New age tech stocks still too risky; 2 midcap bank stocks to bet on now: Gurmeet Chadha

“One cannot be loss-making or single digit profit making and commanding a market cap of a few billion dollars. The market is punishing pockets where either there is no profit or the valuation multiples are too high. There are still a lot of opportunities in banks and manufacturing where earnings multiples are reasonable and the biggest hedge is earning growth,” says Gurmeet Chadha, Managing Partner, Complete Circle Consultants.


What about the lock-ins for these new-age tech companies? Most of them have ended because it has been a year after their listing but that continues to be a big overhang. After the spate of corrections, can one nibble in or keep some of these stocks on a radar?
It’s too risky in my view. This market is not very rewarding when it comes to companies where the glide path to profitability is still unclear. I do not want to put everything in one basket in terms of all new-age companies. There are a few companies which are on our radar; Delhivery is one.

We are very constructive on logistics space. Our parcel deliveries are not even 10% of China. In fact, the new platform migration led to some delay which caused the numbers to be soft in Q2 and that is something we are looking at.

We need a clearer path to profitability. One cannot be loss-making or single digit profit making and commanding a market cap of a few billion dollars. The market is punishing pockets where either there is no profit or the valuation multiples are too high.

I think there are still a lot of opportunities in banks and manufacturing where earnings multiples are reasonable and the biggest hedge is earning growth. The more the earning growth, more is the margin of safety and that is what we should be lever to.

How would you look at safer names like ICICI Bank, SBI? They have done well, one cannot call them very cheap now but do you still think there is an element of safety over there?
I think so. For example, SBI last quarter was a big positive surprise. After a long time, I saw one percent return on assets and almost 16-17% ROE. There was performance across metrics, the NIMs expanded 30 basis points, the slippages were only 33 bps. I have not seen this kind of asset quality in SBI’s performance.

Also, the cost of deposit is a very important parameter for banks. We recently saw Bharti raising money at 8.50-8.75%, a lot of NBFCs raising money at closer to 8%. The cost of deposits will inch up. For SBI, it only went up 8 basis points and SBI has almost three-and-a-half lakh crore of treasury maturing next year and most of these loans are linked to MCLR and ECLR and there is a three month, six month reset which means pre-pricing of loan. The bigger impact will come in the second half which probably will lead to further NIM expansion. At 1.3, 1.4 book value, not very expensive also.

Some of the PSU banks plus ICICI Bank continue to do well and probably will be more consistent. Some of the re-rating probably has happened so banks should be steady and maybe buying on dips is a better strategy.

What are the banks that you would look at? Axis Bank with probably Rs 5 lakh crore plus book comes in your bracket of safety. But closer to Rs 1lakh crore and Rs 2 lakh crore which sort of books or mid banks would you look at?
One bank we have been tracking which is IDFC First. They have transformed the lending book. It is now 70% retail; the legacy infra book now is only 4%. We are tracking some stressed assets. If that goes on well, they will do well. Also, in the next two-three years, their legacy cost, high cost deposits are maturing and that will be replaced by lower deposits, which could mean that some pressure should come up on the liability side as well which should have a positive impact both on NII and NIM.

We also like City Union. These are the two banks in the midcap space for us.