Consumption, construction, cement good themes for FY18, says Upadhyaya of Kotak MF

However, he advises to tread with caution and not chase momentum. As a fund house, they would remain focused on few investment themes.

Consumption is a theme they like. Construction is another space which could see traction going forward once state government’s start giving out orders, thinks Upadhyaya. The house is also positive on affordable housing space and more so post the policy changes, he adds.

Cement too is a sector to look forward to in next 12 months’ time, he adds.

The fund would look to invest into equity via a blend of midcaps and largecaps, says Upadhyaya.

In the same interview, Mitessh Thakkar of miteshthacker.com also shared his views on stock specific ideas like Equitas, Capital First, Rallis India, Indiabulls Real Estate, PTC India and Reliance Industries.

Below is the transcript of their interview

Anuj: Great year for fund managers. The index itself did so well. The midcap index was up 35 percent, the smallcap index was up 41 percent. And in that, of course, we saw how net asset values (NAV) of some of the funds including your funds did. Do you get a sense that FY18 would be as good?

Upadhyaya: It was a fantastic year for equity investors, I would say. We started the year with a lot of worries at the backdrop. There were worries on slowdown in Chinese growth, there was worry on emerging market currency fluctuations and that was the backdrop when we started the year. Through the year, we had many local and global negative events such as Brexit referendum, US elections results, US Fed policy, and our own demonetisation.

However, market continuously scaled some of these worries and we have seen fantastic returns at the index as well as even outside the index.

The funds have probably done much better by picking stocks which have done much better than the broader indices. Our belief is that we are just beginning to see earnings improvement in the country. If that were to come by, we should not be expecting a great year like FY17 once again in FY18. If it happens, it is a bonus. But still, there is a reasonable amount of money that can be made in equities even at current levels.

Latha: Let us pick some sectors. We are going to get into an earnings season now. Do you think April can deliver gains like March or do you think earnings, especially the early ones like IT companies, can jack the market's happiness?

Upadhyaya: We are not so positive on the exporters. There are policy headwinds that are expected. On top of that anyway, the business growth was sluggish across the board for exporters. On top of that, if you see the rupee movement, our rupee has actually appreciated about 4.5 percent in the first quarter of Calendar year which means that there is going to be pressure on topline as well as profitability for exporters on the whole. So, the exporters basket will definitely have a sluggish or muted set of numbers. But overall market will still deliver double digit earnings growth. That is what we have been hoping for. And if that comes by, markets will not be too nervous.

Anuj: It was a great year for investors as you pointed out and it was a great year for domestic investors who put in money. They managed buy stocks at 7,600 Nifty, 8,200 Nifty, 8,600 Nifty. Do you get a sense that this domestic institutional investor (DII) money, this deluge of funds that we have is here to stay in stock markets now?

Upadhyaya: Our opinion is it should continue and we also believe that it will only grow from here on. We have been seeing additional folios getting created on the systematic investment plan (SIP) side. SIP, for the industry as a whole is about Rs 4,000 crore a month as of now and there are about 4 lakh additional folios which are getting created on a monthly basis which means that this money is not only going to sustain, but can also increase as we move forward. If that were to happen, on the liquidity side at least, we should not have any worries.

Having said that, I should also point out, maybe until two months back, we were all worrying about what will be foreign institutional investor (FII) flows, whether domestic liquidity alone can move the market, etc. But if you look at FY17 numbers, the kind of money that they have put in in March, the foreign investors have more or less bought as much as domestic mutual funds.

Both domestic mutual funds as well as FIIs today have put in more than Rs 50,000 crore to work in the financial year 2016-2017 which is a huge number. So, both domestic as well as foreign liquidity seems to be abundant at this point of time. So, we do not see any concerns there.

Latha: Ahead of the earnings season, what would you stock up on?

Upadhyaya: In fact, we have been advising clients not to chase momentum. So, that is going to be the approach even at our fund management side. We are unlikely to chase any of the companies in terms of price levels. We are focusing on few investment themes and we will remain focused on those themes. For example, we are looking at operating leverage to play out in the domestic manufacturing side that we are going to focus on.

We also believe that the consumption revival that is expected to happen is going to gain pace with rural also supporting going forward. So, that is a space which we like. Then, we have already seen some pace in execution picking up on the construction side. We also believe that the order visibility will start to improve. With many of the state elections behind us there is enough reason for some of these governments to actually start giving out orders which means any construction related activity should see good momentum going forward. So, that is another space that we like.

And overall, if you are focusing on companies which are growing slightly better than market, that is where the money can be made.

Anuj: What could trip this rally? It has been a one-way rally and almost everyone believes that we are nearing a goldilocks scenario right now. Sometimes that can be a bit dangerous, so what do you thing is a major risk to this market?

Upadhyaya: Any unknown event can come and hit us. That apart, if liquidity is too strong and if we are forced to invest in the market even before the fundamentals actually start to turn around, then we will have a situation where market valuations or prices will be ahead of fundamentals which is happening at the margin already. So, that is a bit of a worry. So if earnings come through in terms of expectations or better than expectations then there is no worry for the market. But in case, earnings seasons disappoints and still the money keeps coming into markets then at some point of time, you will have valuation worries increasing.

Latha: One policy of the government has not yet played out, but sounds very promising is this affordable housing theme: big subventions announced and rules actually came out on March 11. So, not enough time now to play. Is that a theme and if it is, how will you play it?

Upadhyaya: Clearly, we are very positive on affordable housing policy of the government. In fact, even before the policy, there was enough demand on the affordable housing side from the consumers or the customers but the problem was most of the builders were not focusing on affordable segment because the better profitability was probably thereon the luxury segment. Now with the policy changes, there will be many builders, real estate companies who will start focusing on the affordable housing side.

So, there is a push both from supply side as well as from demand side. This is going to be a significant change that we will see during this financial year where a strong demand for housing, especially affordable housing will start to kick in. So, all the companies which are related to this will be beneficiaries. For example the housing loan companies will benefit, we will also have companies in sectors such as cement and home building material which also have significant growth because of this trend. So, overall this is definitely a good space to watch out going forward.

Latha: Three rapid fire questions. Debt, equity or balanced?

Upadhyaya: I would say equity.

Latha: Largecaps or midcaps this year?

Upadhyaya: A blend of largecaps and midcaps.

Latha: Which is the best sector over the next 12 months?

Upadhyaya: I believe cement can be one of the best sectors.

Anuj: Mitesh, I wanted your thoughts on how to approach Nifty and Bank Nifty at these elevated levels.

Thakkar: There are two things. One that the Nifty, on the hourly closing basis, the level to watch is around 9,180 and 9,200 of course was the level which we were watching in the March expiry when the call open interest was the highest and 9,218 was the highest intraday level being tested. So, around 9,200 you might say is some kind of a level which traders should look at. If we start getting past 9,200 and given the fact that the Bank Nifty and the Reliance stock is at all-time highs, that is certainly possible, then next week could be a story where we could see more momentum.

My initial view was that we might take some more days to consolidate and if that was to happen, the market still remains a long-bias market and we will buy on dips, but beyond 9,200 there could be a sudden burst to about levels of 9,350-9,400 on the upside.

So, trading should be level specific. I would watch 9,200-9,220 very closely and beyond that would definitely warrant a long trade with a 30-40 point kind of stop loss for a 150 point kind of a gain.

Latha: In the midcap space, Capital First was one of those outperforming stocks. Equitas Holdings did not do too badly either. Weekly gainers, these are big ones with 10 percent gains. Anything in the non-banking finance company (NBFC) space?

Thakkar: One, the entire space looks interesting. Time and again, you are getting momentum and breakout buys over here which do very well. We are seeing the sector enjoying some kind of good follow-up once the breakout takes place. Between the two stocks for the time being, I think Equitas looks like it has completed a correction and has given some kind of a reversal. So now can be a good buy with a stop loss at about levels of Rs 160 and the first target on the upside should be close to about Rs 190 and beyond that the highest ever levels of around Rs 205-208 could be revisited.

Capital First, the good part over here is that the stock has made a highest ever weekly closing. That is some kind of a swing breakout. So, keeping a stop loss at Rs 745, I would be a buyer here for targets of around Rs 860-875 and this is slightly a positional kind of a view.

Anuj: A lot of midcaps in your buy list.

Thakkar: In fact, all the three stocks which I recommend are from the midcap side. Rallis India was a stock which was buzzing, a stock which managed to break past a consolidation of about Rs 250 to about Rs 230 which the stock was doing for about seven weeks. It closed the week at about Rs 259, so I would be a buyer here with a stop loss at Rs 244 and Rs 290-295 is the first target.

Indiabulls Real Estate in the entire midcap real estate segment was also very good. It managed to have a big breakout above that Rs 83-84 zone on the weekly closing basis. So keep a stop loss at Rs 82.50 and Rs 95 should be the first target.

I have been bullish on PTC India. That is a buy as well. Keep the stop loss at Rs 89 for a first target of Rs 100.

Anuj: I also wanted your thoughts on Reliance because that becomes important from market's point of view. It made a fresh nine-year high.

Thakkar: I have been saying that the aggressive targets on the street are over Rs 1,600-1,650 and in the next few quarters, they will all be positively surprised. That view still remains. We will still look at Rs 1,800-2,000 kind of target in the next few months. But even on a short-term basis, what happened was that a very strong rally took place after the stock corrected to its 20-day average. Now it becomes a fresh buy. It has managed its highest ever closing as you rightly said, so keep a stop loss below Rs 1,300 and Rs 1,375-1,380 could be the first port of call.

Disclaimer: Reliance Industries that  owns Network 18 Media & moneycontrol.com