Aug 01, 2017 05:23 PM IST | Source: CNBC-TV18

Kotak's Upadhyaya says fund flows continue to support market, positive on banking

Harsha Upadhyaya of Kotak MF said from 3-5 year perspective, one can invest in staggered ways.

The Indian market Tuesday continued its strong momentum, with the Nifty attempting to breach 10,100 again. Midcaps outperformed the frontline indices, and registered a fresh record high.

Harsha Upadhyaya, CIO-Equity at Kotak Mutual Fund says inflows from investors have remained consistent, and are supporting the market.

“At least on the SIP (systematic investment plan) front, inflows have been very consistent at Rs 4,600 crore a month. On the EPFO side, about Rs 2,000 crore is invested every month. In that sense, the market has consistent money flow support,” Upadhyaya told CNBC-TV18 in an interview.

At such levels of fund flows, is it difficult for a portfolio manager to invest in this market? Upadhyaya calls it challenging. “One has to maintain the discipline and not get carried away by volatility. Focus is on domestic companies as these are showing earnings growth,” he said.

According to Upadhyaya most of the other asset classes have lost sheen and more focus continues to be on equity. “We are advising investors to maintain asset allocation, asking them not to put short term money in equities. Only if it is from 3-5 year perspective, one can invest the money in staggered ways,” he added.

Speaking on State Bank of India’s decision to cut rates for savings account with less than Rs 1 crore balance, he said this move means cost of funding will go down for banks. Other banks will follow suit on this rate cut. He is positive on the banking space, but remains cautious on NBFCs and advises stock-specific approach there.

Upadhyaya is not upbeat about information technology (IT) and believes the notion of valuations being lower than median and historical ones is an optical image. The rupee’s movements are being tracked and he expects muted earnings growth.

On auto, Upadhyaya said the rural space has not seen demand recovery yet, but should start coming in now. Monsoon has progressed and accordingly, it is betting on tractors and two-wheelers.

Below is the verbatim transcript of the interview.

Latha: We are at stratospheric levels, 10,100 and counting. Is there any increase in the kind of money that you are seeing at your end? Are more people excited by the levels?

A: In terms of inflows, it remains very consistent and it has been increasing little bit every month, at least on the systematic investment plan (SIP) side. That still continues, about Rs 4,600 crore a month and growing at about Rs 150 crore a month is what the current run rate is. And on the Employees' Provident Fund Organisation (EPFO) side again, about Rs 2,000 crore is getting invested on a monthly basis and mind you, it is long only money. So to that extent, market has consistent money flow support even at these levels.

Anuj: Yes, we saw that with the kind of domestic institutional investment (DII) buy number that we had. But from a portfolio manager's point of view, how do you approach this market now because the market leading sectors have become more expensive than I can at least recall, over the last 10-15 year period. So, how do you invest this incremental money that you are getting?

A: It has been challenging, but at the same time, one has to maintain that discipline and not get carried away by market movements and volatility. We have been focusing on domestic businesses and at least for out comfort these are the businesses which have been showing earnings growth. While I agree that there is a little bit of increase in valuations at many of these sectors, but at the end of the day, as long as the numbers are better than market, these valuations will hold and that is what we are betting on.

For example, some of the sectors where we are underweight, there is a structural problem in the businesses whether you look at IT, pharmaceuticals, telecom and these are essentially the same sectors which have really degrown during this quarter also. And we believe that trend will continue even in the forthcoming quarters. So, we continue to focus on domestic businesses where valuation is comfortable.

Reema: Have you increased your cash holding in order to invest at better entry levels?

A: No, at Kotak Mutual Fund, we have a philosophy that we will not keep more than 7.5 percent of cash in any of our equity funds. So to that extent, our mandate is very clear that we will not keep too much cash in our funds, so most of our funds today have cash levels of anywhere between 3 percent and 5 percent.

Latha: How did you parse the move from State Bank of India yesterday of cutting its savings bank rates? Does that change or impact your stock picking? Do you like real estate stocks? Do you like bank stocks itself?

A: We have been quite positive on the banking sector as a whole and that view continues. There are a couple of incremental positives. One, as you rightly said, the cost of funding for banking sector will go down. Leader has already cut the deposit rate which means that others will also follow suit in the times to come and we will see cost of funding go down for banking sector as a whole.

On top of that, there are a couple of banks which are trying to unlock value by selling stakes in their subsidiaries which means their capital needs at least for the short-term, will also be taken care of. So broadly, we continue to remain quite positive on the banking sector.

Anuj: What about IT? We are seeing a big move in Tech Mahindra today. A large part of that is because of market positioning of course. Most of these stocks may be trading below median valuations. Would you take a jab at these or do you still avoid these stocks?

A: The current valuations which look lower than historical valuations or the median valuations are only optical in nature according to us. There is clear headwind in terms of business growth. We are continuously watching the rupee which is appreciating against the dollar. That is again going to put pressure on the margins.

This year is going to be largely muted earnings growth or a degrowth year for IT as a whole. So in that context, I do not think one can look at historical valuation range and say that the current valuations are low. The current valuations are low for a reason and they will probably remain that way in our opinion.

Reema: Where do you stand on non-banking finance companies (NBFC) because not all the earnings have been good like LIC Housing Finance? Mahindra and Mahindra Financial Services rallied post numbers, but the earnings were not too exciting but the stocks are higher in trade, the valuations are expensive. How do you approach NBFCs now?

A: Between NBFCs and banks, we clearly prefer banks because some of the NBFCs have valuations which are much higher than even some of the banks. Clearly, one has to be very cautious on NBFC sector as a whole, but there could be stock specific opportunities even within NBFC sector for constructing a portfolio.

Latha: We are going to see auto sales numbers coming now. How are you broadly placed in the auto space? I guess no one can do without the big boy Maruti, but in the two-wheeler space, are you still excited?

A: Yes, the rural space has not really seen demonetisation recovery and our belief is it should start coming in now. We had disruptions in the form of demonetisation earlier, then transition of vehicles fro, BS-III to BS-IV emission norms, etc. so most of these short-term hiccups are behind us and we have also seen monsoon progressing at a good pace now and it has been above normal. And there should be a tailwind to rural demand now. Accordingly we have bet on tractors as well as two-wheelers in our portfolio.

Anuj: You have an overweight on oil and gas. We have seen a huge move in oil marketing companies (OMC) but off late, we have seen some profit taking, of course, Hindustan Petroleum Corporation (HPCL) got dragged because of that news flow on merger with Oil and Natural Gas Corporation (ONGC). But which pocket of oil and gas are you most bullish on now?

A: Except for oil exploration companies we are bullish on entire space, we like oil marketing companies as well as gas utilities. Both these sectors are growing at a reasonable pace. There is no government interference anymore in terms of cash flows or subsidies or under recovery. We believe that market is continuously giving them market related valuation and they will sustain those valuations and it is at least one of those sectors where earnings growth is at least in the mid-teens for gas utilities at least and the valuations are also reasonable. So to an extent, it makes sense to have them in the portfolio.

Reema: RBI's policy tomorrow, the expectations are there will be a 25 basis point rate cut. Can it move the needle for the banking stocks? If we do get that rate cut, would you invest your money incrementally in any of the rate sensitives?

A: That more or less has been the consensus view and we believe that has already been discounted in most of the stocks prices. So I do not think a 25 basis point cut will move the needle in terms of equity stock prices. We continue to remain positive on banking sector as a whole. We also are positive on some of the consumer discretionary names which are anyway rate sensitives in that sense. So we continue with that position.

Latha: The historical earnings of Nifty is still only 427. The expectation always is that it is going to pick up in the current year. The first quarter numbers we did not see a huge beat in earnings. Yesterday, the core sector numbers were a little scary, there was hardly any growth. Given all that, are you still, as a house, plumbing more for equities or are you asking people to diversify a little into bonds or something else?

A: Unfortunately, at this point of time, most of the asset classes have lost sheen, so to that extent, equity has become one of the focus asset classes. As far as we are concerned, we are advising investors to maintain their asset allocation. So in case somebody is underweight on equities, one can still do staggered buying in equities through mutual funds.

And in case somebody is already overweight or neutral in his asset allocation and as the allocation keeps moving up at higher levels, then there is need to book profits because it is always good to maintain that asset allocation balance between asset classes and also have long-term perspective in mind. We are advising clients not to put any short-term money into markets, especially into equities at this point of time. So only if somebody is looking at the next 3-5 years then this could be the right time to go in a staggered way. Again, one should not be chasing the momentum at all.

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