The June quarter earnings season has not been a big disappointment since expectations were anyway low, Harsha Upadhyaya, Chief Investment Officer, Kotak Mutual Fund tells CNBC-TV18. He says the silver lining to the quarterly earnings has been the improvement in operating margins for many industries because of the fall in commodity prices.Upadhyaya says topline growth was sluggish and will remain so for another quarter. He is hopeful of it picking up from the December quarter onwards.Tepid global growth and the devaluation of the Chinese yuan are among the key risks to market sentiment, feels Upadhyaya. Below is the transcript of the interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: The currency is clearly rattled by the Chinese devaluation. In the Indian stock market, at the moment only metal stocks are reacting with about 1-1.5 percent cut. Should we worry more?
A: Yes, already the global growth is very sluggish as we all know and in this situation if there is a competing currency that is going to gain, then there is an issue. So, to that extent, one needs to still focus on domestic plays rather than export plays. We are currently positioned that way in our portfolios and that helps us in this scenario.
Sonia: Can you just elaborate on that point further because we have seen a lot of sectors like tyres, metals, etc. get impacted because of the dumping that we have seen of Chinese product. Now, with the yuan devaluation, there is a bigger worry on that front. Do you completely avoid some of these spaces or do you use it as an opportunity to perhaps increase allocation hoping that in due course of time things will get better?
A: At this point of time, we do not have any metal exposure. That has been the situation for almost last two years or so. So, to that extent the recent changes in global economy does not affect us. But as far as tyre stocks are concerned, we have a couple of them in our portfolios. Yes, the chances of Chinese dumping increases at this point of time, so, we need to re-look at those issues and evaluate once again in terms of what is the value proposition that we get at current valuations.
Latha: What is your take on the results season? Has it disappointed you? Have earnings come in lower than expected? What is the comment sectorally as well?
A: To begin with the expectations were quite muted at the beginning of this quarterly results season. As per that more or less, the results have been in line so I will not say that it is a great quarter. It is a very subdued quarter in terms of earnings growth momentum. There is hardly any earnings growth on a year-on-year (Y-o-Y) basis which was the expectation as well. At the top-line, there has been a negative growth that is coming mainly because of the fall in commodity prices and also the pressure that is coming from negative wholesale price index (WPI).
The silver lining in the whole earnings season has been the increase in earnings before interest, taxes, depreciation and amortization (EBITDA) margins across sectors that has come through because of increase in gross margins mainly aided by lower commodity prices. As long as there some volume uptick, this increase in EBITDA margins can continue, but the worry is whether the revenue growth uptick will come back to Indian corporates.Our belief is maybe, one more quarter of sluggish top-line growth, but from December quarter onwards aided by festival season demand as well as some of the low base effect of last year, we should see reasonable bounce back in revenue as well as profitability.
Latha: Would you dump the tyre stocks?
A: No, I don’t think we will take any kneejerk reaction on this. We will evaluate the whole issue once again and then take a view. As it is, we do not have any exposure to metal stocks as I mentioned earlier so to that extent our portfolio is quite insulated from what is happening in China. It is only a marginal weight that we have in some of the tyre stocks that we need to take a re-look at.
Latha: Given the kind of results that we have got, terrible Bharat Heavy Electricals Ltd (BHEL) number, a good Cummins number; how are you incrementally shifting your sectoral positions? Would you up capital goods, would you up public sector undertaking (PSU) banks? What is your next incremental upping sectorally?
A: There are two themes which we are evaluating at this point of time and most of our positions are towards those two investment themes. One is the likely increase in consumption both in terms of auto sales as well as consumer discretionary goods. We believe that the 7th Pay Commission which is going to table its report very soon is going to be a big boost for consumer discretionary demand.
We believe that anyway between USD 10 billion and USD 15 billion of incremental consumption can happen over a period of time because of 7th Pay Commission. So that is one space where we are currently positioned as well as we will look for new opportunities in the same sector. That includes auto, consumer durables and little bit of urban fast moving consumer goods (FMCG). Even banks, some of the retail banks could play a role in terms of housing loans, auto loans etc because the ability of the people who get higher increments will increase in terms of their ability to take home loans and auto loans etc.
The other theme that we are currently looking at is after a lull of may be about four to five months in the last financial year our government has started to spend once again in this financial year. So, we have already seen about four months of uptick in terms of a public spend. That should benefit all the allied sectors including cement, capital goods etc. So, these are some of the areas where we would look to evaluate new investment opportunities.
Sonia: The entire PSU banking lot has seen a trading pop on the upside but how are you as a long-term stock watcher entering into this space. Is this a good buy for the longer term you think?
A: We have not increased our position in PSU banks for quite some time now so we do have couple of larger PSU banks in our portfolio. We continue with that positioning. Our belief is while there have been some moves by the government in terms of appointing a senior management at PSU banks as well as recapitalisation etc are going to take place.We will watch the space closely but at this point of time we are not willing to increase our PSU bank holding. As we clearly see that the biggest issue, which is the issue of asset quality still continues to be a main concern.
Latha: Let us talk the positive news about mutual funds. You all have been receiving a torrential amount of money what is the extra assets under management (AUM) at Kotak itself and how much of an AUM gain do you see in the industry or your funds by say the year end or in 12 months?
A: For the last several months we have been seeing about Rs 5,000-6,000 crore of net inflows into equity funds in the industry. July month was little subdued may be at around Rs 3,000-3,500 crore.Overall the trend continues to be very positive and if you compare equities with all other asset classes let us say gold, real estate or any other asset class, clearly equity stands out both in terms of valuation and the prospect of making more money with a zero tax advantage as well for a long-term investor. So, clearly given the fact that equities are underpenetrated in our market the current set of flows can continue into industries is what is our belief at this point of time.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
