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Revving Up

Equity schemes at Kotak Mutual Fund have faltered recently. Investors expecting more pick-up from these offerings should read what their fund managers have to say

In the last part of this three part interview the two share some of the funds performance

Should we be worried at the FII inflows or overjoyed?
Sanghavi: The volatility associated with FIIs can be a cause for concern but the market has really matured. A few years ago it was hedge funds playing (over long-only funds) the India story. Now there are more long-term investors. So while a few months here and there may see outflows, over the long-term this should not affect market volatility too much.

Tibrewal:There is nothing to be worried about. India is getting a lot of money now and the country is starved of capital. Look at India’s growth rate, there is a real underlying momentum there. Even in the global economic collapse, we still saw 6 per cent growth.

Sanghavi: One area of concern is that when you look at the ownership pattern changing; FIIs are getting in fast and will be the ones to benefit from the India growth story. Maybe the domestic investors are selling out too early and will not be able to gain from India growth story as it unfolds over the next 5-10 years.

What are the hindrances you see to 9 per cent GDP growth?

Tibrewal: We believe there are some reforms that need to be fast tracked in some areas like Infrastructure, Insurance and Retail.

What are you tilting your portfolio towards now?

Sanghavi: We are positive on Banking and Pharma. The business momentum is playing out well in the IT sector as global recovery is taking place. The infrastructure and domestic capex cycle looks set for revival and offers some interesting options. We are also looking at policy oriented businesses as we believe a reasonable reform process is on the way in Fertilisers, Media, Retail and Oil.

Tibrewal: Consumption is expensive right now, so the portfolio has exposure towards Infrastructure, a sector which has massively underperformed the past few years. A number of companies are offering value and there could be outperformance in some of them.

When you speak of Consumption, are you just talking of the rural sector?
Tibrewal: We are great believers of Consumption as a theme in India, from a medium to longer term perspective. However, the growth in rural consumption could outpace urban consumption. There is real money in the hands of farmers today. Wealth is being generated in rural India.

The MSP has really helped this community. Look at any crop over the past four to five years, prices have risen by 50-100 per cent. Take cotton for instance. The yield has not increased in the last few years. However, the price of cotton has skyrocketed and given that extra income to farmers. To put a figure to that, it is Rs. 6,000 crore in the hands of cotton farmers over the past two years. That is fantastic!

They are upgrading themselves. They move from bidis to cigarettes. From cycles to motorcycles. They build houses. They buy TVs. In rural India, TVs are a major and, often, the sole source of entertainment.

The second aspect is the land arbitrage. So let’s say a farmer owns land near a highway which will fetch him a high price. He may not mind selling it and buying another piece of land in the interiors. In the bargain, he makes a profit and may use the money to fulfil his aspirational needs.

Do you think the potential for outperformance for Auto is intact? Just recently, Mahindra Two Wheelers reported its best monthly sales of 16,569 scooters in September 2010. That is a 451 per cent increase year-on-year!

Sanghavi: The momentum of consumption is certainly in place for automobiles. From a volume growth perspective, it will not disappoint. What can be an issue is the extra competition which is coming in and that may have negative implication for margins.

Tibrewal: Some outperformance is left for the sector. But valuation upside is not that high in the near term. There is not that much room for expansion as it was at the start of the year. But we do believe there is some steam left primarily because I think we are at the cusp of explosion in the rural consumption.

You speak of competition in Auto, but is there not stiff competition even in FMCG?

Sanghavi: Sure there are competitive pressures but the sheer growth opportunity overrides that. Within the overall umbrella of consumption, there are pockets of monopolies, in the case of tobacco and liquor and areas of strong completion like soaps, shampoos and detergents. So the competition is more segment wise or product wise.

Your Banking bets have played out well. Is there any upside in that sector?

Sanghavi: On the whole, there are upsides considering the credit growth momentum is strong as the economy growth is strong and all pervasive. We do see upsides in select banks, both PSU and private, as well as some non-banking businesses like infrastructure financing and commercial vehicle financing.

Tibrewal: There is still some steam left in Banking, specially in the mid-cap public sector banking space.

There seems to be a lot of job generation in Infotech. Any interesting mid-cap bets?

Tibrewal: Hiring in IT companies is strong. In our interactions with these companies, they are talking of all round growth. And not just in the BFSI space, it's in Retail, Power, Utilities etc. There is a strong demand revival in IT spend. Whenever revival sets into an economy, IT is one of the first sectors that gains. The market has responded to the fantastic numbers put out by some of the big IT players. Large caps are not too cheap but in a quarter or so, the time will come to bet on mid-cap IT companies. The valuation discount between the large- and mid-cap IT companies has widened tremendously. So if the demand continues to remain robust and they are able to contain their margins, there will be a re-rating in these companies going forward.

Krishna Sanghavi manages; Kotak 30, Kotak Lifestyle, Kotak Contra and Kotak Select Focus

Pankaj Tibrewal manages; Kotak Mid Cap, Kotak Emerging Equity

Together they manage; Kotak Opportunities and Kotak Tax Saver