An industry veteran with experience of 18 years spread over both equity research and fund management, the Alpha Manager of the week is Harsha Upadhyaya, CIO Equity - Kotak Mutual Fund.
He personally manages Kotak Opportunities Fund and Kotak Select Focus Fund.
Kotak Select Focus Fund, with an asset size of Rs 850 crore, has given returns of 82 percent in absolute terms since its inception in August 2009.
Kotak Opportunities Fund has an asset size of Rs 625 crore (latest). The fund has given annualized returns of 21 percent since inception (6.5X initial money) and 15.5 percent over three years.
In an interview to CNBC-TV18, Upadhyaya said there's a clear uptrend visible in the markets. There are some sectoral and stock-specific opportunities where one can make money going forward. "Especially in the scenario, where the earnings growth is recovering in the market, I think the next 2-3 years are going to be great for equity investments."
The Select Focus Fund is overweight on auto, oil & gas and cement sectors. Upadhyaya said the idea was to play on the cyclical recovery, but at the same time did not want to take the balance sheet risk. Both auto and cement stood out in terms of cyclicality and also on the capacities already on the ground.
"With high operating leverage auto companies will definitely stand to deliver above market earnings in the next two-three years," he said, adding the fund has diversified holdings in auto sector, in companies like Maruti , Tata Motors , Bosch , Motherson Sumi , Mahindra & Mahindra .
Below is the transcript of Harsha Upadhyaya's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.
Menaka: What do you make of where we are in the markets? Many people believe that this is a correction that is going on with several up moves, what is your take on where we are?
A: Clearly we are in an uptrend that is for sure. In terms of valuations probably after the recent up move we are probably fairly valued in terms of overall broad market valuations but obviously there are sectoral and stock specific opportunities where one can still make money going forward and especially in a scenario where earnings growth is recovering in the market, I think next 2-3 years are going to be great for equity investments.
Menaka: Let's talk about both of your funds individually starting first with Select Focus Fund where you have three key investment themes; auto, oil and gas. Can you talk us through how you have sort of decided on those three key sectors that you are mostly invested in?
A: These two sectors are overweight in our fund for quite some time now. The idea here is we wanted to play cyclical recovery and at the same time we did not want to take a balance sheet risk, so auto and cement were the two sectors which stood out in terms of the cyclicality and also in terms of the capacities that are already there on ground and as and when you some pick up in volume growth which has already happened in the last past couple of months you will definitely see that operating leverage coming through and if you look at the overall auto industry both commercial vehicles as well as passenger vehicles they have seen sluggish phase for almost three to five years now.
Just to give a number; commercial vehicles at the top in 2009 were selling about 350,000 units in the country and today that number is around 200,000 units. So clearly even if you assume that we will go back to the earlier number there is a big upside in terms of volumes that can happen. Similar is the case with passenger vehicles, the car volumes for the first time in last 20 years successfully for three financial years they actually showed negative growth and that is changing, that has clearly changed in the last few months and we expect that trend to continue. With high operating leverage auto companies will definitely stand to deliver above market earnings growth over the next two-three years and we are just starting the new cycle.
Menaka: In your top 10 holdings for that fund even though auto's cement and oil and gas are your key three sectors that you are overweight on your top auto holding was just one which was Maruti, otherwise you have got a bunch of IT stocks Tech Mahindra , TCS , Infosys , a couple of financial stocks, ICICI Bank , HDFC Bank and then you have got Ultratech which sort of justifies your cement play, BPCL which justifies your oil and gas play. Petronet LNG which is an unusual one and Bajaj Finance and SBI which are some of the other financial holdings. How is it that you don't have anything more than one auto stock in the top 10?
A: That is not the right way to look at the portfolio. Portfolio consists of approximately 45 stocks. So, if you look at the overall weight of the auto sector it is about 15 percent although you find let's say couple of more stocks in the top 10 which are from other sectors those sectors may not be 15 percent weight in our portfolio. For example cement although it has one stock in the top 10 the overall weight in the portfolio is about 8 percent. So, I don't think by looking at just top 10 one can really see through the portfolio construction.
We continue to believe that auto is going to deliver above average earnings growth and that is the reason why we have kept an overweight. May be on a stock specific basis it may not be finding its place in our top 10 yet.
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