Bank Stocks Good Play At Current Levels: DSP Mutual Fund's Vinit Sambre
Strong economic fundamentals should provide the firepower in terms of the growth metrics for companies, he says.
The banking sector is a good play, at current levels with multiple tailwinds in technical and fundamental front, according to Vinit Sambre, head of equities at DSP Mutual Fund.
The banking sector has hit a low point in performance compared to NSE Nifty 50. In the past, this is where the sector has really outperformed the benchmark. From that data perspective, it is a good point to start with, Sambre told NDTV Profit's Niraj Shah in an interview.
On the fundamental front, credit-growth trends have moderated a bit from 18–19% to 14–15%, which is a decent number for an economy that is likely to do well, Sambre said. "Banking is going to remain (a) proxy to that and hence, from that perspective, that is a good way to also play."
Sambre underscored that the non-performing-asset levels in banks and the incremental slippages were giving a lot of confidence as they had been at a decade best.
Vinit Sambre. (Source: company website)
Valuations Remain Concern
Strong economic fundamentals should provide the firepower in terms of the growth metrics for companies, according to Sambre. "What I'm really not worried about is whether our economy is on the right track. I think on that count, we are doing pretty well, and all of the important segments are seeing investments sticking place," he said.
But he remains concerned about valuations in some pockets, pointing out that the better way to approach these categories with rich valuations would be more moderate in terms of investing. "But as far as the macro picture for India (is concerned), it is giving a lot of confidence for the overall growth of Indian corporate sector over long term."
In the current earnings season, as we go down the market-cap chain, earnings growth at the lower end is slipping as compared to the large caps. It is going to be a micro bottom-up approach to follow over the next two years, as "we've gone past the high rate of growth in earnings", he said. "We'll have to deal with more fundamental changes in select companies."
Watch The Interview Here
Edited Excerpts From The Interview:
What are the prospects of the markets when you consider all that's happening globally and locally, or given a choice would you sit on the sidelines and wait for some clarity?
Vinit Sambre: I think, the last three years have been pretty challenging from that perspective, when we look at the way the markets have really behaved.
I think, overall we are seeing two or three important changes in the market. One, there are very quick changes happening as far as the sectoral rotations are concerned.
Secondly, there is a very strong narrative which keeps driving the momentum. Good amount of flows keep chasing some strong performance and then. Those are sort of creating in some form or fashion the link with your core fundamentals.
At some point, that tends to weaken. A lot of the categories today are driven by some good fundamentals, but a lot of flows which have been driving these, a lot of these segments have been themselves trading at very rich valuations people and still are pretty okay about all of these things as the anticipation is that this type of growth will sustain over a long period of time.
So what I'm really not worried about is whether our economy is on the right path or right track. On that count, we are doing pretty well. All of the important segments are seeing investments taking place. I think those should definitely give more firepower in terms of the growth metrics for the companies as I understand.
But what I'm slightly more concerned about is the kind of valuations, which we have hit in some of these pockets. I think the better way to approach these rich valuation categories would be to sort be more moderate in terms of investing, look for bad days in terms of investing. So I think that is what I would say.
But as far as economic growth or the macro picture for India is concerned, I think those to us have given a lot of confidence for the overall growth of the Indian corporate sector over the long term.
The market seems to be favoring companies based on their earnings rather than valuation. For example, when HAL that has been doing really well released its earnings, the stock price rose. Similarly, ABB shot up 10% before the earnings report and another 15% after, despite its expensive valuation.
If you focus only on valuation, you'll never be able to buy any of them. In such a scenario, what should investors do?
Vinit Sambre: Very fair point. I think that's a challenge which maybe I was talking about. As a long-term investor one should realise the fact that eventually what the stock will deliver over a period of time is going to be the cumulative cash flow which they are going to generate, which you know, discounted back at the current levels.
We have gone through these phases in the past as well. You're aware about the year 2000-2008. During those years we have seen a lot of exuberance across many segments. And when companies do not sustain the growth metrics, which are getting built at that point in time, those are the periods when these will also see some of that—damage taking place in a big way.
I'm not suggesting that it looks certain. What I'm trying to say is that people should be cognizant about the kinds of valuations some of these companies are trading at and try to see what kind of growth metrics are getting built into these valuations.
If these seem out of whack, then I think clearly there's a way in which one can sort of reduce the valuation risk and look at segments which may be underperforming at the moment, but could be cyclically at the low point and could turn out to be a good investment over the next couple of years.
Would that same argument apply while valuing a broad brush of stocks such as SMIDs? It's about comparing the valuation of SMIDs to that of the large caps. Similarly, while looking at businesses, do you see if the P/E ratio matches the earnings growth rate?
Are there pockets wherein high valuations do not deter you, due to the strong earnings growth trajectory?
Vinit Sambre: So, let me pick up the second question first.
In some of these cases, where we have seen inflection in terms of the growth, these are mostly companies within the engineering, defence and power segments, all of which are capex-heavy businesses, definitely we have seen good fundamental change out there.
The earnings have grown, the ROEs have inflected and along with the good news keeps feeding into optimism and it keeps driving the valuation multiple.
In some cases, we have chosen to maybe just stick around with the names that we have in the portfolio and let the exuberance run. And, we would like to maybe participate in that kind of exuberance and not do anything.
In some cases, where we feel that maybe the visibility of the growth could fizzle out over the next year or two, we would like to take the call of trimming some of those exposures.
Coming specifically to the mid and small caps, I definitely think when we look at the valuations here, they are again at the high point and in some form or fashion, backed by fundamental changes which were taking place in the last 2–3 years. Clearly, the earnings growth for the mid and small caps have outperformed significantly over the last two to three years.
But interestingly, while observing the results announced this quarter, I realised that as you go down the market capitalisation chain, the earnings growth at the lower end is actually slipping as compared to the large caps. I think, typically it has to do with the banking sector which has still done well.
But if we look at the earnings growth trend, I think, there is clearly some decceleration taking place in mid caps and to a large extent in small caps also.
So, one has to be very clear about the kind of companies one is actually buying into in these spaces. It's going to be, I think, a very micro bottom-up approach to follow over the next 2–3 years as we've gone past the high rate of growth in earnings and we'll have to maybe now deal with more fundamental changes, which will keep driving the earnings for the select few companies that one should focus on.
At the other end are businesses like the financials that are trading at dirt-cheap valuations. While people have been expecting an improvement in their performance, there have also been strong arguments as to why financials may not grow like the past. So, why should someone be optimistic about financials currently?
Vinit Sambre: I think beyond the current dynamics for the financial sector, which I'll come to, an interesting way to sort of look at the outperformance is to plot the Nifty banking index and compare it to the Nifty index.
When we do that, for a long period of time, what we realise is that the banking sector, because of the underperformance, have hit a low point as compared to the Nifty outperformance.
I think, this is the point where, in the past, the sector has really outperformed the Nifty and hence from that data perspective, I think it is a good point to start with.
Now, when looking at the other metrics that you spoke about, it is clear that the credit growth trends have moderated a bit. It's not like it has come down to a pretty low level. I think, from 18-19, we are looking at maybe 14-15 types of growth level. That is still a decent growth number for our economy, which is likely to do well and that is the assumption over the next 5–7 years.
I think that banking is going to remain a proxy to that and hence from that perspective, to us, that's a good way to also play some of these investments, which are taking place in India. It could turn out to be a decent investment over a long period of time.
Third-most important metrics to look at in the case of banking, I think is where in the great cycle are these banks. When we look at the NPA level of these banks and the incremental slippages, I think it has given us a lot of confidence. They have been at a decadal best in terms of those metrics and incrementally also the signs are not giving us any alarming signals.
So I think that is a good thing for the banking sector. If they keep delivering 14-15% kind of growth at these evaluations and with the kind of ROEs these banks have, I think it should be a decent investment in my mind over the next few years.
The only other point that I wanted to add is, why despite all these metrics it is underperforming. I think, the ownership also matters a lot. I think banks have been held by all kinds of investors. Both foreign and domestic, in terms of their exposures, were very high.
Hence, from that perspective, there may not be any incremental, large buying trends that are visible and which make the sector look a little bit more mediocre in terms of performance.
In one of the notes by DSP, there was a chart with your inference that the size of India's annual investments is becoming large enough to get your immediate attention. What is the investment implication of this immediate attention?
Vinit Sambre: If you look at the chart, historically, we were at the lowest point, maybe 10 years back. And, we have scaled in terms of the overall investment. I think, largely post-Covid, what we recognised is the government has very responsibly taken up the ownership of recovering from the lows. They have gone ahead with massive investment, which did help both in terms of the central government and state government spends that are taking place.
The other investment in private sector housing, I mean, those continue. Right now, when we look at the real estate sector, that also is on a very strong footing.
So net-net over the last three years we have seen massive scale-up that has happened across the board in terms of investment. As a result, we are seeing a lot of these companies—be it defence, power, energy, roads, railways—benefitting. Water is coming out as a big segment now.
So I think all of these segments, the kind of investments, which one is sort of talking about and maybe post elections, the contiguity of that, will ensure that we keep seeing the sustenance of this growth.
Now, you know, the other implication of this massive investment on the other side—which was also due to the high inflation, the Covid-related stress—is that the consumption on the other side that is also a large component of our GDP, we have seen that slowing down in a lot of pockets.
Our belief is that if we have a good monsoon and wage level increases, people will get adjusted to the high inflation over a period of time. I think that consumption should also start adding up in terms of the growth momentum over the next maybe six or nine months.
So I think we will have a good combination of both categories doing well. I mean, there are a lot of assumptions that are built into these estimates. But being equity fund managers, our job is to sort of remain more bullish than bearish.
M&M’s results are testimony to the fact that by and large auto has done well. There is positive commentary from some hotel companies and their results have been very, very strong.
In some sense, premiumisation has dominated the last 2–3 years. Do you see that changing, or do you think that rural may come back and therefore staples may come back? If they do, does premiumisation still have a longer runway?
Vinit Sambre: To me, the way I have seen the last many years now, I think premiumisation is something which is structural.
Everybody is actually moving up the value chain. People you know, who were in the middle income bracket are gradually moving up to the high income bracket.
As you move up the high-income bracket, your spends on basic consumption generally don't go up as much as your income levels. And that leads to a substantial amount of money that goes into discretionary spends, which people use to satisfy their high aspirations and that is where we are seeing the premiumisation trends that are taking place now.
It is possible that the bucket of these spends could change over a period of time. At times, autos should do well. At times, building materials should do well. But more importantly, I think the premiumisation trend is likely to continue and this is a structural change that we are talking about for our country that I don't see changing.
What could sort of matter as a broad base increase in the consumption is, I think, the lower end which has got affected. As that comes back, I think that will only add up to the overall premiumisation trend and then I think broadly we'll see good consumption growth, maybe sort of catching up. So that's my hypothesis.
Do you think it's time for staples to turn at all? The commentary has been patchy but one or two companies have spoken about rural coming back.
Vinit Sambre: I think, even we are sort of having that, in our current hypothesis that the rural has had a challenging period, for the last two years.
The monsoons were also not very supportive, the wage levels and real wage levels were also hurting these people in the rural side of the economy. So I believe that all of these could change as a lot of time has really passed and with anticipation of good monsoons will be this good change.
So there's a merit in sort of tactically having exposure in names which could benefit out of the rural uplift over the next maybe one or two years.
So I believe, whether now it is an FMCG or two-wheeler, there are various ways to play this trend and that's how we are also sort of thinking about it.
One another chart shows telecom as among the earnings detractors. Is this story changing now? There has been talk of tariff hikes, etc. Vodafone has got a lease line as well. Do you like telecom? Are you present there?
Vinit Sambre: Previously, we were a bit apprehensive because of the kind of capital spends that the telecom industry was required to carry out. And with the lower ARPUs, I think that led to single-digit type of ROE structure for the telecom companies.
I mean, there are two listed companies. But the point is, now these companies are really talking about the capex spends moderating over the next few years and the benefit of ARPU increases should lead to rising cash flows and also rising ROEs.
In the past, you've seen that whenever the companies really inflect in terms of the ROEs moving from low ROEs, or ROEs that are lower than the cost of capital to maybe crossing the cost of capital and improving from there, those are the periods when the companies have really done well, in terms of the overall returns and re-rating factors.
So I think, from that perspective, these companies are falling in line with what they are saying—that the kind of capex, which was required in the past is not going to be the case and the ARPUs do increase—I think there's a case and merit to look at these because a good amount of re-rating has already happened. But still more room likely, if that sustains.
