Vikram Kotak, Chief Information Officer of Birla Sun life Insurance believes the year 2010 will not be as exciting as 2009. “One can expect USD 2 billion on an average coming in ULIPs between January and March.”Kotak is bullish on the banking sector despite interest fears. “The excess liquidity, which will go away from the system, will actually help banks to earn more money.” He is also upbeat on capital goods and pharma space.
Here is a verbatim transcript of the exclusive interview with Vikram Kotak on CNBC-TV18.
Q: What does 2010 finally look like in terms of the index? What are the themes you are looking at and which of those themes do you think will get translated into market interest?
A: Year 2010 will not be as exciting as 2009 because in 2009, people got bargain values. Now, it’s more of fair valuation to reasonable valuations in some pockets. Always markets are ahead of the economy and that is what has happened in 2009, you had the global economies uneven in terms of growth despite most markets outperformed the 2008 and 2007.
Year 2010 is going to be more normalization rather than very-very hyped year. You will see volatility both the side. But net-net it will give you a long-term average return. Our view is that we may see good allocation coming in both from FII (Foreign Institutional Investor) and insurance. So, you may see a new high coming in Q1 of the year and then possible normalization of things happening post that. But there will be long-term average return for the year.
Q: You seem to be expecting an average year and perhaps a burst up in Q1. There is one theory in the markets, which is globally also held, you will see a serious breakdown as fiscal stimuli are withdrawn. Do you believe that you are going to get another if not fire sale but at least bargain values? Do you see that possibility also?
A: You may see a dip but not like what we have seen in 2008 third quarter. But you are going to see definitely bargain values coming at some point of time because you have many events to play out. Particularly the inflation, which you have seen in the emerging market, can definitely slowly translate from food to core and from emerging to the developed markets. But you will see some bargains coming in.
But the broad point is that you will see a continuous flow coming to the emerging market from both global and local investors. That money, which is under invested in equity from both the side, at every lower level they (investors) will be able to play out and they would kind of allocate more money. Because logically India despite of so much hype, we are still under-invested in terms of global allocation. We have been allocated just 0.8% of global allocation versus 5% of the GDP, so that ratio will slowly shrink. So my view is that you will see more allocation coming with every dip coming in the system.
Q January-March quarter is usually the best quarter for insurance companies? What kind of growth in the pie are you seeing in terms of actual money that will flow into the industry? How much of that will be for ULIPs?
A: The one big change, which happened recently, the IRDA, changed the rules on the insurance new policies and they changed the structure a lot. So there is going to be some lag in terms of new business growth. But one thing is sure that there is going to be a strong renewal pipeline across the insurance company, which is going to be there. So whatever people have bought for last 8-10 years, they will continue to contribute as a premium, so that will actually flow in to the fund managers' kitty. So the total number we are looking at is almost USD 4-4.5 billion per month kind of flow for the next three months, of which 45-50% you can see in the ULIP. So you can expect on an average USD 2-2.25 billion coming to the equity flows in the next three months.
Q: You said the new IRDA rules might smother the new flows. I thought there were still more rules expected to come in terms of agents payments. Are you seeing all that dampening the flows?
A: It will not dampen. It will have some short-term impact. Finally, these changes actually will spur the customers’ penetration. I don’t see it is going to be a long-term problem; it is going to be a lag of one-two months. So possibly you may not see as robust, possibly a new business premium growth as what we would have seen normally and also you have the lag effect of overall economy also coming in. So my sense is that over a period of time you will see lower commissions or the new rules will benefit the customers and in turn benefit the penetration of the insurance market.
Q: One of the rationales you see in a booming market is because everybody is buying phones, telecom will do well. That is we still don’t see investors look at the fund manger to decide the fund but just look at the fund – it is still a sales pitch. General explanation is India’s telecom growth is highest but the tariffs have fallen from Rs 3.48 in 2000, to 20 paisa. We are reaching a point of saturation, so you cannot continue to grow and you have new players coming in who offer even bigger discounts. How do you pick stocks in this environment? So while India maybe becoming mainstream, some would say the arbitrage is getting lost for many fund managers?
A: I agree with the point of telecom and it has been our view for some time. There is intense competition across the board and it’s clear that Indian used to enjoy 40% EBITDA margin, which is unseen, despite the lowest tariff rate. So, some of the global guys have realized that 40% EBITDA margin is a great number, so let’s go and do more competition.
Our view on sector is clear that we are neutral to negative on the sector. There is a huge value in terms of telecom in that area. Second penetration I have a different view, my view is that you will still see a growth of 25% for the next 2-3 years because we are talking about one phone penetration. We are not seeing the multiple phones and usage going up and your value add is still 10% of your total kitty.
So in that area, there is a growth possible. But the immediate you will see is that from 40% EBITDA margin if you start falling, you will have concern in terms of growth of the profitability. That is where the bigger concern today is. But over a period of time once you see the consolidation phase in the market, possibly some pickers will emerge in the telecom space but today the view is that it will not outperform the markets, so right now we are neutral to underweight on the sector.
Q: Let me get some help in sectors since you won't talk stocks. There are some who have described the power sector as today's dotcom. What is your stand there? Will you still buy some companies and leave us with some hints as to what you as a long-term investor will look at?
A: It's all about valuation game – at what valuation you are getting what stocks. Of course, you are rightly said, stocks have actually risen more than what is required and if you look at the demand in merchant power or compared to that the prices, which has risen are definitely much higher, but I am not sure whether dotcom or not.
On our sector pick we like banking despite the worry on interest rate hike. We think that the margins will be better for the banks after interest rate hikes. The excess liquidity, which is going to go away from the system, will help bank to earn more money because the money will go to productive sector instead of lying in the repo. Second, credit growth we think is going to pickup and the signs are already there in the credit growth pickup. So with the private capex and public execution happening, I think banking looks quite interesting despite there is a worry on the rate hike around system.
We like capex related stories because now the cycle for capex will start because the interest rates today are 10 year or below average interest rate and in this scenario and when the capex utilisation in aggregate is 85%, my sense is that you will see some capex happening in a big way.
So banking looks quite and we like capital goods as told and the other sector we like is pharmaceuticals; it has actually moved up sharply but a lot of exclusivity is coming in the next one year and the growth visibility is much better. So at every dip we like to participate in pharma.
Published on Wed, Dec 23, 2009 at 15:22 Updated at Thu, Dec 24, 2009 at 08:31 Source: CNBC-TV18
