Market not as cheap as in Feb but earnings to support
Interview with Nilesh Shah, Managing Director of Kotak Asset Management Company
Jun 10, 2016 | Source: CNBC-TV18
View on the current market scenario: The valuations are not as cheap as they were on the Budget day, but the results which came for March quarter, they are certainly way ahead of expectations. For almost eight quarters, we were going wrong on earnings recovery and we were starting to doubt ourselves. But this March quarter has now given us a lot of hope. If we remove the PSU banks, we remove some of the onetime event companies like Tata Consultancy Services (TCS) or Vedanta which wrote off goodwill, the core earnings is almost 40 percent up year-on-year in the month of March for 600 odd companies. Now these are smallcap companies and midcap companies also and hence, when you see aggregate numbers, it does not look that good. But my guess is that from here onwards we will see earnings upgrade. And that should give support to the market, obviously because it has run up so quickly, it will consolidate for a while, but valuations should not deter you from picking up your stocks.
Earning upgrades in sectors in next 3-6months: The earnings upgrades will come in automobile sector, two-wheeler, as well as commercial vehicles, passenger vehicle included. We will see earnings upgrades in home improvement cycles which might include your tiles company, pipe company, fitting company, paint company. We will see all those companies which are related to rural economy, be it farm equipment, be it non-banking finance company (NBFC), be it agro-chemicals if monsoon is good and it is likely to be good. So we will see a whole host of earnings upgrade coming through in more companies which are liked with domestic cycle rather than global cycle.
View on Banking sector: In banks, there is a divergence happening because of the nonperforming asset (NPA) issues related to public sector banks and corporate focused private banks. People had no options but to deviate towards retail focused private sector banks and NBFCs. And that has pulled up their valuations to reasonably high levels. My feeling is that in the NPA cycle, the worst is yet to come, it is not that we have made a bottom. There is probably two or three quarters of pain yet left and which means the retail focused private sector banks valuations will continue to remain elevated. Going forward, will they be able to repeat this kind of performance? I doubt it. But will they still be giving market performance? I think it is quite likely. The private sector banks and NBFCs at least for the next two quarters should outperform the PSU banks which will continue to clean up their NPAs. And thereafter, it will be individual stock picking because even within PSU banks, the range is quite diverse. There are some banks which have lesser problems, there are some which have far more and they will require huge capital adequacy. The one thing which we need to notice is that if this PSU banks get more capital, at below book, then it kind of compounds their problem rather than solves their problem.