Uptrend to sustain; like private banks, auto: Kotak AMC

He expects a 75-100 basis point-reduction in interest rates in FY16, and sees the economy growing 6.2 percent that year. On reforms, he says the pace has been slow, but the government is moving in the right direction.

Below is the transcript of Alroy Lobo's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What have you got in terms of a strategy for 2015 itself? In the first place, do you think that after having put on 35 percent this year, the markets can see a gung-ho 2015?A: I think we are definitely going to see good markets for quite a few years. We do believe that India is now a multiyear story and what you see in 2014 is perhaps just the beginning. Having said that because the market has given fantastic returns in 2014, you would see perhaps more tempered returns in 2015 but any investor even investing now in the markets in my view would basically generate pretty decent returns over the next few years in India. So India is a multiyear story and we continue to be constructive on Indian equities.Sonia: When you say tempered gains, what do you mean? Of course this 35 percent gains looks very large to replicate but over the next couple of years, what kind of gains do you think investors should expect from the markets?A: I would say something in the region of around 15-18 percent in rupee terms, what we would expect on a compounded annualised growth rate (CAGR) basis and it could be more - you would see perhaps the numbers being far more pronounced as we get into FY17-FY18 where you see the market being led by earnings rather than just by macro changes. If you look at the five year period, our view is that first 12-18 months post Modi has been a case where investors are hoping for a lot of macro changes happening, lot of imbalances in the economy being corrected but post that it is going to be far more earnings led and that is a reason we believe that when it is an earnings led recovery, that time rerating in markets are pretty good and you will see now earnings numbers being upgraded and therefore we believe that from a five-year perspective, India should be able to generate a lot of interest from investors.Latha: Approximately which is the quarter you expect earnings to start shooting up?A: I would say post FY16 and the reason for that is India is still growing far below its potential, gross domestic product (GDP) growth rate and we need to get that GDP growth rate up. Once a country crosses its potential GDP growth rate that is the time when corporate India gets the operating leverage in and the earnings numbers become far more powerful. I don’t think analysts have penciled that event into numbers. First and foremost analysts have just about one-two years estimates but as you get into FY18-FY19, that is the time we are going to see earnings numbers being far stronger than what you are going to see in FY15 or FY16. When you get strong earnings growth, you also get a P/E expansion and therefore I believe that an earnings led growth in market is going to be far stronger for equity returns.

Latha: But FY16 all the four quarters you are not seeing a turn, you are only seeing it after FY16, is it?

A: We are looking at about 15-17 percent earnings growth. When I say that you are going to see powerful earnings growth, it could be more than 20 percent post that. Reason being is that even in FY16, we are pencilling in about 6-6.2 percent GDP growth rate, which is almost close to potential. So you need to have a far higher GDP growth rate for that operating leverage to kick in. That is the time you get more than 18-20 percent kind of earnings growth.

Sonia: In 2014, the best performing sector by far was the private sector banks. So names like Axis, IndusInd, Kotak have risen about 70-100 percent. Do you think that will continue to outperform in 2015 as well?

A: We continue to be positive on the banking sector and in particular private sector banks and the reason for that it has a fantastic proxy for the economy. We do also expect monetary conditions to ease and between private and state-owned banks, state-owned banks have a lot of things to resolve.

One is getting themselves recapitalised, which itself is an issue and therefore the capacity to lend has significantly shrunk for state-owned banks. So market shares will move to private sector banks. We do believe that the asset quality, at least in private sector banks are better managed compared to what we have seen in terms of state-owned banks. So in that context, the private sector banks will continue to outperform.

There could be a period of time during the year when monetary conditions ease where you will see some kind of catch up in valuations of state-owned banks but strategically, we would still like to be with private sector banks from a medium-term perspective.

Latha: In many of your funds at least Kotak Select Focus is one of your big funds, Kotak 50, Kotak Midcap, you are overweight on financials, compared to the market weight by about three-four percent, will that continue to be the strategy or will you go even more overweight on financials?

A: We have got in the positioning pretty right. We will continue to maintain this kind of overweight on our portfolios.

What we are doing is basically trying to play the interest rate sensitives, sectors that will benefit from a monetary conditions easing. So in some of our portfolios that auto is one sector which we like. We think it is early beneficiary of an interest rate cut.

As far as infrastructure is concerned, we are very selective, we do understand that there is benefit on company, which are leveraged but there are other issues that infrastructure segment needs to address and unless those are addressed, we will not basically go significantly overweight that sector. So we are trying to play more the early interest rate sensitives.

for the entire interview watch video