Expect big bull market in largecaps when earnings hit mid-teens: Harsha Upadhyaya, Kotak AMC

In a chat with ET Now, Harsha Upadhyaya, CIO - Equity, Kotak AMC, says we will have to see one quarter of 15-16% kind of earnings growth in Nifty basket. Once that happens, you will see a lot of rerating in the markets. Edited excerpts


ET Now: Good to see the stability finally return. Of course, the big question mark is, is the worst behind us or do you sense that markets could get a little edgy and volatile in the days to come?

Harsha Upadhyaya: What we need to see is the market has already moved up 25-30% in the last six months. So, to that extent, the market was anyways expecting some bit of a consolidation and correction and we have got a reason for the market to correct now. But I think as investors there is a good opportunity to actually look at the volatility and use it to buy stocks which you like and where did not correct earlier. If those valuations correct because of the volatility, it gives us a good opportunity to build our positions and that is what we are looking at. While geopolitical tension has added to that volatility, it is more of a last six months move which is getting consolidated at this point of time.

ET Now: For you nothing changes or will geopolitical crisis force you to take a step back?

Harsha Upadhyaya: We are not stepping back. It is not that we hold too much cash and hence are very defensive to start with. We do not have too much cash in our funds anyways but whatever cash we have, we will deploy it at appropriate levels once the volatility sets in. Markets will give that opportunity once in a while and we just have to be open for that.

ET Now: So what else could actually scale down sentiment for us because you have got come next week you have got the RBI policy as well and I guess because of the FCNR redemptions as well which are upcoming that could be a sensitive data point sort to speak and then of course a lot globally with the Fed, the US presidential elections etc. what to your mind could lead us to correct more from here?

Harsha Upadhyaya: If you look at the currency volatility, it does not seem like FCNR redemptions will have too much of a negative impact. Currency has been more or less stable at around 66.5 to 67 range. Even when there was geopolitical tension yesterday, the currency did not react too negatively. That shows that the fear that most of the market participants have in terms of a possible impact on our currency due to FCNR redemptions may not really pan out.
Secondly, in terms of interest rates, while it is very difficult to make a prediction in terms of exactly in which policy the interest rates cuts will happen, it is very clear that we are on a downtrend in terms of our interest rates and that scenario is unlikely to change. So from domestic perspective, these two events are unlikely to really rattle investors.

On the US side, if there is global negative news and if the flows turned negative for Indian markets, may be there will be some consolidation or correction. This quarter, close to $4 billion of FII flows came into our markets. While there are no signs of reversal as yet, if there are any reversals, then probably markets will be volatile.

ET Now: What are the chances that for next six months we do nothing, we move in a 4-5% range, we do not go anywhere jump on the same place because the event sequencing is such that both locally and globally everyone would be monitoring the space. First, there is election in Italy, outcome of US Presidential election and come December everyone will start talking about another Fed rate hike?

Harsha Upadhyaya: That is possible because the markets have already moved up quite rapidly in the last six months. We have already seen some correction in the last two months and that could continue for some more months. That gives a lot of investors who have been on the sidelines or who are waiting to increase their equity allocation, a good period of time to actually go and increase without really chasing momentum. That is what we have been advocating for our mutual fund investors that there is no need to chase momentum in this kind of a market and you will get your prices and be disciplined and be staggered in your approach in terms of your investments.

ET Now: So what is the sectoral approach right now? While it is clear that this remains a buy on dips market and the fact that it is not just yesterday, the market is going to give us more opportunities to buy, the big question is what do you buy?

Harsha Upadhyaya: We have not changed our portfolio positioning at all. We continue to remain focused on domestic businesses. We believe IT, pharma and some of the other export businesses will have their own set of issues. We continue to remain underweight on that pocket. Among the domestic businesses we continue to focus on the consumption revival that we are seeing in patches and we believe along with the urban consumption revival you will also see rural participating going forward, we have had a reasonably strong monsoon this time around and hence the sentiments are positive in the rural areas as well.

ET Now: Where is value in this market? Largecap IT, select pharma or cyclical? Today cyclicals may not look cheap because earnings are not there but when earnings catch up in 2018. the 2016 stocks will look cheap?

Harsha Upadhyaya: The way we are constructing our portfolio, we should be somewhere close to or slightly lower than overall market valuation. At the same time, the portfolio earnings growth has to be slightly better than the market as an average. That is the approach that we are following.

If you follow that approach, while IT and pharma may appear better in terms of their historical valuations. they are still not a great in terms of their relative opportunities that we have elsewhere. The growth rates have really come off in IT. There have been profit warnings, there have been guidance cuts.

Similarly in the pharma sector, even today there are some 483 and import alerts. So clearly these two sectors will find it tough to really upbeat overall market earnings growth.

You may have some cushion in terms of the downside protection if you are investing into these sectors but definitely our belief is wherever there is better than market earnings, growth those sectors should be watched out for as these will be the ones which will outperform going forward.

As far as cyclical domestic businesses are concerned, we will have to look at them in two different baskets -- one is the cyclical companies which have great balance sheets and they are just waiting for the revival in terms of the demand and with revival in demand they will be able to actually increase their profitability.

The other set, along with operating leverage may also have financial leverage. Or, they may not have operating leverage at all and they are just distressed. As interest rates come down they will start to see some benefits. That is the risky part of the domestic businesses where we do not have much of position.

ET Now: How critical will be the new policy by the new RBI Governor come next week and these uncertain times you think a rate cut if indeed it comes by and if indeed that is your assumption would please the market somewhat?

Harsha Upadhyaya: Clearly people will look forward to the views from the new RBI Governor it will be his first meeting to really air his opinion about the economy and the way the overall inflation and interest rate trajectory are going to go going forward so to that extent everybody will watch out for not only what happens on the rate side but also in terms of the language that will be there in the press release. We will also keenly watch that but whether there is rate cut or not, already the wholesale lending-borrowing rates have come down.

We have seen 10-year yields cooling off quite a bit. So already to an extent interest rates have cooled off in the last few months. That trend will continue to remain so. It is unlikely that you will see a significant sharp upward movement in interest rates but the question is whether the rate cut is going to happen now or little later so to that extent we are in a very good space I would say.

ET Now: When do you think the real powerful bull market will start in largecap stocks? Till now, we have been drifting here and there but that big bull market is still mot there.

Harsha Upadhyaya: We will have to see one quarter of 15-16% kind of earnings growth in Nifty basket. Once that happens, you will see a lot of rerating in the markets. In the last two quarters, while the earnings growth has started to improve, corporate facing banks have dragged down the overall earnings numbers and hence at the Nifty level or the Sensex level you are not really seeing the earnings growth changing materially.

Over the next couple of quarters, you will start to see some amount of moderation in terms of the drag that has been there from some of these banks and that is when you will start to see overall earnings growth moving up. Once it hits that mid teen number, markets will really move forward.