21:43:34Strong domestic flows and a better than expected second half could see the market higher from current levels by March 2016 is the word coming in from Nilesh Shah, Kotak Mahindra Mutual Fund. However, market is also keenly watching near-term uncertainties like July rains, parliament’s monsoon session and any positive guidance by company managements in this quarter earnings, said Shah in an interview to CNBC-TV18's Sonia Shenoy and Anuj Singhal.He hoped that at least the GST Bill is passed in the monsoon session if not the Land Acquisition Bill.According to him Greece in itslef is unlikely to impact our market unless things don’t go out of hand in terms of a GREXIT or in terms of other countries like Spain, Italy, Portugal expecting same terms from EU as maybe granted to Greece.Currently, the market is supported by strong domestic flows, which are likely to continue going forward too, said Shah.Talking about his expectations from earnings, he said with regards to IT sector he would wait for all the earnings and management guidance. However, the space is likely to be a beneficiary of rupee depreciation and see returns from investments into cloud, digital etc., going forward. “So end of this result season IT could provide an entry opportunity,” he said.
Nilesh Shah, Kotak Mahindra Mutual FundBelow is verbatim the transcript of Nilesh Shah’s interview with CNBC-TV18's Sonia Shenoy and Anuj SinghalSonia: What is worrying the market? Is it purely global led like we saw last week or are investors starting to worry about domestic cues as well now?A: I don't think it is global worries alone which is keeping the market under check. It is as much also concern of the domestic front. We have worry on the monsoon from plus 21 percent in June we have now become minus four percent. The good part is that while the monsoon has not come up to the expectation of the first week of July the reservoir level of water has gone up by almost 100 percent.The second worry is obviously the quarterly result. The result season while sporadic has not been up to the expectation of the market and the third thing which the market is keenly looking forward is the monsoon session of parliament which is beginning on July 26. Clearly now market is getting bit worried but their agendas and bills which can push economic reforms like GST bill, land acquisition bill will it get cleared in this session of parliament or not. So, apart from the global worries like Greece and China our market is also battling with monsoon, monsoon session of parliament and the quarterly result.Anuj: So, are we looking at a time wise correction or do you think a pricewise correction could be also on the cards?A: From a correction point of view what we see is that there is a good domestic demand now coming for equity. If you see last quarter the total Foreign Institutional Investors (FII) buying was quite meagre at just Rs 150 crore whereas the domestic investors lead by mutual fund pumped more than Rs 32,000 crore. So, this strong domestic demand is keeping market supported and we believe as we move forward into the current year the domestic demand will continue to be strong which will provide support to the market. We had never seen investment by provident fund trust in Indian equity market and we had now seen them started taking baby steps. I am sure over next five years they will be substantially large player in our market. So this domestic demand will provide a kind of support in the market, we will probably see more of a consolidation phase in this environment.Sonia: How worried would you be about Greece hurting our market. Purely that trigger, is there still a worry about a contagion impact?A: Frankly speaking Greece is becoming like the old childhood story or tiger coming, tiger coming. When it was announced first it had an impact, when it was announced second time it had limited impact, now my guess is that market is more or less over with Greece. What they are worried about is that whether this will result into contagion or not. If European Union gives debt write offs and waiver from austerity measures from Greece will other countries like Spain, Italy and Portugal also demand the same benefits and perquisites from European Union. And if European Union allows Greece to go out of Europe will markets start believing their ability to defend their weakling and start pricing in that at some point in time in future even Portugal, Spain and Italy could be out of Europe because they are not really as strong as Germany and France.
So, market is more bothered about what will be the stance of European Union and how will the Greece result into a contagion kind of effect and as long as those things are not really going out of hand I don't think Greece will have a materially lasting impact on Indian market.Anuj: For the near term do you think the upside for the market is capped and where do you see this market by the end of the financial year?A: Let me answer the second part first. We think towards the end of the financial year that is March 2016 markets could be higher than the current level driven by couple of things. One, if you see the result season September 2014 to March 2015 results were actually negative. They were quite below market expectations. We have created a low base in the second half of FY15. If the second half of FY16 is relatively average still on a year on year basis it will portray optically better growth and that will support the market.The second thing is the domestic flows. Clearly if we are looking at Rs 30,000 crore per quarter buying from domestic investors led by mutual funds, provident funds and insurance companies that is substantial sum of money and I do't think we are going to see supply pressure emerging at today's valuation. So, both from a flow point of view and an optical year on year (YoY) growth point of view second half looks to be brighter.
We just need to overcome the near term uncertainty related to monsoon. I hope and pray that the July monsoon should be as good as June and then half of our problem will be over. Second the parliament session should at least pass GST bill if not land acquisition bill and third while the quarterly results market is almost priced in as if it will be just showing moderate profit growth the body language of the management, the guidance of the management should be positive, combination of all these three things should result in far better second half than current level.Sonia: Let us talk about some individual stocks and sectors. What did you make of TCS' earnings and in general how are you positioned on the IT space?A: In the IT sector what I have been telling is that I want to see the results, see the management guidance and then take a call. Clearly there will be different kinds of results on different companies and then we have to tie that up with the valuation. What is important in IT sector is that last year rupee probably appreciated against major currencies except dollar, this year that is not going to be the case. So, you are going to get the benefit of rupee depreciation going forward.Second, a lot of IT companies have invested in future cloud, digital, social media and so on and so forth. Probably revenue from that has not yet appeared as much as it should have appeared in the quarterly results. So, within these two parameters of currency depreciation coming in and investments paying off could really provide somewhere around end of this results season, good opportunity to get into the IT sector.
Anuj: Stocks like Tata Motors, Tech Mahindra, we have seen quite a bit of derating, do you dip into them or do you think the tide has turned for them?A: The names which you have mentioned, clearly there will be a great opportunity to buy them over the next couple of months. We need to first analyse the causes which are resulting into such sort of derating. Let us look sectorwise, the PSU banks have been derated significantly, majority of them are today trading at a valuation as well as marketcap which is very low. Why is PSU banking sector trading at a low level? First - there is a lack of talent, the salary level in PSU bank at the top is substantially lower than about a mid level private bank executive gets. With that kind of salary how will PSU banks attract talent?Second is lack of capital. To meet Basel III norms, to meet the non-performing assets PSU banks will require lot of capital and where are they going to get that capital from? We are not seeing successful issuance or capital raised by PSU banks unless until they get money from the government of India. Third is related to lack of independence in decision making process. We all know that they have accumulated huge amount of NPA burden, now how are they going to sort out? Will the introduction of bankruptcy code help them recover their money? So, unless until we see a resolution to the effect of lack of talent, lack of capital and lack of independent decision making process it is unlikely that the PSU banks will be able to give other than a trading opportunity to invest. So, we need to see what has caused the de-rating, what steps are taken by the company to overcome that de-rating and then you have to time the market to get invested into the stocks.I can reasonably be confident that some of the stocks in this cheap sector of valuation whether they are leveraged companies, whether they are de-rated IT companies, whether they are PSU banks you will see some good opportunity to invest. However what is most important is that there should be catalyst to change the conditions which has caused that derating.Sonia: You mentioned earlier that a lot of domestic money is entering the market now. Is the enthusiasm the same as it was last year or has some scepticism crept in, how are you reading the flow situation?A: We are seeing good amount of traction in the flows. I think there is a different segment of investors in domestic market. One segment of investors I will call is really smart and long term and they are investing in market through systematic investment plan. Today, mutual fund industry has 78 lakh SIPs contributing in excess of Rs 25000-30000 crore every year. This is real serious long term smart money coming and giving good opportunity to us to bottom fish in the market. The second money which is more of one time investment kind of thing, today that is taking advice from many advisors and they are also able to bring money with a longer term horizon. So, I have no reason to disbelieve that this year we will probably end up outperforming what we received last year in terms of flows. Last year we were at Rs 70000 crore, this year my guess is that equity mutual fund should be upwards of that number.LIC has been also doing fair amount of investments in market and I think their growth rate also will continue and they will outperform last year’s money which they powered into equity markets.The big change is going to occur on the provident fund side. They haven’t invested any money in equity market last year. This year between EPFO and private sector provident fund we should expect about Rs 10000 crore coming into the market.The private sector insurance companies and banks and other domestic institutional investors had sold about Rs 28000 crore of equity last year. Now with the ULIP redemptions coming to an end, we can probably see some amount of positive contribution may be Rs 5000, may be Rs 10000 crore from that.So, whether I look at retail investors, whether I look at mutual funds, whether i look at private sector insurance companies and banks, whether I look at LIC, whether I look at EPFO my feeling is that this year we will end up seeing anywhere between Rs 1,20,000 crore to Rs 1,50,000 crore domestic institutional investors flow into the market.Anuj: We saw L&T and BHEL do well over the last few days. Is this a space that you would like to add some names and more importantly have you seen any kind of pickup in the investment cycle?A: Bottom-up certain industrials do look attractive, one which has a technology edge or one where the valuations are looking attractive. On the other hand there are a couple of industrials where they being a multinational company they have a potential delisting premium priced into it.If the business takes-off and the parent does not make a delisting offer, I don't know what will be the reaction to the stock price. More than the industrials we are bullish on the domestic cyclicals, cyclicals in cement industry, in automobile industry. We think this is the sector where today working capital utilisation is high, debt burdens are little bit there, capacity utilisation is low and they will be biggest beneficiary once the economy takes-off in terms of improved capacity utilisation, lower interest rates, lower working capital and efficient working capital cycle, all these things will result into their profit growth higher than their current valuation. So, we are more bullish on domestic cyclicals than the industrials.
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