Mid and small-caps have become reasonable but much will depend on the stock- to stock & business basis. Infra is also very cheap but the outlook is weak.
Vinod Nair
The Banking sector has been the worst performer in the last three to four months due to a forethought that industry's profitability, credit offtake and asset quality will fall in FY21.
A good part of it got discounted in the current valuations of the Nifty Bank index; P/B has fallen by 45 percent to 1.5x from a high of 2.75x a year back.
At the same time, the view is changing that banking & financial sector will do better as the economy re-opens, with more positivity in second half of FY21.
Operationally, the fall in cost of funds, stable liquidity and big equity funding deals announced with foreign and domestic investors at higher valuations have upgraded the view.
We believe that a cut in interest rates, charging provisions over and above the regulatory requirement in Q4FY20, capital conservation and easy funding to increase the capital adequacy ratio are positive factors for the sector to do well in the short to long-term.
Broadly, the market has been doing well in the last two weeks but we are in the bear rally. We are at the long cycle of the trend with some volatility in the near-term and have room to go higher in the future as the economy attempts to get back to normalcy.
The Nifty has added more than 1,300 points in the last two-three weeks, which is about 15 percent in a short time. Some consolidation is warranted and the market may get cautious as the economic data and company results will be released next week with negative bias.
The global momentum is going to be important as we are trying to catch up with the rest of world since the domestic economy has underperformed hugely in the last three months while re-opening of our economy is changing the trend.
India's monthly economic demand will improve on a continuous basis since it is opened from a standstill. We are bound to see improvement on a daily basis while to reach the pre-COVID level may take a year or more in which some sectors will do better and some will underperform.
We should not expect a complete V-shaped recovery in everything, the sustainability of the current momentum may be challenged as a backlog of demand is seasoned.
Stocks, sectors and companies which are able to maintain a positive outlook on revenue in this challenging situation will get a premium valuation.
Currently, valuation is expensive in consumer durables and discretionary like auto, airlines and electricals. Valuation is also high in segment like FMCG and telecom but outlook is stable to positive, so they may stay in the medium to long-term.
The valuation is reasonable in segments like pharma, chemicals, banks & IT. Mid and Small caps have also become reasonable/cheap but much will depend on the stock to stock & business basis. Infra is also very cheap but outlook is weak.
(The author is Head of Research at Geojit Financial Services.)
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