Smart Talk with Pankaj Tibrewal

Pankaj Tibrewal is the Senior Vice President and Equity Fund Manager at Kotak AMC. He manages schemes such as Kotak Emerging Equity, Kotak Small Cap Fund, and Kotak Equity Hybrid. Pankaj was featured in the top 10 fund managers in India in 2016 and 2017 as per Outlook Business and Economic Times (Morning Star). A commerce graduate from St. Xavier’s College, Kolkata, Pankaj also holds a Master’s degree in Finance from Manchester University.

When we analyse the portfolio of Kotak Small Cap Fund, the fund holds chemical sector as one of the top five sectors in it. In the current scenario, where the chemical industries have more exposure towards defence sector, what is your outlook on this sector for the next two years and will the current valuation sustain till then?

Chemical industry in India is witnessing a rapid shift in capacities from developed world. Disruption in Chinese supply chain has created multiple opportunities for Indian suppliers to grow through new product introductions. Global players are looking at Indian manufacturers as a second source of supply. Indian chemical manufacturers are getting better terms of trade from their customers given their capabilities on processes and compliant manufacturing abilities. We continue to focus on better capital allocators who are expanding their product development capabilities and adding to their management bandwidth to support next multiple years of growth.

 Out of the top ten holdings in your Kotak Emerging Equity Fund, two stocks are from cement industry. With the expectation that the demand for the capital goods will increase due to the capital infusion towards infra sector, what is your long term outlook on the cement industry?

We are positive on cement sector from a two-three year perspective. We believe in the coming years, demand (6-7% per annum) is likely to exceed supply (4-5% per annum) in the sector which would mean higher capacity utilisations and better pricing power in the hands of manufacturer. Also the sector over the last decade has seen increased consolidation where now top 10 players command more than 65% of the market. This should bode well for the profitability of the sector going forward.

How much correction can we expect in small cap segment, as there is no clarity in the election outcome? What will be the expected tenure of this correction and what is your advice to investors who have invested in small caps?

We believe mid-small caps post correction in CY2018 are attractively placed and valued. The current divergence between performance of large and mid-small caps is at historical extremes. History suggests that such divergences don’t exist for too long and post such large underperformance, mid-small caps tend to outperform large caps over the next 12-18 months. We are positive on this segment from a three to five year perspective.

After the SEBI coming with a clear cut categorisation based on the capitalisation of stocks, the universe of small cap companies have become big. What are the strategies you adopt to select the potential stocks from this big universe?

Yes, it is true that the universe of small caps has expanded post the recent categorisation by SEBI based on market capitalisation. Our strategy is to remain focused on our philosophy to invest in good businesses run by competent and honest promoters, generating strong cash flows and return on capital over longer periods of time. We don’t try and focus on how we can make quick gain out of our investments in a short period of time but rather invert that and find situations where we can’t lose over the next few years. We believe that if we can avoid losers then winners automatically take care of themselves. The latter is often times where we find the next great winner. We have held our stock for an extended time frame and this has led to good compounding of returns. Also running a diversified fund and our attempt to minimise mistakes has helped the fund.

What is your suggestion to those new investors who are looking for fresh investment at this time? Which scheme should they concentrate on?

Investors should be focused on disciplined asset allocation depending on their risk profile for longer period of time. The asset allocation should be goal based. The equity allocation at the current juncture should be spread across schemes from multi cap, mid cap, small cap and dynamic equity though STPs/SIPs.

What is your sector-wise expectation in new financial year 2019-20? Which sector would you reduce allocation and why?

We are positive or overweight on sectors such as banking and financials within which we are positive on corporate private sector lenders, light engineering capital goods, cement, speciality chemicals and consumer discretionary. We are underweight on sectors like automobiles, pharma, IT and PSU banks.

RBI has been continuously trying to help the financial sector revive from its doom. What is your short and medium term outlook on this sector with special emphasis on private sector banks and NBFCs?

 We are positive on private sector corporate lenders as we believe we are heading towards the final lap of NPA recognition and next year profitability across corporate lenders should see meaningful improvement due to lower provisioning for NPAs. From a medium and longer term perspective we believe that the market share shift from PSU banks to private sector is real. On the NBFC front, we have been cautious for some time now, even before the outbreak of September events. We believe that the NBFC sector is still not out of woods. Aggregate liquidity has significantly eased over the past six months with bank borrowings from RBI dropping from over Rs 1.2 trillion in September, 2018 to near Rs 500 billion in March, 2019, however NBFCs have not yet seen this benefit, as spread for NBFC paper over corporate bond is still 40-50 bp higher. More worryingly, the domestic wholesale debt market appears to be differentiating amongst NBFCs. Even as those perceived to be strong/backed by parent have been able to tap bond markets, issuances by the other NBFCs/HFCs have been minimal. Increased asset sell-downs, retail bond issues and external borrowings have helped these NBFCs meet repayment needs, and disbursements are yet to pick-up. As increased sell-downs lead to contraction in the share of retail loans on book, credit ratings may come under watch. We believe that structurally over the medium term NBFCs would come down to much lower ROE/ROA profile versus what has been seen in the previous cycle.

In spite of Nifty recovering to its all-time high recently, the mid cap stocks are not showing fair valuations. What is the reason for this scenario?

We believe that over valuation of mid-small cap which we witnessed in CY 2017 has corrected to a large extent and the relative valuation of mid caps versus large caps are at a historically low level, both at an absolute level as well as on a rolling basis. We now believe that valuations are reasonable to support midcap recovery.  Our analysis of historical returns from mid caps reveals that in no two consecutive years the annual returns have been negative. Moreover, the positive annual returns have exceeded the negative annual returns in each of the years post the years of negative annual returns. Once the near term event of elections is out of the way, mid-small caps may see outperformance over large caps.


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