In the domestic segment there is growth in most sectors when compared with export-oriented business, says Harsha Upadhyaya, CIO (Equity), Kotak Mutual Fund. He tells Bharadwaj Sharma that in domestic segment profit margins are reasonable since most of the industries have already made investments in the previous cycle and should now gain from these. Excerpts:
What has been your investment strategy so far this year? Which sectors and stocks make it to your investment list?
We have been preferring domestic business over export oriented business. In the domestic business segment we have seen growth in all segments. There is reasonable degree of profit margins since most of the industries have already made investments in the previous cycle and they should be able to derive more benefits for making further profits without making further investments. When we look at export oriented industry such as IT or Pharma then each of these industries have their own set of headwinds. So we have been avoiding those sectors.
Mutual funds have shown strong preferences for domestic cyclical sectors such as financials, industrial that accounted for almost 60% of mutual funds ownership value in the BSE 500 companies. How do you see this trend going forward?
We always advise investors to opt for diversified funds because that is where we will be able to reduce risks. If you invest in a thematic or a sectoral fund then both the entry and exit has to be timed well which in many cases investors are not able to do properly. So in sectoral or thematic funds, one has to choose a period where you think things are turning positive and start believing in that particular theme and investing into it.
In October, the government announced a major road building programme along with the planned expenditure and capex targets for the infrastructure sector. What is your outlook on the infrastructure space?
Infrastructure space as a whole is going to pick up. Already there have been a lot of announcements. Once the execution starts we will see a lot more companies participating. The only difference will be just because it is infrastructure; it does not mean infrastructure companies which had bad balance sheets during the previous cycle will turn out to be great investments. Any sector which caters to infrastructure eg cement and capital goods will definitely have a positive outlook. These are the sectors where the balance sheet is also very healthy and they are able to grow the business without investing any further.
After the government’s announcement to infuse Rs 2.11 lakh crore into struggling PSBs over the next two years, stock prices of PSBs have surged immensely. Is this trend likely to continue?
Before the recapitalization plan was announced there was too much pessimism because not only there was NPA issue but capital funds were also inadequate for PSBs. Earlier the government did announce recapitalization plan, but this plan is comprehensive covering the entire public sector banking space. I do not think one should be extremely pessimist about PSU banks.
The BSE IPO index has yielded a return of nearly 45% since the beginning of the year. Do you see the IPO boom likely to continue in the next fiscal?
Just because it is an IPO it does not mean that it is a cheap valuation. Depending on each of the issue attractiveness one has to take a call. Unfortunately most of the investors think that all IPOs are similar and end up losing money. It does not mean that every IPO has to come at an attractive valuation. To that extent investors will have to be cautious.
Do you see improvement in terms of profitability in telecom sector?
At least for a time being it is good for the consumer but not from an investor’s point of view. The competition will remain intense for considerable amount of time. Even historically this industry has seen lower return on capital when compared to many other industries. Given all these conditions we would remain cautious on telecom.
According to you where is the next push for the market is going to come from? Do you think the market rally has more steam left?
The government has come up with various long-term reforms such as demonetization, bank recapitalization plan, GST, removal of petroleum subsidy etc. Given all this I think our economy is fairly positioned. The reforms done in the domestic context will start yielding results gradually.