Bullish on beaten-down beta stocks in near term: Mukul Kochhar, Investec Capital Services

There cannot be a call for a runaway bull market, till we get more certainty on the elections next year, Mukul Kochhar, head of equities, Investec Capital Services, tells ET Now.

Edited excerpts:

How are you looking at the market right now given that we are going into elections?

The news flow is improving on the macro side. The disruption caused by fiscal stimulus in the US may not be repeated post the Republicans ceding majority to Democrats in the House of Representatives in the US. With a divided Congress, it would be difficult to pass any disruptive law in the US. It is a negative dollar, positive EM event and so it is good for India.


Oil also has cooled off faster than anybody expected. We were mentioning to clients that post Iran, there could be some softening in crude but the extent of softening has taken everybody by surprise. That is a substantial positive for India. A $15 cut in Brent crude is almost a 0.7% of GDP benefit to current account deficit. The situation is a little more comfortable there.

There has been revival of trade talks between China and the US. Any thaw even in that context will encourage emerging market flows and India will be a natural beneficiary. Moving on, you are getting closer to national elections and state elections in the interim, maybe completely discounted, because you are so close to the national elections.

The opinion polls were not that of disappointing as far as capital markets are concerned and indicated that BJP may be able to come back with a coalition. So the setup for the next four, five months as far as the macro news flow is concerned is very supportive of Indian equity markets in the near term.

Having said that, valuations are not that cheap and that is something to be considered. Earnings downgrades continue and optically the valuation numbers are slightly inflated. Adjusted for that, valuations are even higher. While the current account deficit could benefit in the near term from declining oil prices, we are not completely out of the woods yet.

We are constructive on the market in the near term, especially the beta stocks which have been beaten down. I do not think right now there is a call for a runaway bull market, till we get more certainty on the elections next year.

Alibaba has sold in a day what e-commerce players in India like Amazon and Flipkart sell in a year. They clocked $31 billion in single day sales. What does this mean for players back home as well?

I do not know, honestly I do not track China much and e-commerce especially. But one thing for sure is that there is a move even in India towards e-commerce as a play. For Indian players, sales growth in the e-commerce channel is north of 140-150% year-on-year. It is off a small base.

One implication for the economy and the capital markets is the friction in the economy comes down. Despite very high fuel inflation, you did not see a pickup in consumer price inflation and so e-commerce reduces friction in the economy, increases efficiency and , it is very positive in the longer run for the Indian economy.

With lower inflation and lower pricing power, it has implications for stock valuations. It is a fairly disruptive trend to bode for India.

Why is there a dichotomy? The world is talking about e-commerce disruption. Yet D-Mart and Trent are commanding extraordinary m-caps!

Just think about what is happening in India and compare it with developed markets. D-Mart, Trent and all the companies are organised retail. What did Amazon do in the US? They acquired Whole Foods. The world is moving more towards organised retail,- e-commerce is just one leg, organised retail is another. They are merging together to provide a solution for the consumer.

So D-Mart organised retail will be part of any solution that will emerge. Even in India, Amazon is interested in a partnership with Future. All these are part of any future solution. I like organised retail and e-commerce businesses better than FMCG because barriers to entry in this business are very high. How many new retail players have emerged? Practically zero. But if you look at private equity funded FMCG brands, there is an abundance of that.

So barriers to entry in these businesses are very high so for a successful business a high multiple is justified.