Overweight on domestic cyclicals rather than IT or pharma: Harsha Upadhyaya, Kotak AMC

In a chat with ET Now, Harsha Upadhyaya, CIO – Equities, Kotak AMC, says focusing a little bit on two wheelers, little bit on some other auto names and also on agrochemicals. Edited excerpts

ET Now: Let us start with the primary market first. It gives a bit of confidence to retail investors that the investments that they are making in a bunch of these IPOs and they are quality names that have come out are doing well. Is it actually a good sign and would you expect this exuberance to continue because the pipeline of IPO companies as well seems to be very strong for the time being?

Harsha Upadhyaya: As long as the primary market is vibrant, that helps the secondary market as well. So that sentiment rub off clearly helps the secondary market but as far as your question is concerned about whether the IPOs will make money for retail investors, I think clearly one has to evaluate each of those IPOs separately and see whether there is value in it, whether there is growth in it and take investment calls based on that. As far as small finance banks are concerned, we have seen the first listing today. That is in a very interesting space and we have been an anchor investor in the stock as well. So we will continue to keep focussing on the growth that is likely to happen in that space which is going to be much higher than the overall financial space in our opinion.

ET Now: How do you respond to scepticism regarding the market that they address and the serviceability of those loans, even though they may be small-ticket loans, the serviceability of those loans impacting the NPA levels and the recoveries for business like this?

Harsha Upadhyaya: Clearly until now they have managed their asset quality quite commendably. Going forward it remains to be seen with the kind of growth rates that we are expecting in the space whether the same kind of credit quality will be maintained. So two things to watch out for would be – one, the credit quality and secondly, how will they bill the liability franchise because until now they have been focussing mainly on lending money but not getting money into the banks in terms of deposits, etc. So I think what will be critical and what will differentiate small finance banks maybe three or five years down the line would be how strong they are on the credit quality side and how they build their liability franchise. These will be the critical factors.

ET Now: Banks are active today, this morning. There is, of course, interest coming in ICICI Bank which is a top gainer. PSU banks over the last two days have been rallying. There are some murmurs in the market about how the RBI may ease norms for provisioning of 20 accounts or so for the banks have exposure to. Sum in summary, do you think that in this upmove from the lows in February, we have not seen a big contribution coming from banks just yet? Do you think that this leg, the next leg that is likely to come in, can take the market beyond 8000? Would it be largely driven by banks?

Harsha Upadhyaya: It is very difficult to comment on short-term movements. But as a space, banking has to contribute if the market has to remain high because if you look at any index in the market, banking sector accounts for a very dominant position, upwards of 25 per cent. So to that extent, a healthy banking sector performance is always required for markets to do well and our opinion is there was excessive pessimism on the space maybe at the beginning of the calendar year and now there seems to be some bouncing back and some better sentiment around that sector. So we will watch out for the earnings numbers and the commentary that will come out at the end of the financial year which will start pretty soon and then take a more fundamental call in terms of whether to really increase the weight in the banking sector. As of now, we are slightly underweight in terms of our portfolio stance.

ET Now: The other aspect is this whole monsoon theme and it is such a vast space available. My question to you is what is your best bet when it comes to playing the advantage that comes into the markets because of monsoon because it could well be the two-wheelers, it could be certain four wheelers and it could well be those white good companies that a lot of people are betting on. I heard comments about ice-cream companies as well and even they are going bonkers right now. So how would you play this theme?

Harsha Upadhyaya: Currently, we have some positions in rural plays but those essentially straddle urban as well as rural consumption. Our take on the whole thing is even if for some reasons God forbid monsoons are not so good, then there is urban consumption which is going to actually help the companies in terms of demand and that should be okay. Currently, we are focussing little bit on two wheelers, little bit on some other auto names and also on agrochemicals.

ET Now: In your opportunities fund, Infosys is the top holding and I know you cannot talk stocks but this is a disclosed position, actually you have an allocation of 7 per cent there. From the IT space, do you think that that is one theme that will continue to support the market going forward given the numbers reported by Infy and TCS, Wipro maybe a bit of laggard but that has been for a while?

Harsha Upadhyaya: At Kotak Mutual Fund, we believe that the portfolio has to remain tilted towards domestic cyclicals and those cyclicals which have least amount of financial leverage. So to that extent, our overweight stance is on domestic cyclicals rather than IT or pharma which are more export oriented. Coming to IT in particular, we believe that the sector is going to be driven by more stock specific developments and growth rates rather than the entire sector performing uniformly. We have already seen some of the geographies and vertical continue to be very sluggish. So companies which are in good geographies, good verticals, have slightly better earnings compared to the overall segment and that is where money can be made.

In our opinion, given the fact that rupee has started to appreciate a bit that at least in the short term which is coming mainly because of dollar weakness and there is going to be wage cost increase which is going to happen in the next quarter which is a seasonal thing. The margins could come under little bit of pressure. So one needs to watch out whether the companies are in a position to actually maintain their margins going forward or not. Only in those companies where the growth is reasonable and there is expectation about maintaining those profitability margins despite increase in cost, that is where we need to focus on and that is what we have done in our portfolios as well.