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    Forget broad-based rally, market very stock specific for next 6 months: Harsha Upadhyaya, Kotak AMC

    Story outline

    • Next couple of quarters to be difficult for most NBFCs.
    • Given a choice, look at gas utilities rather than power utilities.
    • Currency unlikely to be a great tailwind for IT sector.

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    Once the economy starts turning around over the next three or six months, people will start building in some risk in the portfolios and start looking at some of the names which are beaten down today, but have a little risk in terms of funding etc, says Harsha Upadhyaya, CIO- Equity, Kotak AMC. Excerpts from an interview with ETNOW.

    The news for NBFC/financial space is just not improving -- be it DHFL or Yes Bank or Indiabulls Housing Finance. What do you think the situation is there?
    Clearly the pain points are still there in the NBFC space. Initially, the problem started with the asset liability mismatch and on the liability side, there has been a complete freeze. I do not think many of the NBFCs are getting either the bank lines or the lending from MF and they are also not able to raise money through other sources at this point of time. In a way, their liability side has always been a difficult one and at the same time, in some cases we have seen some of the asset quality or governance issues coming up, which adds to the whole problem. Every few weeks, if you hear a negative story on one or the other NBFC, then to that extent, normalisation in the debt markets is unlikely to happen at a faster pace. I would say the next couple of quarters are going to be difficult for most of the NBFC names.

    Is that pain going to continue? We have been talking extensively about the slowdown and while there have been a fair amount of comments coming in expecting a pick up, how dire do you feel the situation is currently?
    There has been a visible slowdown in the economy, more pronouncedly in the consumption side. We think this is likely to continue for some more quarters. Once the fixed income market normalises, all the businesses that require working capital or money for growth will be able to source that money and slowly the economy would start recovering.

    At this point of time, only the better balance sheets or better businesses are able to access money and usually they are the ones who do not need so much of money for growth or working capital. It is the basket which is down the curve which actually needs more money and which is also more leveraged at this point of time and that is where the benefit of lower interest rates has not really accrued because transmission has come to a standstill. Until that revives, we cannot expect a large and pronounced economic recovery.

    Cement has been a complete proxy to economy but consumption is slowing down and investment cycle is yet to pick up. There is a global slowdown and exports are dwindling. Could you be forced to relook at your positions in cement or even corporate banks because they are proxy to economy?
    We have already done that to an extent and we still find more value in some of these infrastructure or economic-activity linked stocks rather than the consumption side. While a slowdown would affect both sides eventually, but today the consumption side is witnessing a lot more slowdown compared to some of these economic activity or infrastructure activity linked stocks. Also the valuation differential between these two segments is very large one. We believe that as long as the consumption sector continues to underperform as against market expectations, there is unlikely to be any valuation support for these segments and in our view there is a visible slowdown which is not really built fully into analyst expectations in that segment.

    In case of some of the other names, there is a relative valuation comfort while the growth may still slowdown for some of these proxies of economy. We believe that valuations are not as high as what you would see in the consumption basket.

    You have a large exposure to chemicals. There is a large block deal in Sudarshan Chemicals. SRF, PI Industries stocks are at record highs. What exactly do you like in chemicals -- agro chemicals, industrial chemicals or speciality chemicals?
    We have exposure across our portfolios in speciality, agro chem and even pharma related chemicals. We believe this is a space which gives a short-term opportunity because of the environmental issues forcing some of the Chinese facilities to shut down their production. So the demand being same, you will see a lot of export opportunity for some of these names depending on which segment of the chemicals they are operating in.

    Also from a medium to long-term perspective, we believe another large opportunity is opening up because of the trade tension between US and China. A lot of global majors have also seen consolidation and they are looking at outsourcing from regions other than China for their intermediates. If the tension continues and if there is a chance of disruption of supplies, then some of these global majors would look to diversify their intermediate base and that is where some of the Indian chemical companies would start to figure in.

    I am not saying that the entire Indian chemical basket would get an opportunity like this but at least the ones which have better quality, which can stick to the supply timelines, etc, and which have scaled to compete with some of the global majors would be the ones to get a medium to long-term export opportunities.

    One sector that has been in limbo has been the consumption space. When could we see the impact of the monetary stance play out because we think a low interest rate environment should bode well? Would it be better during the festive season by the end of the year or could it stretch into next year?
    This is exactly what I was trying to explain initially that while the interest rates have been low, the transmission has not taken place. There is also room for further interest rate cuts as global liquidity is abundant and global interest cycle is also benign and our own inflation is also ruling quite moderate. Given all this, the interest rate scenario looks quite benign in the Indian context. But the problem has been more of transmission. I do not think the transmission has been taking place and it is difficult to put a timeline in terms of when that transmission will start to happen.

    But it is going to be a very slow grind over the next couple of quarters and it also depends on no further accidents from the NBFC space. As the market tries to normalise, if there are more accidents from NBFC space, then that will delay the normalisation process. Another point to note is that in most of the consumption segments, especially the discretionary consumption segment such as auto, there is a lot of inventory that is still lying with either the dealers or distributors or even the manufacturers.

    There is no hope for the revival of demand at least in the immediate term and we will have to watch this space closely over the next couple of quarters to understand where that inflexion point would come from.

    Would you be looking at utilities? Would you be looking at buying NTPC, Power Grid purely because interest rates are likely to come down?
    We have got an overweight position on gas utilities. Between power utilities and gas utilities, our preference has always been gas utilities given the fact that there is going to be a medium to long-term growth trajectory for gas. Gas being a cleaner fuel, that tilt is always going to be there. Whether it is the Indian government or any other government in the world, everybody is focussing to reduce environmental issues. Given a choice, it is better to look at gas utilities rather than the power utilities at this point of time because the lower interest rates scenario would benefit both of them equally.

    Is it valuations, is it global trade war or domestic slowdown/liquidity -- where do you think markets are not prepared for a shockwave?
    Clearly the market is not prepared for a liquidity shock. We do not expect any change in either global liquidity or domestic liquidity but for some reason, if you see that happening, then the current valuations may not sustain.

    Clearly today’s valuations are slightly elevated compared to long-term averages and that is sustaining because of the money that is coming from foreign investors as well as the structural change that has happened in Indian context, where money is moving away from physical assets and coming into financial markets.

    These two have been in combination helping the market to sustain slightly elevated valuations and if you see any change in that liquidity trajectory, there is a risk for the market.

    What is your view on IT not playing it as a defensive? You are looking at some of the bigger names that have been performers, not being concerned with the tremors on growth over the next 18 months. What is making you so confident on the IT names?
    We have an underweight position on IT names. We have just stock specific positions there. As far as the entire sector is concerned, we believe there are some verticals which are slowing down and there are also issues in terms of whether the Indian IT companies have the right business model to take on the future expected growth in the digital space.

    As you rightly mentioned, the currency which can be a short-term tailwind is unlikely to be a great tailwind for IT sector at this point of time. Given all this, we remain underweight on the sector but we do have a couple of names where some of these issues are unlikely to play out and hence we are more positive.

    Where do you see value within some of these high PE stocks?
    Clearly high PE stocks carry some amount of risk, especially in a scenario, where the overall economy is slowing down. If you witness a slowdown in any of the names where the valuations are very high, then there is a risk of a) earnings downgrade and b)multiple contractions.

    So to that extent, you have to be very careful in selecting some of the high PE or high valuation stocks at this point of time. That is where on the consumption side we have been very careful because that is where the slowdown is. If that continues, some of the valuations could at risk for some of these companies.

    When do think this market’s obsession with near term visible growth/corporate governance will change? In any market, 50% of the market does better than the index, 50% of the market underperforms the index but now we are looking at what 3-4% of the market doing better than the index! How long will this trend continue?
    I will again go back to transmission of lower interest rates. Once the broader market starts getting funding for growth, then it will start participating in the overall upside. Today a), there are very few stocks which are consistently delivering earnings growth; and b), there are far fewer names where there is no management or governance concerns.

    People are moving their investments into some of these names where there seem to be a reasonable degree of risk protection. Going forward, when you see lower interest rates getting transmitted and helping most of the businesses, slowly the expectations on earnings growth for that basket will also improve and that is when you will start seeing some money going into that segment.

    But I would say that for the next couple of quarters at least, it is going to be very stock specific market. I do not think you will see a broad-based rally at this point of time and when there is a likelihood that the economy is going to turn around maybe over the next three or six months, that is when people will start building in some risk in the portfolios and start looking at some of the names which are beaten down today, but have a little risk in terms of funding etc. That is the point of time where they will start picking some of those names in our opinion.
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    1 Comment on this Story

    amalesh bhattacharya394 days ago
    the HDFC group ie hdfc life,hdfc amc,etc will be star performer this year as most of problems faced by others do not bother HDFC group much,with elss benefits people are rushing for various tax saving plans
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