MUMBAI: Kotak Mutual Fund will increase focus on pharmaceuticals, FMCG, IT, and power utility shares as these sectors are better insulated against high interest rates and its impact on demand and profit margin. "Companies are apprehensive about the strain on working capital. There are worries about declining demand and rising raw-material costs. From what we understand, incremental growth rate of companies will be down for a few quarters," said Krishna Sanghavi , head of equities, Kotak Mahindra Mutual Fund that manages over 32,000 crore.
"Investors will be better off in companies related to non-discretionary consumption," said Mr Sanghavi, who manages Kotak Opportunities Fund and Kotak Select Focus Fund and co-manages a few other equity schemes with other fund managers.
Mr Sanghavi has increased fund allocations in ITC, Infosys Technologies , TCS, HDFC Bank , Bharti Airtel, and Cipla, while it has cut exposure to Grasim, Reliance Industries (RIL), ICICI Bank , ONGC, and Petronet LNG.
Some of these investments have not played out as funds. Kotak Opportunities and Kotak Contra, for example, are yielding lower returns than the average for the category. Mr Sanghavi has cut exposure to real estate and infrastructure and said that rising rates and inadequate government spending will dent profit and turnover margins of these firms. Headline inflation, hovering at 9%, is the biggest market currently, he said.
"The market is likely to be in a range for some time. We do not expect any positive trigger in terms of earnings upgrades or softening of interest rates," he said. He is comfortable with current stock valuations. "Valuations have come back to normalised levels. Investors with longer investment horizon can start investing in equities," he said.
Monetary tightening by the Reserve Bank (RBI) is putting pressure on systemic liquidity, he said. Also, government's delay in policy framing and decision making are causing concerns among investors, corporates and stakeholders.
Private economists have already come on record saying that low government spending will hurt economic progress of the country. Several economists have slashed growth forecasts to below 8% for the current fiscal. "We expect a few companies to get downgraded once the June quarter results are out," he said, adding, "companies with higher leverage will be impacted due to higher interest rates. High interest rate could also impact overall demand."
Raw material costs have risen for most companies since the September 2010 quarter. Equity analysts said overall profit margins of companies have dipped 70-100 basis points over the past 10 months. Among sectors that witnessed margin pressure are auto, realty, steel, mining and fast moving consumer goods (FMCG). Companies - especially small- and medium-sized establishments - will also be impacted by rising diesel prices. The government on Friday raised diesel prices by 3 a litre. policy response to reduce fiscal deficit...at current oil prices, government is finding it difficult to give diesel subsidies. Food prices may go up because of diesel rate hike," said Mr Sanghavi.
Source- Times Of India
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