See new highs this fiscal; near term clouded
In the immediate term, June quarter earnings, monsoons in July and legislative progress in Parliament are important, says the Kotak Mutual Fund chief.
While the Indian market's near term direction will likely be dictated by a number of factors, including developments in Greece, the market could possibly again create fresh highs during this fiscal year, according to Nilesh Shah, MD, Kotak Asset Management Company.
In an interview with CNBC-TV18, Shah said valuations became attractive below 8,000. "But immediately, the June quarter earnings, monsoons in July and legislative progress in Parliament are important," he said.
For earnings, Shah said he sees a U-shaped rather than a V-shaped recovery, which may not necessarily show through in the June quarter.
Below is the transcript of the interview on CNBC-TV18.
Latha: The range is now settling in. Where do you think the market is headed immediately? Is it more likely to break the downside, rather than break 8,500?
A: A lot will depend upon how events pan out -- clearly, what happens over the weekend in Greece in terms of referendum. Do they stay in euro or go out? If they stay in euro, do they get the treatment, which will encourage Spain, Portugal and Italy also to follow their route? Or if they go out, what will be the future implication for the Eurozone?
There are too many questions, which the world has to answer and while they do not impact us directly, our markets will have no option but to watch out carefully what will happen over there. So, a lot will depend upon the events in terms of direction of the market.
One thing I know is that if market goes below 8,000, it becomes very attractive to buy compared to today’s level.
Reema: Is the upside capped for our markets, let's say, at 8,500 or do you see the possibility of us hitting our all time highs?
A: Will we go and capture all-time highs somewhere in this financial year? The answer is quite likely. Will it happen in the near term? No, It depends upon certain outcomes of events.
One we talked about is Greece, but more important for us is the month of July which will see the spread of monsoon. The July rains are far more critical for agricultural growth and rural economy. Indian Meteorological Department (IMD) is forecasting, despite going wrong on June forecast that July will be below average. So clearly, we need good monsoon in July like in June.
The second is the monsoon session of Parliament. There are some important legislations which will push economic reforms like land acquisition, like goods and services tax (GST). We need to see whether they will be able to see the light of day or not. The successful outcome in passing of GST and land acquisition bill will be definitely be supportive of the market like a good monsoon.
And the most important thing from the market point of view is the June quarterly results. The December 2014 as well as March 2015 quarterly numbers have been below expectation. And in June 2015, at least the indications have begun from certain sectors like technology where people have started lowering the expectation of investors.
So, we hope that June 2015 turns out to be different from March 2015 and December, 2014. Here the profitability actually grows positive year-on-year as well as quarter-on-quarter and these three even can then take the market on the higher direction.
Latha: But even today we got some downgrades of some good stocks like Voltas and Blue Star, because home air conditioners are not selling as well as they did three months back. The report speaks about higher discounts being offered by these products. We also have a Moody’s report telling us that rural demand is still very soft. Not something we do not already know. But, my point is which can be the earnings-turning quarter? Is it June at all?
A: One, is the turn going to make a V-shaped recovery? The answer is quite unlikely. I do not think so we are in a economic situation where earnings can bounce back in a straight line manner. We are going to see more like a U-shaped recovery in earnings.
And the driver for earnings will be one, interest rate cut which will ultimately get passed on to the borrowers. We have seen about 20-25 basis point rate cut happening from the borrowers point of view. But we need more action on that ground.
The second thing will be the government spending. Whole of FY15, government probably worked on the back foot to control fiscal deficit. But, in the month of April and May, they have begun with a bang. Their spending has gone up. Now, we need positive resonance of that spending into the economy. Clearly, that spending will come more from the roads and construction and railways side. But, eventually I do see benefit of this spreading into the economy.
The third is the good monsoon. Now, we do not know how July monsoon will pan out, but if June is an indication, then there is a probability of more hope for July monsoon to be good.
The fourth will be the domestic leverage which will come into play. In FY15, our reserve money growth was averaging about 12 percent, credit growth was averaging about 12 percent. Clearly, with tight liquidity, there is a constraint on balance sheets in terms of higher working capital cycle. Hopefully in FY16, we will see reserve money growth going up and liquidity improving which will reduce the working capital cycle.
So, combination of all these things coming together in terms of better working capital, lower interest rates, government spending creating resonance in economy along with better capacity utilisation of industrial sector, we will see earnings recovery on a slow and steady basis.
Reema: Coming to the IT sector, is it possible that the challenges faced by some of the companies will not be resolved in a quarter or two and therefore it may make sense to trim exposure to the sector?
A: From a valuation point of view, today most IT companies are at a reasonable valuation. And if you remove the cash on their balance sheet, the return on equity (ROE) which they generate on their business which are the valuation at which they are available in the market, they appearing on the cheap zone.
The real concern is coming on the growth side and there is no particular pattern developing for the whole sector because each company is talking about client specific issue, each company is talking about geographic specific issue, each company is talking about sector specific issue.
But, if we see broad sector, whether it is a smallcap company, midcap company or a largecap company, all of them are talking about some problem or other. In the quarter of March, they lowered expectation and delivered numbers which was lower than the lowered expectation and in the June also, the trend is beckoned where a couple of smallcap and one largecap companies have indicated that the June 2015 quarter numbers will not be very positive.
So, clearly this is the time to be careful about IT sector. I would not recommend a sell right now, but before buying, I want to see the June 2015 results, see the management commentary and understand that the pattern is not developing for the sector as a whole. It is still an individual company-specific issue.
Latha: Then what is your sectoral allocation? If you were given an incremental Rs 100, where would the distribution be if not IT?
A: One it will be far more bottom-up approach rather than top-down approach. Second, it will be more related to domestic cyclicals where we believe that due to the improved capacity utilisation, lower interest rates, improved working capital cycle as well as the domestic economy getting rejuvenated by the government spending. All these companies will be in a position to provide benefit of operating leverage as well as financial leverage.
We are also overweight selectively in the pharma sector where we are seeing some companies, now after having a beautiful correction are appearing in the buy zone. The third sector is the private sector banks and the non-banking financial companies (NBFC).
Clearly, they will have to take the lead in terms of providing credit for industrial and economic revival and they will also be the beneficiary of falling interest rate. They will also benefit from the overall growth in the economy. So, between domestic cyclicals, selective pharma and private sector banks and NBFC, we think there should be allocation to these sectors.
Reema: What is your expectation on how the public sector (PSU) banking earnings are likely to be in this quarter and therefore what would your approach be on particular PSU banks? And if someone is already invested in them, what would you recommend?
A: For the first time, last year, private sector banks with 20-25 percent of banking balance sheet, generated more profit than PSU banks which contribute 70-75 percent of balance sheet. Clearly it shows how efficient private sector banks are vis-a-vis PSU banks.
Second, we believe that the non-performing asset (NPA) cycle has not fully been factored in, in terms of PSU banking system. There will be more restructuring or more refinancing or more disclosure of NPAs which are not yet fully disclosed and this will have a far bigger bearing on the profitability numbers.
The crucial question for PSU sector is that today they are constrained by lack of capital, lack of talent as well as lack of independence in decision making. Their lending decisions are not necessarily driven by only shareholder value creation. They have social obligations as well.
From a talent point of view, the highest paid PSU bank CEO is probably getting less than what a mid-level executive in private sector bank will be getting. Clearly, how will they attract talent if they are not going to pay market price? And the third and important thing is lack of capital. Obviously, with Basel-III norms, you need equity capital to continue growth and today, not all the PSU banks will have the ability to tap into the market. If some of the PSU banks have to tap the market, their dilution will be actually below book or below stated book and that itself will be negative for their equity capital or equity value.
So, we believe this is time to be overweight private sector banks and NBFCs. Surely, PSU banks have fallen a lot, so they will provide a trading opportunity. In some sense, in a very lighter vein, you have to buy PSU bank when they are very cheap and sell when they are just cheap.
Happy Investing
In the immediate term, June quarter earnings, monsoons in July and legislative progress in Parliament are important, says the Kotak Mutual Fund chief.
While the Indian market's near term direction will likely be dictated by a number of factors, including developments in Greece, the market could possibly again create fresh highs during this fiscal year, according to Nilesh Shah, MD, Kotak Asset Management Company.
In an interview with CNBC-TV18, Shah said valuations became attractive below 8,000. "But immediately, the June quarter earnings, monsoons in July and legislative progress in Parliament are important," he said.
For earnings, Shah said he sees a U-shaped rather than a V-shaped recovery, which may not necessarily show through in the June quarter.
Below is the transcript of the interview on CNBC-TV18.
Latha: The range is now settling in. Where do you think the market is headed immediately? Is it more likely to break the downside, rather than break 8,500?
A: A lot will depend upon how events pan out -- clearly, what happens over the weekend in Greece in terms of referendum. Do they stay in euro or go out? If they stay in euro, do they get the treatment, which will encourage Spain, Portugal and Italy also to follow their route? Or if they go out, what will be the future implication for the Eurozone?
There are too many questions, which the world has to answer and while they do not impact us directly, our markets will have no option but to watch out carefully what will happen over there. So, a lot will depend upon the events in terms of direction of the market.
One thing I know is that if market goes below 8,000, it becomes very attractive to buy compared to today’s level.
Reema: Is the upside capped for our markets, let's say, at 8,500 or do you see the possibility of us hitting our all time highs?
A: Will we go and capture all-time highs somewhere in this financial year? The answer is quite likely. Will it happen in the near term? No, It depends upon certain outcomes of events.
One we talked about is Greece, but more important for us is the month of July which will see the spread of monsoon. The July rains are far more critical for agricultural growth and rural economy. Indian Meteorological Department (IMD) is forecasting, despite going wrong on June forecast that July will be below average. So clearly, we need good monsoon in July like in June.
The second is the monsoon session of Parliament. There are some important legislations which will push economic reforms like land acquisition, like goods and services tax (GST). We need to see whether they will be able to see the light of day or not. The successful outcome in passing of GST and land acquisition bill will be definitely be supportive of the market like a good monsoon.
And the most important thing from the market point of view is the June quarterly results. The December 2014 as well as March 2015 quarterly numbers have been below expectation. And in June 2015, at least the indications have begun from certain sectors like technology where people have started lowering the expectation of investors.
So, we hope that June 2015 turns out to be different from March 2015 and December, 2014. Here the profitability actually grows positive year-on-year as well as quarter-on-quarter and these three even can then take the market on the higher direction.
Latha: But even today we got some downgrades of some good stocks like Voltas and Blue Star, because home air conditioners are not selling as well as they did three months back. The report speaks about higher discounts being offered by these products. We also have a Moody’s report telling us that rural demand is still very soft. Not something we do not already know. But, my point is which can be the earnings-turning quarter? Is it June at all?
A: One, is the turn going to make a V-shaped recovery? The answer is quite unlikely. I do not think so we are in a economic situation where earnings can bounce back in a straight line manner. We are going to see more like a U-shaped recovery in earnings.
And the driver for earnings will be one, interest rate cut which will ultimately get passed on to the borrowers. We have seen about 20-25 basis point rate cut happening from the borrowers point of view. But we need more action on that ground.
The second thing will be the government spending. Whole of FY15, government probably worked on the back foot to control fiscal deficit. But, in the month of April and May, they have begun with a bang. Their spending has gone up. Now, we need positive resonance of that spending into the economy. Clearly, that spending will come more from the roads and construction and railways side. But, eventually I do see benefit of this spreading into the economy.
The third is the good monsoon. Now, we do not know how July monsoon will pan out, but if June is an indication, then there is a probability of more hope for July monsoon to be good.
The fourth will be the domestic leverage which will come into play. In FY15, our reserve money growth was averaging about 12 percent, credit growth was averaging about 12 percent. Clearly, with tight liquidity, there is a constraint on balance sheets in terms of higher working capital cycle. Hopefully in FY16, we will see reserve money growth going up and liquidity improving which will reduce the working capital cycle.
So, combination of all these things coming together in terms of better working capital, lower interest rates, government spending creating resonance in economy along with better capacity utilisation of industrial sector, we will see earnings recovery on a slow and steady basis.
Reema: Coming to the IT sector, is it possible that the challenges faced by some of the companies will not be resolved in a quarter or two and therefore it may make sense to trim exposure to the sector?
A: From a valuation point of view, today most IT companies are at a reasonable valuation. And if you remove the cash on their balance sheet, the return on equity (ROE) which they generate on their business which are the valuation at which they are available in the market, they appearing on the cheap zone.
The real concern is coming on the growth side and there is no particular pattern developing for the whole sector because each company is talking about client specific issue, each company is talking about geographic specific issue, each company is talking about sector specific issue.
But, if we see broad sector, whether it is a smallcap company, midcap company or a largecap company, all of them are talking about some problem or other. In the quarter of March, they lowered expectation and delivered numbers which was lower than the lowered expectation and in the June also, the trend is beckoned where a couple of smallcap and one largecap companies have indicated that the June 2015 quarter numbers will not be very positive.
So, clearly this is the time to be careful about IT sector. I would not recommend a sell right now, but before buying, I want to see the June 2015 results, see the management commentary and understand that the pattern is not developing for the sector as a whole. It is still an individual company-specific issue.
Latha: Then what is your sectoral allocation? If you were given an incremental Rs 100, where would the distribution be if not IT?
A: One it will be far more bottom-up approach rather than top-down approach. Second, it will be more related to domestic cyclicals where we believe that due to the improved capacity utilisation, lower interest rates, improved working capital cycle as well as the domestic economy getting rejuvenated by the government spending. All these companies will be in a position to provide benefit of operating leverage as well as financial leverage.
We are also overweight selectively in the pharma sector where we are seeing some companies, now after having a beautiful correction are appearing in the buy zone. The third sector is the private sector banks and the non-banking financial companies (NBFC).
Clearly, they will have to take the lead in terms of providing credit for industrial and economic revival and they will also be the beneficiary of falling interest rate. They will also benefit from the overall growth in the economy. So, between domestic cyclicals, selective pharma and private sector banks and NBFC, we think there should be allocation to these sectors.
Reema: What is your expectation on how the public sector (PSU) banking earnings are likely to be in this quarter and therefore what would your approach be on particular PSU banks? And if someone is already invested in them, what would you recommend?
A: For the first time, last year, private sector banks with 20-25 percent of banking balance sheet, generated more profit than PSU banks which contribute 70-75 percent of balance sheet. Clearly it shows how efficient private sector banks are vis-a-vis PSU banks.
Second, we believe that the non-performing asset (NPA) cycle has not fully been factored in, in terms of PSU banking system. There will be more restructuring or more refinancing or more disclosure of NPAs which are not yet fully disclosed and this will have a far bigger bearing on the profitability numbers.
The crucial question for PSU sector is that today they are constrained by lack of capital, lack of talent as well as lack of independence in decision making. Their lending decisions are not necessarily driven by only shareholder value creation. They have social obligations as well.
From a talent point of view, the highest paid PSU bank CEO is probably getting less than what a mid-level executive in private sector bank will be getting. Clearly, how will they attract talent if they are not going to pay market price? And the third and important thing is lack of capital. Obviously, with Basel-III norms, you need equity capital to continue growth and today, not all the PSU banks will have the ability to tap into the market. If some of the PSU banks have to tap the market, their dilution will be actually below book or below stated book and that itself will be negative for their equity capital or equity value.
So, we believe this is time to be overweight private sector banks and NBFCs. Surely, PSU banks have fallen a lot, so they will provide a trading opportunity. In some sense, in a very lighter vein, you have to buy PSU bank when they are very cheap and sell when they are just cheap.
Happy Investing
Source:Moneycontrol.com
No comments:
Post a Comment