Even as the market has seen a record high in March, domestic institutional investors (DIIs) have been net sellers. However, Kotak Mutual Fund has continued to remain almost fully invested.
"We have been getting consistent inflows over the last few weeks and that continues…it is a constructive market," Harsha Upadhyaya, CIO-Equity, Kotak Mutual Fund told CNBC-TV18 in an interview.
The fund house believes that earnings growth trajectory is improving and that was visible in December quarter results. It expects seeing a similar trend in March as well.
Upadhyaya prefers private sector financial companies in the banking space as issues regarding bad loans are not as big as PSU banks. The focus is on those with a stronghold on the retail side, he said. Against corporate credit growth, retail growth has been good, he said.
Though there is a policy push to resolve non-performing assets (NPAs), nothing has materialised yet, he told the channel, adding that one must wait till there is further clarity on the issue.
Kotak MF is overweight on oil and gas as it has seen steady demand growth and expects profitability to continue ahead. Many stocks are fairly valued as well, Upadhyaya said.
Meanwhile, he is also upbeat on the auto sector with a bet on rural segment to improve. "Growth rate in rural segment was not high and there was some impact of demonetisation…we can see strong rural demand ahead and will continue to be invested in this sector," Upadhyaya told the channel.
However, the fund house is not very positive about information technology (IT) and pharmaceuticals space. There is sluggish growth across the entire space, with IT service providers having lost their pricing power. Moreover, the rupee appreciation and adverse policy moves by the US administration are negatives for the sector.
Below is the transcript of the interview.
Anuj: You and your tribe were buying when the market was at 7,900-8,000 and we saw huge foreign institutional investors (FIIs) selling. Why are you selling of late? Is it just because now we have seen the big FIIs come back and so your selling does not impact prices. What is the reason for the recent domestic institutional investors (DIIs) selling that we have seen?
A: Yes, we have seen little bit of aggregate selling by DIIs but one should also know that that includes insurance as well as mutual funds. We do not know who all have been selling of late.
As far as Kotak Mutual Fund is concerned, we have been getting consistent flows over the last few weeks and that continues; we have been investors at various levels in the market including post demonetisation when we were very aggressive in terms of buying stocks. So we continue to remain fully invested. We have not changed our view on the market. We continue to believe that it is a constructive market.
Sonia: You are neutral on the banking space at least that is what I get to know from your top holdings. The finance minister spoke about the possibility of quicker resolution to non-performing asset (NPA). Would you ride on that hope or do you think there are better opportunities outside banking?
A: We continue to prefer private sector financials where there are no NPA issues of the same magnitude as that are there in public sector banking units. While there has been a lot of policy push in terms of resolving NPA issues in the public sector banking space, nothing material has happened until now. Therefore, we would wait for more clarity in terms of actual resolution of some of these cases before we take a higher weightage in public sector banks. Until then we continue to believe that the incremental growth that is happening in terms of credit is all coming from retail sector where private sector banks are very strong compared to public sector banks and we believe incremental market share gains will be there for private sector banks.
As far as public sector banks are concerned, we do not see NPA issues expanding at this point of time but at the same time we are not even seeing any resolution. So we are holding on to our positions and not looking to change that view as of now.
Anuj: You are overweight on oil and gas and autos and you are in stocks which have done well, the likes of Reliance Industries, Hindustan Petroleum Corporation (HPCL), Maruti Suzuki. What is next for these pockets? Do you think these stocks have multiyear bull market ahead of them?
A: Continue to remain overweight on oil and gas - that is a space which is seeing steady demand growth, pricing is in favour of businesses and profitability should continue and these are not richly valued stocks; most of the stocks are fairly valued even at this point of time. Therefore continue to remain positive on oil and gas sector.
As far as auto is concerned, our belief is that the rural dependent auto stocks have not participated in the rally in the last two quarters or so and the growth rate in the rural segment were not high and there was some hiccup because of demonetisation which is behind us at this point of time.
However, our belief is that going forward we could see strong demand come from rural segment, continue to remain invested in those stocks. We also think that two-wheelers will start to show good demand growth going forward.
Sonia: I notice that you have no IT stocks in your top 10 holdings. We have discussed this space repeatedly in the past but are you worried about more bills against H1-B visa, the issues that are piling up in the IT space that could restrict upside in the near term?
A: The entire space is struggling for growth. Look at any vertical whether it's manufacturing, energy, natural resources, telecom, communication, the growth has been sluggish for IT services companies. The pricing power has gone from the IT service providers. We have not seen pricing improving at all. However, on top of that in the last couple of weeks we have seen rupee appreciating which puts pressure on pricing. At the same time we are also hearing noise from US in terms of possible action in terms of adverse policy which is a significant negative in our opinion. So given all this at this point of time we are looking at more of domestic focused manufacturing companies rather than export lead IT services.
Anuj: Is that the same argument for pharmaceutical as well because I do not see too many pharma stocks in your portfolio but some of these stocks have corrected quite a bit?
A: Pharma stocks have corrected but for us the question has been when will the upside come from these levels while we believe that maybe the downside is already there in the stock prices, the negative news is already discounted but we are of the view that until and unless there is clarity in terms of Food and Drug Administration (FDA) approvals, we are unlikely to see big upside in the entire pharma sector. So you need to be more stock specific. And wherever we see some of these approvals coming through, we will build our position which we have done in the past as well but to take a bet beforehand could be risky because you cannot put a timeline in terms of when these approvals are going to come through and until and unless there are approvals, their businesses hamper. So that is where we are on the pharma sector.
Sonia: I have to ask you about Yes Bank because you did mention that you like private sector banks and I notice IndusInd Bank is one of your top picks but we have seen phenomenal gains from Yes Bank and now such a successful qualified institutional placement (QIP). You think the case is becoming stronger to buy into Yes Bank or is it expensive now?
A: Without being stock specific, we continue to remain positive on private sector financials especially those which are very strong on the retail side. As I mentioned vis-à-vis corporate credit growth, retail credit growth has been very strong. It is growing in high teens as an industry and those private sector financials which are focusing on retail network and retail asset base will be the ones to gain from this. Therefore, we continue to remain positive on the entire space.
Anuj: As a fund manager your priority is to look at bottom up stock ideas and generate alpha but do you get a sense that this market is running a bit ahead of itself. Is this market at risk of seeing correction especially if the earnings do not match up or you think the market is fine even at aggregate level?
A: The aggregate levels earnings growth and the valuations are little misleading, in the sense that if you look at Q3 earnings for Nifty, the Nifty basket grew at about 10.2 percent year-on-year but it is only half truth. If you dissect that - if you remove Bharti Airtel, Tata Motors and Axis Bank, the rest of 47 companies as a basket grew in excess of 20 percent in terms of earnings and also whatever growth you are seeing in the basket of Sensex or Nifty, is much lower than the aggregate growth that you are seeing outside the index. Therefore, to that extent as a portfolio manager if you are able to pick stocks where there is significantly higher growth than the market and if they are available at reasonable valuation then there is money to be made still, but if you keep looking at headline valuations yes, market will look on the higher side, it would look fair value plus kind of a zone in terms of overall valuations. However, continue to believe that earnings growth trajectory has improved and March quarter should give confirmation of that what we saw in December and thereon the earnings growth scenario will become more broad based and that is when you will see valuations as a whole looking more reasonable but until then the headline valuations could remain little stressed.
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