Rise in gold prices will aid recovery in rural areas: Pankaj Tibrewal, Kotak Mutual Fund

Pankaj Tibrewal, Kotak Mutual Fund, says one sector that could surprise this year is the rural sector, mainly led by higher commodity prices on the agri side. Edited excerpts from his interaction with ET NOW:

ET Now: The big talking point has been the catch up broader markets are playing. Do you think if earnings don’t improve all that much then this kind of rally would potentially be unjustified?

Pankaj Tibrewal: Since January 2018, both mid- and smallcap segments have underperformed largecaps by quite a margin. Smallcaps have underperformed to the tune of 50% and midcaps have underperformed to the tune of about 35% versus Nifty. Since October we are seeing the breadth being better and month to date the smallcap index is up 5%, while the midcap index is up 3% versus Nifty which is up 1.5%.

Clearly, there is a catch-up trade which has started to play out. Our view is that it would not be a repeat of 2017, where the lowest quality stock was multiplying in a very short period of time. Even in the last calendar year, out of BSE 500 stocks, 140 stocks gave 15% plus returns and most of the companies which delivered healthy returns were companies that delivered earnings growth. So, clearly markets and stocks are slaves of earnings. In companies where we have seen less corporate governance issues, good balance sheets, healthy earnings growth, such companies have been disproportionately rewarded by the market and we would see that trend continuing. We do not see a linear return coming into the markets that every month you get a 4-5% return. It will be a stock pickers market and bottom-up stock picking will be rewarded.

ET Now: Where do you see value in the broader market?

Pankaj Tibrewal: One big theme of this cycle has been that of consolidation. The consolidation has been either in form of mortality or in form of combinations, and clearly we have seen in every sector the tail getting wiped out and the market share moving to the top three or five guys.

Look at telecom, they were about 15-16 players three-four years back and now you are left with three. In the airlines, there were about eight-nine players and now you are left with four-five. Even in financial services, the incremental market share is moving towards the largecap banks.

In pipes, for example, the top four guys are growing their pipe volume by 15-20% and the market share is clearly moving from the lower end of the sector or players to the larger guys. Even in real estate, when RERA was introduced, you had 1,530 builders registered and now you have 620 builders registered. So, clearly consolidation has been a big theme of this cycle. We believe that rather than chasing sectoral themes it is very important to be bottom-up focussed and look at companies that are sectoral leaders. If they survive this cycle over the next three to five years, then their size will become large in our view because the tail would give away market share to the larger guys. Among sectors, we believe that there are opportunities which we have captured and still look exciting lies in the specialty chemical space, agrochemical space, cement, capital goods, industrials, auto ancillaries. There are a whole lot of sectors where we are seeing bottom-up stock picking opportunities.

ET Now: What is your take on the sectors linked to the rural theme the agri space, specialty chemicals?

Pankaj Tibrewal: So clearly one sector where we believe would be a surprise factor this year is the rural sector. Over the last three-four months, we have seen agri-inflation coming back after a subdued last three years, and we have seen that not only in India but globally the agri-inflation is back and the index is up by almost 8-9%. In India, in the latest CPI print, the food prices rose 12% and this inflation number on the food prices has been around 1.5-2% for the last three years. It boards well for the pharma income. Second, if you look at the rabi season, it has been a very strong sowing season with sowing up by almost 8%. The water reservoirs are good and also one of the less-discussed facts is the wealth effect of the gold. Gold has been one of the best asset classes in the last one year, it is up 30% and assuming Indians hold about 25,000 tonnes of gold approximately, then the Indian households are richer by about Rs 15 lakh crore and that is a big boost from a wealth perspective. Though we acknowledge gold is not as tradable as equities, but the feel-good factor at some point will aid consumption and a large part of that gold resides in rural areas. In our view and that should also help rural recovery. The correlation between agri-food prices and wage growth is about 0.65 to 0.7, which means with the lag the rural wage growth should also bounce back. This year there could be a surprise on the rural side led by higher commodity prices on the agri side.