Liquidity to limit downside, 'it's a buy on dips' market: Kotak

He prefers to invest in domestic companies with operational leverage. Among sector-specific picks, he prefers to avoid information technology due to uncertainties on US President Trump’s policies.

Similarly, while downside in some pharmaceutical stocks looks limited it is tough to predict when USFDA clearances will come for some companies. He is willing to buy only companies where clearances have already come by.

He is fundamentally circumspect on the telecom sector too and prefers to wait for contours of business post consolidation. The current upmove in the stocks, he says, seem more like short-term move than consistent secular upmove.

Below is the verbatim transcript of Harsha Upadhyaya\\'s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Anuj: The talking point for market over the last six months has been the domestic liquidity and the way we have seen foreign institutional investors (FII) selling not only getting absorbed but it has not make any difference to the market and the market has just moved on. Do you get a sense that that has now put a bit of a template in place that even at times of large FII outflows our market is may be a bit de-risked?

A: You are right, I think the consistency in terms of domestic flows continues which means that on our regular basis you are going to see inflows from retail domestic investors through systematic investment plans (SIP) and today on an aggregate basis that amounts to over Rs 4,000 crore, so it is not a small sum. So, to that extent I think the dependence on foreign flows has reduced over a period of time. I am not saying that India doesn’t need foreign capital, but at this point of time I think there is a very nice counter balance that is happening because of positive flows from domestic investors which is definitely a good sign and it is likely to continue as well because we don’t see any change in terms of investor preference for equities and SIPs and that number is only growing by the month.

Latha: Is there any anecdotal evidence of the demonetisation increasing the flow of funds either because real estate now looks an even poorer bet or because simply more money has come to the formal economy?

A: My guess is that money is still to come into the markets while part of that could have come in the first few weeks or later on but the significant portion of that money is still in the Banks I would feel. Also, when we speak to our distributors and partners, recently we had an annual distributor event where we spoke to a cross section of our business partners and the common thread was most distributors are waiting to see a big correction in the market so that they can advise their clients to put in money. When a majority of participants are waiting for the correction that never usually comes through. So that is what is probably happening in the market today.

Anuj: Your sense on telecom stocks, could this be the next metals pack in a sense that the under-owned space where nobodies has invested and all of a sudden there is a big buying interest? Your thoughts on how these stocks have done over the last few days?

A: Recently there have been various reports in terms of what could happen in terms of consolidation in the industry and that is what is driving up prices in this sector at the moment. But, for any consolidation to be profitable, you need to see pricing power coming back into the industry, which we have not seen at all. In fact, day-by-day we are seeing worsening of that situation where players are resorting to pricing war.

In that scenario, it is very difficult to predict that the short-term outlook for telecom sector is going to be anything significantly better than where it is currently. So, to that extent on a fundamental basis we still are circumspect in terms of how much profitable the business is. We will have to wait and see the entire contours of the consolidation and then take a call in terms of how the industry is going to fair but at this point of time, looking at the entire scenario, it seems more like a short-term move rather than a consistent secular upmove.

Latha: Next week is also going to be big, we will come to the elections a bit, D-Mart will start asking for public funds, the initial public offering (IPO) will open, what is the thought? There is a Future Retail and a few other listed stocks, more marginal perhaps in this retail space. Is that something you would watch out for, money to be made there?

A: Without being stock specific, that entire segment is very large segment, underpenetrated in Indian context. So we are always looking for players who have very good business models in that particular business segment and who are profitably doing that business while growing the entire piece. I think that is where our investment focus will be and if companies fit in that model, definitely we will be one of the interested buyers.

Anuj: From hereon what is your portfolio stance in terms of stocks that could do well? Would you look at -- given some more weightage -- IT or pharma where we have started to see some buying interest come back or would you stay invested with the erstwhile leaders, the banks, the autos, the discretionary consumption?

A: Our positioning has remained more or less same for quite some time now. Our focus is mainly domestic businesses that have operating leverage. IT continues to have business issues. The topline growth is very sluggish. There is pressure on the margins, which could only increase if there is any adverse US policy in that report.

Even if you assume that there is nothing adverse going to come from the US policy, the clarity is going to come only at a later point of time, which means that at least for some more time, the stocks are going to remain under pressure.

Given all this, we continue to remain underweight on IT. That view has not changed. Similarly on pharma, in earlier interactions I have mentioned it is very difficult to predict when the USFDA clearances will come and that is the point there. While the downside could be limited, we don’t know when the approvals will come and how that is going to change the overall business trajectory. So to that extent, wherever we see clearances from USFDA, we are willing to buy it even at a slightly higher market levels but we would wait for those clarifications.

As and when that comes, which happened in one of the cases earlier in the month, we have built some positions. So that will be our stance on the pharma side. But our focus clearly remains domestic segment.

A: As I mentioned earlier at least the number of distributors and advisors that I have interacted with most of them are waiting for correction to enter. Most of them believe that UP elections could give that opportunity.

A: As I mentioned earlier at least the number of distributors and advisors that I have interacted with most of them are waiting for correction to enter. Most of them believe that UP elections could give that opportunity.

I would again say that when majority of the market wants something to happen that may not come through. Even if you assume that there is going to be volatility during those result days, it is likely that it will be bought into simply because there is huge liquidity with the mutual funds. For example, if you go by average cash holding of MF industry at the end of January, it was about 5.2 percent, which means about Rs 27,000 crore. On top of that, January to March quarter is usually strong for insurance players who also get inflows. Plus domestic mutual fund industry itself has been getting consistent flows every month.

Given all that, I don’t expect a large amount of downside even if there is an adverse outcome in the elections. I would see it has more of a buying opportunity and it will be a buy on dips market.