Interview: Nilesh Shah, managing director, Kotak Mahindra AMC.
After a dream run, the benchmark indices have started moving downwards from September due to earnings disappointment and geopolitical uncertainties. However, Nilesh Shah, managing director, Kotak Mahindra AMC, believes that this is a healthy consolidation. He tells Joydeep Ghosh that foreign portfolio investors (FPI) will make a comeback once valuations come down. Excerpts:
The stock market seems to be in a correction mode at present. Besides FIIs, are you also seeing profit booking by retail investors/high net worth individuals? Also, do you see a deeper correction than what has already happened?
Markets are witnessing a healthy consolidation due to FPI selling, geopolitical uncertainty, subdued Q2FY25 results, removal of more than 1,000 scripts from eligible securities for collateral and IPO supply. The correction is coming in those stocks where valuations were stretched.
Low double-digit earnings growth, underweight of FPIs on India relative to benchmark indices and the maturity of retail investors to buy during corrections give us confidence that the correction will be an opportunity to buy selectively.
Avoid irrational exuberance in a few sectors where the Street believes that the management of these companies is like Hanumanji, who has the power to jump across the sea in one jump. We all know that Hanumanji is divine. Management is human.
The earnings season has been weak, including the consumption story. Are things expected to get worse before they get better, or is it a one-two-quarter blip?
The earnings season is mostly below expectations. Earnings have been affected by rains, low government spending, the Shraadh period and a slowdown in exports due to a sharp increase in freight costs. We believe most of these factors are behind us, and earnings should recover in the second quarter of FY25. Undoubtedly, the estimate for Nifty EPS for FY25 will be revised downwards. The festival season is sending a mixed signal.
Do keep in mind that we can push growth through the easing of monetary policy in CY 25.
We are selectively investing in the consumer space. Companies leveraging distribution, innovative product launches and cutting costs are our preferred choices on a bottom-up basis. While there is some premiumisation (of buying habit) trade, there is also some mass market trade (value buying)
Which are the sectors that could take the maximum hit in this correction? And why?
We have warned about low-floating stock counters across PSUs, SMEs, microcaps and sectors like capital goods, consumer durables and infrastructure. Finally, the correction has set in. Stocks are slaves to earnings power. If valuation moves way ahead of fair value, they have to correct. Neither the greed and greater fool theory nor liquidity and concentrated holdings can justify excess valuations for long. We believe this set of stocks is likely to fall further.
FIIs have been pulling out money aggressively from Indian markets. Is it a short-term phenomenon, or do you see this trend continuing for a longer period?
FPI selling is common across most emerging markets. We think FPI selling in India is driven by near-term valuation concerns. FPIs will find India attractive to invest in, considering a longer-term price-to-earnings growth. As long as we deliver higher earnings growth and better governance, FPIs will invest in India. Subah ka bhula sham ko ghar laut aayega.
In the last couple of weeks, FIIs have been pulling out of the bond market (FAR) for the first time since their inclusion in the JPMorgan index. What do you think triggered this? Do you see this spoiling the FII mood when Indian government bonds get included in other global indices in the future?
Global debt investors put money in Indian debt markets ahead of passive debt FPI flows on India’s inclusion in bond indices. They are booking profits as US yields have picked up. As we get included in the other bond indices, passive debt fund flows will increase. As the US interest rate comes down, we may see active debt FPI flows. At $700 billion in FX reserves, India can manage the volatility in debt flows.
The RBI has been uncertain about cutting interest rates due to inflation worries. Do you see one coming in December or later?
The RBI is in a far more comfortable position than the US Fed. Growth is good, inflation is within the target range and the rupee is stable. Therefore, they are unlikely to cut rates in CY24. The rate cut cycle will be driven by a lower inflation trajectory, which looks more likely to occur in CY25.