Interview: Nilesh Shah, Managing Director, Kotak Mahindra AMC.

After a dream run, benchmark indices started falling from September onwards due to disappointing results and geopolitical uncertainties. However, Nilesh Shah, Managing Director of Kotak Mahindra AMC, believes that this is a healthy consolidation. He tells Joydeep Ghosh that foreign portfolio investors (FPIs) will make a comeback once valuations come down. Excerpts:

The stock market currently appears to be in correction mode. Apart from FIIs, are you also seeing profit booking by retail investors/high net worth individuals? Do you also see a deeper correction than has already occurred?

Markets are witnessing healthy consolidation due to sale of REITs, geopolitical uncertainty, poor Q2FY25 results, removal of over 1,000 scrips from collateral eligible securities and IPO provide. The correction is coming to stocks whose valuations were strained.

Low double-digit earnings growth, underweight REITs on India relative to benchmarks and the maturity of retail investors to buy during corrections gives us confidence that the correction will be an opportunity to buy selectively.

Avoid irrational exuberance in a few areas where the street believes that the management of these companies is like Hanumanji, who has the power to cross the sea in one go. We all know that Hanumanji is divine. Management is human.

The earnings season was poor, including on consumption. Should we expect things to get worse before they get better, or is this a quarter-blip?

Earnings season is mostly below expectations. Revenues were affected by rains, weak public spending, the Shraadh period and a slowdown in exports due to a sharp increase in transport costs. We believe that most of these factors are behind us and earnings are expected to recover in Q2 FY25. Undoubtedly, the Nifty EPS estimate for FY25 will be revised downwards. The festival season sends a mixed signal.

Keep in mind that we can boost growth through monetary policy easing in CY 25.

We are selectively invest in the consumer space. Companies that leverage distribution, innovative product launches, and cost reduction are our preferred picks on a bottom-up basis. If there is a certain premiumization (of purchasing habits), there is also a certain mass commerce (value purchasing).

Which sectors could be most affected by this correction? And why?

We have warned against countering low float stocks in PSUs, SMEs, microcaps and sectors like capital goods, consumer durable and infrastructure. Finally, the correction took hold. Stocks are slaves to earnings power. If the valuation significantly exceeds fair value, they must correct. Neither the theory of greed and the biggest fool, nor liquidity and concentration of assets, can justify excessive valuations for long. We believe this set of values ​​is likely to continue to decline.

FIIs have been aggressively withdrawing money from Indian markets. Is this a short-term phenomenon or do you foresee this trend continuing over a longer period of time?

The sale of REITs is common in most emerging markets. We believe REIT sales in India are driven by near-term valuation concerns. FPIs will find India attractive to invest in, given long-term price-to-earnings growth. As long as we generate higher profit growth and better governance, FPIs will invest in India. Subah ka bhula sham ko ghar laut aayega.

Over the past few weeks, FIIs have withdrawn from the bond market (FAR) for the first time since their inclusion in the JPMorgan index. What do you think triggered this? Do you think this will spoil the mood of FII when Indian government bonds are included in other global indices in future?

Global debt investors are investing in Indian debt markets ahead of FPI passive debt flows linked to India’s inclusion in bond indices. They are recording profits as US yields recover. As we are included in other bond indices, liabilities debt fund flows will increase. As US interest rates fall, we may see active debt REIT flows. With $700 billion in foreign exchange reserves, India can manage the volatility of debt flows.

The RBI has been uncertain about cutting interest rates due to inflation fears. Do you see one coming in December or later?

The RBI is in a much more comfortable position than the US Fed. Growth is good, inflation is within target range and the rupee is stable. They are therefore unlikely to cut rates in year 24. The rate cut cycle will be driven by a lower inflation trajectory, which seems more likely to occur in year 25 .