Nothing can stop Nifty from moving up, except monsoons: Prakash Kacholia, Emkay Global

Emkay Global has the unique distinction of becoming the country's first financial services company to be listed. In a free-wheeling chat, ET Now's Nikunj Dalmia catches up with the effervescent power-packed duo, co-founders of Emkay Global, Prakash Kacholia & Krishna Kumar Karwa.

It's often believed that behind a successful man there is a wife but the success secret for you is not a woman but another man...?

Krishna Kumar Karwa: Interesting question. Our wives have always said that you guys spend more time together than you spend at home. To an extent, the secret of our success has been that — we have complemented each other very well.

I am curious on this time from you that friends and partners these are two separate definitions, how has that worked for both of you?

Prakash Kacholia: We were family friends first, then we were together in college. When you get into a professional understanding, the most important thing is that both of us needed to understand each other very well, we have complemented to each other. And professionalism, I think, overplays friendship and business. This is how I think we have taken the business forward.

So you have divided your roles from day 1 itself? Because you look at the derivative markets and KK, you look at the cash market?

Krishna Kumar Karwa: I think the role division evolve over a period of time and as your size and scale of operations keep on increasing and you also evolve in terms of your likings, your strength and also what is good for the organisation at that point of time. So you play to your strengths. Having said that it is important that when you are saying that we complement each other, don't we argue? yes certainly we argue but after having convinced the other guy that this is the right way of moving forward. Then both of us have to we do what 100% to it. So without a discussion nothing moves forward. So it complementing each other and playing on each others strength.



I am going to talk about the market conditions and let's first talk about short term that's where the curiosity is. Ahead of Q1 numbers, how are you positioning yourself and what exactly are you telling your clients, PK, to do?

Prakash Kacholia: I personally believe that India has a different story. The Sensex as well as the Nifty is holding very well. It has been range bound for the past 6 months or so, but I have been advising clients to play more the options and take a slightly uptick and buy the calls on the upside.

So what is the kind of range you are sensing or you think markets would move in next 60 days or 90 days KK?

Krishna Kumar Karwa: I look at the market in this way- for the last almost 4 quarters now if you look at the Nifty it has been at similar levels. So it has been a flat market if you were concentrating only on the Nifty but within that there has been huge amount of action in individual stocks which comprises the Nifty, also there has been good amount of action in the midcap stocks. So my take is that, the market per se is in a consolidation phase in terms of the broad market, if you are looking at. And having consolidated in this range after that big move post 2009 for almost a 80% to 100% return but this consolidation phase is probably now coming to an end.

But now PK, this year the market movement has not been large in terms of upside, in terms of downside you are 2% here or there on a YTD basis. What is the best way to make money if someone is a compulsive Nifty trader?

Prakash Kacholia: Frankly I think trading stock futures or trading Nifty futures is not a good idea according to me.

That's a business for you...?

Prakash Kacholia: It is but what we have as a house is that we are educating all our clients on trading options. And when you trade Nifty futures, normally you see that the retail or the HNIs they always have a trigger OF stop loss. But options are like an insurance product. For example I can just give you a live example, sometime in the month of June so may be the first week of June when Nifty somewhere around 5000..

5200 on 10th June..

Prakash Kacholia: Yes, just now. The 5300 call was available at 10 bucks. Markets moved up, we do not sleep with the position. We advise our HNI clients, its got sold at Rs 50.

So quote the strategy for us, with a one line explanation- a Nifty strategy?

Prakash Kacholia: For July if I would see I would buy a 5500 call one call and I might sell to a 5700 call. It’s called the ratio spread. I'll make money the moment Nifty goes above 5400 or even approaches nearer 5500. My loss will start beyond 5900.

Let me fillip this thought here KK, with you that markets this year have not done anything but if you look at individual names you have got winners which are emerging up every day from auto ancillary, auto, oil marketing even in technology, how are you positioned yourself and what are you telling your clients to do?

Krishna Kumar Karwa: See at current valuations, where in a broad market basis markets are kind of fairly valued- You need to be very careful in terms of your stock selection and the time frame that you were investing in. So we are very clear that investors need to be very clear on their return expectations. It has to be moderate return expectations, that's where we start from. After having said that, then you move on to a time frame that at least you should be looking at 12 to 18 months of timeframe for investing in any stock rather than looking at a very short term 2 month-3 month because I do not think you are going to make any great returns if you are having a very short time frame. We believe that the domestic consumption story is a very strong story. We have seen the kind of GDP.

Isn't that a well discovered story? just about every fund manager, every brokerage house seems to be endorsing the consumption story?

Krishna Kumar Karwa: I think what you say is right but this is what is the strength of India. Having said that, as I said in the beginning itself -if I am buying something at 25% of earnings or obscene valuation then I will not be able to justify the returns that I can make out of that. But I do not think so we have gone into a over stretch valuations territory as far as a domestic consumption story is concerned.

And then you have to look at a longer time frame also. So based on that I believe that still there is an opportunity, domestic consumption story is one sector that we believe that we should play and specifically you could also look at housing finance companies in that sector or four-wheelers in that sector.

Another sector that we are very comfortable in recommending to our investors is one the infrastructure and the engineering space. I think now we are in the cusp of another opportunity in terms of capex cycle picking up and most of the large companies now in terms of their capacity utilisation etc. are at 85% and 90%. So this is the right time for them...and they also right size their balance sheet in terms of their debts etc. So, if they have to capture the next round of growth in the domestic economy or the world economy then there has to be a capex cycle. So infrastructure stocks and engineering stocks in that sector look good.

I just want to try and understand the midcap names you identified, LIC Housing, Voltas, Bluestar- which to your mind is your No.1 top midcap pick? We call that as KK's idea for 2010.

Krishna Kumar Karwa: I think LIC Housing Finance the kind of opportunity it has in terms of fundamentally the scarcity in housing and the kind of growth that the company has achieved in the last few years and the opportunity which it addresses....I mean a 25%-30% kind of compounded growth for this company is easily possible. And the valuation gap which this company has versus the market leaders they have almost like its quoting at some 50%-60% lower than and I think as time passes by and people, investors become more and more comfortable with the growth of this company this is one stock which should give you great returns in the next few years. So that's one stock that I would want investors to invest.

Let me keep the same flavour with you PK-endorse a trade for us and again we will call that as PK's golden trade for the year?

Prakash Kacholia: I would just go by, I think I will go long Nifty futures itself and to protect myself I will sell some of the calls on the upside.

So you don't expect a sizable gain but you expect that its not going to be grind down but a grind up for Indian markets?

Prakash Kacholia: I believe so, I strongly believe that.

Are you getting a sense that foreign institutional investors, they do not want to have a net cash exposure in India?... Let me just expand my thought here, they want to buy Indian stocks but they also want to buy exposure either in the call market or the put market, which is, they also want to buy protection?

Prakash Kacholia: If you see over a period of last one year I think the volumes on the options market has gone up substantially. I think it has nearly doubled. Yes, they take lot of exposure and they express their thought processes through the options market but it is very difficult to track and predict or take a call on their order flows because we do not know whether it's a directional or a client call or a delta trade. It is very difficult to take the call on their flow. But, yes, the FII volume on the long-dated options...I think they take care of more than 30% to 40% of the overall volume of long-dated options and so is interest the long-dated options is highly skewed towards FIIs.

I want to ask you, PK, and I know you were instrumental in this decision. The extension of trading hours, they got extended by one hour but where are the volumes?

Prakash Kacholia: I personally believe that yes the volumes don't go up just because you extend the trading hours. If you see whenever there's sun outage the market gets extended for something like half an hour, I personally believe it is not necessary. Extended hours does not mean that volumes will go up.

You still come late to office or you have started coming early?

Prakash Kacholia: Well we all go stretched but I think the broking fraternity or everybody in the financial segment is now feeling the pinch. Initially there was lot of enthusiasm to reach office early but slightly now is taking a toll on us.

KK, what about you?

Krishna Kumar Karwa: I think from a longer term perspective, whenever decisions were taken initially there was very big resistance and then we get used to it. Its unfortunate that the volumes per se in the markets have not gone up and so the trading hours have got extended by one hour and you do not have sufficient volumes. The volumes has just got expanded over a longer period of time, so employees and everybody is feeling the pinch or rather become boring sometime. Having said that personally I used to come to office at 7:30 or 8:00 earlier also and still do, I haven't changed in that fashion.

I going to switch sectors and talk about what markets do not like and what markets like? Currently markets don't like telecom stocks but maximum money is often made when you sell greed and when you buy fear, is telecom sector a bad business available at a good price?

Krishna Kumar Karwa: No, I do not think so that this is a bad business available at a good price. I think its in a transformation space where as increasing penetration in the voice segment and telecom companies made lot of money etc. and now again they are going into that big investment phase in terms of the spectrum fees and then the technology so its going to evolve to the next level.

Now, it could be a question of a few years before the investment that are made by telecom companies in the next two years when they start giving returns. So having said that some of the stocks offer good entry points but your investor time frame is to be very clear. Now if you are expecting immediate bounce backs than probably this is not the time but from a long term perspective 3 to 5 year perspective than this the right time to start accumulating.

The industry itself is in a consolidation phase. I believe that there will be consolidation amongst various operators also and at that time it will give you an opportunity to make that fast bug today its in consolidation.

But there are three names the obvious names Bharti, RComm and Idea which one do you like?

Krishna Kumar Karwa: I think with the sheer size of operations and market leadership I mean we would prefer to go with Bharti and that's a very top down approach. Whenever industry is in a kind of turmoil or in a consolidation phase you always go with the best and then as the industry was then you can take a bet on the second best or the third one. Today Bharti is our top pick.

What about oil sector stocks and when I saw oil sector stock specifically oil marketing companies HPCL, BPCL, IOC. They already have appreciated on an average 15% to 20%...is there some more juice left on the table?

Krishna Kumar Karwa: I think the major gains have already been made. We have price targets which are still 10% to 15% higher than the current existing prices as of may be yesterday. So the major gains...there were always available cheap so valuations were in the 6-8 months if you have held on to it suddenly you see the 30%-40%-50% appreciation. As major gains have been made there will be a 10%-15% further appreciation in the next few months but having said that earlier also in 2004 correct if I am wrong you had this APM dismantling and then again it was put on the backburner for various reasons.

The NDA government..

Krishna Kumar Karwa: So having said that, today oil you got around $75. Tomorrow if it goes to $100 than what happens do we reverse this policy or not? So this has always been a question. HPCL, BP, IOC at that point of time did it go up to 1.6-1.7 times book value. Now they are quoting at around 1.4 book value. So there is still some juice left but I would be very cautious the moment these stocks go to 1.6-1.7 book value.

PK, I know you track Nifty with the magnifying glass but let's look at some more stocks here. There are good 10-15 stocks which are quite liquid and where we know that in derivative traders even institutional derivative traders they love to get in, they love to get out. Are there any specific names where you are positioning yourself or you telling your clients to position themselves?

Prakash Kacholia: What we tell our clients is primarily driven from what comes from our research. There is a element of technicals also into it but as KK has rightly said, we had betted on all these oil marketing companies because we believed that yes this is obviously that this has to happen some day or the other. Besides that on the two-wheeler segment as well as on the four-wheeler more so there is Maruti that's one stock that we have been long on the single stock futures. I think broadly we being only a 3 month trade that we can create and more so it has to get rolled over, I think it is mostly driven by technicals as well as fundamentals both.

So can you identify some stock trades for us and let's keep the stop loss aside because then we are looking at a pure trader but 3 or 4 tactical trades for us?

Prakash Kacholia: I think you should go long Maruti.

Even at current levels?

Prakash Kacholia: Yeah. I would go long Reliance today at this current levels and frankly speaking I would just go long Nifty.

So you are actually sounding very bullish on Nifty PK?

Prakash Kacholia: I think seen the Indian markets compared to all the world markets, as I just said sometime back, is pretty strong. I think the decoupling story, which we should talk one year back, is actually proving to a great extent true. If the markets hold here and I do not see any reason why what could crack the market barring this monsoons, if there is something goes wrong with the monsoons I see Nifty is holding very very strong. I would not be surprised if it goes beyond 5500-5600 in July itself.

KK, can we see the reverse happening in the second half, first half, was all about alpha generation, which is eager to pick your stock right forget about Nifty-50 or Sensex 30, second half, can the benchmark indices-can they surprise us?

Krishna Kumar Karwa: I think if you look at the composition then Reliance is a big component of Nifty and most of the fund houses are underweight on it. They cannot claim weight for statutory reasons. So Reliance, and if Reliance participates big time in terms of their price movement then Nifty is going to run and that could impact fund performances they were have to be literally. So for Nifty to outperform in the immediate next 6 months index heavyweight Reliance has to really perform well so that's what I think.

And do you think that's a likely proposition because are now criticizing Reliance, they criticizing Reliance for the simple reason that Reliance was always defined as a large petrochemical company which was generating superior amount of cash. Now Reliance has a different complexion, a different colour a company which has petrochemical business, has acquired telecom assets and has plan to move into power?

Krishna Kumar Karwa: Your key question is that the kind of free cash that this company will be generating few years from now and how well it deploys that and knowing the track record of Reliance in terms of investing capabilities and in terms of successful execution of their various expansions. So I would not look at the immediate short term in terms of how the company is getting transformed. The company has constantly kept itself ahead of the curve and its ability to deployed resources and do it in a very efficient manner that is what the key differentiator for Reliance have always been. I think it going forward also going to be there. So I would imagine that, I would believe that this is going to be a big outperformance in the stock price of Reliance for the next one year.

How is the business environment for brokerages because 2008, 2007 valuations were literally running all over the place for brokerages also?

Krishna Kumar Karwa: So like in any business there is a phase of consolidation and brokerage houses are in a phase of consolidation as far as their businesses are concerned and they are evolving big time in terms of different business models that they would like to follow. So you would have a business model which could believe heavily on proprietary trading or on institutional business or on retail business or within retail how we are going to be targeting customers as such. Are you going to be a discount brokerage house?, are you going to be focusing on private wealth management? I think there is a lot of evolution introspection happening within the brokerage industry.

Earlier everybody was trying to do everything now you could possibly be a regional player or you want to be a Pan India player or you want to focus fully on cash market. So it's an evolution phase. Having said that despite the markets having moved up sharply in the last post 2008 debacle brokerage volumes in the markets have not gone up significantly. We are average around 1 lakh crore and that has been the volumes now for almost a year now.

So bottom line KK is don't buy brokerage stocks?

Krishna Kumar Karwa: No, I would say this is the best time. I mean a long term investor buys stocks not when they are at their peak in terms of their growth but when inherently believe in the growth but when its going through a consolidation phase. So today the same brokerage houses which were quoting at 4 times and 5 times price to book today most of us are available at anywhere between 1.5 to 2 times and this is just the beginning of the industry in terms of the penetration of financial services within the Indian community. So brokerage houses this is the right time if you want to buy.

PK, what's the next big thing the firm is getting on?

Prakash Kacholia: Just like what KK said I think the way we are positioning ourselves we have 50% of our revenues come from institution and 50% coming from retail. Actually the way we want to position ourselves on retail is not like a discount brokerage house. Our concentration is on assets under management, because we believe once you have AUM with you it’s what can give you the next delta. On the institutional piece yes we are expanding our geographies, the US markets, the UK markets and I think we believe we are in the top 10 out brokerage houses, we got to move up that's our aim in life to in the next 3 to 5 years-come up replace some 3 or 4 of them that's our vision for 2013-2015.

I know you guys complement each other but personal preferences are different? You like pizzas, he is not fond of pizzas. You are supporting football, he is supporting cricket..

Prakash Kacholia: I support football.

So which team are you supporting?

Prakash Kacholia: Argentina for the World Cup.

KK, what about you which is your favourite cricket team?

Krishna Kumar Karwa: Obviously my cricket team which is India.

And which is the fair cricket player and the option to pick Sachin Tendulkar is not there so it’s like I like Reliance Industries.

Krishna Kumar Karwa: I understand. I think the way Dhoni has evolved and the way he has carried the team on his young shoulders and I think. I mean always he gives the credit to his team and if there is a debacle he takes it on his own shoulder I think that is the true mark of a leader and I respect him for that.

Before I wrap up I just want to complement you guys with one movie which I saw when I was a child "sholay" yeh dosti hum nahi todenge...so keep it up guys. Good luck and thank you so very much for joining us on double bill on ET now.

Krishna Kumar Karwa: Thank you very much.

Prakash Kacholia: Thank you very much.