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FY18 earnings should be much better: Harsha Upadhyaya
Thu, Dec 22, 2016
Source : Jeni Shukla, Citrus Interactive

Mr. Harsha Upadhyaya, heads the equity management team at Kotak AMC, and personally manages funds such as Kotak Select Focus, Kotak Opportunities and Kotak Tax Saver. He has nearly two decades of rich experience spread over Equity Research and Fund Management. His prior stints have been with companies such as DSP BlackRock, UTI Asset Management, Reliance Group and SG Asia Securities. Harsha is a Bachelor of Engineering (Mechanical) from National Institute of Technology, Suratkal, a Post Graduate in Management (Finance) from Indian Institute of Management, Lucknow and Chartered Financial Analyst from the CFA Institute. On the personal front, he has a passion for sports and is a university level hockey player. He likes travelling and enjoys exploring new destinations.

 

He shares his views on his funds and the equity market with Citrus Interactive.

 

In the last 1 year Kotak Opportunities has given 11.4% return and Kotak Select Focus has given 11% against Nifty 500’s return of 5.4% (as on 30th November, 2016). What has contributed to the performance?

The outperformance has come from both sector and stock selection. The sector allocations have more or less panned out the way we expected them to. Most of the overweight sectors have done pretty well and underweight sectors have not done so well. For instance, we were overweight on Auto, Cement and Oil & Gas. All the three sectors have been outperformers in the last 12 months. We were underweight on Telecom, Metals, IT and Pharma. Among these, except of metals, all other sectors have not done so well. Some of the stocks picked up within sectors like NBFC, Oil and Gas have done much better.

 

Not only in terms of the last 1 year performance but the funds have also done well in the last 3 year period. Have you maintained the sector over weights since then or has there been a churning in the portfolios?

Since the time I took over in August 2012, broadly we have been overweight on Auto but within Auto we may have changed our positioning. For example, earlier we were mostly into urban consumption but in the last 6-8 months we have also picked up 2 wheelers and tractors owing to the rural focus. There were also periods when we were heavy on auto ancillaries. Currently, we are not holding auto ancillaries because of lot of noise like Brexit issue, weak global growth outlook etc.

We were overweight on IT in 2012 and 2013 when the industry outlook was much better. In the last 2-2.5 years we have been underweight on this sector.

 

What is the positioning of Kotak Select Focus and Kotak Opportunities Fund? What is the difference in the management style?

In Kotak Select Focus, we follow a top-down approach and select few sectors, which are likely to outperform. We take concentrated positions in those sectors. We can go up to 50% in mid and small cap stocks in this fund. By nature, the fund is more aggressive than Kotak Opportunities.

In Kotak Opportunities, we follow a combination of top-down and bottom-up approach. So there could be stocks coming from industries where we don’t have a positive view on the sector but yet the stock is part of the portfolio because we like it from a bottom up perspective. For example, we have stocks in Construction, Media, Healthcare services which are part of the portfolio. In this fund we can go up to 40% in mid and small cap stocks.

In both the funds we see the overall growth and valuation characteristics of large caps and mid-caps within our selected basket and then take a call whether to give higher weight to mid-caps or large caps. It is not something that we try to focus on while building the portfolio. The market cap weight is more of a consequence of how we build the portfolio. 5 to 6 months before the elections we were almost 35% in mid-caps but today the mid-cap exposure is in early 20s in percentage.

 

Which sectors are you positive on currently?

Currently we are bullish on Auto, Cement, Oil and Gas. Financials is broadly a neutral sector at this point but within that, we are more inclined towards private retail players.

 

In the last month after demonetization many sectors in the portfolio (like Auto, Cement) have taken a hit. Do you think this is a temporary phenomenon or are we likely to see some portfolio restructuring?

Even if you look at the last one month performance we are not too away from the benchmark or the broad category average. Initially there was a fear that some of these consumption sectors will take a hit and the fear is there still. We believe this is temporary in nature. I don’t think we can draw inferences from what has happened in the first few weeks of demonetization. The cash situation will definitely improve as we go along. Some of these consumption areas are not such that if demand gets postponed it won’t come back. For example, a food item if not consumed today you may not want to buy twice of that next month. However, in case of a two-wheeler or cement once the demand revives, the consumption will be back. It is more of deferment. We also believe that the government will unleash initiatives to revive consumption – both urban and rural – more so in rural. We also expect the government to take up infrastructure projects simply to create more jobs for unskilled labour – which have got impacted by the demonetization move. There have been some hints coming from the Finance Minister as to the likelihood of revision of tax rates for individual tax payers. That should also revive urban consumption.

Hence, we are not looking at changing the portfolio complexion. We were anyway building some position in Oil and Gas, which we have continued which is a neutral sector from demonetization perspective. We were also not exposed to NBFCs focused on loan against property or loan against small businesses or real estate players. That insulated the portfolio.

 

The portfolios are well diversified in terms of the number of stocks. Is that a deliberate strategy?

It has to make sense from an overall philosophy standpoint. We look for growth at reasonable price. In some sectors you find many stocks that fit into that criteria so we obviously include those. In other cases, it is to balance the overall portfolio to reduce risk. In Kotak Select Focus, there is concentration in the sector so we do not want to take further concentration on individual stocks. We try to diversify within that sector. In Kotak Opportunities it is more to do with the bottom-up approach.

 

US Federal Reserve has hiked the interest rate by 25 basis points. Also the new outlook is 3 hikes next year. What will be the impact?

The 25 basis point hike was largely expected and hence factored in. The 3 interest rate hikes expected is slightly more hawkish than what the market expected. Having said that, if you go by what they said at around the same time last year they had said there is likelihood of 4 interest rate hikes but ended up hiking only once. The market is also taking into consideration that the actual number of hikes may be lesser. The currency is so strong even before the hikes have started. The equity markets will be better off with 1 or 2 rate hikes rather than 3.

 

What is your outlook on the markets and earnings?

In FY17 itself we were seeing reasonable amount of improvement. In the first half it was 8.5 – 9% on Nifty. But if you exclude 4 banks (SBI, Bank of Baroda, ICICI Bank and Axis Bank) which have been on the corporate lending side where there has been higher NPA provisioning etc. the earnings growth was in the mid-teens (16.5% in the first quarter). Our belief was second half will be better than that. Last year’s base was really bad for some of the cyclical sectors. We thought that momentum will continue and we will end up having 12-13% kind of earning for the full year on Nifty. We really don’t have a hang on that today. We need to see how the demonetization impact pans out. In many cases the November numbers have not shown much of a fluctuation because either the demand was preponed or it was too early to feel the pinch. FY18 should be much better as we are coming out of a cyclical downturn. The adjustments that have to happen will happen over the next few months.

 

What is your view on the FII pullout from Indian markets? Is this a cause of concern?

There is little more focus on FIIs than it should be. At least in the last 2 to 2.5 years, domestic money has been significantly consistent and that is likely to remain assuming the money remains in the banking system. Definitely, the money deposited is not going to real estate or gold. Within financial assets, equity is going to get a major share. So a substantial amount of money will flow into the equity markets in the next few months. That should more than compensate the likely sluggishness in FIIs. We are seeing large inflows in mutual funds. We also have EPFO and private PF trusts investing. In order to generate 8% plus return they will need exposure to equity markets. Private PF trusts have been investing in active funds. The SIP inflows are likely to increase. Overall, domestic flows look very healthy.

 

 

 
 
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