Nilesh Shah: Private sector investment is on the cusp of revival: Nilesh Shah


“We believe there are certain trends where there could be opportunities going ahead not in the short term but over medium to long term,” says Nilesh Shah, MD, Kotak AMC.

Which sectors are you comfortable in terms of valuations and which sectors would you be bullish on in 2023?
First the markets are at a record high level and valuations are above average. Its marginal premium to historical average is above average that means market is expecting companies to perform like Suryakumar Yadav. If you score at strike rate of below 100 that would not be acceptable. You will have to start delivering at more than 100 strike rate from the ball number one.

Now keeping that in mind we believe there are certain trends where there could be opportunities going ahead not in the short term but over medium to long term. The first trend which is visible right now is revival in consumption.

Now we believe it has turned around and there will be positive growth. We can pick up companies within this sector which will benefit from this positive growth. The second sector where we are bullish is related to investment revival.

Like consumption has revived at the bottom end, middle end of the society the same thing is happening in investment where government was already investing but now private sector large, big as well as small are redrawing capital expenditure plan.

Companies which are engaged in industrial engineering and capital goods will be beneficiary of this capex revival. Broadly these are the two sectors where we are looking to invest.

« Back to recommendation stories

Revival of consumption and investment but then which are those sectors where you are really cautious and you would have your own reasons for that in 2023?
From a sectoral point of view, one needs to be cautious on sectors like global cyclical. Global economy is going through a tough challenge and it will have consequences on global cyclical but more than the sector it is the management.

If you have a bad management it is like riding in a boat with the hole. The rising tide may lift the boat for a while but eventually the boat will sink. So we need to invest in good management in good sectors which will deliver better returns to us.

Sure so this was about the sectors but then what levels are you seeing on Nifty and Bank Nifty going ahead in 2023 now?
One it is always impossible to predict market in the short term. Over long period of time will equity deliver real return more return than the inflation and other asset classes like debt and gold, the answer is yes. Now can next one year’s return be positive, there is a reasonably good chance. But can next one year’s return be in double digit there is a reasonably low chance.

In market you never say never but you can never predict the market. Our recommendation to investor is to please follow your asset allocation and do not get lured by past performance to invest, look at the future potential and invest. This is the time where you do keep in mind that interest rates are reasonably high, equity valuations are at a marginal premium to long term average. So put your short term money in debt, put your long term money in equity and maintain asset allocation which is suitable to your risk profile.

Now India is at the cusp of capex cycle revival but manufacturing has actually degrown in second quarter. How do you see this panning out in 2023?
Undoubtedly we believe that despite the degrowth in the September 2022 quarter for manufacturing sector there is a reasonably good chance for capex to revive. Capex revival is happening because capacity utilisation at 75% is now reaching a threshold where entrepreneurs would like to invest. Second corporate India’s balance sheet is fairly strong. It is deleveraged by more than 12% percentage point compared to subprime crisis. Also, bank’s balance sheet is healthy, their NPAs levels are at decadal low level and they are willing to extend credit so you have higher capacity utilisation, cleaner balance sheet and sufficient credit available. Combination of these three can create revival in investments.

So Indian financial service space seems to be in a sweet spot as foreign investors have made a net investment of Rs 14205 crore in the sector in November so do you see this trend continuing?
We do believe banks will have positive momentum but what we have seen in the last one year is unlikely to be repeated in next one year. One year back, bank valuations were very very cheap, FPI had sold aggressively and that had kept the prices low. The banking sector was having single digit credit growth. Now we have double digit credit growth. We have FPI selling turning into buying and we have seen bank stocks moving from cheap valuation to reasonable valuations. So going forward banking sector will do well in terms of profitability, growth but the stock price may not repeat what has happened last year.

Improvement in rural sentiment is developing what is your take on this?
Undoubtedly rural economy seems to be coming out of the inflation and COVID crisis related hit. The government’s allocation towards rural economy has increased significantly while kharif season had slightly lower output compared to last year because of the rain shortfall in northern India. The rabi season looks to be progressing well.

The reservoir water level is 25% higher than 10-year average which boards well for the rabi season. Rabi season crop being successful and government spending more money in rural economy put together can create bottoming out of rural consumption and show positive growth. One positive thing about rural economy is the tractor buying consistently year after year has seen a double digit growth which shows that one part of rural economy is doing reasonably well.

But rural consumption here is still to pick up? Now do you think it is an area of caution for us?
While the rich and upper middle class consumption is not impacted by COVID the lower middle class and poor people which is in majority in India have been impacted by COVID. They had to probably leverage to survive the COVID crisis and when normal times came they were focussing more on repairing balance sheet between October 21 to June 22. We did see FMCG companies volume degrowing. We believe somewhere between September 2022 to December 2022 quarter we will see FMCG volumes turning positive.

Strong resilience was shown by retail investors in 2022 and SIPs have also been at record levels. Any sign of slowdown you are expecting or the strength will continue according to you?
We believe SIP is on a secular growth trend, however, there is huge maturity in retail investors thanks to the mutual fund distribution community. By and large in a rising or expensive market we see SIP minus redemptions and net flows coming down. In a falling market we see SIP plus subscription and more money comes in than the SIP flow.

This trend has worked out pretty well since 2020 March. So we believe retail investor has become matured, they know when to go to fifth gear, they know when to go to first gear and we believe SIP will continue to expand. Totally we have about 3.5 crore retail investors in mutual fund industry, majority of them have SIPs. We believe there is potential to grow in 10 times over next many years to come.

Inflation has been a major concern but first time it has come below 6% now. What is your outlook for inflation 2023? Do you see easing down?
Inflation did remain elevated for majority part of calendar year 2022 but that was more because of global factors. This is first time in our history that for more than a year American inflation is higher than Indian inflation. Now notwithstanding that we need to ensure that inflation remains near RBI’s target level of 4% rather than above it. There is a trade off between inflation and growth, RBI has walked that balance very well, they have taken away excess liquidity, have raised interest rates and impact of that should be visible on inflation as global commodity prices have started easing off. We believe for calendar year 2023 as a whole, inflation will be below RBI’s target range at the higher end below 6%.

Private sector investment is still to pick up now. Do you believe 2023 will be a year to look forward to?
Yes, we believe private sector investment is on the cusp of revival. In certain sectors like renewable energy we have already started seeing private investment reviving. There are certain sectors like automobile where because of supply bottlenecks capex revival will take some time but collectively higher capacity utilisation, deleveraged balance sheet and availability of credit from banking system put together will revive private sector in calendar year 2023.

What are the areas of concern and challenges for you in 2023 let us talk about that now?
There are two or three local factors and many of the global factors. One we need to ensure that inflation remains under check. Second we need to ensure that consumption especially at the bottom of the pyramid gets supported. Third we need to ensure that private sector investment revives and supports growth in the coming years. The fourth and more important is trade deficit. As India is growing faster than the rest of the world, the gap is funded through trade deficit. We are running trade deficit of about $100 billion more than what we can afford. We can do it for a year or two but not beyond that so if we manage revival of private sector investment, if we revive consumption at the bottom end, if we keep inflation below 6% and if we reduce our trade deficit I think India growth story will be on a very very firm footing.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

Source link

Denial of responsibility! NewsConcerns is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – The content will be deleted within 24 hours.

Leave a comment