Prefer large banks over insurance & NBFCs: Vinay Sharma, Nippon India AMC
We are advising our clients to invest more in banks and go bottom up in picking stocks.
Would the markets remain range-bound or should one see a further move from here, given that macro data has been fairly sluggish? We are talking about auto sales and we are not seeing any major trigger until we see what the RBI does?
Markets saw a sharp up move over the last few weeks. The markets are fairly valued as of now. The breadth of the market has started to improve over the past few weeks or months. While markets might be fairly valued, there are various segments which look pretty interesting and one has to be much more bottom up in the market today, given the current macro scenario. In a nutshell, markets have seen a good uptick and valuations seem fairly reasonable. We still believe broader markets have a lot of strength. As and when the macro situation improves, we could see some more uptick in the broader markets.
There are newer financials which are catching up, but the rally is very restricted to top financial names like Bajaj Finance and HDFC or for that matter the private banking names. Could there be a bottom-up story as well here?
We have been fairly positive on the overall financial space for some time. We still believe that in the medium term, one has many reasons to be optimistic about the financial space, especially the large banks including the public sector ones. In the last few years, India has seen a massive NPL cycle which has depressed profitability of most large banks.
As profitability normalises, there could be very strong positive earnings surprises in the space which relative to the market valuations, are still not very expensive. If you look at the large banks in India, and I would like to include large government banks here as well again because they have seen huge profitability depression over the past few years and once that normalises, markets will realise that they are now starting on a much cleaner balance sheet. The corporate deleveraging that India has seen, over the past few years, would also take a stop at some point of time and we would again see balance sheet expansion in some sectors. All these benefit banks hugely.
As to whether the financial space has broadened over the past few years, we have seen many new listings in the space, particularly in the life insurance and general insurance side. Overall, we believe banks are at a much better advantage than most of these sectors. One, valuations are way more reasonable in banks; second, the cycle is quite favourable.
Therefore we today are advising our clients to invest more in banks and one has to be bottom up here as well. Given the macro scenario, it is very important to be stock specific but overall in the space, we like large banks over insurance and NBFCs as of today.
What is your take on tariff hikes by the telecom companies? Would some of these stocks be on your radar now?
Telecom has been on our radar for some time. It is one of the sectors where profitability has been quite depressed over the past few years, purely because of excessive competition. The earnings surprises could be very strong here because inflation is coming back after a long time and in the next few years, profitability could be very different from what we have seen in the past few years.
We believe it might be a good time to look at telecom space in general. But one has to be stock specific because not all balance sheets are as strong and not all balance sheets are similar in the sector. We would prefer the stronger balance sheet here.
What about autos? It seems that inventory levels are going down. Would you consider autos now or do they continue to be an avoid?
This has been one sector which has seen a lot of headwinds over the past few quarters. We have seen price increases because of the new technology changes coming up, because of the insurance issues and the overall income growth scenario in the economy has not been pretty great. This is one of the sectors which reflects discretionary spending of the consumers, which in the current scenario, has been weak. One has to be stock specific here. It seems like the cycle can be close to bottoming out for a few segments in the auto sector. There are a few pockets where the cycle seems to be bottoming out. You cannot really time the cycle because one never knows when the uptick comes back. The uptick will probably resonate with the income growth in the economy, but as and when an uptick comes, stock performance could be fairly interesting. To us, it seems like the cycle is bottoming out in a few sub segments and over the next few quarters, you would see an uptick in some of the sub segments.
Should one take a little bit of risk and move more into the midcaps? Should one even look at cyclicals at this point or stick to the safer names?
Over the past few quarters, market breadth has not been very good. A few heavyweights have been pulling markets up and the entire investor preference has been to look at companies where balance sheets are in great shape, where the nominal GDP growth slowdown has not impacted too much or where the formalisation of the economy and GST has brought market share gains to some sectors and some players.
Today, looking at the valuations, one can see an interesting dichotomy developing in some of the heavyweights which have done very well over the past few quarters and some of the midcap names. The distinction between great and good companies has never been so high as we are seeing today in the market.
As and when the economy recovers and macro data improves, these good companies will start to do much better. So, to that extent, I agree that some sections of midcaps are looking fairly interesting today. There is a bit of divergence developing between the largecap and midcap valuations. As and when the economy recovers, these midcaps have the potential to do much better than what they have done over the past few quarters.
But again, one has to be stock specific till real green shoots are seen in the economy. We would not suggest taking too much risk. One has to stick to good quality names and where balance sheets are strong and where the story is going good. But overall, in a broad framework, we agree that midcaps are fairly interesting today and as and when the economy revives, you could see a valuation uptick there.