Earnings recovery boosted market sentiment, rupee outlook improves: Kotak AMC CIO Harsha Upadhyaya 

Easing geopolitical tensions in West Asia, resilient corporate earnings and a revival in foreign capital flows have significantly improved investor sentiment, according to Harsha Upadhyaya, Chief Investment Officer (CIO) and President – Equity at Kotak Mahindra Asset Management Company. In an exclusive interview with BTTV, Upadhyaya said the June-quarter earnings have beaten expectations, removing fears of a sharp demand slowdown and margin compression that affected market sentiment ahead of the results.

Even as the earnings season still has around two weeks end, Upadhyaya believes the stronger-than-expected corporate performance has provided a meaningful boost to investor confidence and supported the recent recovery in equity markets.

Outlook for rupee improves

Upadhyaya said one of the biggest concerns for investors in recent months had been the conflict in West Asia, mainly because of its potential impact on crude oil prices and the Indian rupee. The situation worsened due to sustained foreign institutional investor (FII) outflows, which added pressure on domestic markets and the currency.

However, he noted that strong inflows under the Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit scheme have helped improve the outlook for the rupee. According to Upadhyaya, the inflows gathered momentum towards the end of July and are expected to remain healthy over the coming months, helping stabilise the rupee against the US dollar.

He also pointed to the return of foreign investors as another encouraging sign.

Foreign institutional investors have started buying again. While it is still too early to conclude that this marks the beginning of a sustained trend, the buying witnessed over the past few weeks has certainly helped improve overall market sentiment, he said.

Kotak AMC raises exposure to private banks

Upadhyaya said Kotak AMC has been steadily raising its exposure to private sector banks and financial services within its Flexicap portfolio over the past year.

A year ago, the fund was around 5-6 percentage points underweight on banking and financials. That gap has now been largely bridged, with the portfolio moving close to a neutral allocation.

The decision is backed by healthy credit growth, which has continued to expand at nearly 17% year-on-year.

He noted that monthly credit growth has remained robust, benefiting NBFCs and public sector banks over the past year.

According to Upadhyaya, private banks had struggled earlier because of intense competition for low-cost deposits and regulatory constraints that limited balance-sheet expansion.

With FCNR(B) inflows improving system liquidity, he expects deposit-related pressures to ease over the coming quarters.

Cautious on IT sector 

Despite the recent rally in technology stocks, Upadhyaya remains cautious on the sector. He said valuations have become considerably more attractive after the correction, which could continue to trigger intermittent rallies.

However, he believes the industry's underlying business fundamentals have not improved enough to warrant a more constructive stance.

Accordign to Upadhyaya, except for a handful of companies, business momentum across the IT sector remains subdued. Revenue growth continues to be muted and profit margins have stayed under pressure despite the depreciation of the rupee, which is typically a positive factor for export-oriented technology companies.

Given the lack of a meaningful improvement in earnings visibility, Kotak AMC continues to maintain an underweight position on the IT sector relative to its benchmark.

While lower valuations offer some downside support, Upadhyaya said the fund house is waiting for stronger evidence of a sustained recovery in business growth before increasing exposure to the sector.