ETMarkets Smart Talk: Harsha Upadhyaya increases exposure in auto & auto-ancillary sectors; underweight on IT & metals

In an interview with ETMarkets, Upadhyaya who has over 20 years of experience said: “We are overweight in Banking, Auto, Cement, and Industrials; and underweight in IT services and Metal sectors” Edited excerpts:

India indeed emerged as a shining bright spot with a GDP of over 6%. With macro remaining stable where do you see markets in 2H2023?
Domestic growth continues to be resilient despite global headwinds. Currently Indian equity market is trading near fair range of valuations.

We expect earnings trajectory to improve in the coming quarters led by improved margins driven by moderating cost inflation. In our opinion, market returns are likely to be in line with corporate earnings growth.

How do you sum up the March quarter earnings season in one word? With slowdown fears emerging as well as China reopening how will earnings pan out in the rest of the FY?
Overall, the March quarter earnings season was slightly ahead of expectations at the aggregate levels, while there were hits and misses amongst sectoral performances.

We expect earnings trajectory to improve in the coming quarters led by improved margins driven by moderating cost inflation.

We are halfway mark in 2023 – and we have climbed all war of worries and is trading closer to record highs or might even hit the number. Can we say the worst is behind us? Any big risk that one should watch out for?
For the last few quarters, we have witnessed headwinds in the form of spikes in inflation and interest rate hikes.
With expected moderation in inflation going ahead, we could witness better demand conditions across the sectors. To that extent, one can say that the economy and the business outlook are improving gradually. How should long-term investors play the India story? Some call this as India’s decade some call it as India’s century – what are your views?
Equity investing is the best route to play India’s long-term story. We are at the beginning of a new corporate earnings upcycle in our opinion.

Most of the domestic-dependent sectors of the economy seem to be well-placed to capture this opportunity.

Long-term investors should make disciplined equity investments and hold on to their investments to reap the benefits of this expected upcycle.

Where is the smart money moving – do you see more money will get allocated to infra, consumption sectors, and banking?
Both Infra and Banking sectors have been doing well for quite some time now. There is already a reasonable level of ownership in these themes across most institutional portfolios.

The consumption theme could make a comeback in the next few quarters on the back of expected rural recovery and stability in urban consumption trends. However, one should keep an eye on the monsoon trends to assess rural situations.

Any changes which you have made to your model portfolio recently and why? Which sectors are your overweight and underweight on? Which theme will do well in 2H2023 – value or growth?
We have continued to prefer domestic sectors over global-facing/ export-oriented sectors in our portfolios. We are overweight in Banking, Auto, Cement, and Industrials; and underweight in IT services and Metal sectors.

Over the past few quarters, we have increased our exposure in auto and auto-ancillary sectors as we are witnessing improved demand conditions along with expectations of better profitability going forward.

FIIs flows have resumed – do you see more stability from the FII front? How are FIIs looking at India amid not-so-cheap valuations?
India has always been an expensive market relative to other emerging markets. Some of the valuation premium can be justified by India’s relatively better growth, higher return ratios, and stable governance.

While it is difficult to predict flow trends in the short term, we believe that given India’s structural growth story, the long-term trends in FII investments into Indian equities will remain quite strong.

Small & midcaps stocks have started outperforming – how should long-term investors play this theme?
These segments have also faced similar or larger headwinds compared to their large-cap counterparts from a business perspective.

With expectations of moderating inflation, these segments will also benefit going forward, maybe with a little lag as compared to the large-cap segment.

However, the interim volatility until we see clear evidence of improvements could be higher in the case of small and midcap categories.

We would advise a staggered approach to invest in these segments along with an investment horizon of at least 3-5 years.

How do you pick/filter stocks for investment in your portfolio?
We try to look for businesses that have proven business models, which are scalable in nature, where capital efficiency is high and that has a reasonable competitive edge in their respective areas of business.

We also very keenly look at the management track record and its quality. The final filter is valuation in every case.

Typically, we look for compounding characteristics of earnings growth at reasonable valuations and build a portfolio around that strategy.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of Economic Times)