HomeMoney & Finance‘Post-correction, price value gap for banks is favourable’

‘Post-correction, price value gap for banks is favourable’

Have market valuations turned attractive now? 

Yes, the correction of about 15% has turned market valuations attractive. This correction is primarily led by the oil and commodities shock caused by the ongoing Russia-Ukraine conflict, which will have a negative impact on India’s current account, inflation, and consumer demand. While these would cause demand/margin issues and erratic earnings in FY23, FY24 earnings per share (EPS) is resilient as it’s driven by a bottom-up revival in a few large sectors like financials, IT, telecom, and metals. 

Overall, if we pivot to 1000 + EPS for Nifty in FY24, the same is broadly intact despite recent developments. Internal earnings divergence would be high with upgrades for exporters and commodity companies, and consumer sectors will see a downgrade, while for financials it will be neutral. Overall, markets are now trading at about 15-16x FY24 EPS, which we believe is reasonable given that post the ongoing headwinds, the long-term growth drivers are intact. 

Among large caps, and mid and small caps, is there any one segment better than the other? 

We would prefer large caps for multiple reasons. Firstly, the valuation is similar, and generally large well-managed companies have a better ability to withstand ongoing shocks. Secondly, in India, the long-term growth potential is intact for large caps. In addition, the ongoing consolidation across businesses is in favour of strong and large companies. Lastly, we have seen that a large part of the recent foreign institutional investor (FII) selling has been skewed in large-caps and thus, is a technical factor that is leading to quotation, rather than permanent loss. Overall, we continue to recommend investors to allocate about 70-75% of exposure in large caps and the remaining in the mid-caps. 

With Russia’s removal from the MSCI and other indices, will a lot of money come to India because  it will get a proportionately higher weight in indices? 

There are many moving parts as of now and we need to sequence the importance of the headwinds. We believe the most important issue is where oil prices settle in the medium term, followed by the extent of a global increase in interest rates. Flows generally determine the near-term movement in markets, and are not necessarily driven by medium to long-term fundamentals. While not related, what could be meaningful would be if there is any progress on the inclusion of government securities in global indices, as it could lead to sustainable flows on the fixed income side, and help mitigate current account challenges. 

What is your view on new age tech companies? 

Mirae bought into some IPO and they have come off new prices since then. 

We believe that some of the new-age companies could create wealth in the long-term depending on the strength of the business model, competitive positioning, and execution. These businesses need to be looked at from a long-term lens, as they are still in the investment phase. As regards our exposure, it is calibrated and risk-adjusted at about 1-1.5% of AUM spread across a few names. For us, any business (new tech or old economy), our decision to buy, hold or sell will be driven by regular and dispassionate assessment of long-term assumptions. If there is something wrong in terms of our assessment or the business itself not doing well or a combination of both, we would take a call accordingly. For now, while stocks have corrected, the underlying markers for business stability are intact. 

On anchor allocation and IPOs, does it confer an advantage to mutual funds to come in that way rather than afterwards in the secondary market? Is it that you are able to get a higher allotment?

First of all, whether IPO of secondary market transactions, the template to invest does not change. In this context, there is no specific advantage from a price-value perspective. You are right that during anchor allocation, there is a liquidity or execution advantage to all large funds to build a position. 

In an environment of high oil prices, which sectors are best leads to endure and thrive? 

The best pocket is which has corrected only because of market sentiments, and the underlying business is broadly neutral to positive. Pharma, IT, and manufacturing exports will fall in the category. An important point in stock investment is that sectors that are materially impacted by current headwinds could be good stock provided the fall in valuations more than factor the near-term impairment, and the long-term thesis remain intact. Few consumer businesses would fall in this segment. Overall, we should look at strong companies as they are better positioned to weather the oil crisis. It is equally important to keep valuation discipline as once the oil crisis settles, the end of the low-interest rate era would need to be considered particularly in a few companies whose P/E multiple expanded owning to earlier low-interest rate regime. 

How bad is the oil shock for banks? 

All else being the same, high-interest rates is not negative for banks as they have access to stable low-cost current account savings accounts (CASA) deposits, and asset repricing is faster than liabilities. An important positive for banks is that the risk of non-performing assets (NPAs) is low as the system is significantly cleansed.  In our opinion, we would see stable earnings for banks.

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