Published On: Wed, Dec 4th, 2019

Have 50-60 solid gorillas in your portfolios, some will turn into King Kong: Pankaj Tibrewal, Kotak MF


Markets are showing early signs of broad-basing. October was the first month after a long time when midcap index out-performed largecaps. In November again, the midcap index was in line with the largecap index and stocks specific. We are seeing momentum building up, says Pankaj Tibrewal, Senior Vice President & Equity Fund Manager, Kotak Mutual Fund. Excerpts from an interview with ETNOW.

The overall macro picture is not looking encouraging at all with GDP numbers at a six-year low, the overall manufacturing slowing down and it seems the next big trigger is going to be some sort of further rate action from the Reserve Bank. But already having cut interest rates by about a 135 bps from the start of the year, do you think something more is the need of the hour?
The second quarter print of GDP came at about 4.5%. Clearly the issue in the economy is that of credit supply. When you look at the data from April to September, credit has shrunk very meaningfully and banks are risk averse and not lending. Hence, the rate transmission has also not happened in the economy. The 135 bps rate cut that RBI has done this year has not been transmitted and the term premium is at an all-time high.

Also, the average lending rate which RBI discloses versus the repo rate is at an all- time high. A lot of effort needs to go into making sure that the credit transmission starts taking place and the economy which is starved of credit, starts getting money back. We have started to see some early signs coming in the last 30-40 days, but it is too early. From RBI perspective, we need to see some more monetary easing and tomorrow the policy is out and markets expect 15-25 bps of incremental rate cut.

This morning, CSB Bank got listed. It has seen phenomenal response to the IPO. Despite the fact that it has posted losses from FY17 to FY19, we are seeing a pick up there. Any observations here?
Without going into specific stocks, the overall financial space has to be divided into three buckets; one is the banking part where we are positive on the private sector corporate lenders for a while and that call has worked very well for us in our portfolios. The second is the NBFCs where we have been underweight for the last couple of years and that stance remains. We have been very selective about picking the NBFCs in the overall space. The third is the non-banking financials which comprises of life insurance and asset management companies.

We have been positive on both general and life companies and they seem to have done exceedingly well in this environment. That is how we are positioned in the financial space.

Why do you expect a continued slowdown within the consumption space? HDFC Bank is seeing a pickup in rural economy. Do you believe that we are not likely to see any material pickup in consumption? What is the rationale here?
We believe that over the next few years, consumption as a basket should underperform investment cycle and if the economy has to pick up, the next leg of growth has to be from the investment cycle. Over the last few years, the wage growth for white collar workers has been minimal and that has cramped the consumption cycle. For the last few years, we saw easy liquidity in the economy. Banks, NBFCs were funding the consumption and a large part of that consumption was supported by leverage by individuals and households. Somewhere it is coming to a halt and that is putting the brakes on the consumption cycle. From here on, government’s push will be towards making sure that the investment cycle picks up. We are seeing some interesting opportunities in the investment cycle — be it the short cycle play or the long cycle play — and the risk reward seems to be much more favourable than owning very high PE stocks in the consumption basket.

Just looking at the way CSB has listed. It has been a bumper listing, going almost 50% up with issue price that it is currently quoting. Would you say that the time has come to look outside the large and mega caps banks?
If you divide banking into two parts — private sector banks and government-owned PSU banks, we have been positive for the last few years on private sector corporate lenders and we see no reason to change that view.

We believe that the incremental market share is moving from PSU to private banks and some of the larger names are doing exceedingly well. The credit cycle is behind the high credit cost cycle, which is behind us. The megacap banks are doing the right things and have the right leadership at the top.

We believe that these are great compounding machines and hence we find that these compounding machines over a period of time will gain market share. Second, if you look at this business of banking, with size this business keeps on getting better. Seldom do you find a person not willing to open a bank account with a large bank rather than opening an account with a bank which has just got licence. I do not think it works that ways.

There is an overall valuation gap between the largecaps and the midcaps. But complete polarisation does exist. Where do you expect to find opportunity within midcaps?
The GDP had the lowest growth in 26 quarters, but the markets are at an all time high. When you dig a little deeper, you get the answer yourself. The Nifty is at an all-time high but the broader markets have not done so well. Nifty is hovering near all-time high. The smallcap index is still 40% away from all-time highs and the midcap index is 22% away from the all-time high. There is complete polarisation in the market where top 15 Nifty stocks had led the Nifty to where it is today.

The biggest theme of this cycle has been that of consolidation. We are seeing consolidation across telecom, cement, steel and real estate sectors and the leaders are getting stronger and stronger.

-Pankaj Tibrewal

We believe, markets are showing early signs of broad basing. October was the first month after a long time when midcap index out-performed largecaps. In November again, the midcap index was in line with the largecap index and stocks specific. We are seeing momentum building up. We are not calling for a 2017 rally anytime soon but we believe over the next 18 to 24 months, the divergence between mid and smallcap versus largecaps should narrow down.

We are advising clients to up one level of risk in their portfolios. If they are in balanced funds, they should move to largecaps; if they are in largecaps, then move to multicaps; if they are in multicaps, move to mid and smallcaps and increase their allocation towards this space.

The valuation of mid and small versus large caps have come at 2014 levels and clearly the risk reward is in favour of investors. But it has to be very stock specific. We believe that bottom up stock picking will work in this market for the next 12 to 18 months.

The biggest theme of this cycle has been that of consolidation. We are seeing consolidation across sectors telecom, cement, steel, and mother of all consolidation real estate and the leaders are getting stronger and stronger. The market share is shifting from the tail to the larger guys and that trend is not changing anytime soon. We believe you need to be very stock specific even in the mid and smallcap segments. But we are finding a lot of value in this space.

A large number of sectors are represented by mid and smallcaps. Look at construction, speciality chemicals, capital goods, some of the mid tier private sector banks, some of the auto ancillary names are all represented by mid and small cap. We follow a gorilla to king kong strategy. Have 50-60 solid gorillas in your portfolios some of them will turn into King Kong.

What about the PSUs with the divestment drive in full throttle? What do you make of some of these stocks and their valuation?
The overall PSU sector looks attractive as a proposition but again, you need to be very stock specific in this entire segment. There are certain businesses which structurally are losing market share and here value would not be created. But there are certain businesses which we believe are leaders in their segments and continue to do well, like defence, oil PSUs and so.

Market is concerned how the government would be meeting its fiscal targets. Government has been falling short on tax collection and a nominal GDP growth of 6% also would not help them because the government is borrowing at more than 6% today. There is a fear, we could end up in a debt trap. The only option left with the government to shore up their revenues is to go through a very massive disinvestment process as fast as possible. They have shown some inclination towards naming those PSUs, but let us see how it goes along.

If the government can push through the reforms very fast, markets would be excited and there would be spill over of some of those names to other names in the disinvestment list.





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