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'Private Sector Investment Will Wait For Better Environment'
In 2016, investors' stock selection rather than sector selection will make money, says Nilesh Shah, Managing Director, Kotak Mahindra Asset Management
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In the second-part of the interview with BW | Businessworld, Nilesh Shah, Managing Director, Kotak Mahindra Asset Management, talks about what's in store for investors in 2016, stocks of which sectors could benefit from Modi government's policies and what is holding back the investments in India.
- In 2106, investors' stock selection rather than sector selection will make money
- The country does not give Param Vir Chakra for our modern day Abhimanyu, which passes through multiple chakravyuh to build a project.
- In last 18 months equity mutual funds have received more flows than previous 10 years.
- The estimated betting on election results or IPL matches is more than flows in equity mutual funds. Investment in Gold in last two years is more than the total AUM of equity mutual funds in the country.
Equity market does not give symmetrical return. It is not fixed deposit. In last 12 months our funds have delivered return of 3-15 per cent even when broad markets are down 5 per cent. For an investor such phase of the market provides excellent opportunity to make money. A bull market is always built on a bear market. We believe CY 2016 should be a better year for Indian equities as corporate earnings will recover in CY 16 on back of interest rate cut, government spending, exports recovery and hopefully a better monsoon.
Investor will probably get disappointment from expensive valuation stocks in multinational companies, pharma companies as well as value traps like leveraged companies, real estate and select infrastructure companies except dead cat bounce. Investors' stock selection rather than sector selection will make money. Investor paying the right price for right business will make money.
Given the regulatory changes and several recent policy initiatives, especially post-Modi taking over the prime ministership, which sectors according to you would be at an advantage?
Modi government's initiatives are changing the paradigms of doing business in India. They are bringing transparency in resource allocation like coal and spectrum. They are bringing urgency in decision making as is witnessed in road, railway and defence sector. They are stepping up on spending especially on road, railway and defence sector to fill the gap left by private sector investment. This has resulted into coal production increasing in FY 15 by more than the incremental production in FY 11-FY 14. This has resulted in road construction increasing to 17 Kms a day in FY 16 YTD from 7 kms a day previously. This has resulted in augmentation of renewable power capacity and roll out of LED programme which will help save electricity cost.
From a sector point of view while the government is committed to growth and reforms one has to factor in entrepreneurs, governance and price. A leveraged company in a Road sector or a badly governed company in a railway sector may not make sustainable return for investor even through other companies in the sector will do well. CY 2016 is going to be a year of stock picking looking at valuations rather than top down stock calls. CY 2016 is also going to see 7 th pay commission recommendations leaving substantial surplus in the hands of government employees for spending on consumption across sectors like white goods, automobiles and affordable housing. We believe there will be opportunities in cement, automobiles, consumer durables, Auto components and lower leveraged companies in capital goods and engineering companies.
The investments, including private and public sector, seems to be not happening on ground. What according to you, is holding back the investments?
In the private sector let us take the example of an entrepreneur who wanted to set up a power plant. His whole projection has gone haywire in setting up project. The time estimated to put project is doubled as various approvals did not come through on time. His funding ratio has been skewed towards debt as anticipated equity capital never came. His allocation of Coal mines have been taken back and he is buying coal from market at a much higher cost. His interest cost has gone up significantly in real terms adversely impacting the profitability. More importantly interest during construction has gone up from a marginal part of the project cost to be an important part of Project Cost. His selling price in the mean time has come down as SEBs are not buying power and there is a surplus capacity. The entrepreneur today is struggling to get the last mile funding to complete the project with an uncertain future. The country does not give Param Vir Chakra for our modern day Abhimanyu, which passes through multiple chakravyuh to build a project.
Combination of market events, policies and global environment has pushed private investment especially in infrastructure projects on back foot. There were a set of entrepreneurs who invested largely from debt financing 2008 onwards. Now they are leveraged and the expected cash flow from projects have not materialised. These entrepreneurs are unlikely to invest as banks will not lend more money to them and markets are unlikely to give them any money.
There are a set of entrepreneurs who have cash and who are waiting to buy assets rather than building assets. They are unlikely to invest in new projects as buying looks better than building. The private sector investment will wait for better environment. Better environment will be function of low real interest rates, speedier execution of projects on the ground, availability of equity as well as debt financing, stable tax laws and sustainable demand pick up in economy. May be recognition from society of the entrepreneurship will also act as a motivation to step up investments.
There a lot of talk and even some work happening in the online space when it comes to distribution of mutual funds. What is your view on this channel of distribution?
In mutual funds we have a glorious past and attractive future. SEBI has nurtured mutual funds quite nicely to bring them to a take off stage. In last 18 months equity mutual funds have received more flows than previous 10 years. While we have grown well we have not reached Kona Kona of our Country. We have barely scratched the surface of our potential. The estimated betting on election results or IPL matches is more than flows in equity mutual funds. Investment in gold in last two years is more than the total AUM of equity mutual funds in the country. Partly this is driven by lack of appropriate incentive for distribution of mutual funds. We don't have more than 20-25000 active distributors selling mutual funds which are minuscule compared to people selling gold or insurance or real estate. We have not developed our physical distribution network as much as required.
Online distribution is good and will help in reducing cost but at the same time we must understand that physical distribution is also equally important. They are complimentary in nature. We must encourage both the channel so that as a country we avoid importing $221 billion worth of precious metals and gems in last 10 years. We keep Indian savings in India rather than exporting to gold exporting countries. We make India grow faster with more capital available to our entrepreneurs at competitive real interest rates.