India must create far bigger companies to attract foreign capital: Nilesh Shah, Kotak AMC

profit streetIn an interview with Nikunj Dalmia and Ayesha Faridi of ET Now, Nilesh Shah, MD, Kotak AMC, points out that today India is in a sweet spot and people are positive India on a top-down basis. All they need is an anchor to pick up stocks on a bottom-up basis. Just a little amazed with the way realty has been moving. It has been a great performer all of last year and it continues to be so. Do you have conviction in real estate and for someone who has completely missed out on the rally, is there still time to jump in and hop on to the bus?

When you come down from100 to 10, it is a drop of 90% and then you climb from 10 to 20, it is a gain of 100%. But you are still down 80% from the top. Probably something similar is happening in real estate stocks. There was a time when only one real estate company’s market cap in 2008 was bigger than entire pharma sector’s valuation. Today the tide has reversed. Just one pharma company’s valuation is bigger than entire real estate sector put together.So these are all bouncing from the bottom and obviously they had fallen a lot. They are looking in percentage terms great return but majority of investors in real estate have not entered at current level of prices. They have entered at much higher level of prices and the real estate sector has to do a lot in terms of governance to gain shareholder confidence. 

We as fund house believe that it is a far better to play out a properly governed company and hence to play the construction theme, it is better to play out in building materials, housing finance and ancillary industries rather than pure real estate companies. Probably active versus passive trade is going on. Based on our interaction in US market especially on East Coast, we believe there is a fair amount of redemption coming through exchange traded funds and which is why we have seen indices lagging the broad market. 

The midcaps and small caps continue to rise partly because there is no ETF selling whereas the broad indices like Nifty or Sensex continues to remain subdued because there is ETF led selling. What I met across this road trip was fund of funds, endowment funds, charity funds, family offices and one message which I got and probably which got reinforced in Warren Buffett’s interview on your channel is, one, India is gaining its own momentum and previously in our meeting with such investors, They were perfectly okay taking India exposure via global emerging market funds or global funds 

Now like China, India is emerging as a single country fund. In fact, one of the chart which we presented and which is pretty well known in India is that India is not a country. It is a continent. The smallest state in India Goa has population equivalent to Estonia and the largest state in India UP has population equivalent to Brazil. 

Effectively India gives you a choice of population from Estonia to Brazil. We also showed on per capita GDP basis, the richest state of India Delhi is equivalent to Indonesia and the poorest state of India UP is equivalent to Nepal. So again in terms of per capita GDP, we give diversity ranging from Nepal all the way to Indonesia. So do not evaluate India as a country, evaluate it as a continent and this is the message which is getting resoundingly favourable response from the investors. 
It does not mean that people are not worried about valuation, people are not worried about portfolio. The other problem which most of these investors face and Warren Buffett also alluded to is that we need to create far bigger companies in order to attract global capital. We also need to create far better governed companies in order to attract larger flow of capital and my feeling is that today we are in a sweet spot, people are positive India on a top-down basis.
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