With the market having rallied post UP general elections’ result and Fed’s rate action, the Street is now in a wait and watch mode during the earnings season.
Harsha Upadhyaya of Kotak Mutual Fund believes that the market is in a consolidation mode and does not expect fireworks from the results as well.
“We are now looking for opportunities during the earnings season,” Harsha Upadhyaya, CIO-Equity, Kotak Mutual Fund told CNBC-TV18 in an interview.
He said investors must be cautious on midcaps due to higher valuations. There could be short term volatility in the space, but it may not be a bad idea from a 3-5 year perspective, he said.
Upadhyaya sees pain for banks, especially the corporate sector lenders and chooses to wait and watch for the developments in the space. As a result, Kotak MF’s portfolio is positive on private sector retail financial companies.
Based on the turmoil in information technology (IT), the fund house maintains its underweight stance on the sector. “Valuations may look optically cheaper, but there is no real reason to jump into IT right now. There is no improvement in growth visibility and margins are under pressure,” Upadhyaya told the channel.
Based on the government’s affordable housing push, his focus continues to be on housing finance and private sector retail banks. But he is cautious on real estate it is yet to see some real affordable housing projects. Unless there is some change in the model, this would be just sentimental than fundamental change, Upadhyaya said.
Simultaneously, the cement sector is also a positive due to gains from affordable housing policy, he said. “We have looked at firms with excess capacities in manufacturing side…our positions are in these places,” Upadhyaya added.
In the auto space, the fund house believes that economic activity and transportation will improve. "Having said that, over the next couple of quarters, demand for two-wheelers and tractors will increase," he said.
Below is the verbatim transcript of the interview.
Anuj: Are you buying right now? Is there enough stock in the market in terms of midcaps, largecaps where you can still buy?
A: Market is in a consolidation range, we are unlikely to see any great fireworks in the earnings season. So to that extent, market seems to be in a consolidation range and we are looking for opportunities during this earning season. We are not creating too much cash but with whatever cash we have in our funds, we will look for opportunities in terms of volatile periods during earning season and accordingly we will build up positions. We remain positive on the overall outlook for the market.
Latha: Remain alert to buying during volatile times, will Yes Bank qualify?
A: Without getting stock specific, clearly there is some more pain in the banking sector especially for the corporate lender. Recently, Reserve Bank of India (RBI) has mentioned that there seems to be a divergence between the real asset quality and the provisioning numbers that some of the banks have shown. We do not know, how this is going to show up in terms of earnings in the March quarter or in the June quarters. So we need to wait and watch that space and also they have mentioned that there are other sectors which are showing signs of stress and hence needs more provisioning. For example, they have mentioned telecom as one of those sectors. So clearly, there is still more pain for corporate lenders in our opinion. So our portfolio continues to be towards private sector retail financials both NBFCs as well as private sector banks.
Sonia: As long-term retail investors, what do you do when some of these names like Yes Bank and IndusInd Bank give you a bit of trouble as far as asset quality is concerned, do you just wait for a couple of quarters and do not change your strategy there or do you book out and move into some other names for a long-term investor?
A: We would advise that any investor who is unable to spend 24/7 research time on stocks, it is better to go through mutual funds. So we would advise them to come to our mutual fund.
Anuj: I wanted your thoughts on how would you approach a sector like IT? Infosys and Tata Consultancy Services (TCS) we have seen numbers from both, both are down 20-25 percent from peak, trading below medium valuation, do you take that call or do you say that look the business is not looking good and it is time to stay out, how would you approach them now?
A: We continue to remain underweight on the sector. We continue to believe that while the valuations may optically look cheaper compared to where they were 12-18 months earlier, there is no real reason to jump into the IT sector as of now. The headwinds are very strong. We are not seeing any improvement in the growth visibility. The margins have already been under pressure and our expectation is going forward next quarter onwards, there will be more pressure on margins and the environment in terms of US outsourcing continues to be questionable. So given all this, it is better to wait and watch in this space, we do not see that sector outperforming some other domestic businesses in the near-term.
Latha: One of the themes that everybody has been playing is the affordable housing theme. Would you now get into real estate or would you remain with housing finance companies?
A: In our portfolios, we are focusing more on housing finance companies and private sector retail banks, which also focus on housing finance as a large focus area. While real estate stocks have done well and sector as a whole has gone up maybe 30-40 percent in the recent times, we haven’t seen any real affordable housing business model in the real estate sector overall. Until unless we come across change in business model in some of these real estate companies. I would still think that this is more of a sentimental move rather than a fundamentally driven move. So to that extent we would remain cautious on the real estate sector per se but we would love to play that through either housing finance companies or through cement, which will also see uptick once the affordable housing goes up.
Sonia: Do you stick to some of the larger cement names or do you see more value in some of the non-index largecaps?
A: We have both large as well as midcap names in the cement sector across our portfolios rather than going by the size of the company, what we have done is we have looked at companies, which have excess capacities in the manufacturing side and that is where the operating leverage will kick in once the volume growth starts to come in. So if we were to look at the entire cement industry, wherever we have higher excess capacity is where most of our positions are rather than going regional, we have looked at excess capacity issue.
Latha: Will 2017 be the year of midcaps or year of largecaps? For mutual fund investors, who take your advise and say we cannot do our homework, we will come to you. Should they put it in blue-chip kind of funds, largecap kind of funds, should they put it in midcap kind of funds?
A: The valuations continue to remain at a premium in case of midcaps over largecaps. So that remains a worry. Having said that, we haven’t seen any meaningful correction simply because there is one way flow that is coming into the market. Foreign institutional institutions (FIIs) have been largely absent in the midcap segment whereas Indian mutual funds have been getting consistent flows into both largecap as well as midcap funds.
So to that extent, the flows are driving some of these names. So I would be little cautious only in the very near-term in terms of midcap performance but if somebody has money to invest for three-five years in midcaps, I do not think that is a bad idea even at these levels. However, if somebody is looking at only next six-twelve months, probably the volatility could be higher in case of midcaps.
Anuj: Any other theme that you would want to back in the midcap market because we have seen so much variety in the market? Last year NBFCs rallied, we have seen tyre stocks, paint stocks, auto ancillaries, any particular theme that you are backing?
A: We are looking at couple of paints – one is the improvement that we are expecting in the rural economy. Both because of what is happening in the agriculture as well as what is happening in terms of government policy push so anything related to rural economy is what will be our focus area and other than that with remonetisation and goods and services tax (GST) implementation which is going to happen sometime during the year, we are going to see increased move towards organized listed space in every business. I think the unorganised sectors in each and every segment of the economy will probably lose out and that will be a gain for organised players. So these are the two themes where the focus is going to be.
Sonia: In the larger auto names, you have had exposure to some of the two-wheeler names like Hero Motocorp, the four-wheeler names like Maruti, what about commercial vehicles because we are expecting a lot of pre-buying to come in over the next three-six months, are you bullish on that space or do you think that there is more value in the other spaces?
A: We do have exposure to commercial vehicles (CV) manufacturers in our portfolio although it is not a big exposure. We continue to believe that the economic activity and the transportation segment will start to improve and that is where the commercial vehicles will also see better demand numbers going forward.
Having said that, over the next couple of quarters, we could see a strong demand coming in for some rural dependent auto segments such as two-wheelers and tractors and that is where we have higher weightage in our portfolio.
Latha: What has been the nature of lows, are systematic investment plant (SIP) percentage increasing and flows as well, non-SIP?A: SIP flows have been very consistent, have been growing every month and now the number for the industry is more than Rs 4,000 crore a month. So that has been the healthy sign and along with that we are also seeing regular inflows into the funds. So March was definitely a very strong month and the way April has started that also seems to be very good in terms of overall flows.