Inflation is a Risk | Value Research Says Harsha Upadhyaya, Vice President and Fund Manager-equities, UTI AMC

Inflation is a Risk

Says Harsha Upadhyaya, Vice President and Fund Manager-equities, UTI AMC

Harsha Upadhyaya Manages six funds worth Rs 4,856 crore and has 14 years in the fund management and equity research space gives him a ringside view of the stock markets. He believes that winning in the markets requires you to take tough calls and stick with them despite the volatile conditions. This is something that is reflected in the performance of the funds managed by him.

Which direction will the markets take from here?
Currently, the Indian market is trading broadly in fair range of valuations. At Sensex level of about 20,000, the market is discounting FY12 consensus estimates by about 16 times. These valuations can be sustained if the earning estimates do not disappoint going forward. It is likely that the market will move up in line with corporate earnings growth, estimated at 18-20 per cent each year over the next two years. However, the short-term market movements are driven more by liquidity and sentiments, and hence are difficult to predict.

What triggers can change the complexion of the markets?
In the Indian context, domestic inflation and hardening of interest rates and uncertain global economic backdrop are key downside risks to the market. The positive trigger for an upside may come from re-rating of Indian equities due to sharp increase in foreign flows, as India continues to be one of the high-growth regions in the world.

Which sectors hold promise in 2011?
Although the infrastructure sector valuations have corrected a lot over the past three years, the business fundamentals and profitable growth prospects continue to be hazy. As this industry is highly working capital intensive, the likely higher interest rate regime will pose significant challenges to profitable growth. We continue to be underweight on the sector. We will be reviewing our decision when we see pick up in infrastructure spending coupled with softening of interest rates. At current market levels, we do not see any significant pockets or sectors of undervaluation. We may need to be more stock specific in our approach as we step into 2011. As we see inflation as one of the likely risks going forward, we believe that the sectors insulated from inflation-related negatives may outperform the broader market.

What is your view on mid- and small-cap stocks?
Mid- and small-cap segments of the market usually move in spurts. The valuation gap relative to the large-cap segment was very huge at the start of the upward move and hence, we witnessed a sharp rally in mid- and small-cap stocks that outpaced large-cap stocks by a wide margin for about a year between mid-2009 to mid-2010. After this rally, the valuation differential between the two segments has narrowed significantly and the absolute valuations of mid- and small-cap segments have also risen. We have already witnessed mid- and small-cap segments underperforming relatively against the large-cap segment by 10-15 per cent in the past six months or so. Hereon, we believe one needs to be stock specific even in mid- and small-cap segment as in the broader market.

This interview appeared in Wealth Insight January 2011

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