Strong liquidity, macros driving fairly-priced market: Kotak MF

Both global and domestic liquidity has been strong alongwith macro fundamentals. The current market is fairly priced, says Harsha Upadhyaya of Kotak Mutual Fund. Strengthening micro-fundamentals is an added plus. With good monsoon, focus is now more on domestic oriented businesses than exports, says Upadhyaya. Kotak MF, in last 3-4 months, has been increasing its exposure to rural plays. Upadhyaya is bullish on sectors like auto ancillaries, private retail banks and cement where earnings are expected to be high. He expects demand uptick in cement to improve utilization.Kotak continues to remain underweight on IT and metals. While Brexit noise is expected to continue around IT, fundamental turnaround in global commodities is needed for the metal sector.Below is the verbatim transcript of Harsha Upadhyaya’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: It has been a strong market. Do you think it is still good to buy at current levels even from portfolio investors' point of view or do you think you need to take a bit of a backseat right now?A: We are advising investors to make staggered and disciplined investments over next few weeks. While the valuations have moved up over the last four months, they are still in fair value plus kind of a territory, it is not expensive according to us. At the same time we have seen earnings season pass by and there have not been so many disappointments.Overall the earnings growth for Nifty basket has been about 9.5-10 percent year on year (YoY) which is not bad. Also if you exclude some of the public sector undertaking (PSU) banks which drag down the earnings growth that could be more like 13 or 14 percent YoY.So, clearly the momentum that was built during the last few quarters in terms of earnings growth is still continuing. The topline growth has been positive. As I mentioned earnings growth has also been quite okay. So, given all this, we do not see a big correction in the market. Yes, there is no hurry to chase the market at this point of time but staggered and disciplined investments will definitely be worthwhile to look at.Latha: Now that the result season has ended at the end of it what are you tweaking higher where are you increasing your exposures?A: We are continuing to have same kind of positioning in our portfolios. Currently we are more positive on domestic oriented businesses as compared to export or global oriented businesses and that positioning continues. We continue to remain underweight on IT and pharma and also some of the auto ancillaries, which have export business.On the other side auto, cement, some of the select capital goods are the names where we have a positive view on and also we continue to like retail in the private sector banks. So, these are some of the domestic businesses where we believe earnings is going to be much higher than the overall market and hence they should deliver better stock performance.Sonia: One segment or one sector that you guys don't have too much of a weightage on is the metal space. I don't see it in any of your funds but some of these stocks have been great trading opportunities, names like Tata Steel, Hindalco all are sitting at new highs. Is this a space that investors should also start to look at now or would you be cautious?A: We continue to remain cautious on this basket. Our view has been until and unless there is a fundamental turnaround in overall global commodity market, it is very difficult for some of these companies to sustain their profitability and hence they will keep giving you tactical opportunities once in a while but from a portfolio perspective how much of that will be meaningful is a question. Hence we continue to remain underweight on metals and we believe the earnings in the metal sector will continue to remain volatile and there are many other areas, which will probably offer a better and steady earnings growth and that is what we are focussing on.Anuj: The other thing that stands out in your portfolio is some of your stocks have done well in both these spaces, large exposure to cement and non-banking financial companies (NBFCs). But in both the pockets do you think the valuations are a bit of a hurdle of do you think the growth will take care of the near-term valuations?A: We continue to remain confident on the cement segment. We believe that the demand increase that we are seeing is sustainable and hence we are going to see capacity utilisations continuously moving up as we are unlikely to see any big capacity additions and hence fundamentally the sector will continue to remain very strong in terms of pricing and profitability. So, we continue to own those stocks.As far as NBFC segment is concerned while we continue to remain positive -- as you rightly mentioned the valuations -- we also believe that has got stretched in some cases. In some of those cases we have booked some profits. We are not negative on the businesses per se but in some cases the valuations have made us book some profits and pare our positions in the portfolio.Latha: Are you going to increase your exposure to any of the rural stocks and if yes, then what kind of stocks do you play?A: We have already done that. For the last 3-4 months we have increased our exposure to rural place in the hope of better monsoon, which it has turned out to be and hence those are the stocks which will continue to attract our attention. Mainly some of the two wheelers, some of the building material stocks, these are some of the areas where we believe the revival in rural economy will definitely help some of these companies to post better demand. Also hence they have quite a bit of excess capacity at this point of time, their operating leverage will enable them to post better profitability. Hence we believe they are good picks at this point of time.Latha: Are you tuning out of IT?A: IT we already had underweight position across our portfolios. We continue to remain circumspect in terms of the earnings growth that is going to come by in the IT sector. We are unlikely to increase our positions and incremental flows will also probably not going to IT sector and hence the underweight positions, which is there in the sector will continue to become even more underweight going forward.Latha: You think 9,100 is around the corner?A: Let us not look at the targets but clearly liquidity has been quite strong. We have seen about USD 1 billion money of foreign institutional investors (FII) money coming into the market in the current month. This is something over the USD 1.7 billion that came in the month of July. Similarly from the domestic perspective we continue to see inflows into most of our funds.So, both domestic as well as global liquidity continues to remain strong. Valuations have just moved up above the fair value, maybe I would call it fair value plus kind of a zone. So, it is not very expensive at this point of time and the macro fundamentals remain strong and the micro fundamentals are improving. So, given all this I believe markets can move higher but at the same time there is no reason to chase the momentum.Anuj: What is your call on the recent developments and we have the first casualty of Brexit as well with Infosys losing that Royal Bank of Scotland (RBS) contract, your thoughts on that?A: Clearly we have been underweight on the IT sector and even the stock that you mentioned Infosys is an underweight in most of our portfolios. So, to the extent while we hold some of these stocks we are conscious in terms of the kind of momentum that is faltering in the IT space. We continue to believe that the noise around Brexit will continue to increase as we proceed forward and also there are various other company specific, sector specific issues here. Hence we are not looking to add up to our IT position as I mentioned earlier. So, we are happy with what we have and we will just continue to monitor those stocks.Sonia: I wanted to ask you whether you have increased your allocation in the auto sector because you have been sitting on a lot of two-wheeler stocks like Hero MotoCorp which have done well but lately have you increased your allocation there?A: Maybe marginally it would have gone up because earlier we were not focussing on the rural plays within auto segment and we had some of the auto ancillaries in our portfolio. Around the time when Brexit vote happened we have cut most of the positions in our auto ancillaries we believe that there could be some negative sentiments around those businesses. We have moved those positions into rural plays. Overall there could be slightly marginal higher weightage in auto as compared to few months ago in our portfolios.Latha: What do you do, do you add on to the Axis and the other stocks that you have or now would you start looking at value and even the PSU?A: We continue to believe that the incremental market share gains will be for those banks, which are well run, which are focussing on retail credit growth and hence some of the private sector banks that are there in our portfolio will continue to gain incremental market share.If you look at corporate credit growth, it has been completely absent. So, in such a scenario it will be very difficult for public sector banks to grow their business. On the other side, they have issues to content with in terms of non-performing assets (NPAs), provisioning and credit costs. So, we continue to remain focussed on retail private sector banks which in our opinion will deliver better returns.Anuj: Are you taking any cash calls in this market? Are you looking at raising cash and what percent of your portfolio is cash right now and would you look to deploy it or raise it?A: At Kotak Mutual Fund we do not take very high cash falls. All our funds are limited with 7.5 percent maximum cash calls at any point of time. Currently on an average 3.5-4 percent is what we hold as cash across our portfolios and we continue to look for opportunities on volatile days where we like those stocks and those stocks have corrected. Maybe that gives us an opportunity to go ahead and invest. We are not looking to build our cash positions beyond this.