Vaibhav Agrawal, CIO of TejiMandi, believes banking stocks are better positioned given that the Indian economy is set to grow at over 9 percent in FY22. This will help banks as it will boost demand for loans and the creditworthiness of borrowers, he said.
This is the right time one should accumulate market leaders in the auto space as well as auto ancillary as they will be ones who will catch the earnings momentum, says Agrawal who is a seasoned professional with over a decade of expertise in stock picking and generating index-beating returns.
Edited excerpts:
Is it the time to bet on banking & financial sector, especially after gradual easing in asset quality pressure and going-on recovery in economy?
Banks and financials are the backbones of any economy, and without them, you can’t have a market, and you can’t have an economy. So, the economy needs financials. With India set to grow over 9 percent in FY22, we are quite positive about the sector. This will help banks as it will boost demand for loans and the creditworthiness of borrowers. Hence, we believe banking stocks are better positioned.
Banks and financials space has already witnessed a sharp decline in business activities because of lockdowns. But since July, led by the easing of lockdowns, record vaccination etc., things have started to rebound. This was reflected in the quarter gone (Q2FY22), with banks reporting the highest profit as well as improvement in asset qualities.
For example, ICICI Bank saw the highest ever net profit and most importantly, on the asset quality front, the net NPAs are down close to 15 percent sequentially. SBI, on the other hand too, continues to perform well and was ahead of the street estimates on all cylinders. Asset quality of SBI and large peers clearly indicate undershooting of credit costs from H2FY22.
With the country crossing the milestone of 100 crore vaccination and hopefully the 3rd wave not being there or being far less disruptive, and the wheels of the economy picking up speed, we should see higher credit uptake in the near future.
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We, therefore, expect banking and financials to be the biggest profit-generating machines. Valuations, too, are quite reasonable, and earnings have been fairly solid. So, these two factors combine to make the outlook strong.
Few analysts saying auto is not out of woods yet due to chip shortage issue. Do you agree and should one start buying the sector?
If someone had told an investor in 2002, that crude will be up 8x over the next decade, then he/she would have rushed to his/her broker to sell his/her holdings in stocks. Right? But, during this period Asian Paints rallied 30x. As a rule, a long-term investor should not get too worried because of any news, which affects the industry in general rather than his/her company in particular.
Any event that affects all the players in the industry, should in most cases be ignored. That is because if everyone gets equally impacted, then such an event does not change the relative competitive positioning. Good companies get across ways to manage broad macroeconomic issues.
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An interesting thing in the auto industry is that many of them have been shifting their volumes to higher-margin products, and despite the volumes being down, they still were able to manage profitability. And, now as the chip shortage eases over the next couple of months, we might see volume pick up as well.
So, this is the right time one should accumulate market leaders in the auto space as well as auto ancillary as they will be ones who will catch the earnings momentum.
What is your take on real estate space which has seen stellar run in past few months amid hope of recovery and improving demand?
After 7-8 years, the residential sector is finally seeing positive sentiment concerning demand. While the COVID-19 second wave impacted demand for most of the sectors, the real estate residential market has seen the opposite as it begins to see the need for personal space and housing in the homebuyer’s mind.
With prices hitting rock bottom, attractive interest rates, and higher household savings, one should expect housing demand to continue going forward. Also, the government has taken several steps to encourage development in this sector. Furthermore, with people resuming work from office, demand for commercial real estate is also picking up.
In the real estate space, we thus prefer players having a market presence, healthy balance sheets, and visibility on the existing landbank monetisation over the long-term horizon.
What are the two sectors that one must have in the portfolio now, to get healthy returns by end of next year 2022?
With the economy set to grow over 9 percent in FY22, we are quite positive about demand picking up. So, choosing only two sectors will not be ideal at this point of time. However, let’s look at the broad picture. If you look at management commentary post Q2FY22 earnings call, almost every company said, “Demand is robust, there are supply-side issues”. So as soon as the supply-side issue softens, you will see growth momentum.
In H1FY22, the broader markets have outperformed their larger peers. The S&P BSE midcap and S&P BSE smallcap gave a return of 25 percent and 36 percent, while the large-cap was only 20 percent. So, while constructing a portfolio, one should diversify it into two categories: tactical bets and long-term winners. Long term winners will be your largecaps stocks, while tactical bets should have stocks from the small and midcap category.
Important point to keep in mind while choosing the tactical bets is to go for companies having leaders of their market share because they will give you maximum returns and are likely to be future largecap companies.
To sum it up about making healthy returns by the end of FY22, our perspective is not how much money you make in the market, it’s how much you can retain. The market is turning very fast, and with six months’ timeline i.e., end FY22, we think the sectors that have been impacted the most by COVID-19 should perform the best.
IT story is expected to remain solid going ahead, but is it the time to reduce exposure to segment as the number of positive surprises have reduced?
If you see our markets, we might say that the Nifty is at 17,700-17,900, and at current levels, you will agree that IT was among the 3-4 sectors that were leading the markets. Demand for digital has grown, thanks to the pandemic led lockdowns. And because of this, the cloud has taken the centre stage.
In H1FY22, you see that many major and minor IT companies have reported strong deal wins and are even continuing after that. Once things are executed, you see further growth kicking in. Also, several companies are reporting positive commentary on IT spending, and we see greater visibility on tech spends leading to higher growth momentum.
The majority of the operations of Indian IT companies are in the US and Europe. With the hope of global recovery intact and India contributing too, one must surely increase their exposure to the segment.
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