Some stocks like SBI, ITC, NTPC, BEL might prove value traps

Without the fundamental triggers, you can continue to look at valuations and hold in the portfolio, but they could turn out to be more of a value trap., says Harsha Upadhyaya.

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Harsha Upadhyaya, CIO for Equity at Kotak AMC, says his fund house has been more stock specific in some of the sectors that are still not at 100% normal levels. Excerpts from an interview with ETNOW.

You come from a school of thought that follows value investing, which is about buying things cheap when they trade below their intrinsic values. As an illustrative example, SBI, ITC, NTPC, BEL are trading at rock bottom valuations and there is a case for value investing in some of these names for many years now. But the market is not acknowledging them. Why is the market not recognising the intrinsic value in some of these companies?
There may not be a common theme across all the value stocks. They are beaten down for various reasons. We would invest into a so-called value stock only when we believe some fundamental factor is going to change. Any change in terms of the management approach or if there are non-core businesses because of which the overall stock or the company is getting affected in terms of valuations, then there has to be a monetisation roadmap for that particular non-core business. Some of these things are necessary for valuations to change in our view. Otherwise, you can keep looking at the excel sheet, saying it is very good value, high dividend yield, but until and unless something changes for the positive, we are not sure whether the market will recognise that and give it a buy. To that extent, we are being cautious, not now even in the past, in terms of betting on just the value, we would like to see some other fundamental catalyst coming through. If that happens, then it will be good to see some of these stocks in the portfolio. But without those fundamental triggers, you can continue to look at valuations and hold them in the portfolio, but they could turn out to be more of a value trap.

So while you are waiting to see how things stabilise, would you maintain just a cautious approach, if you are not completely buying into the signs of a consistent recovery?
If you are referring to cash levels, we are fully invested. Because that has been our investment policy. We will not hold too much cash in the portfolios, as we all know, at times the market can get very difficult. So we do not currently have much cash in our portfolios, but the portfolios have a good mix of, what I call, resilient pockets of the economy, which have been largely unaffected due to the coronavirus pandemic – be it IT, pharma or FMCG. We have also had a reasonable position in many of the other cyclical sectors, which are at various levels of improvement at this point. As more evidence comes in terms of further recovery or otherwise, we will be able to take a bet on one of those pockets and move meaningfully. So at this point of time, we are well diversified and fully invested.


What is it that you would completely stay away from at this point? Would they be pockets like real estate or aviation or anything else?
We are looking at some of these opportunities very keenly. We do have them in some of our portfolios. Many of the sectors which are under some sort of restriction, for example aviation, or where the activity levels have not really resumed to the old normal levels -- for example the real estate, construction pieces – they are something we are holding in our portfolios. We believe as more confidence come into economic activities, we will start seeing resumption of work in these segments and that should help some of these stocks get a rerating. It is not a top-down sectoral approach that we are taking in some of these sectors. We need to be sure that some of these balance sheets will be good enough to really sustain the adverse impact of the pandemic in case there is second spike, or if there is continuation of the pandemic. To that extent, we have been more stock specific in some of these sectors which are still not at 100% normal levels.
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