Gurmeet Chadha, CIO & Managing Partner, Complete Circle Consultants, says “banks offer better risk reward and if rates remain higher for longer, I think the liability side will start differentiating. Axis is below 2 book value. SBI is almost 1.1 book value. And all this in an economy with 7% GDP growth, 12% nominal growth. The credit growth is not usually in line with nominal GDP growth. So we will probably sustain 14-15% credit growth and banks should do well. There is some margin of safety especially in HDFC, ICICI and Axis.”
Are we on the way to the World Cup win and maybe on Monday we will welcome 20,000 on Nifty?
Hopefully, fingers crossed for both and this is what markets does and which we have seen now so many times, the moves are very sharp, the news gets discounted both ways very quickly. So the moment the US inflation came lower, the moment there was a fall in the dollar index, a fall in the US 10-year, we saw a decent reprieve for the market. But as I was saying, I think the odds are evenly balanced. We have more things coming up. We have state election results on 3rd December. We need to see how things go.
But overall, directionally, things are looking very constructive as far as India’s macro is concerned. We are in a perfect Goldilocks space; corporate leverage is at all-time low, bank NPAs are pretty low. Corporate profit to GDP is back to 5% and so at a macro and a micro level, things are looking better.
The other thing we were looking at was the kind of participation that you have had from the IT sector in the last two trades. Even today, across market cap, IT is the one which is most charged up along with autos. Is there merit in looking at IT right now and are there really any signs hinting at a recovery?
No, there is some merit in some large caps. But midcap IT has run up. Just look at the way Persistent or KPIT even Tata Elxsi to a certain extent has run up. So wherever there has been a bit of a resilience as far as deal making is concerned, order wins are concerned. KPIT for example has the best onsite mix. Things have turned out well.
For largecaps, in my view, you should wait for a broader recovery in US markets. The moment the Fed formally announces a pause, that probably will trigger a bit of an upside for IT. So Infosys, HCL in my view are pretty reasonable at these levels. But in my view. probably they have to grind out for maybe one or two quarters more.
Have you looked at Mama Earth IPO? It started off in a bit of a limbo then went below the mark of Rs. 300. Now it is bouncing back quite a bit. Any thoughts here? Even Tata Tech for that matter because that is the next IPO that everybody is waiting for?
You know I will probably wait for some better financials to come. We got a little constructive on Zomato a couple of quarters back. Now the contribution margins is improving. The gross order value is picking up well and 40% jump in their gold membership as well which means a lot of repeat customers coming. It is a duopoly now.
Most of the players have tried their hands including Amazon in Bangalore. It is a duopoly now. So probably there is a high entry barrier to the business. They have done well in this festive season and even Blinkit seems to be on track. I think they have indicated a turnaround next year. Hopefully that should happen. I think the only risk remains the take margin which is 22-23% and there is some resentment in tier two-three towns where the take rates are much higher. So, you have to watch out for that and the impact of ONDC there. But amongst all the ones, this is the one which looks most interesting.
Large private banking names which have been underperforming. Would you be a buyer at these corrections? Will you wait for such corrections to take up these long-term ideas and investing bets?
Absolutely. I think while I know it has been a grind in some large private banks, HDFC for three years now, ICICI Bank for almost a year, but the risk reward is much favourable vis-à-vis the NBFCs. A lot of good NBFCs are already trading at five plus book value whether it is Chola, whether it is Bajaj, whether it is some of the new digital ones including Poonawalla.
Banks offer better risk reward and if rates remain higher for longer, I think the liability side will start differentiating. Axis is below 2 book value. SBI is almost 1.1 book value. And all this in an economy with 7% GDP growth, 12% nominal growth. The credit growth is not usually in line with nominal GDP growth. So we will probably sustain 14-15% credit growth and banks should do well. There is some margin of safety especially in HDFC, ICICI and Axis.
Are the state election results going to be a market moving event at all or is that pretty much in the price?
No, unless there is a big drop in vote share of the ruling party, it should not be a more than a couple of days’ event. But on the contrary, if they do well and win probably a couple of states, the market should take it positively. The focus should be more on rural facing stocks. That is where as a portfolio manager, I would look. But that is the part of the economy which we saw urban is clearly doing very well.
Also, there is a lot of negative news in agrochemical space, two-wheeler space, and the rural economy linked themes and sectors. That is where there is some value for money. Look at PI Industries. It has done very well considering it is the CDA who play in agrochemicals, considering the non-performance in others really stood out right.
Something like Tata Chemical trades at 10 times. It is an agrochemical play. Soda Ash, as well as they are also into speciality chemicals in terms of battery parts. So there is a lot of valuation comfort in that space. And if things turn around, I think agrochemical, two wheelers, two wheeler ancillaries I think they offer a lot of value.
