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Last Updated : Jul 20, 2016 11:52 AM IST | Source: CNBC-TV18

See 14-17% earnings growth in FY17; bet on cement cos: Kotak MF

An accelerating earnings momentum, which could translate into profit growth of about 14-17 percent in fiscal year 2017, means fund managers are betting on the domestic sector to provide them portfolio gains.


An accelerating earnings momentum, which could translate into profit growth of about 14-17 percent in fiscal year 2017, means fund managers are betting on the domestic sector to provide them portfolio gains.

Speaking to CNBC-TV18, Harsha Upadhyaya, CIO - Equity, Kotak Asset Management Company, said the fund house is overall bullish on sectors such as cement, capital goods and road construction.

He is, however, underweight IT, saying that the sector faces strong headwinds on the margin front as well as due to developments like Brexit.

The AMC's flagship Kotak 50 fund is underweight on financials (27.2 percent weightage versus 30.2 in the Nifty benchmark) but Upadhyaya said NBFCs dealing with retail consumer business will have good credit growth, going forward. 

Below is the verbatim transcript of Harsha Upadhyaya’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: The market doesn’t seem to be perturbed by the initial lack lustre earnings picture that we got form the IT and the FMCG space? How have you read into the cues so far?

A: Most of the results that have come in the IT sector have been as per our expectations. We didn’t expect great set of numbers from IT sector. We are clearly seeing headwinds in terms of business growth. The margin pressures still continue. The Brexit concerns still remain while the IT budget allocations may be there. We believe that the spends could get back ended because of these concerns. Brexit will be an issue for an IT sector in India. There is a reasonable degree of exposure of UK and other European countries from our IT services side.

Overall while the headwinds are very strong we are not seeing earnings momentum in this sector. It is likely to be an underperformer compared to the market. We had this view even sometime back and that is the reason why we are running underweight on this sector. We continue to remain that way in our portfolios going forward as well.

As far as FMCG is concerned, we haven’t seen too many results day, but we have been very stocks specific in our approach in FMCG sector. We don’t have too many stocks in the sector in our portfolio. We believe that those are the stocks which have higher earnings growth momentum and hence they will outperform.

Latha: In your Kotak Opportunities Fund as well as in your Select Focus Fund you have Infosys as one of your top holdings. Will you be trimming these holdings or have you already trimmed them?

A: If you look at a Kotak Select Focus we are running at an underweight position in Infosys. We are clearly okay with the current positioning, so we are unlikely to change there. If you look at the overall sectoral exposure for IT, again in both the funds we are running under weight stances and that is unlikely to change. If we get incremental flows we are unlikely to look at investing in IT at this point of time. So, to that extent they will continue to become even more underweight in our portfolios.

Sonia: You also have UltraTech Cement in one of your funds. It was a good show in this quarter, but the only worry is that valuations are stretched and now raw materials prices like petroleum coke etc have crept up. So, do you think that this quarter’s performance could be sustainable for the rest of the fiscal?

A: We are not playing cement sector from a quarter or a half year or a one year perspective. It is a multiyear call that we have taken. The thesis is very clear that incremental demand is likely out straight incremental capacity additions in the industry. Those companies which have higher operating leverage will continue to benefit from this uptake. We haven’t seen any negative in terms of huge raw materials price pressure. Petroleum coke prices have increased a little bit but some of the companies are already having inventory at older levels which are much below the current level of cost.

Also even if you were to assume that the future buying will happen at current levels it is not going to make a huge impact as there is pricing power in the industry. Cement companies have been able to raise prices as the demand is picking up.
So, overall we continue to remain very positive on the cement sector. It is in fact one of the highest overweight’s in our portfolios for quite some time now.

Latha: What will you incrementally look at as positive? Would it be real estate, will it be road construction companies?

A: Currently, we are not changing our portfolio we will wait for the earning season to pass by and then depending on how the earnings momentum has panned out then we will review our portfolio. Clearly, real estate has not been our focused area for any investments in our portfolios. I do not think that that will change immediately.

As far as road construction is concerned there is lot of momentum in the road construction industry but we are preferring to play that through cement stocks and select engineering and capital goods companies.

Sonia: What is your view overall on the earnings season? I mean not what we have seen so far but what the expectations is from FY17?

A: FY17 we continue to believe that it will be somewhere in the middle of 14 to 17 percent kind of earnings growth. Having said that it is very difficult to put a number on an quarterly earnings growth at least for this quarter as the provisions in the PSU banking space as well as some of the corporate facing private sector banks is still something which you cannot put a finger on. So, to that extent the earnings growth rate maybe little difficult to predict at this point in time.

However, having said that if you leave aside this basket, rest of the market has already being growing double digits which was the case even in September, December as well as in March in fact. The momentum has increased quite a well in the March quarter. We continue to believe that is going to be the case even in June quarter.

Clearly the domestic manufacturing companies whether it is autos, cement or any of the other companies clearly those are the companies which will show a better set of numbers. From a portfolio perspective, I think the domestic companies will definitely have higher earnings growth compared to some of the global or export oriented stocks and also some of the stocks in the banking space.

Latha: Are you getting a sense that further gains outsized gains may come from the midcap space?

A: We continue to believe that the valuations on the midcap side are slightly overstretched so to that extent you have to be really stock specific in terms of picking midcap stocks. Also your investment horizon has to be little longer than what usually would be. We continue to prefer a largecaps over midcaps. Having said that if the mandate is for midcaps and the money comes in to our midcap funds we do invest in midcap funds without holding too much cash in the portfolio. However, that will again be stock specific investment ideas that we will look at.

Sonia: What is your view on the market now? What is your base case target on the Nifty by the end of the year and what would you attribute this fatigue that we are seeing in the market now to, is it the lack of any follow on triggers or do you think that the market is still a bit worried about global volatility?

A: Markets have been quite resilient, despite many negatives on the global front as well as some of the issues in the domestic front market has remained quite resilient that is still continuing. I won’t say that market has been weak off late. However, having said that I think the first leg of re-rating in the Indian markets has already happened on the back of expectation on the continuation of earnings momentum that we saw in the previous quarter as well as good monsoons.

On top of that there is some bit of hope that some of the reforms could get passed, some of the bills could get passed in the current parliament session. All these have already been priced into the market in terms of expectations. I would say that in the very immediate term we would see some kind of a consolidation in the markets. Then depending on way the earnings momentum is going and also the progress of the monsoon we will see next leg of move from the markets.

Latha: Wanted to ask you about the non bank companies, non bank finance companies? Stocks like Bajaj Finance which are in your top 10 have already given you outsized earnings. Will this sector continue to give you outsized earnings Bajaj Finance or maybe other smaller Bajaj Finances in the making?

A: Clearly, the banking companies as well as non banking financial companies which have plays in consumers are doing much better. So, the retail focus has definitely helped them. In a scenario where you are going to see more of consumer discretionary demand coming from, payouts from the 7th pay commission as well as increased spend from the rural area etc overall the consumer discretionary demand is likely to remain quite strong.

Hence, those which are facing retail consumer business will continue to have better credit growth compared to the corporate side of the business. To that extent incrementally market share gains will happen to this segment of companies. Having said I think one has to be really looking at the valuations as well in terms of incrementally investments.

At this point of time we are evaluating both growth prospects as well as valuation and then taking a call on some of these stocks which have really outperformed already over the last few years.



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First Published on Jul 20, 2016 10:18 am
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