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Betting on 4 themes for value play: Pankaj Tibrewal, Kotak Mutual Fund

Talking to ET Now, Pankaj Tibrewal, Kotak Mutual Fund, says ..

Talking to ET Now, Pankaj Tibrewal, Kotak Mutual Fund, says bullish on the momentum theme which can show growth over next 2-3 years including capital goods, early engineering plays and some parts of infrastructure, the rural theme, private sector financials theme and cement.

Edited excerpts:

Do you believe that the kind of the move that we are seeing today is not entirely unanticipated and that the markets could get a breather and that this could be a time of consolidation which could play out over the short to medium term?
Yes. One year ago, this was the time when we were dealing with demonetisation, Mr Trump had got elected, oil prices were low and people were really worried how calendar year 2017 would span out. As markets are always unpredictable, we clearly saw last year being a record year globally and obviously India participated in that and Nifty give us 27-28% and broader markets were much better.

We think that we have started this year on a very bullish sentiment. The expectations are running high, stock prices have multiplied over the last 12 months in many of the sectors, especially in the small cap space. Here, the market could take a breather in the near term. People will watch out for third quarter earnings and the budget which will be presented in the first week of Feb and these two will be the near-term events. Also, from a 12-18-month perspective, we have about 8-9 state elections in this calendar year and then the big finale which is the general elections. Clearly, markets will be much more volatile this time than what we saw last year and hence we believe that consolidation in the near term should be there.

Let me congratulate you first on your impressive track record — 25% CAGR on your fund in the last five days, whereas the big rally in broader markets came in just 15-18 months back. Though the market started moving up three years back, for five years, your fund has done 25%. Do you think at this rate you will be able to continue with that run rate for the next five years as well?
This is a very difficult question. I wish I knew the answer for this but from a 3-5-year perspective, there are a couple of things which are really happening on the ground. What we pick up in the last one and a half-two months is that economy has started to turn around. Many of these sectors which probably were not doing well have started doing well. Take steel for example. The demand for long products which goes in infrastructure projects has picked up significantly. Demand for CV has gone up, demand for automobiles continues to be strong, demand for cement is running in double digits for the last few months. These early economic indicators are suggesting that definitely there is a turnaround in the economy and we believe that over the next three-five years, there will be a lot of companies which will multiple their profits and earnings from where we are today.

Hence, India is a land of opportunities. In difficult markets you will always find 50-100 companies which can create wealth for you and if there is volatility this year, it is a very welcome step for institutional investors like us.

We can buy strong companies at a reasonable price whenever the market corrects or gives us an opportunity. From a three-five year perspective, India will surprise many of the investors in India as well as globally with the growth rates and the kind of process which has been put in the system where the government is trying to build in and many of the sectors are coming from last seven-eight year lows. They would continue to surprise us on the upside. I am very positive from a three to five year perspective. Near term, definitely valuations have slightly run ahead of fundamentals and there could be near term correction or a consolidation which cannot be ruled out but one takes a three to five year call and money is to be made still.

How are you positioning or approaching the market right now to hunt for bargains? Are you looking at some rural plays, are you looking at home improvement stocks to increase your exposure or beaten down infra or perhaps laggards of yester months, pharma, IT anything any value there, where do you see value?
Finding value is the most difficult task in the current market. However, there are pockets of improvement and our portfolio has always been growth at a reasonable price. When we look at the sectors which can show momentum over the next 24-36 months, clearly capital goods, early engineering plays and some parts of infrastructure stands out. The tailwind in that sector is clearly very,very strong.

The second sector which probably will continue to do well is the private sector financials. Clearly the market share shift from PSU to private is happening. With almost 22% of your system credit under PCLA which is under the RBI Prevention Act, clearly you would see some kind of credit market share moving from PSU to private incrementally also. That is a very sweet spot from a sectoral perspective.

The third thing is rural. We have seen that rural push coming through over the last six months. This will only exaggerate as we go into May 2019 general elections. Clearly this budget should be for pro poor, pro rural and a lot of incentives should be given to the rural areas. I think that sector looks very promising.

The fourth is cement and with infrastructure push happening and affordable housing starting to pick up, no more incremental new big additions in capacity is coming up. The pricing power will move after a long time in the hands of producers and that will bode well for cement stocks, cement sector as a whole and that is where our money has been put to work.

What is it exactly that you are looking at within the consumer discretionary and within some of the cyclicals, is there any specific type of companies that you would be eyeing?
In the last three four years, consumer discretionary has brilliantly worked in our portfolios and we continue to remain bullish on that space going forward as well. We are at a very sweet spot of about $1800 per capita income and even if you compound it by 10% for the next few years, we will definitely cross that sweet spot of $2000-2100.

We have seen in many economies in the western world as well as in South Asian economies that when we cross that $2000-2100 dollar per capita income, there is a hockey stick jump in many categories like white goods, organised retailing and so and so forth and they grow 2 or 3x of the economic growth.

We believe that we are at that very sweet spot where consumer discretionary could really surprise us from here also on the upside and a lot of those names are there in our portfolios. It either comes from white goods, a company which is making mattress, lighting companies etc.We are quite bullish on that sector and that theme going forward as well.

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