Bearish on FMCG, IT, bullish on banking, telecom: Kotak MF

Moneycontrol Bureau

The fast moving consumer goods segment is likely to perform below market expectations going forward, feels Harsha Upadhyay, head of equities, Kotak Mutual Fund. In an interview with CNBC-TV18, Upadhyay said IT was the other sector his fund house was bearish on. Quarterly numbers from the Big 4 of the IT industry has been a mixed bag. Infosys and Wipro disappointed with weak numbers, while those from TCS and HCL Tech managed to meet analyst estimates. Upadhyay says weak business sentiment globally could weigh on order flows for Indian IT companies. He is expecting a cyclical uptick in the auto sector. On Friday, Maruti and Hero Honda reported numbers ahead of analyst estimates. Hero reported a decline in earnings, but the drop was not as high as analysts were expecting. Most of the quarterly numbers announced so far has been in line or slightly better than market expectations. But Upadhyay cautions that the remainder of the earnings season could be volatile. Upadhyay is bullish on banking, where he sees robust earnings growth, and also on telecom, where he sees signs of consolidation. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Let us start with your views on the consumer space because Hindustan Unilever (HUL) reports today. What are your expectations given current valuations of how HUL and these stocks might perform? A: FMCG has been a sector where we are underweight and this stance we have been continuing for last couple of quarters. Our take on the sector is the valuations are not very inexpensive, they are quite rich. At the same time we are seeing some amount of slackness in volume growth and some pressure on margins. That is the reason we believe that this sector could underperform going forward. Hence, we hold underweight stance. Q: You are overweight on the auto space, Maruti Suzuki was the big gainer last week, Hero MotoCorp numbers were better than expected as well. If you had to put incremental money into this sector which pocket would you choose? A: We are not going to increase further weight in automobile sector the reason being most of our portfolios are overweight on auto. We are playing rate sensitive theme there. We believe that the volume growth in auto space has been quite sluggish for last 18-24 months, whether you take two or four wheelers. We believe that is unlikely to continue going forward. So, there is going to be some cyclical uptick and along with that if interest rates are cut then that will provide further fillip to the sector. Incrementally we are not looking at increasing weight in this sector. Q: How are you receiving news flow from New Delhi now because again there seems to be turbulence in parliament, functioning is getting stalled. Over the next few months do you think the market should expect some positive triggers in terms of announcements or should it keep its expectations low? A: It is always wise to keep expectations low whenever it comes to political decisions. We believe that yes there are couples of sectors, which are quite linked to government policies and their decisions. Those are the sectors where there could be some impact if decisions are not taken. For example oil and gas sector where most of our portfolios have been either neutral or overweight. It is one sector, which is prone to political risk, but we believe structurally that sector is looking good today. We have seen crude prices correcting. There has been some adjustment in terms of petroleum prices domestically. That is one pocket where we believe that things are structurally changing for the positive. Rest of the sectors we continue to be underweight. Q: What is your expectation from the Reserve Bank of India (RBI) policy this Friday and is there any outside chance in your mind of a 50 bps cut? A: Well there is more space today than few months back. Crude has corrected quite a bit, gold has corrected so to that extent the pressure on current account deficit (CAD) is going to reduce going forward. Also inflation numbers are looking much better today. So, to that extent RBI has more space, but our expectation is of a 25 bps cut. If it is more than 25 bps or if the language is clearly dovish, I think market will take it very positively. _PAGEBREAK_ Q: What have you made of this fairly vicious correction in large cap IT names over the last fortnight or so? Do you think it is deserved or is there an ownership issue where people are beginning to scale down their overweight positions? A: What happened in the first quarter of calendar year is somewhat reversing this quarter. While in our portfolios we maintained underweight position on IT. That is mainly because of the challenging business outlook and also issues in terms of their profitability. We were hurt little in the first quarter of this calendar year, but that seems to be correcting today. We continue to hold the underweight position. We believe that things are going to be patchy for this sector. Yes there could be stock specific opportunities depending on the valuation, depending on the business outlook. However, as a sector this is likely to continue to underperform. Q: The big theme last week in the broader market was that deal that got fructified in the aviation space. All of those stocks, at least two of them rallied about 20 percent last week. Would you put any money in that space? A: No we have largely been out of this sector because of the balance sheet concerns and the stress that has been there in the industry. After this some things have changed in some of the companies. We will re-look at some of these names, but I don't think it is going to be one of the sectors where our entire focus is going to be. Q: We are halfway through this earning season. Do you expect us to end on as poor note as the Q3 earning season ended? A: Usually the second half of the earning season is what is going to be more volatile. Let us keep our fingers crossed and see how it goes. Until now there have been more positive surprises than negative ones. So, to that extent this earning season has begun well and carried on well. The last two weeks will be critical. Nevertheless for the next year we believe there is going to be double digit earnings growth and hopefully that will come through. Q: Does the market give too much credence to the first forecast that the IMD makes of monsoon and how would you react to what has come through so far? A: No, I don't think anybody is looking that for today. These weather forecasts keep changing very frequently. So, I don't think anybody is focusing on those forecasts yet. Q: What are your views on the market? Do you expect this pullback to continue or do you expect the markets to get into a consolidation phase now? A: It is very difficult to predict short-term movements in the market. We are working with an opinion that probably markets will move inline with earnings growth over the next one year. Yes every now and then depending on liquidity and sentiments, I think markets can make sharp moves. However, over a period of one year we don't expect these sharp moves are sustainable whether it is upwards or downwards.
Overall we can expect double digit returns from the market more or less in line with earnings growth. _PAGEBREAK_ Q: How are you approaching the private banks now after the recent rally, do you think there is more valuation upside or in the last two weeks the 15 percent kind of upside more or less factors in the good news? A: I agree that space has really shot up in the last couple of weeks in expectations of a rate cut. Also the results have been quite good in that sector. The earnings growth has been very strong. Nonperforming assets issue has not been there largely in that particular pocket. We continue to be overweight on the sector, but as we move forward if that segment of the market continues to move up then may be there is case for taking some profits off the table. Q: You are overweight on the telecom space as well. Bharti Airtel will be announcing its numbers this week. What is the expectation there and overall in the sector as well? A: Overall for the sector we are quite positive. We believe that we are seeing first signs of benefits of consolidation. There seems to be pricing power, which has returned to the industry. The competition intensity has lessened considerably.  However, it is difficult to take a call on Bharti because it also has Africa operations where things are not as rosy as what we are seeing for Indian operations. Never the less India telecom operations for everyone seem to be turning around. We are quite positive on that.