Kotak Mutual Fund

Kotak MF’s Shibani Sircar Kurian on where to find value in 2019

At this point in time, there is selective opportunity in mid the smallcap arena, says Kurian.

2019 overall will be an interesting and constructive year for the market with some degree of near-term volatility in the run up to the elections, Shibani Sircar Kurian, SVP & Head of Equity Research, Kotak Mutual Funds, tells ET Now.

Edited excerpts:

The way the markets have panned out for the better part of 2018, isn’t it clear that in some sense we are a little decoupled from the way the global markets have panned out?

2019 we believe will be more of an inflection point where we are fairly constructive on the market. Near term, in the run-up to the general elections, there could be some degree of volatility but macro risks have abated and there are clear signs of earnings growth coming back.

Also, we have noticed that midcap valuations relative to the Nifty largecap valuations, are now back to 2014 levels which is where the initial part of the midcap bull run really started. And this is same for the smallcaps as well. Therefore, with the correction that you have seen on the midcap space and valuations being very reasonable, we believe at this point in time, there is selective opportunity in the mid and the smallcap arena.

Of course, the caveat is we are looking at companies which are high growth and high quality and which have stable balance sheets and managements. 2019 overall will be an interesting and constructive year for the market with some degree of near-term volatility in the run up to the elections.

As part of the sectoral bets, capital goods is showing early signs of recovery. How do you see the road ahead for the capital goods sector and could the general elections bring in greater traction for the overall cycle?

Capital goods is one sector where it pays to have a slightly longer term horizon of about 18-24 months.

In the last few years, most of the investment growth or capex has essentially been driven by public capex specifically in roads and railways. We believe that the scenario is now changing towards initial signs of private capex pickup and a few key reasons for this; one, across few sectors, we have seen capacity utilisation levels improving and coming back to longer-term averages. It is still not at its peak but it has significantly improved.

Also, a lot of banks which were struggling with NPL issues now are seeing signs of incremental stress and delinquencies coming off and therefore there is willingness to lend once again to the corporate space.

So if you have a slightly longer term horizon, this is one area where there could be revival especially in terms of private capex spends. Also, when we talk to companies in terms of their order inflows and order books, there are again signs of a pickup. So, this is a sector which in the near term could still take time but over a 18-24 month period, there would be definite revival.

Where else do you find value?

Another sector we are positive on has been the private corporate banking space. In the banking sector, we have played the retail private banks as structural themes which are more compounding stories given their high ROEs but at the margin over the last few months we believe that private corporate banks is an interesting space. Signs of delinquencies coming down especially in the corporate side means asset quality stress and credit costs will start abating.

Also these banks have really worked hard on their liability profiles which are extremely strong. On the asset side as well, the retail book is growing at a faster pace than the overall market. These banks are now well poised to seek improvement in terms of their core operating performance and that should flow through in terms of better ROEs and earnings growth for next year. That is again one space we are positive on.

Within the chemical sector, in which space is there regulatory advantage though the growth is substantially higher than other aspects of chemicals?

We are positive on the sector as a whole and while we spoke about the regulatory aspect of what is happening in China because of pollution etc and the cost advantage now flowing through to India, what we have seen overall in the chemical space is that if you look over a long term, clearly market share shifts are happening between countries.

There was a point in time when US was the dominant player. Then that market share shifted to China. Today India’s market share in the entire global chemical space is low single digit and therefore the opportunity to grow off this low base is something significant.

Secondly, apart from what is happening in terms of China, there is a lot of investments that Indian companies have done in terms of R&D as well as in setting up infrastructure in the country and that is also helping the entire sector in terms of growth.

Essentially from a sectoral perspective, we believe that growth can be significantly high off a low base. This is the time for India to actually gain market share. It is possible that over the next few years India could see that market share shift happening from China.

What is your perspective on how IT is likely to pan out? Do you think growth and momentum will sustain for the sector stepping into 2019 too?

IT clearly was the star of 2018, given the fact also that there were signs of some amount of demand revival and the currency acted as a tailwind. The sharp depreciation of the currency that we saw in 2018 is unlikely to be repeated in 2019. While there will be a mild depreciating bias, it would not be as sharp as what we saw in 2018.

The way we are looking at IT is that the kind of upmove that you saw in 2018 would be a much more stable sort of move from here on. Clearly, when we are speaking to companies, they are optimistic that growth in 2019 from a demand perspective would be marginally better than 2018.

We have still got to see that really playing out. The key risk would be what really happens to the US economy. If the economy slows down marginally, it is still fine for the sector. However, if there is a hard landing and a sharp slowdown in terms of GDP growth in the US economy, that would have a bearing in terms of demand outlook for the sector.

As of now, we are building in some sort of improvement in terms of overall demand growth. The best of the margins would be behind us. In terms of valuations, the largecap IT space still looks fairly reasonable. These are cash generating companies and they return cash back to the shareholders and therefore valuations are fairly reasonable on the larger cap space.

In the midcap space, there would be select opportunities where growth remains buoyant. However, it would not be a scenario that we saw in 2018 where the entire midcap space rallied sharply. It would be in comparison a slightly more muted year for IT as a whole in 2019.

Tactically do you believe that in 2019 we will see the re-emergence of the small and midcaps which had clearly taken a back seat all of the past year?

Yes. Our belief is that the kind of correction that you have seen in the midcap and the smallcap space clearly presents an opportunity. We have to be selective and focus on companies which are high growth and good quality companies. But given that midcap valuations relative to largecap valuations are now 2014 kind of lows, there is definite opportunity in the mid and the smallcap space. One has to be selective in terms of stock picking and clearly have a horizon of 18-24 months. Near term, there could be some degree of volatility but there is definite opportunity in the mid and the smallcap space.

Do you think we will continue to see what we have seen in the past three months a slowdown across categories, CV, PVs as well as two-wheelers?

Yes. It is a difficult time for the auto space. While over the term we are still structurally positive on autos but near term, clearly there is pressure and what we have seen in terms of slowdown, especially in the case of CVs and even in the case of passenger vehicles could continue for some time given the fact that demand trends are weak.

While rural demand has been better than urban demand, the huge pickup that was expected in rural demand is yet to play out. Also, from a CV and tractor space, the kind of cycle that we have seen over the last few years, it is possible that the cycle is coming close to its end. So that is something that we need to be cognisant of. Near term, there could be pressure on the space and this would be a slightly difficult area to navigate. Over the medium term, we do believe that once things really settle down, demand would start to revive in pockets and over the medium term, we remain structurally positive but near term yes, there would be pressures.

What is happening in NBFC space?

Yes, there could be a scenario where NBFCs lose market share from here on to banks. Over the last five-six years, we have seen a stupendous growth of the NBFC sector where they were clearly growing at a pace faster than the overall industry and the overall space and that resulted in the ALM mismatches which resulted in the trouble that we have seen today. However, does that mean that we paint the entire NBFC sector with the same brush? The answer would be no.

Clearly there are NBFCs who have been very prudent in their ALM management which are growing and continue to grow at a fast pace. These NBFCs will possibly gain market share and will emerge as superheroes.

But the growth rate that we saw in the past few years would clearly come off and private sector banks at this point in time are in a sweet spot. So far, they were gaining market share only from PSU banks but will now gain market share from the PSU banks as well as from a select few NBFCs.

From a liquidity perspective, the kind of liquidity tightness, that we have seen in the market post the IL&FS crisis, has abated at the margin. For the kind of growth that we saw, you need long-term funding and long-term funding comes at a low cost both of which will take some time to revert back.

So yes, at the margin growth for the sector would be a challenge and we believe that there would be a few players who would emerge stronger but as a sector as a whole growth rates would be slower than what we have seen over the past few years.
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