After recording the highest-ever monthly equity flows of Rs 20,362 crores, mutual fund industry as a whole will find it difficult to find stocks at reasonable valuations as there has been a massive drop in overall profitability of the companies says Nilesh Shah of Kotak Mutual Fund. In conversation with CNBC TV18, Nilesh Shah explained his hypothesis on profitability. “In 2008 profit as a percent of GDP was 7.2%, today it is roughly around 3%. So, there is a massive drop in profitability.”
Pointing out to the reason for such a drastic drop, he said, “Partly it is driven by cleanup in PSU banks, competition in telecom sector, and slowdown in IT companies, slowdown in generic export companies, and partly it is driven by contraction in margin across various sectors.” Examining the reasons for the contraction of margins he said, “One of the reasons this has happened is because there has been a drop in capacity utilisation. Companies expanded their projects through efficiency and brownfield expansions. But the demand hasn’t kept pace and capacity utilisation is dropped.”
