Talking Point | #KotakMahindraAMC's Harsha Upadhyaya shares outlook on India's IT & auto sales ahead of the earnings, in a conversation with BQ Prime's Sajeet Manghat. #BQLive
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00:00 Hello and welcome to BQ Prime.
00:01 You're watching Talking Point.
00:03 And my guest today is Harsha Upadhyay,
00:05 who is a Chief Investment Officer, Equity,
00:07 at Kutumbh Mahindra AMC.
00:11 And he's also the president of the AMC there.
00:14 Harsha, thank you very much for joining us on BQ Prime.
00:17 To begin with, we've seen a good buildup of crude happening
00:23 over there in the last quarter.
00:26 As a fund manager, how do you position the portfolio
00:30 because of the kind of impact that
00:32 could have on many of the sectors
00:35 and on crude derivative dependent sectors?
00:40 In KLP, one of the reasons for a strong move in the market
00:44 was strong liquidity that we saw across the board,
00:49 across segments over the last five to six months.
00:52 Along with that, there was also improvement
00:55 that we saw in terms of the earnings trajectory,
00:57 and which was expected to continue as we go forward.
01:01 Now with crude moving up to $90, $95 per barrel,
01:05 clearly it's a red flag.
01:07 There are many pockets of our economy
01:10 which will get impacted adversely
01:12 if crude remains at higher levels.
01:14 So to that extent, yes, while we still
01:17 believe that the earnings growth numbers are achievable,
01:20 but definitely it's a red flag that we need to cut.
01:24 May not be in the September quarter,
01:26 but definitely in the December quarter,
01:27 there will be some lagging factor
01:29 for higher raw material or higher energy
01:32 prices on the profitability of Indian cooperates in R&D.
01:36 What kind of earnings growth that you're looking in Q2,
01:40 and which sectors do you think will be outperforming?
01:46 Most domestic sectors are likely to be
01:49 more resilient than export-oriented or global
01:51 facing sectors in R&D.
01:53 We do believe that for the year, financially at 24 and 25,
01:57 we should be looking at somewhere in the mid-teens
02:00 in terms of earnings growth number for the large cap
02:02 basket.
02:03 However, the expectations for the mid and small caps
02:06 have been even higher in the region of 25% to 30%.
02:09 I think that's where one needs to be a little cautious.
02:12 Not only market has seen a very, very strong move
02:16 in mid and small caps as compared to large gaps,
02:18 but also if the red flag that I mentioned,
02:23 increase in crude oil prices and hence
02:25 how it's moving back profitability,
02:27 et cetera, is going to play out.
02:28 Then probably you're going to see more disappointments
02:32 in the mid and small cap basket as compared to large cap
02:34 basket.
02:35 So that's where probably there is a bit of a risk in terms
02:38 of market volatility.
02:41 However, on the large cap side, even if you
02:42 assume that there is going to be a little bit of pressure
02:45 because of the crude oil prices or otherwise,
02:48 given the valuations are more or less
02:49 in the fair range of valuations, we
02:52 do not think that there will be too much of volatility.
02:56 Harsha, as a fund house, you've seen a pool of capital
02:59 coming in for mid cap and small cap companies
03:02 in the last three to four, five months,
03:04 where we've seen a lot of flows coming
03:06 into some of the funds within the mutual fund
03:10 and directly to these companies.
03:12 How do you see these flows?
03:14 Do you see some signs of ebbing of flows?
03:18 Because we've seen some correction also
03:19 in these companies.
03:22 And what is your view on the liquidity
03:26 that many of these small and mid cap companies today have?
03:29 In the past, there has been instances
03:31 that we know investors used to get stuck
03:34 because of lack of liquidity.
03:36 Do you think that these companies are now fairly liquid
03:38 and so you have easy flow in and flow out of capital coming,
03:42 going into these companies?
03:45 So clearly, the liquidity remains an issue for small caps.
03:49 May not be for all of the mid caps,
03:50 but definitely some of the mid caps, at least,
03:52 as compared to large caps.
03:55 As a fund house, we have been advising investors
03:57 to remain cautious on the mid cap basket
03:59 because of the relatively richer valuations in that space.
04:02 And also the fact that if you look at last one year
04:05 performance or last three year performance,
04:07 especially since we are looking at a three year
04:09 performance coming from the bottom of the COVID rally,
04:13 you would definitely see very, very strong numbers.
04:15 And one should not extrapolate those numbers
04:17 to continue going forward.
04:19 That's where we are advising caution.
04:20 And we are also telling investors
04:22 not to look at the short term performance,
04:24 not to come into even small caps from a short term perspective.
04:29 If one is looking at this basket,
04:30 one should be looking at how Indian economy is going
04:33 to go over the next few years and come for maybe five
04:36 years or beyond.
04:37 And also in a staggered approach,
04:39 rather than putting lumps of money at these valuations.
04:42 That's what we have been advising.
04:44 But clearly, liquidity works both ways.
04:47 Sometimes lack of liquidity takes stock prices
04:51 to higher levels than what is warranted.
04:53 And similarly, if that liquidity reverses,
04:55 there is a risk of stocks falling more than warranted.
04:58 So one should be aware of this risk,
05:00 especially in case of illiquid or lower liquidity baskets.
05:06 As a fund house, when you select some of these mid caps
05:09 and small caps, have you been--
05:11 have you done an exercise of what
05:13 is the kind of capex these companies are putting in?
05:16 When is this going to come through?
05:18 And is the valuation which has been given to them
05:23 because of the kind of liquidity coming in,
05:25 is it factoring in three, four years of earnings growth
05:30 and sustained earnings growth?
05:33 See, clearly, it depends on different baskets
05:37 or different sectors of stocks that we evaluate.
05:40 I don't think it's a homogeneous trend in terms
05:43 of either valuations or earnings growth.
05:46 Clearly, we look at not only the business of the company.
05:50 We also look at the management in terms
05:53 of whether they're aligned to minority shareholders, what
05:56 has been the track record in the past,
05:57 what has been the bandwidth in terms
05:59 of managing the business or the cycle or the [INAUDIBLE]
06:03 et cetera.
06:04 And finally, in all cases, valuation is a feature.
06:07 So nothing of this changes.
06:10 It has to go with the markets.
06:12 Definitely, when the markets are at reasonably higher
06:15 valuations, one has to be even more cautious in terms
06:18 of looking at some of these businesses
06:20 or from a valuation angle, how to evaluate, et cetera.
06:24 So that's an ongoing process.
06:26 And clearly, we also keep liquidity
06:28 that I mentioned in our mind when
06:30 we are building portfolios, especially
06:32 when you look at our mid-gap or small-gap strategy.
06:34 We have been always following very, very diversified
06:37 portfolio strategy just to mitigate
06:39 any of the unexpected liquidity changes.
06:43 So to that extent, we generally keep a portfolio
06:46 of anywhere between 70 to 80 stocks
06:48 and very well-diversified in terms of the base as well.
06:52 So that's how we try to manage the overall portfolio
06:54 risk and the market risk.
06:58 I was looking at your top holdings.
07:00 It seems more tilted towards financial services, banks
07:04 and financial services.
07:06 Do you think the run-up in banks and financial services
07:09 is going to continue, the kind of earnings
07:11 they have been coming out with?
07:12 Will that continue for another few quarters?
07:16 So clearly, banking and financial services
07:19 have not performed as much as what
07:21 we expected for the last six months or so.
07:23 They have been moving sideways.
07:24 There have been many other pockets of the economy
07:27 which have done even better.
07:29 So to that extent, given the current valuations,
07:31 if they're any ways of inexpensive,
07:34 we do believe that the recent underperformance
07:37 of this basket gives us some kind of a pusher
07:40 in case of an unexpected market volatility.
07:43 And also, while there could be some pressure on net interest
07:46 margins as we go forward, there is clearly
07:49 a very, very strong trend in terms of the lending growth.
07:52 That should lead to a better overall profitability.
07:55 And when you look at this basket,
07:57 this is likely to be one of the baskets where
07:59 you will see a reasonably strong set of numbers
08:02 in terms of earnings.
08:04 But there are absolutely no issues on the asset quality.
08:06 So overall, I think it's a good space to be in.
08:09 Yes, it has not gone as much as we
08:11 wanted it to be in the last six months or so.
08:13 But that also gives a kind of a valuation cushion
08:16 and one looking at this sector.
08:19 OK.
08:21 From the other point of view, there
08:23 is IT which seems to be underweight.
08:27 I mean, there's only Infosys in the top 10, if I'm not wrong.
08:32 What's your view on IT and the IT earnings
08:35 are expected in the next week?
08:40 How do you see IT's performance in Q2?
08:43 Is it going to be subdued given the fact, the kind of guidance
08:47 we have seen from many of the companies?
08:49 And when do you see the turnaround happening in IT?
08:54 Clearly, in terms of the earnings trajectory,
08:56 we don't see anything exciting as compared to the market
08:58 expectations of the IT sector.
09:01 It may take maybe another couple of quarters
09:03 for the entire industries to come back in terms
09:05 of better business momentum.
09:08 So at this point of time, clearly, our focus
09:11 has remained more towards domestic businesses,
09:13 as we discussed earlier, where we believe that growth
09:16 is resilient and also overall, earnings growth
09:19 is much better as compared to many
09:22 of the export-oriented or global-facing sectors,
09:25 including IT.
09:26 So to that extent, on a relative basis,
09:28 we continue to be more focused on domestic businesses
09:32 as compared to IT or some of the other export-oriented
09:35 businesses.
09:36 Harsha, how do you look at consumer, FMCG consumer?
09:41 Do you see some pain there with respect to the demand coming
09:46 from the rural sector?
09:48 Because the expectation was that the monsoon would bring in
09:52 some kind of demand and consumption resumption coming
09:55 from the rural segment.
09:57 Do you see, given the fact that monsoon was almost near normal
10:02 and not above, and the spread was not as even as expected,
10:07 demand from rural segment to be a little bit sluggish
10:12 in the second half?
10:14 Sajid, clearly, for the past couple of years,
10:17 we have seen rural segment not performing as well as
10:19 the urban segment in terms of consumption trends.
10:22 The hope was this year's monsoon will probably
10:24 give the necessary fillip to rural consumption.
10:29 And also, the pre-election year, you
10:31 will see a lot of social schemes from the government
10:33 also directed towards rural areas.
10:36 So these two factors should have actually
10:38 improved the overall consumption trend in the rural segment.
10:42 That was the hope.
10:43 But as we are coming to the close of monsoon season,
10:47 it's clear that monsoon is unlikely to be
10:49 one of the favorable factors for any resumption
10:53 or any revival in rural consumption trends.
10:57 At the same time, there is definitely
10:58 going to be some positive impact of the election year
11:02 spend that comes from our government schemes
11:08 towards rural areas.
11:09 So it will be a combination of these two factors
11:12 and how that's going to interplay and lead
11:15 to overall consumption trends.
11:17 Definitely, it's going to be slightly better
11:19 than what we have seen in the last couple of quarters.
11:22 But I don't think one can be very, very confident
11:25 that it's going to be a significant change
11:27 in the overall trajectory for rural consumption trends.
11:30 So to that extent, I think it will still
11:33 remain an area where you may not have a very large overweight
11:37 in the portfolio.
11:38 But incrementally, you will start
11:39 watching how this trend pans out.
11:42 And accordingly, probably, you will
11:44 keep taking certain positions.
11:46 Akshay, you mentioned about the fact
11:48 that you expect the large caps to have
11:51 an early front of mid-teens in this financial year.
11:54 So which are the sectors that's going to drive that growth?
11:59 We have been very positive on outbound industrials
12:02 among many other sectors which are also
12:04 likely to be very strong in terms of earnings.
12:06 As we discussed, even financials can participate
12:09 with a decent amount of earnings.
12:11 May not be as strong as financial year '23
12:13 because this year, we are going to see a little bit of future
12:16 on the net interest margins.
12:17 But nevertheless, I think these are
12:19 the pockets which will continue to remain resilient in terms
12:22 of overall growth as well as in terms of the earnings trajectory.
12:27 And that's where most of our core positions
12:29 are in terms of our portfolio based on that.
12:33 Which are the opportunities that you see here in this market?
12:38 See, clearly, given the valuations where they are,
12:41 I don't think there are pockets which are very, very attractive
12:44 in terms of valuation.
12:45 So it's always going to be more of a relative evaluation
12:48 of where the earnings growth trends are going
12:51 and what the valuations are.
12:53 So from that perspective, I would say,
12:56 still domestic businesses tend to scoring better
13:00 as compared to some of the export-facing or global-facing
13:03 businesses, given the fact that Indian growth has been more
13:06 resilient than the global growth and also
13:08 is expected to continue in a similar fashion.
13:11 Beyond that, I don't think one can comfortably
13:13 say that there is valuation attractiveness in sectors.
13:18 And these valuations, especially,
13:21 it's very unlikely that the entire sector is
13:23 going to perform uniformly.
13:25 It has to be more from a bottom-up evaluation
13:28 of businesses and valuations and taking a fall on those.
13:31 So clearly, I think the easy money
13:34 that we have seen being made in the market
13:36 is probably coming to an end.
13:38 And from here on, it has to be more because of the way
13:41 that you will evaluate businesses and look at valuations.
13:46 So my assumption is that you may not
13:48 be as bullish on the pharma sector
13:50 because you're not betting much on exports, right?
13:54 While pharma exports are different than many other
13:57 exports, it's directly linked to global growth.
14:00 In case of pharma, I don't think the global--
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