Kotak AMC expects banking rally; bets on industrials, home improvement sectors

Shah believes broad-based sector rotation seems to be the theme in the market. He said, “Over the next 6 to 12 months, there may be sector rotation from expensive stocks to cheap stocks. Now again, definition of expensive and cheap is not universal. It depends on investor to investor. But essentially, if we have to summarize this thing, it is all about what is priced into the market, what is priced into the current market price.”

“On a broad basis, I see market rotating from expensive stocks to cheap stocks or from stocks where market believes that what is priced in, in terms of growth or earnings is unlikely to materialize due to change of events,” Shah said.

On industrials and home improvement sector, he said, “From a broad sectoral point of view, we see that some of these sectors on industrial side or home improvement side should do well. On the industrial side, we see a revival of capital expenditure in most private sector balance sheets. Steel, cement, sugar, chemicals, these sectors are all spending money. Corporates itself are deleveraged, they are sitting on huge cash. If that cash is deployed in debt mutual funds or bank deposits, you are unlikely to get more than single digit returns. In business, there is opportunity to make double-digit returns. So capex cycle will start and that is where industrial companies, engineering companies should deliver outperformance over broad market.”

“The second thing is theme related to home improvement. We have seen some of the building materials companies, for example in tiles deliver about 37 percent volume growth, cement saw about 14 percent volume growth. We believe this kind of volume growth can continue for some time as real estate cycle is reviving and many people may try to upgrade or improve their houses. So home improvement sector should see volume expansion and hopefully margin expansion. So apart from banks and financial services, we remain overweight on industrials and home improvement,” he mentioned.

On market, Shah said, “The biggest risk to the market is earnings disappointment. So far, I think about 14 Nifty companies have declared results and their profit growth collectively is about 31 percent against expectation of 24 percent. As long as this trend continues, to that extent markets’ downside is limited. The festive season has begun. So far, the numbers have been encouraging especially in consumer durables and electronics, but we need festive season to become broad-based. It should include consumer staple also. If third quarter results are as good as second quarter results, then I think there is limited downside in the market.”