Rajan's work cannot be forgotten, but Rexit hit ltd: Madhu Kela

Lav Chaturvedi

Madhusudan Kela

Chief Investment Strategist
Reliance Capital

Mr. Madhu Kela firmly believes there is huge amount of money, both with local and global investors, waiting on the sidelines and investments will begin as earnings growth gathers momentum and monsoon pans out as expected.

While what Governor Rajan has done for the Reserve Bank and the country will not be easily forgotten, Mr. Madhu Kela feels his exit is just another incident, which in isolation is unlikely to have any big impact on markets.

"People are taking the (Rajan’s exit) matter too far," he says in an interview to CNBC-TV18.

Mr. Kela firmly believes there is huge amount of money, both with local and global investors, waiting on the sidelines and investments will begin as earnings growth gathers momentum and monsoon pans out as expected.

He expects earnings growth of at least 15 percent over FY17 and FY18 and suggests two themes, consumption and cyclical sectors like real estate, construction etc., which can be invested in.

On information technology sector, Mr. Kela believes there is limited room for rerating while in the pharmaceutical sector although margins seen earlier for generic companies may not be sustainable, there are stocks that can still be picked up.

Below is the verbatim transcript of Mr. Madhu Kela's interview with CNBC-TV18

CNBC TV18: You had previously said that the money will have to come to India. It does not have too many destinations. How would you look at this market's maturity in terms of reacting to a perceived negative news like the exit of Governor Rajan?

Ans: Just to put things in perspective what Mr Rajan has done for Reserve Bank of India (RBI) and this country will not ever be easily forgotten and will be remembered for a long time. And at a time when he came three years back India actually needed someone with his credibility to instil that confidence into global investors mind and he did a great job in last three years. He has actually laid the foundation stone for the policies which actually India needed. Having said that people are taking it too far, as if the country is going to go down the drain because of any one person's exit. I am not in the camp who believes that.

Secondly, at the time of real crisis if this had happened it would have had a very different impact. But today whatever work which he has done and we are basically very comfortable as compared with where we were three years back. So, I would not think this particular incidence in isolation is going to have a big impact and market is already showing us that people want to buy equity, people are actually waiting for bad news to come in and trust me if it was like down 100-150 points you would have had significant inflows from both local and foreign investors even in an event like this.

CNBC TV18: Yes, the sentiment is very bullish in the market, is it not. Now even the odds of a Brexit are quite low, so once that event is out of the way on June 23 do you think there is a possibility of the market resuming a big uptrend and perhaps even getting close to its all time highs very soon?

Ans: I have discussed many times that I really don't worry about where the index is going to go even though if the barometer of the bullishness of the market or bearishness of the market. I still believe that there is a lot of money from local as well as from global people which will have to come in India in due course of time. So, the biggest event in my mind is earnings recovery. Why the markets was sluggish for the last two years because actually we did not have earnings and every time we start the year whether it was 2014, 2015, 2016 we will come under April 1 and we will say that this year earnings will grow by 15-20 percent. By that time the year was over the earnings growth was very tepid, either negative or one or two percent plus or minus, that is going to change this year which is what we spoke in your channel last time and last quarter was a clear indication. So, when the markets have earning they listen to only that and the money and the flow is only a matter of time once you have earnings. So, this year our conviction is that earnings would positively grow above 15 percent for 2016-17 and the same can be repeated for 2017-18 and you have a very good monsoon, even though the first 10-15 days have not been as good but it was predicted but it will not be spread over between July-September but I am hopeful that if the monsoon is good and earnings recovery cycle is there lot of money will come in.

CNBC TV18: You are a bottom up stock investor and you remain that at most times but if what you say is true and in that case the earnings recovery also have to reflect in the index. The index has done practically nothing if you were to take a two years horizon. Do you see with earnings picking up how high would the probability be for the markets to not just hit a new high but high a significantly higher high maybe in next year's time?

Ans: I would not rule that out and this market is time and again proving. One of my friend has organised a meeting of 100 people on Sunday and I went and met them. People are left out, trust me, I am saying. People are just waiting for somebody to push them, so they don't have a guilt of not buying lower. So, the point is they need a little bit of push. So, there is such tremendous amount of money which is waiting in the sideline and once the market gives that confidence of earning money will come and of course index will go up, so will lot of other smaller and midsized companies.

CNBC TV18: So where do you put your money now. Do you put it in some of these beaten down sectors, real estate, the infrastructure space because lot of people are recommending those sectors now, perhaps feeling that the worst could be over or do you stick to some of these companies that have done well and are hitting new highs; the L&T, Yes Bank, Tata Motors of the world that have done very well in this quarter and continue to hit highs?

Ans: I think there are two themes which one has to play in this kind of markets one is anything which is really relating to consumption, because you have a good monsoon, you have a Seventh Pay Commission money which is go into people’s hands, this direct subsidy transfers so there will be lot of winners in that theme is what I believe.

Second, I think this is a time to play cyclical so whether you want to play it through real estate, whether you want to play it through construction companies or whether you want to play it through beaten down banks which are bear market survivors. So these are two spaces where differentiated return will come in apart from you will have bottom up stories practically in every sector. Out of my 25 years experience I say that now saying that auto sector will do well doesn’t mean much. You have seen such differentiated return between two companies in the same sector, so for me to say that this sector will do well I would not like to say. I would only like to say that you identify a theme, then go do your bottom up work and then be convinced that this company will do well.

CNBC TV18: Your views on IT and pharma because they were the two backbones of our market in the last bull market, two pillars of strength, but barring Infosys IT has not done much and pharma has sort of collapsed at least at the large cap level. Do you see money coming back to these two sectors?

Ans: In IT what we have seen is that the rerating is not happening basically the PE multiples have stagnated broadly between 15-19 times one year forward earning. I don’t see much change out there, so whatever the earnings growth is depending on what the global economy will do, whatever is the earnings growth that is return once you respect in IT stock. I don’t see a significant room for rerating in IT companies.

In case of pharma a lot which has happened in the last 12-18 months because of lot of inspection which happened of large companies and let accept that pharma as a sector has done very well and again we spoke about it in the weekend the margins which were there for generic companies of 40-50 percent that doesn’t seem sustaining. Having said that I am quite positive on stock specific companies in the pharma sector, this is one sector which will continue to do well, maybe the players will change and maybe the return expectation of people have to be more sanguine. Pharma sector market cap in 2008 used to be Rs 1 lakh crore, now today the overall market cap of the pharma sector is Rs 8 lakh crore, so you have gone from Rs 1 lakh crore to Rs 8 lakh crore in matter of 7-8 years. If you expect the same kind of return that is not going to happen, but whether in your portfolio should we have a pharma company which can deliver 15-20 percent from here there will be select pharma company which will deliver. Let me just give you one fact in 2008 DLF used to be more than the market cap of the entire pharmaceutical sector and in 2016 Sun Pharma was twice the market cap of the entire real estate sector, so this how much life can change in matter of 7-8 years.

CNBC TV18: The aviation space which is hotting up and now we have 100 percent FDI in aviation that’s allowed. Etihad has been looking to increase its stake in Jet Airways . Is that a space that would interest you for the medium term?

Ans: It is consumption. It is direct consumption because these are people who are benefitting. If you have more money obviously you are going to spend on travel, so it is part of the consumption theme and I am sure select companies from the aviation sector will do well.

As told to CNBC TV 18