Sep 09, 2016 06:13 PM IST | Source: CNBC-TV18

Consumer, auto ancillary, exports make good bets: Kotak MF

Domestic equity funds have infused inflows worth Rs 6,500 crore and the market is seeing sustained flows on the retail side, according to Harish Krishnan, Senior Vice-president and equity fund manager at Kotak Mutual Fund.

Domestic equity funds have infused inflows worth Rs 6,500 crore and the market is seeing sustained flows on the retail side, according to Harish Krishnan, Senior Vice-president and equity fund manager at Kotak Mutual Fund.

He told CNBC-TV18 that the returns from investments too have been good from retail and SIPs, adding that consumer, consumer discretionary, auto ancillary, cement, capital goods and exports make good bets. Investments in such sectors in the next 2-3 years can see healthy returns.

Below is the transcript of Harish Krishnan’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.

Prashant: Rs 6,500 crore is what you and your peers in the mutual fund industry were handed over on the equity side itself. That is a huge number. Could you just talk to us a little bit about the factors behind that big number, the big jump that we have seen as compared to July or for that matter compared to any of the other months between January or July?

A: One needs to look at this as part of a bigger trend of moving from physical savings to financial savings. So, if one really looks at the alternate asset classes and how they have done, and look at it in conjunction with the typical investor returns that most of the flows have happened every since this government came into place. And most of the investor returns have been in reasonably strong double digit on a compounded annual growth rate (CAGR) basis so it is therefore, these flows are not really surprising. We continue to see sustained flows coming in from the retail side. A lot more of systematic investment plan (SIP) collections continuing to happen which shows a great amount of maturity from the Indian investor pace. Almost every day, we continue to keep reading multiple success stories of people who have actually managed to grow their wealth quite significantly through the simple techniques of SIP and investment into equities. So it is a combination of all of these.

The fact that alternate asset classes have not really worked during this period. The fact that we have had some stable policy, there have been some material policy actions that have taken place. There is a general hope of an improvement on corporate earnings. We have started to see two consecutive quarters of decent stabilisation of earnings. And then the fact that investor expectations have matured quite significantly from equity markets as a whole and they have been pretty much delivered over the last 2-2.5 odd years. So, it is a combination of all of these.

Ekta: You run two funds yourself, Kotak 50 as well as Kotak Infrastructure and Economic Reform Fund. How has interest been incrementally in August as compared to the other months for you?

A: We continue to see sustained flows in all our categories as a fund house that we run, be it in the balance category, be it in the largecap, be it in midcaps. So, the industry investor education drive that has happened, sustained over all of these years is bearing fruit. You have got now this myriad of products that investors want to choose which fits into their risk return profile. So, it is not something that we are saying there is a time to get into this particular scheme or that particular scheme. So, we continue to see sustained drive even in thematic funds for example, like the infrastructure fund that you mentioned. We continue to see sustained action, sustained inflows into these categories as well.

Prashant: In any other period, getting this kind of money takes a lot of work, it is a lot of hard work and I am sure your distribution side would be very enthused about this from a business perspective. But as a fund manager, putting the money to work, given where the markets are at this point, is the bigger challenge. What are you doing essentially? Where is all this money going? Where are you deploying it?

A: As a fund house, we are more growth investor, so our style bias has always been growth at a reasonable price. We are seeing pockets of growth coming through primarily on the domestic cycle exposed sectors. So, we continue to invest in sectors such as auto and auto ancillary, consumer discretionary, consumer durables, you have got on the infrastructure on the investment side, we are positive on capital goods and industrials as well as cement is a reasonably large sector which we continue to be overweight on.

So it is essentially sectors and businesses which, in our opinion, over the next 2-3 year kind of a period can have a sustained earnings growth in strong double digits, that is the kind of businesses that we continue to focus on. But you are right. There has been a challenge that a lot of these businesses and these companies have actually moved up quite significantly. But is not to say that the entire market is in a bubble zone or anything like that. This is a healthy phase, possibly what we are going to see over the course of the next 3-6 months is going to be more a consolidation phase, especially after that blistering run that we have seen in the last six months or so. But it is not definitely something that worries us in terms of the overall market as a whole.

Ekta: Your Kotak 50 fund has Infosys as one of its top holdings. Your cumulative portfolio towards technology is towards 12 odd percent and correct me if I am wrong about those statistics. Are you reducing your holdings in tech simply because of the news flow that we have seen in the past couple of months and most recently, Tata Consultancy Services (TCS)?

A: We continue to remain underweight in that space by anywhere between 200 and 300 basis points vis-à-vis the benchmark and across the fund house we continue to remain underweight into the export oriented space. So, specific to the technology space per se, we do acknowledge the fact that these are businesses which throw a huge amount of cash. They are great businesses run by competent management teams. Of course, they have reached a pocket of sorts over the last 2-3 quarters wherein business making or decision making at their client’s end have elongated or there have been externalities like Brexit which has impacted a few client specific decision.

But we are in this phase wherein we think that if you got a 2-3 year kind of horizon, we do not think that one should be looking at material underweighting of the sector from here as well. Valuations are reasonable, maybe from a timing perspective, yes we could be a but way off, but we genuinely do think that these are well run companies. And therefore, at some level, both the valuation comfort as well as the return of growth in a few specific companies. But we need to be a lot more stock specific rather than paint the entire picture of the exporters as a whole.

Prashant: Now, the YES Bank saga. I know you obviously do not want to comment on a specific stock. Can we take away broader lessons for the sector, one lesson probably could be that obviously, there is a fair bit of demand for private sector financials. Just the stock performance of YES Bank shows us that. So, that I not in doubt at all. But maybe now, things are getting a little tiring after the relentless run up that we have seen over the last year or so.

A: As an overall space, like we have discussed, overall flows into the domestic side have been very strong. Even the foreign institutional investor (FII) flows have been strong. So, essentially all of these flows which have come through in the last six months has not been met with any supply. We are possibly starting to see the first signs of big supply in select financials be it in insurance company listings as well as in few select private sector banks. In a way it is healthy that this forms a conduit to absorb a significant chunk of these flows and allows the market to consolidate on a broader basis. So, I do not think it is a question of so much about demand, it is a question of maybe some unfortunate developments happening over the course of a day or two or so.

But it is not something that we think will have broader repercussions on either the primary market as a whole, we think that there can be a lot more good quality listings that are coming up and that will continue to come through. And like I said, the amount of flow that one is seeing into the equity markets as a whole, it is only healthy that it comes up with supply of these forms of good healthy companies wanting to raise money for growth. So, I would put it that way that these are something which will happen, like you rightly said at the start, it is a small correction that we are seeing after such a huge outperformance that has happened. But we would think that investors would want to buy into such growth stocks.

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