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Jul 04, 2017 03:31 PM IST | Source: CNBC-TV18

Harsha Upadhyaya positive on market in mid- to long-term; likes private banks

Harsha Upadhyaya on Kotak Mutual Fund believes that some consumer firms could also benefit from GST and lowering of taxes.

The market has witnessed strong movements in the past couple of sessions, with the Nifty reclaiming the key 9600-mark Monday. The upmove comes after almost a month of consolidation and correction.

Some sectors or stocks are trading ahead of their valuations but still not showing signs of a correction, according to Harsha Upadhyaya, CIO-Equity, Kotak Mutual Fund in an interview with CNBC-TV18. He continues to be positive on the market from the medium to long-term perspective.

Upadhyaya expected most companies in the consumers space benefiing from goods and services tax (GST) as there could be an overall reduction in taxes.

He preferred retail banks due to fewer issues relating to non-performing assets (NPAs). “Banks which focus on retail lending will gain incremental market share,” he told the channel. Considering haircuts needed from IBC-related developments he preferred to stay away from PSU banks, barring a few large names.

Upadhyaya bet on the auto sector and is watching out for the rural recovery story as well. This sector seems to be a reasonable one where there could be earnings growth seen, he added.

He was underweight on information technology as there could be margin contractions across the board and earnings de-growth in some cases. One could look for bottom-up opportunities here, he said.

Below is the verbatim transcript of the interview.

Anuj: What next for this market? It has been a bottom-up stock pickers’ delight but at index level also it has done well. Do you get a sense that the market will keep making all-time highs and midcaps will keep outperforming regardless of valuations?

A: We continue to remain positive from a medium-term to long-term perspective on our equities but what is little bit worrying is some of the pockets of the markets are not correcting at all. So there is this zone of overvaluation especially in smallcap and microcap stocks. That is where one needs to be very cautious about. Other than that if one is making a staggered disciplined investments even at these levels in largecap or largecap oriented funds, I think there is every chance of getting healthy returns from the market.

As portfolio managers, it is going to become even more challenging as the market moves up to find something at reasonable valuations.

Surabhi: In the Kotak Select Focus, I believe ITC is a key holding. I know you won’t talk about individual stocks but just your thoughts on the way some of these names have moved after clarity on GST and also how are you looking at playing consumer?

A: Most of the consumer businesses are going to benefit from GST, it simplifies the entire structure and also in many cases, there is going to be reduction in overall tax incidence and cigarette business is one of them where the tax incidence has come off, which means that either it will be passed on or the profit margins can go up slightly. In case it is passed on to the consumers then there could be a significant volume recovery that we will see in the industry.

So from unorganised to organised move, which was happening in many of the other fast moving consumer goods (FMCG) sectors but unfortunately not in cigarette business, can kick-start because of this reduction in additional excise duty or removal of additional excise duty. So we clearly believe that it is going to be a major positive for cigarettes business.

Reema: Have you changed your view on the banking stocks post the recent developments surrounding resolution of the bad assets either you resolve it or you are heading into liquidation at least for the top stressed accounts. Any change in view on the banking sector in the last three months on account of the recent developments?

A: Not much, continue to believe that incrementally it is going to be beneficial for retail focused banks because that is where the credit growth is happening and that is where the NPA issues are also lesser and continue to believe that banks, which are focusing on retail business will continue to gain incremental market share and also will have healthy balance sheet.

As far as Insolvency and Bankruptcy Code (IBC) is concerned, still the entire picture is not clear but at least couple of banks have mentioned that they have adequate provisioning. Let us hope that the entire banking sector has made adequate provisioning. In our opinion that is not the case.

Some of the smaller banks will need to increase their provisioning and also there is a high possibility of larger haircuts. So that keeps worrying us. So between private sector and public sector banks, we continue to prefer private sector banks and within public sector banking space, we have been positive on some of the larger names where capital is not an issue and also they have made adequate provisions for some of these stressed accounts.

Anuj: As a fund manager, I am looking at your portfolio and the likes of Maruti Suzuki, Hero Motocorp, Shree Cements, UltraTech Cement, I know some of these are good companies, they have good earnings growth but they have been so well discovered and you are paying almost top dollar price for some of these. Is that a bit of a worry for your existing portfolio as well? You have to top up, right?

A: We look at what is the growth of a particular company in the foreseeable future which we can project compared to what market is going to offer and what  the valuations are on relative basis. Some of the names that you mentioned have higher expected earnings growth than the market. Valuations, ideally we may have liked them to be at lower levels but since there is a disparity in terms of earnings growth in the entire market, the pockets which have been showing higher earnings growth are generally traded at higher valuations in this kind of a market and that is the case. So to an extent rather than focusing on individual valuations one will have to look at the entire portfolio of valuations. For us that is more important because once you diversify, you need to see what is the portfolio of valuation and what is the portfolio of expected earnings growth. On that basis most of our funds, in fact all are funds are looking at higher earnings growth than the market for financial year 18 and 19 at the portfolio level and we are paying possibly similar valuations or slightly lower valuations compared to the market. So that gives us comfort that we are not overpaying for the portfolio as an aggregate and expected earnings growth is higher than the market.

Surabhi: Where does that leave autos? Do you think that kind of earnings growth is going to come through from the likes of Maruti Suzuki and some of the two-wheeler makers particularly the likes of Bajaj Auto; the numbers haven't added up at least in the last couple of months?

A: Some of the stocks that we have in our portfolio show that there is earnings growth in the near future as well as from medium-term perspective. Earlier we were focusing more on urban consumption. Now we have also added stocks which are based on rural recovery and post GST we have seen price cuts across many sub-segments of automobile industry which should also enable higher demand in the category and the raw material prices have not moved up, so there is going to be no pressure on margins. Overall this seems to be a reasonable sector where there is going to be earnings growth plus on a bottom up basis there is still money to be made.

Reema: In your top holdings it is a bit light on fast moving consumer goods (FMCG) names barring something like ITC. Consumption is expected or FMCG names are expected to get a boost on account of GST, the market share shift from unorganised to organise. Your thoughts on consumption and would you look to add on to it, add some stocks to your top holdings?

A: Apart from ITC we do have a couple of more FMCG names in our portfolio. They may not be in the top ten holdings of our portfolio but we are little worried in terms of the overall valuations that the sector is attracting at this point of time. So while we are positive on the consumption growth, we prefer to play through consumer discretionary especially the autos which are lesser expensive compared to FMCG as a basket and in many cases the volume growth is going to be substantially higher than what we can expect in FMCG sector. So to that extent while we are positive on consumption because of little bit of concerns on valuations, we prefer to have automobiles in our pack rather than FMCG.

Anuj: You are underweight on IT but that is a bit of a consensus call now. Do you get a sense that it may be presenting a nice contra opportunity right now?

A: Not yet. If you look at the quarterly earnings which are expected anytime now, you are definitely going to see margin contraction across the board. In many cases you will also see earnings de-growth, which in our opinion is not in many of the projections yet. So I do not think market has fully recognised the kind of margin contraction that can happen on the IT sector and also from a high growth sector it has become a kind of de-growth or a muted earnings growth sector. So, to that extent while the valuations may seem to have come off given the relative attractiveness of other sectors, it still doesn't make any sense to go overweight on IT. So we would remain underweight and look for some bottom up opportunities there.
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