. One acceleration in earnings is coming from the faith that this festival season has picked up quite well. Second, the monsoon has been good, so the rural economy should revive. Third, the seventh pay commission will put money in the pockets of investors. And if you are seeing this e-commerce billion dollar days the volume expansion over there has been fantastic.

So, probably market is taking this comfort from various data points available till now that it is the third quarter season, the festival season where companies should be able to report good profits.

Anuj: The sun rise sector for last one or two years has been Non-Banking Financial Company (NBFC) space. Do you think that valuation for some of these stocks like Bharat Financial inclusion or Bajaj Finance are justified looking at their return on equity (RoE) or do you think these stocks are now approaching a bit of an exuberance territory, maybe not bubble yet?

A: I will definitely agree with you that today NBFC sector looks expensive. In some sense NBFC sector exploits the regulated loop hole outside of banking system. The Reserve Bank of India (RBI) restricts a certain amount of lending for banking sector from a risk to return point of view and that space is occupied by the NBFCs today. That space can't be very big because the moment it becomes big the RBI will allow banks to penetrate over there and if banks indeed go into that space clearly it is going to create huge competition from NBFCs.

Second thing what we have seen in terms of NBFCs is spectacular growth. There are some NBFCs growing at 50-60 percent. The gut suggests that in a financial system when you are growing at that rapid pace there could be some risk which you might would have taken. Today I will prefer private sector banks over NBFCs, they are available at almost half valuation man to man one company versus another and their balance sheet strength is probably better than NBFCs. So, it is time to move from NBFCs to private sector banks.

Anuj: For those who are not tempted towards SIPs and who want to invest on their own do you think the midcap basket remains the best place to be in?

A: For people who want to invest on their own they need to have dedication of Eklavya. Eklavya didn't need guru Drona's teaching. He could just have his idol and learn everything. So, unless and until you think you have Eklavya's dedication don't venture into direct equity market. You will have to read balance sheets, you will have to go and attend annual general meetings (AGMs), you will have to go and track the company's peer performance, you will have to go and track variables. Now unless and until you are going to put that effort I don't think you should invest directly into the market but people who have these skills, ability, willingness and intelligence certainly today's midcap provides a gold mine of opportunity. Many of the current midcaps will become tomorrow's large cap and that is where you are going to get a lot of money making opportunity.

Latha: We have got the this Maruti Suzuki sales numbers which were mindboggling for the month of September as well the e-commerce guys are saying it has been damn good sales. What kind of a realistic earnings growth you can go with for FY17?

A: On a broad basis we are somewhere in mid teens. Just around 10 percent give and take one percent here or two percent there. But the broad market earnings are getting restricted, you have a company like Tata Consultancy Services (TCS) which works very hard. After years of working they make Rs 6,000 crore profit and then you have one public sector undertaking (PSU) bank declaring Rs 6,000 crore loss.

Latha: But that is over isn't it? Even the PSU banks either they are buying opportunities or at least they are not selling opportunities you would say it is not the big non-performing asset (NPA) issue?

A: The only point here is that what you have accumulated over the years could be written off by just one quarterly result of one bank. Now this is where the broad market earnings are misleading. We are saying earnings are not growing but India\\'s largest IT company whatever profit they made after years of working were negated by just one bank's quarterly result. So, don't look at broad market earnings, look at stock earnings.

First Published on Oct 3, 2016 10:11 am
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