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Last Updated : Jun 28, 2016 01:08 PM IST | Source: CNBC-TV18

Brexit a chance to buy; like rural theme, cement: Kotak MF

There will be global hiccups but one should use this volatility to build equity allocation from a long-term perspective, says Harsha Upadhyaya, CIO Equity, Kotak Mutual Fund,

The Brexit event will trigger a risk-off trade for a couple of trading sessions but going forward the Indian fundamentals, passage of bills, good monsoon could be triggers for the market is the word coming in from Harsha Upadhyaya, CIO Equity, Kotak Mutual Fund.

There will be global hiccups in between but Indian macros are good and in fact one should use this volatility to build equity allocation from a long-term perspective, says Upadhyaya in an interview to CNBC-TV18.

The focus of the fund is on rural themes, and also on spaces that will benefit from urban improvement, says Upadhyaya. Although valuations in some of the domestic consumption themes like cement and autos are expensive, it makes sense to buy them at a premium because over the next 2-3 years they are bound to give good returns.

Making a case for cement, on which the fund is overweight, he says with supply likely to remain, demand and pricing power will continue for the sector.


On the rural side, they will also focus on two-wheeler and tractor spaces, says Upadhaya.

Other than spaces like cement and autos, the fund would look at stock-specific stories but would avoid metals and telecom, says Upadhyaya.

Below is the verbatim transcript of Harsha Upadhyaya's interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Sonia: The consensus view seems to be that don’t be too ruffled by the Brexit and continue buying into the quality names that you have always wanted to, is that your view as well, you don’t see any major correction on the anvil?

A: This is only going to be a short-term knee-jerk reaction according to us and there could be some kind of a risk-off trade for a couple of trading sessions, which we have witnessed already. Going forward, people will come back and look at the fundamentals. If you look at the Indian fundamentals whether it is earnings growth, the monsoon progress or the passage of some of the key bills in the parliament, all of these point to a very positive direction.

Yes, there will be some global hiccups every now and then but when you look at overall macro-fundamentals of India, they are still intact and they are improving quite a bit at this point of time. Hence, any volatility in the current market phase should be used as an opportunity to build up equity allocation from a medium-term to long-term perspective.

Anuj: The theme, which has clearly played out is domestic consumption. We have seen phenomenal moves in whether it is autos, cement, sugar -- sugar is more of a commodity play -- but so many domestic stocks doing well, but do you think valuation is a bit of a hurdle now for some of these sectors and stocks?

A: Even now, the earnings growth is not very broad-based. So to that extent wherever you see better earnings growth than the market, obviously the valuations will be at a slight premium and that is what has happened in maybe cement and little bit even on automobiles.

However, if you are looking at next two-three years, these are the two sectors, which will illustrate lot of operating leverage and hence probably grow much better than the rest of the industry and hence buying at a slight premium is not a negative in that sense.

Sonia: So within the auto space, you are inclined towards the two-wheeler names that are the best proxy to the domestic consumption story or do you also like some of the global names like Tata Motors etc?

A: We do have some of these names but most focus has been on the urban consumption as well as possible improvement in rural consumption. So what we have added in the last quarter or so would be some of the tractor names and the two-wheeler names, which have higher demand coming from the rural segment and we believe that after two years of bad monsoon, this year it is going to be much better and the early trend seems to suggest that as well.

So tractors and two-wheelers are the new additions in the automobile pack that we have currently.

Anuj: Some of your funds have done well. They have outperformed the market and you have a lot of exposure to cement as well which I believe would have played part in this outperformance. At current levels, do you still back cement stocks both in the largecaps and midcaps, you have exposure in both the sides of the market?

A: Cement has given us a great bit of outperformance compared to respective benchmarks in across our funds. We continue to believe that the story is not a short-term story. It is a story, which is a multi-year story.

As we all know, it is very difficult to predict demand but supply can be determined quite easily. If you look at the supply scenario for cement, there is hardly anything that is coming in terms of new capacities. So, we believe that going forward for the next few years, you are going to see capacity utilisation rates continuously moving up, which also means that the pricing power for the industry will keep going up.

Hence we believe this is an industry, which can outperform over the next two-three years. Hence despite the recent outperformance we continue to remain overweight on the sector.

Sonia: I also noticed that in one of your funds you have recently added Reliance Industries into the portfolio. This stock has been so very flat over the last 12 months and refuses to get above Rs 1,000-1,050 level, what do you see as the triggers for some of these refiners?

A: I won't be able to give stock specific comments but we believe that there are many stocks in the largecap universe today, which have very high level of intrinsic value and we believe that some of those can play out in the medium-term to long-term. We believe that in a market scenario where earnings growth has been very scarce and there are very few plays, which you can bet on, some of the largecap plays where at least the valuation is on your side is definitely worth looking at and that is what we have done in this portfolio as well.

Anuj: Which are the other spaces where valuations are on your side in terms of broader sectors or bigger sectors, where can one still find comfort of valuations?

A: Apart from auto and cement, we are playing stock specific stories across most of the other sectors because we believe that the entire sector may not perform uniformly whether you look at IT whether you look at capital goods, these are some of the sectors where we will have specific stock picks depending on their growth prospects and their valuation but it is not an entire sector call.

So to that extent, the two big sector calls would be auto and cement on the overweight side but we do have couple of sectoral plays on the underweight side where we do not have any position or we have very small position. For example, telecom is a sector where we have zero position. Similarly, metals is another sector where we are completely avoiding. So there are sectors, which are either underweights or overweights but mostly we are playing stock specific plays in other than some of these three-four sectors.

Sonia: I noticed that your Kotak Opportunities Fund has many non-index largecaps that have been great wealth creators in the past but now have stuttered a bit, names like Britannia, Torrent Pharma, UPL, Petronet LNG, would you continue to back names like these?

A: Yes, we continue to believe that some of these names medium-term to long-term plays and there is nothing wrong. Yes, to an extent the valuations were rich in some of the names that you have mentioned and accordingly, the stocks have corrected in the immediate past but when you look at the medium-term to long-term perspective, they still can offer a lot of wealth creation opportunities.

We do keep monitoring our portfolio and alter the weights, it maybe there in the portfolio for a long time but we do have different weights at different points of time. So to that extent when the valuation go up, we do cut our exposure to some of these stocks and then re-enter when the volatility presents next buying opportunity and that is what we will continue to do.

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First Published on Jun 28, 2016 09:16 am
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