Speaker: Nilesh Shah
Designation: Managing Director, Kotak Mahindra Asset Management Co. Ltd.
Q.1 Where do you see the equity markets going from here? (00:12)
Ans - Equity markets are numerically touching all time high, but from a valuation point of view it is at a significant discount to all time high level and hence, we can be reasonably confident that this rally has more legs to continue. There will be correction, but this corrections will be transient, it will be short-lived and in fact, it might be an opportunity for someone who wants to increase his allocation to equity.
Q.2 Are the valuations a concern considering the current earnings growth? (00:44)
Ans - We are trading at a premium to our historical average valuation. Historically, Indian markets have traded at about 15 to 16 times forward earning. Today we are at 18 times forward earning. Now we are looking at central bank targeting inflation at 4%. This will bring down inflationary expectations and eventually interest rates. So in the lower interest rate environment, P/E ratio necessarily expand and hence this 10-12% premium to historical average can be justified. Profit after tax as a percentage of GDP at peak has been about 8%. Today it is roughly about 4%. Today profitability is depressed because overall turnover, overall capacity utilization is averaging between 65-70% for many of the industries. As the capacity utilization goes up, the margin expands and operating leverage kicks in. So these valuations can be justified based on lower interest rate environment, based on improving capacity utilization creating operating leverage.
Q.3 Which sectors look attractive for investment? (01:57)
Ans - Traditionally what we have seen is that Indian markets are more bottom-up. So essentially it is all about stock picking. Today we have private sector investment on the backfoot. So the bulk of the investment is done by the government and sectors where government is going to spend money like road, like railway, like defense, like healthcare will see better capacity utilization for companies. So we are bullish on those sectors which are benefitting from the government spending. The second thing which is happening in India is the shift of physical savings to financial savings. Partly gold has not delivered great return over last few years. People started moving from gold to bank deposits and other financial savings. Demonetisation also shifted money from Tijori to bank accounts. This has increased financial savings and all companies linked to the financial savings, it could be insurance companies, mutual funds, banks, NBFCs, they are all benefitting from this trend.The third theme which is continuing is the shift of business from unorganized sector to organized sector. Indians are becoming brand conscious. Second is demonetization has adversely impacted trade settlement which happens in cash and more importantly now GST is coming. GST will reduce the tax arbitrage available to unorganized sector. So combination of brand consciousness, demonetization and GST will slowly but steadily shift market share from unorganized sector to organized sector. This trend is visible in auto components, chemicals and specialty chemicals, textiles and garments, building materials, cables, wires, consumer durables kind of sectors. So this is the theme where we believe if you pick stocks correctly, you can make money over the days to come.
Q.4 What is your advice to investors? (04:05)
Ans - I would like to draw the analogy of mythology over here. In Ramayana, we were told that Lanka was a very prosperous city. How did Lankans become so rich? Ramayana doesn’t explain, but my own hypothesis is that Lankans became rich because they were investing like Kumbhkarna. They invested and went to sleep for 14 years. So if you can become like Kumbhkarna, certainly that’s the way to invest into market. Invest for longer term.The second thing which we have to again draw from mythology is importance of advisor. In the epic battle of Mahabharat, Kauravas and Pandavas were fighting each other. Kauravas have more warriors, more resources and yet Pandavas won. Because they chose the right advisor. Krishna guided Pandavas to victory. So when you are looking for investment, you need a good advisor. If you have long term horizon, if you select a good advisor who will give you right asset allocation and right product to suit your risk-return requirement, I have no doubt that even in today’s market you will be able to make money.