Kotak Securities Midcap Conference 2017: Kamlesh Rao’s investment growth mantra

In an interview to CNBC-TV18, from the sidelines of the Kotak Securities Midcap Conference 2017, Kamlesh Rao, MD of Kotak Securities discussed the market outlook.

Rao said the midcap companies that have grown in the last year; we believe a few of them need to be in the largecap space by now because of the size of their marketcap.

“We have looked at companies largely in the range of about Rs 3,500-7,500 marketcap and we firmly believe there are a few winners from here on,” said Rao.

The sectors that I would look at going forward for next year would largely be in the area of infra, where a large amount of money is getting spent, he added.

He further said that on the non banking financial companies (NBFCs) and bank financial side we would look at some public sector banks. We like some of the companies in the insurance space and a lot of the disorganised to organised segment which is moving in, we see a number of midcaps making space in this for the next year, added Rao.

Below is the transcript of the interview.

Sumaira: What is the overarching sense that you are getting in terms of where growth will come from because in the midcap space volatility continues to rule, so, come 2018, what will be the three top bets from the midcap space?

A: The midcap companies that have grown in the last year, we tend to believe quite a few of them need to be in the largecap space by now for the size of their market cap.

If you look at the conference, we have looked at companies largely in the range of Rs 3500-7500 crore market cap. We firmly believe there are a few winners from hereon.

The sectors that I would look at for going forward next year would largely be in the area of infra, where large amount of money is getting spent. On the NBFC and bank financial side I would look at some public sector banks. We like some of the companies in the insurance space. A lot of the disorganised to organised segment which is moving in, we see quite a few number of midcaps actually making space in this for the next year.

Prashant: Are there many investable kind of companies that you can buy and sit reasonably for the long term or you got to be constantly on the lookout because these might be tactical moves and they might be very large moves but you have to be on the lookout, what is your sense?

A: If you look at last four years, the midcaps have outperformed some of the largecaps significantly. Over four years the largecaps would have given a return approximately of about 60-65 percent, there are some midcaps which have run all the way up to even 120-130 percent. I think it is time to separate the big boys that have got created out of the midcap space.

My view is, if you look at the fundamentals in some of them, if the leverages have come down significantly and they are in segments which are actually getting benefitted by the formalisation of the economy – a lot of ones are getting formalised now, thanks to demonetisation money is moving in in that area.

The only thing I still would be worried about is the overall market scenario of flows which have been dominated by domestic inflows coming in. If that continues I am still saying there is a huge run for midcaps but like I said selective, it is not the broader midcap index. I still think there is steam in a lot of companies in the midcaps which are in the Rs 5000-10000 crore market cap range that could do well next year.

Sumaira: Do you see any sort of a meaningful downside in 2018, perhaps the early part?

A: Lot of people compare the bull run to the 2008 times but there are significant differences between 2008 and now. 2008 saw run up on interest rates being at its peak, corporate earnings being 20 percent plus, huge excitement in the infra and the real estate space, none of them are replicated at this point in time as we talk about in 2017-18. Corporate profits at that point of time used to be at about 8 percent of GDP, it is at about 3 percent right now, market cap to GDP was about 1.35 times, it is at about 1 time right now. Whilst these are positives, there are obviously risks. I would be worried about oil – which way it would go and there is obviously a price point at which it can make a difference, whether it is USD 60 plus or less than USD 60, some spike in international rates – we will wait to see what FED will do in the coming months.

I wouldn’t be worried as much on fiscal and current account deficit as long as the GST numbers and collections fall in place. India as a country is always dependent on monsoons, some of these will get built in but on the back of fundamentals we need to move away from a liquidity driven market that we have seen for the last 12-18 months to a corporate earnings growth driven market which I think is something that we see happening over the next two or three quarters.

 

Source: MoneyControl

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