Winning in the markets requires that you take tough calls and stick with it despite the volatile conditions, believes Harsha Upadhyaya.
In a situation of high market volatility and poor earnings visibility, the 37-year old vice president and fund manager at UTI AMC hasn’t done too badly. According to Valueresearchonline.com his Opportunities and Wealth Builder Funds have given investors 85 per cent and 69 per cent returns over the last one year comfortably beating the category returns at 61 per cent and 54 per cent, respectively. When the markets were bearish the fund became defensive and invested in sectors such as FMCG and pharma to protect its returns and stayed in cash towards the end of 2008 and early part of 2009.
Looking ahead
While accepting that prudence is required during volatile times, the management graduate from IIM Lucknow believes that at some point in time there is a need to look forward rather than at what’s happened over the last six months. He says that the fund had held cash during earlier part of the year but did not want to sit on it forever and invested most of the cash in February and March. While retrospectively, it is easier to justify a course of action how did the fund manager figures out that the time was right for investments. “Some of the data points were turning for the better,” says Upadhyaya who has had stints with Indian and foreign brokerages.
He believes that critical economic numbers such as inflation which was at double-digits was trending down, crude oil prices were coming off from their highs and interest rates too were softening. The reason why we made investments was because the market was at historically-low valuations, most of the negatives were factored in and the downsides were limited, he says. On a broader level, he believes in a top-down approach, picking sectors first and then stocks which are relatively better placed within the sector. While he managed to navigate volatile times well, which were the bets that worked and those that didn’t come off?
Hits and misses
Among the winners in his portfolio has been the two-wheeler maker, Hero Honda. The fund house got into the stock at the Rs 600-Rs 650 level in early 2008 (currently trading at Rs 1,643) and has given good returns. While last year, the BSE 100 went down 55 per cent, Hero Honda generated more than 15 per cent returns. Despite 8-10 quarters of margin squeeze and subdued volume growth in 2006-07, the company was generating a large chunk of cash. Since the two-wheeler business does not require a large amount of capex, the returns on capital and equity are high for all companies in the business, Upadhyaya was comfortable with the business profile and the cash generated.
The drop in commodity prices was a bonus as it improved margins substantially. Added to this was the fact that the Hero Honda had good brand value and competition was not looking very strong at that point for the company. Among the misses was media stock Deccan Chronicle. Upadhyaya bought it as there was a good growth in ad revenues and a strong domestic economy was helping ad price growth, circulation was going up and things were looking rosy. The media company had also invested in Deccan Sporting Ventures, the owner of the Deccan Chargers team. When the markets turned, it impacted the stock as ad revenues took a beating and costs went up significantly on account of rising newsprint costs which eroded their margins. “Usually in a bearish market you don’t attach any value to embedded business,” he says. The stock had fallen to 20 per cent of our cost though now it has recovered quite a bit. Going ahead which sectors would he bet on?
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Source: Valueresearchonline.com
Growth sectors
The sectors that the fund manager believes will do well going forward on counts of valuations and growth prospects would be banking, energy/power, IT, metals and auto. Justifying his bets he says that in the energy sector especially the oil marketing companies have potential. The news points he believes point to a possibility that the government will partially decontrol the prices. The stocks which have been lying in the low valuations band for over a decade now could gain significantly if the event were to take place. He believes that power sector also offers tremendous growth prospects although the call is on the longer term.
The huge demand-supply mismatch offers good growth opportunity and companies which can execute projects on time in the power generation space can reap super normal profits at least in the period that the mismatch continues. The Opportunities Fund is invested in stocks such as the Jai Prakash Associates, Lanco Infratech and Tata Power. The key, he believes is execution. “Everybody has lot of plans in the power sector but if they can execute on a timely basis, the market caps will significantly change from the current levels,” he says. The markets according to him are still looking at the projects and the risks associated with it and not much on the earnings when the projects are commissioned.
