Deposit growth for good quality, technologically superior large private sector banks have grown by 20 percent during April-June 2020.
The key reason for private banks medium to long-term investment attractiveness is value migration happening from PSU banks and instead of reversing it, the coronavirus pandemic has accelerated this trend. Deposit growth for good quality, technologically superior large private banks have grown by 20 percent in the April-June quarter, Shailendra Kumar, Chief Investment Officer at Narnolia Financial Advisors, tells Moneycontrol's Sunil Shankar Matkar in an interview. Edited excerpts:
Q: Most technology stocks are near their 52-week high, given strong results from Infosys and Wipro despite the lockdown. So, what are you advising your clients?
The IT sector, after underperforming the general market for the last three-four years, has recently shown smart outperformance and we believe this is sustainable. The majority of IT companies are quality, high free-cash-flow generating businesses. And, underperformance over the last three-four years implies that the valuation multiples are not high. Also, we need to understand that though we as consumers of digital technologies are consuming mostly products of US large tech companies, Indian listed IT companies get good software services business from those leading tech companies of the world. Also among traditional users like BFSI, retail, travel, etc, the usage of digital technology is increasing rapidly and digital transformation from a service point of view is a large business opportunity.
Most of the large Indian IT companies like Infosys, TCS, etc get 30-50 percent of their revenue from newer digital technologies. Another area where we see tremendous potential in the current work-from-home environment is cloud implementation, which is catching up very fast.
Q: The economy has reopened in all non-containment zones and most rural areas are active but infections are growing at a faster clip. ICRA expects India’s real GDP to contract 9.5 percent against earlier estimates of 5 percent. Given the 45 percent rally seen from March lows, what is the market discounting or is it just a liquidity driven rally?
It is interesting to link the market fall post-COVID fear with the underlying earnings of Indian corporates. Remember that the earnings estimate of Nifty50 companies for FY21 was Rs 5,23,072 crore during the pre-COVID time and now post-COVID disruptions, the same is Rs 3,72,435 crore, implying a 30 percent cut in earnings, at the same time the COVID triggered fall in the market in March was a similar percent.
So, the market has largely tracked the cut in earnings, though with way faster speed than what we analysts can get our computations done. The other thing to keep in mind is that the valuation multiple has to take into account the massive fall in the interest rate that we are witnessing. In a textbook sense when the interest rate falls, valuation multiple has to get higher.
Q: The flow into equity-oriented mutual funds has been declining for the past three months and SIPs also have moderated. What is the major reason behind it and will the trend continue in the coming months?
After almost a year, SIP flows have fallen below Rs 8,000-mark. Also, after the sharp rally post-March lows, overall equity MF inflows in June was mere Rs 240 crore but it is important to note that number of folios have still grown smartly, implying that the financialisation of savings and equity participation is growing in-line with past trends but HNIs (high net worth individuals) are booking some profit at higher levels. Once the market cools off, we will see fresh buying by this set of investors as well.
Q: Many experts feel the bad loans can increase significantly or the actual picture of bad loans will be seen once the six-month moratorium ends August 31. Many banks seem to be preparing well in advance by raising funds to avoid a crisis. Should one stay with banking and financials space?
Good quality private banks continue to be a good investment proposition. The key reason for their medium to long-term investment attractiveness is value migration happening from PSU banks to private banks. COVID-19 instead of reversing the same has rather accelerated this trend.
Deposit growth for good quality, technologically superior large private sector banks have grown by 20 percent during the April-June 2020. Though, in the very near term, we need to be very stock-specific here. Moratorium-2 books of various large-good quality banks are in the range of 9-15 percent. We have to closely look at the possibility of slippage from this once the moratorium period ends.
Some banks like HDFC Bank and ICICI Bank appeared to have made sufficient provisions. While HDFC Bank retail book is mostly to salaried employees working with government or highly rated corporate sector. For ICICI Bank, most of the loans are home loans with sufficient value of underlying assets. At the same time, banks having exposure to the self-employed segment look more vulnerable.
Q: Some experts feel the current rally is partly driven by the strong participation from retail investors following the rise in new demat accounts during the lockdown. Do you expect retail participation to continue or will it be caught in a mini-bubble burst, which some experts see coming with 45 percent run-up in the Nifty and 44 percent in the smallcap index from March lows?
Rampant speculation in low quality mid and small-cap companies invariable ends with bad outcomes. And my sense is that this time, too, it will not be any different. There are other issues here as well though earning normalisation looks a high probability event once we enter FY22 but the market should spend some two-three quarters and let a high degree of clarity come. Also towards the end of this year, we have the all-important US election.
Q: Some FMCG companies' numbers were very strong during lockdown period. What is your call on the FMCG sector and how should one approach the space?
Britannia numbers for Q1FY21 were a kind of outlier due to excellent strategy adopted by the company in terms of supply chain management by producing higher-margin category and SKUs and meeting the demands in an otherwise difficult situation for normal functioning of the supply chain. Market response by the management of most of the other companies has started becoming growth focussed only after June. Still, some part of every portfolio has to be invested into FMCG stocks as they are high cash-generating quality businesses and are not cyclical.
Also, during COVID while down trading is getting evident, barring personal care products rest of the categories are showing high single-digit volume growth. Also, lots of de-stocking happened in March and April, and once re-stocking starts, volume growth for most of the companies would be higher.
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