Harsha Upadhyaya – Sr. Vice President and Head of Equities at Kotak Mutual Fund expects corporate earnings to register double digit growth in FY 2013-14.
2012 has been a good year for Indian equity markets. Is the good run likely to sustain in 2013 as well?
The year 2013 hasn’t begun in the same way. But it is understandable that after returning strong returns during 2012, the market is correcting now. There is no need to panic or be pessimistic on equities. With overall expectations being low, there is room for valuations to improve as the year progresses with gradual improvement in economic fundamentals. We expect corporate earnings to register double digit growth during the year. The market is likely to move in line with earnings growth, and provide reasonable upside during the year.
What factors (both domestic and overseas) are likely to affect the markets? What are the key risks according to you?
Globally, all eyes will be on the expected spending cuts in US and its implications on global growth. On the domestic front, any slip up in fiscal consolidation plan will be a key risk to market.
Which developments are you keenly looking forward to?
Over the next quarter, we would be keenly watching how the corporate earnings season progresses. Even the monetary stance during the next few months will have its impact on the equity market. Lastly, with many disinvestment offers and offers from promoters lined up for next 3-4 months, one needs to see whether equity inflows will be sufficient to keep markets strong.
Can you please describe Kotak MF’s investment philosophy and process?
Our investment style is predominantly ‘growth at reasonable price’. We follow a blend of top-down and bottom-up approach for portfolio construction in order to derive value from macro trends and security specific opportunities. From a top-down perspective, we adopt a thematic approach, whereby we identify themes that will likely outperform or underperform the market over a rolling 12-month period. Once the themes are identified we drill them down to sectors or sub-sectors that will benefit or fail to benefit from these themes. Our expectation of the direction of macro variables as well as the way market is positioned, plays an important role in identifying the right themes. Sector exposures also rely on change in future return on capital employed (ROCE), return on equity(ROE), free-cash, earnings momentum and are passed through relative or absolute valuation filters.Our bottom-up approach adopts the Business, Management, Valuation (BMV) approach to stock picking.
Can you take us through the risk management process at Kotak MF?
Managing risk is as important as identifying investment opportunities. Risk is multi-dimensional. It is not like you can look at one particular number or a set of parameters to manage risk. At the fund house level, we have several risk limits such as limits on sector weights, stock exposure levels, portfolio concentration, cash levels etc. Liquidity in a particular stock is also an additional risk criterion. If we are taking a position which is very illiquid, then we would rather limit it only to a certain manageable portion of the portfolio. Apart from that, frequent review of the portfolio and revisiting the assumptions made at the time of investment also help in mitigating risk.
How do you narrow down on investment ideas for your funds? How often do you reshuffle them?
We generally stick to the businesses that we understand well and those that have long term compounding characteristics. The quality of the management, company’s cash flows and its sustainability are very important aspects. A business that continuously needs capital to grow is not the type of business which will return a lot of value to its shareholders. In a nutshell, we like proven and scalable business models run by competent management that are capital efficient and generate steady cash flows. At the end of the day, however, the company should be available at the right valuation. So we always make the final investment decision with valuation as filter.
We don’t target a particular portfolio turnover. It is always a derived number based on the decisions we take. We typically make an investment with long term view in mind. We look at churning that investment only when market price moves well ahead of fundamentals or our investment hypothesis turns out to be wrong. We do not really focus on catching every short term move, once we are positive on a stock from a long term perspective. Therefore, to that extent, portfolio turnover tends to be low.
Retail investors are continuing to book profits from mutual funds at every rally. What would be your advice to them?
In Indian equity history, there have been very few instances of a 5 year period where one has got marginal or negative returns. We are currently in one of those rare periods. If you analyse the past, subsequent periods have always provided very strong equity returns. Most investors have either moved out of or have avoided equities in the recent past due to underperformance of equities vis-à-vis other asset classes such as fixed income, gold and real estate, resulting in a skewed asset allocation. Currently equity valuations are well below long term averages; also, the economic and corporate fundamentals are expected to improve gradually. Therefore, this may not be the time to be underweight on equity. Over the next 3-5 years equities will definitely outperform most other asset classes.
In which sectors do you see an opportunity now?
We have been focusing on interest rate sensitive sectors in the last few months, and we continue to like them as monetary easing cycle is expected to begin soon. We are overweight on banking and financials. In banking sector, while one pocket gives comfort in terms of quality of book, the other lends comfort in terms of valuations. So we are maintaining exposure to a mix of private banks and PSU banks. We are also positive on automobile sector. Midcap cement stocks and media sector are some other pockets that we like. Possibility of mergers and acquisitions in specific cases could also be good investment case in 2013, as many sectors have seen regulatory changes, growing the need for capital and also interest from multinational companies. We believe that in some of these cases, the market value could move up and reduce the gap with strategic value.
What is your Sensex target for 2013?
We expect corporate earnings to grow at low double digits during FY14. The valuations which are currently below long term averages may also inch up a little higher during the year, as we see some improvement in economic and macro fundamentals. Given all this, we believe it is likely that Indian equity returns will be in double digits during the year.
