FMCG sector is relatively unaffected by the pandemic as compared to many other sectors of the economy.
If you look at the immediate term, definitely the earnings decline is going to be significant. For example, most estimates are pointing at around 40 percent decline in aggregate earnings during April-June quarter, said Harsha Upadhyaya, President & CIO – Equity at Kotak Mahindra Asset Management Company said in an interview to Moneycontrol's Sunil Shankar Matkar.
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Q: Economy reopened in all non-containment zones and most of rural part is active, but number of cases have been increasing at fast pace. Given the 45 percent rally seen in benchmark indices from March lows, what is market actually seeing?
Market seems to be looking forward to FY22 and beyond, which are expected to be normal years for businesses. If you look at the immediate term, definitely the earnings decline is going to be significant. For example, most estimates are pointing to around 40 percent decline in aggregate earnings during April-June quarter. Even July–September quarter is unlikely to be a normal one.
Q: Most technology stocks are near their 52-week high given the strong results from Infosys and Wipro despite COVID-19-led disruptions. So what are you advising to your clients?
The first quarter results and management commentary of some of the largecap IT stocks have been better than the muted street expectations. While the revenue weakness has played out as expected, the guidance on growth is comforting. Deal wins have also improved towards the end of the June quarter, with reasonable pricing stability in most verticals. The significant improvement came through cost reductions, which more than made up for weak top lines.
IT sector generally has stronger cash flows and hardly any leverage on the balance sheet side, which implies it will be a resilient sector compared to many other sectors in any crisis. So in effect, a better outlook as guided by the management and strength of balance sheet, have resulted in outperformance of this sector in the recent past. We are carrying slight underweight to neutral exposure to IT sector in our funds.
Q: The flow into equity-oriented mutual funds has been declining consistently for last three months and SIP inflow also has seen a moderation during the same period. What is the reason behind it?
The increased volatility in the market and continuing concerns around the spread of Coronavirus outbreak have led to investors taking a more conservative view on equity investments in the current context. However, the longer term trend of shift away from physical investments to financial investments will continue. Once the market stabilises and/ or there is clarity on containment of coronavirus, we expect equity investments through MFs to improve.
Q: Britannia numbers were very strong given the demand for biscuits during lockdown and the stock reacted with 85 percent gains from its March lows. What is your call?
FMCG sector is relatively unaffected by the pandemic as compared to many other sectors of the economy. As you pointed out, some FMCG businesses in fact have seen significant growth too in the recent times. The valuations have remained high in this segment for quite some time. We do not think that the valuations of FMCG sector will compress too much in current scenario, given that many other segments of market remain vulnerable due the current crisis.
Q: Given the stellar rally in benchmark/broader markets and across leading sectors, which sectors are yet to participate in the rally?
At Kotak MF, currently we are not exploring investment ideas from a top-down sectoral basis. Across sectors, we are looking for companies with low leverage, flexible cost structure and cash flow strength. On these parameters, even within the same industry you will find divergent trends. The focus has been to look for businesses that will come out of this crisis in a stronger manner, and be able to gain market share incrementally. So the investment approach has been more bottom-up in nature.
Q: Many experts feel bad loans could increase significantly. What are your thoughts? Should one stay with banking & financials space?
Since we are still under moratorium period, it is difficult to assess eventual impact of the crisis on asset quality and credit cost trends in the banking and financials segment. The real impact will be known only from October - December 2020 quarter onwards, after the moratorium period ends.
However, most players in the segment have already bolstered capital base or looking to raise funds soon, which will help them withstand any ill-effects post moratorium. Currently, we have an underweight stance on banking and financials. We are invested in a few large private sector banks and insurance companies. However, we are avoiding or have a low exposure to NBFCs and PSU Banks.
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