Portfolio Management Diary - Dec 2020 Kotak Special Situations Value Investment Approach - Kotak Mutual Fund
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Portfolio Management Diary – Dec 2020
Kotak Special Situations Value
Investment Approach
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Focus On Key Themes In Portfolio - Domestic Revival India is becoming ready for its mega vaccine rollout after saying goodbye to a 2020, a year everyone would like to forget. If there was ever and unanticipated, high impact event, which shook the world, it was the Covid pandemic which had its origins in Wuhan, China. This Black Swan event shook global markets with lockdowns becoming the norm across the globe. In response to the pandemic, Central Banks undertook Monetary and Fiscal measures to pump liquidity into the system and support ailing households and businesses. On the medical front a concerted & joint effort was put in place to develop a vaccine. As the year ended there are at least 6 vaccines which are believed to be efficacious. The roll out of these vaccines would give some succor to the global markets regarding a pickup in demand in CY21. In order to play the demand recovery, we are focusing on the following themes in our portfolio. Domestic Revival The propensity of households to save appears to have risen significantly during the pandemic. Households have been unable to consume up to normal levels and have raised their precautionary savings. In the first three quarters of FY20, household financial savings stood at between ₹3.3-4.3-lakh crore and went up to ₹5.32-lakh crore in the fourth quarter. Owing to seasonal factors, household financial savings generally peak in the fourth quarter but moderate in the first quarter. However, in the April-June quarter this year, household financial savings shot up to ₹8.16-lakh crore. Flow of financial assets increased to ₹8.27-lakh crore in the June quarter, more than double the level seen in the same quarter last year (₹3.9-lakh crore) and up from ₹7.1-lakh crore in the March quarter. On the other hand, flow of financial liabilities shrunk to ₹11,000 crore in the June quarter, from ₹1.8-lakh crore in the March quarter. Note: The names mentioned in this note are for reference only, actual portfolio may differ as per fund manager’s discretion and the underlying stocks mentioned in the note does not guarantee future performance/return. Source: The Hindu Business Line 3
Domestic Revival
According to the RBI report, the increase in household financial assets was led by significant increase in the households’ holdings of mutual
funds, insurance products and currency.
There are considerable savings on account of not opting for Travel & Tourism, curtailment of entertainment, etc. Since the good news on the
vaccine front is already making headlines, the trend is visible through the increased consumption numbers across sectors, for instance..
• Auto industry is expected to post a double digit recovery in FY 22 after their de-growth in last couple of years.
• Auto sales recorded 17% increase YOY in Sep 2020 quarter and is expected to be with around 14% increase in Dec 2020 quarter.
• As per Knight Frank India, Housing sales jump 67% YoY in Mumbai in Nov 2020.
• Domestic air travel back to 65% of pre-Corona times as per Indian Civil Aviation Department in Nov 2020.
• A surge in hotel bookings has been recorded in many tourist destinations across Maharashtra, seen as a silver lining to a bleak year for
hospitality.
The portfolio is positioned in the following sectors/ companies to take advantage of this trend.
• Automobile cos. like Motherson Sumi, Carborundum
• Real Estate and Building Material Companies like Oberoi Realty, APL Apollo Tubes, Century Ply & Sheela Foam
• Travel & Tourism plays like VIP Industries
• Infrastructure and Construction businesses like Kalpataru Power and RVNL
• FMCG and Agriculture oriented plays like Kaveri Seeds, Balrampur Chini and KRBL Ltd
• Financials like HDFC, ICICI Bank, City Union Bank
Note: The names mentioned in this note are for reference only, actual portfolio may differ as per fund manager’s discretion and the underlying stocks mentioned
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in the note does not guarantee future performance/return. Source: KIE, Internal
China + 1 Theme The US-trade tension along with Covid disruption has catalyzed diversification of supply chains away from China. The objective of such a diversification is to supplement current supply lines from China. The Indian government is mindful of this global trend and has put in place multiple incentives to attract businesses toward India. For instance, implementation of far reaching reforms like GST, IBC, Cut in Corporate tax rates (17% for setting up new manufacturing facilities) & recent Production Linked Incentive schemes in sectors like electronics, durables, chemicals, pharmaceuticals, etc. are expected to make India an attractive investment destination. Businesses in these sectors are witnessing enhanced enquiries and order inflows. Companies are gearing up to take advantage of this prospective order inflow by adding to capacities and R&D Capabilities. For instance Deepak Nitrite, a portfolio company, has given guidance of Rs 400 Cr capital expenditure in FY21 and a larger number in FY22. Additionally it will be setting up one more R&D center to undertake cutting edge research in developing value added products. Deepak Nitrite has over the years built its business on two key principles, 1) Import Substitution, 2) Backward Integration. These two principles are helping the company gain contract research and manufacturing (CRAMs) business since marquis customers are seeking backward integrated suppliers to ensure price stability. Similarly SRF Ltd, another portfolio company, has indicated that growth in Specialty Chemicals segment will sustain at 20-25% levels for the ensuing few years. The company is looking to invest Rs 1,600-1,800 Cr in building capacities to capture future growth opportunities. Despite the Covid led lockdowns, the company has raised its revenue guidance for FY21 to 25%. Note: The names mentioned in this note are for reference only, actual portfolio may differ as per fund manager’s discretion and the underlying stocks mentioned in the note does not guarantee future performance/return. Source: Internal 5
Outsourcing And Technology Revenue trajectory of Indian IT companies is expected to witness sharp mean reversal, as enterprises embrace Digital to combat Covid-19 triggered disruption. Agile Indian IT companies quickly adapted to changing needs of enterprises. The deep entrenched relationship with clients and Work From Home have reinforced outsourcing/offshoring model. The lockdowns had near-term impact on IT services companies due to lower volumes and pricing (select verticals). Though the economies are gradually reopening, the pandemic risk remains. Hence, remote working and virtual customer engagements are new normal not only for IT services business, but also for client businesses. Steady improvement in deal closures, revenue tailwind, and margin resilience for Indian IT is likely going forward. Indian IT companies command 35-40% market share in application maintenance in terms of value, making them critical for digital transformation journey of any large enterprise. TCS conducted a survey of over 300 large enterprises in North America, Europe & Asia. Even though revenues of 68 of the companies declined, 90 of them would either “maintain or increase” IT budgets. The companies’ priorities for IT spending were (in order): collaborative technologies, cyber security, cloud-native technologies and advanced analytics. Good demand was seen for business initiatives in end-to-end customer experience. Companies have also been trying to use AI and analytics to improve customer experience; 24 of them have already deployed such measures; 39 of them are developing them. Lastly, automation for core businesses is also seeing good traction. We anticipate demand to remain strong in the Outsourcing & Technology space and are participating in this trend through companies like Tech Mahindra & Oracle Financial Services Software Ltd. With investments in 5G technology likely to pick up over the next few years, Tech Mahindra will be a key beneficiary. Oracle Financial offers Core Banking solutions and an integrated Cloud service. The company’s services are likely to witness tailwinds with remote banking and an integrated customer experience become critical in today’s banking environment. Note: The names mentioned in this note are for reference only, actual portfolio may differ as per fund manager’s discretion and the underlying stocks mentioned in the note does not guarantee future performance/return. Source: Internal 6
Global Economy
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Global Economy Has Rebounded Strongly
Citi Economic Surprise Index* (global)
*The CESI compares economic data against economists expectation , rising when the exceeds consensus estimates and falling when the data are below estimates
Source: Refinitv 8
Record Money Printing By Central Banks
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Source: Goldman Sachs Global Investment Research
Excess Liquidity Supports Global Equities Source: Refinitiv, Credit Suisseresearch 10
Record Debt Now Trades At Negative Yield
11Low Interest Rates Support Equity Valuations
Equity valuations will remain a big part of the
market narrative in 1H21. However, history
indicates today’s valuation are supported by
historically low interest rates
Source: Market Desk Research, Yale / Robert Shiler 12 12Global Valuations At Elevated Levels After A Sharp Rerating
MSCI AC World – 12-month forward PE band
Source: Jefferies, FactSet, As on Nov 2020 13Big Becoming Bigger Source: Bloomberg 14
lndian Economy
15Activity Tracker: India : Majority Of Demand Side Indicators Showing Improving Trends Source: CMIE, RBI, Vahan, UBS 16
Activity Tracker: India :Supply Side Indicators Also Showing Improving Trends Source: CMIE, RBI, GSTN, Vahan, UBS 17
Recovery Is Getting Broad Based
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18Economy Back In Green Red- Negative, Amber-Watch, Blue-Neutral, Green-Positive; Source: Nirmal Bang Institutional Equities Research, Google-mobility report, CMIE, Reserve Bank of India, Government of India, CEIC,Bloomberg. 19
Economic Normalisation Continues Apace Source: Google, Apple, CMIE, Bloomberg and Nomura Global Economics 20
Record High GST Collections Source: Ministry of Finance, moneycontrol.com 21
Manufacturing PMI Shows Momentum Holding Up
Manufacturing momentum stabilizes in Dec Services could show sequential improvement
Source: CEIC, Bloomberg, Markit
22Real Estate Should Support Economic Recovery
Affordability levels at all-time high Mortgage rates have fallen to record lows
Source: SBI, HDFC, Jefferies Source: The BLOOMBERG PROFESSIONALTM service, Credit Suisse estimates
23PLI Schemes Can Add 1.6% To FY27 GDP Source: RAVE, Credit Suisseestimates 24
Rabi Season Sowing Strong Growth Reservoir levels higher in central and southern India Rabi sowing strong for wheat, pulses, and oilseeds Source: CEIC, IMD, Agricoop , Axis Capital 25
Centre’s 2H Spending Is Likely To Grow Vs Fall In 1H
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Source: CGA, Credit Suisse estimatesIndia Has Clearly Passed Peak On Daily Covid Case Counts;
Risk Of Second Wave Remains
Source: Bloomberg, Datastream, UBS Estimates, As on Nov 2020
27Vaccination Will Begun In 1 Q CY 21
28Budget Has Raised Expectations
29Unemployment Is High
CMIE Series of Unemployment : Unemployment Rate : 30 day moving Unemployment Rate 4th Jan
Unemployment rate (UER)(>=15) average (%) 2021
Source: CMIE
30Jobs Demanded Under MGNREGA Remain High
Employment demanded by persons under MGNREGA (inmn)
Source: CMIE, Kotak Economics Research 31Equity Markets
32Rising Ownership Of FII’s In Indian Equities Source: CMIE, Bloomberg, UBS India 33
$1 Trillion Could Flow Into The Stock Market In 2021
Change in flows per year in $bn.
Source: J.P. Morgan 34EM Equities Are The Most Preferred Asset Class Source: BofA Securities fund managers survey 35
India Is Attractive Destination For FPI Flows
30.0 12 Months FPI Flows (Dec’ 19 to Dec’ 20) USD Bn
25.0 23.0
20.0
15.0
10.0
5.0
0.0
-5.0 India Philippines Indonesia Malaysia South Thailand Brazil Taiwan South
-2.5 -3.2
Africa Korea
-10.0 -5.8
-7.4 -8.3 -8.5
-15.0
-16.2
-20.0
-20.1
-25.0
Source: Axis Capital 36Sept 20 Results Were Above Expectations
37
Source: BloombergEarnings Upgrades After 23 Quarters Of Downgrade
Consensus Nifty EPS growth estimates
Source: Credit Suisse 38Earnings Growth Likely To Rebound Strongly
`
Source: Bloomberg estimates, Bernstein analysis 39Nifty Trading Rich Relative To Its Own History But Not Relative
To EM Peers
Nifty trading at rich valuations on 12m fwd PE: India's premium to EM at 5 year mean
Source: Datastream, Bloomberg, UBS 40Small Cap Still Below Its Peak Of 2018
Price as on
Indices Absolute Returns
15/01/2018 31/12/2020
Nifty 50 10742 13982 30.2%
Nifty Midcap 100 21697 20843 -3.9%
Nifty Smallcap 100 9580 7088 -26.0%
Source: Capital Line
41Nifty At Lifetime High Levels Due To Few Stocks –
But Mid & Small Caps Still Below January 2018 Levels
27,000
Nifty-50 (TRI) Top-15 Stock (Re-based) Next-35 Stock (Re-based)
24,000 24,575
Top 15 stocks delivered return of 75%
21,000
19,494
18,000 Index delivered 39% return
15,000 14,790
14,072
12,000
Next 35 stocks delivered return of 5%
9,000
Return (%)
Index Name (Dec 2017 to Dec 2020) Nifty Index TRI Nifty Midcap 100 TRI Nifty Small Cap 100 TRI
145 Nifty 50 TRI 38.5 139
125 Nifty Midcap 100 TRI 2.1
Nifty Smallcap 100 TRI -19.0
105 102
85 81
65
Rebased
45 to 100
25
Jun-18
Jun-19
Aug-20
Dec-17
Feb-18
Sep-18
Feb-19
Aug-19
Sep-19
Oct-18
Dec-18
Dec-19
Oct-20
Dec-20
Apr-20
Mar-18
May-18
Jul-18
Jan-19
May-19
Jan-20
Mar-20
May-20
Jul-20
Nov-19
Nov-20
Apr-19
Source: Motilal Oswal & internal analysis Past performance may or may not be sustained in future. 42Performance Across Market Cap
Performance as on 31st Dec 2020 Sectoral Performance CY20 YTD (%)
30 61%
55%
21.9 21.5
20
14.9
12.0
9.9 9.2 8.9
10 8.6 22% 21%
7.8 7.8
5.7 5.6 15% 16%
4.6 13% 12%
11%
6% 5% 4%
0
(0.5)
-3% -3%
-9%
(10) (8.0)
Secvices
Bank
Financials
IT Services
Metals
Private Banks
Smallcap 100
Auto
Energy
FMCG
Realty
NIFTY 50
Pharma
Media
Midcap 100
Nifty-50 Nifty Midcap 100 NSE SmallCap 100
1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR
Source: Bloomberg, Axis Capital. As on 31st Dec 2020. Past Performance may or may not sustain in the future 43Corrections Are Part Of Market Cycle
Nifty -10% correction from 6 month highs
Source: Bloomberg, As on Dec 2020 44Market Surprises Even The Experts
In March / April 2020 In November 2020
45 45Market Cap-to-GDP Ratio – Above Long Term Average
Market cap-to-GDP ratio: Market rebound brings ratio above long term average
103 Average of 75% for the period
95 98
88
82 83 83
81 79 79
71
66 69
64
55 56
52
FY09
FY05
FY06
FY07
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
OW Equities =Ratio Below Historical Lows Neutral Equities = Ratio at Historical Average
Source: Motilal Oswal 46Disclaimer
Investments in securities are subject to market risk and there is no assurance or guarantee of the objectives of the Portfolio being achieved or
safety of corpus. Past performance does not guarantee future performance. The performance related information in the presentation is not
verified by SEBI. Investors must keep in mind that the aforementioned statements/presentation cannot disclose all the risks and
characteristics. Investors are requested to read and understand the investment strategy, and take into consideration all the risk factors
including their financial condition, suitability to risk return profile, and the like and take professional advice before investing. Opinions
expressed are our current opinions as of the date appearing on this material only.
These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local
law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons
who come into possession of this document are required to inform themselves about, and to observe, any such restrictions
We have reviewed the document though its accuracy or completeness cannot be guaranteed. Neither the company, nor any person connected
with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and
take their own independent professional advice. While we endeavor to update on a reasonable basis the information discussed in this
material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Investors and others are cautioned that any
forward - looking statements are not predictions and may be subject to change without notice.
Statutory Details: Portfolio Manager: Kotak Mahindra Asset Management Company Ltd. SEBI Reg No: INP000000837- Registered Office: 27
BKC, C-27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051, Principal Place of Business: 2nd Floor, 12 BKC, Plot No. C-12, ‘G’
Block, Bandra Kurla Complex, Bandra East, Mumbai – 400 051,India. Address of correspondence:6th Floor Kotak Towers, Building No 21
Infinity Park, Off W. E. Highway, Gen A K. Vaidya Marg, Malad (E), Mumbai 400097. - Contact details:02266056825
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