Banking is doing well, but why are PSU banks finding few takers? Are oil marketing companies a better bet than oil producers? As an investor, you may be having hundred such questions on your mind. When fund managers share their insights, these are worth their weight in gold because actual money decisions have been made based on those calls. Kotak Mutual Fund (Kotak Mahindra Asset Management Co) has shared its views on some of the most crucial sectors of the Indian economy and how it is playing those sectors. Read on to know more.
Banking & Finance
Kotak MF, like many others, has an overweight stance on private sector banks. Overweight refers to an excess amount of an asset in an investment portfolio compared to the weight in an underlying benchmark index. The fund-house reasons that private sector banks are gaining market share and there is a revival in the corporate credit cycle.
Kotak MF has an underweight stance on both public sector banks (PSU banks) and NBFCs (Non-Banking Financial Companies). The leading fund-house says consolidation in PSU banks will impact growth while the core operating profitability is weak for PSU banks. On NBFCs, Kotak says it remains focussed on strong NBFCs. The NBFC sector growth outlook appears muted to Kotak while access to funding is limited to a few NBFCs. It warns that asset quality stress is likely to emerge in some pockets.
“Corporate focussed private banks and very select PSU Banks with a strong liability franchise and which are adequately capitalised trade at attractive valuations. Resolution of large ticket NPLs (non-performing loans) under NCLT likely to be one of the key triggers,” says the fund house.
The fund-house is underweight upstream energy companies. Upstream is a term for the stages of the operation in the oil and gas industry that involve exploration and production. Kotak MF argues that there is a margin risk for upstream firms due to oil price volatility.
Kotak MF is overweight on both downstream energy companies and gas utilities, for whom it says there is positive demand growth.
“Our allocations prefer gas utilities companies which have significant scope for volume growth as share of natural gas in India’s energy basket increases. Pricing reforms were positive for refining and marketing companies. However, this received setback last year due to recent Govt. action,” says Kotak MF.
Pharmaceuticals are deemed to be a slowdown-proof business. But Kotak MF is largely underweight in the pharma sector due to regulatory overhang, possibly in the overseas business. However, the fund house admits to largely stock-specific positions on account of positive trends in domestic business.
“US generics business has become structurally less profitable leading to a decline in return ratios for Indian pharma companies. Recovery would depend on Indian companies’ success in building a specialty portfolio. This would be gradual and unlikely to happen in the near term,” says the fund house.
Pharma and IT are considered defensive sectors whenever there is volatility in the stock market. Like pharma, the IT sector also appears out of favour with Kotak MF. The fund house is underweight on IT sector due to uncertainty over the second half of FY20 demand outlook, anticipated margin pressure as the cost of doing business rises. Kotak MF points out that US / Europe GDP growth outlook would be key going ahead.
“Outlook on client spends especially in BFS (Banking Financial Services) and Retail verticals need close monitoring,” says Kotak MF.
There has been a large amount of negative press when it comes to the auto sector, which has been reeling under slowing monthly sales. Kotak MF is underweight on this sector due to higher system inventory and resultant high discounts, BS-VI transition leading to sluggish sales in the near term especially for MHCV & two-wheelers.
“Our exposure is dependent on the manufacturer’s ability to manage pricing competition, market share dominance and multiple streams of revenues from product/geographical sub-segments,” says the fund house.
The consumption story for the moment remains in the haze. Economic growth, expressed by GDP, slipped further to hit an over six-year low of 4.5% in the July-September quarter compared to 7% in the corresponding quarter of 2018-19. Importantly, private final consumption expenditure fell 5% year on year. Talking about its underweight stance on consumers, Kotak MF says it expects GST led volumes gains to normalise though high equity valuations levels remain a key risk.
“We expect that the increase in disposable income, as well as easy finance availability, will boost the demand for consumer discretionary segments like durables. Our stock preference is based on high earnings growth visibility,” says Kotak MF.
Construction & Cement
These two sectors are among the few on whom Kotak MF is overweight. Arguing in favour of construction, the fund house said it sees strong demand and attractive valuations. On the cement sector, which is linked to construction, Kotak MF said this is a proxy infrastructure play and the sector is witnessing improving utilization and pricing discipline.
“We believe that the massive outlay and rising growth momentum will provide a significant demand fillip for companies operating in this sector. Within the construction sector, we have a preference for companies with robust balance sheets, proven project management skills, and those having substantial growth potential,” says the fund house.
Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any credit risk fund or any other mutual fund.