Keep some powder dry, also look to invest in 3 sectors: Gurmeet Chadha

“Financials and banks seems to be more of a consensus and for the first time probably, we are seeing the consensus playing out where ICICI and others and even HDFC has started moving a little bit. We are also looking at telecom. My view is more medium term and not immediate. We are selectively looking at being a little contrarian in IT, says Gurmeet Chadha, Managing Partner, Complete Circle Consultants

How should one be positioned? Is it better to look inwards to sectors like industrials and banking?
The best hedge for inflation is equities where the earnings yield is much higher, where earnings are higher than the bond yields. If you see Nifty earnings, probably more than 50-60-% of earnings will come from financials. So not only is the NIM expansion happening in banks with high CASA, after a long time, we have seen bank credit growth at 15% which means a lot of the private sector banks will probably clock 18-20% kind of credit growth and it is exceeding the deposit growth, which is a good economic indicator in terms of the overall cycle.

Also the credit cost would be lower. So we would have good NII, good fee income, lower credit cost in provisioning, better NIMs. All of it is converging and so probably, one should see good earnings upgrade and that is why Bank Nifty is 41000 plus.

One should be in some of the names in industrials and some of the home improvement themes. Also, keep some powder dry because there will be heightened volatility in the interim. We definitely seem to be decoupling from emerging markets and right now, developed markets in the short run. But one cannot completely be decoupled if yields go up aggressively and if there is reasonably quantitative tightening.

How should one play within the financial space because the larger ones like HDFC Bank have been under pressure, given the FII outflows at the start of the year. Since the tide is turning, would there be a bigger alpha there?
One should probably have the core holding still with the top three banks. For us, it is ICICI Bank, HDFC and SBI in that order. Maybe the satellite portion can go towards some of the banks which are now showing signs of stress easing out on the balance sheet. So probablyIDFC First Bank. We have been interacting with them and the book is now more granular – 70% is retail, less than 5% is infra. The credit costs increasingly will keep coming down.

They have been working very hard on the CASA and retail deposit bit. So gradually you will see improvement in both ROA and ROE. They had been shredding the corporate loan book and that is why in the last three years advance growth has been slightly subpar. Also in some financials like CDSL and CRAMS, the activity as far as capital markets is concerned continues to be pretty buoyant and they continue to add new investors both in depositories and mutual fund portfolios. I think that is another way to play it and maybe insurance. It had bad two years and things are probably looking better now.

What are you making of the consolidation buzz within the cement space as soon as Adani enters the cement sector becoming the second largest player?
Stocks also went up post the news and we have been in a phase where anything Adani touches has been making new highs so let us say look at Ambuja for example, you were getting it at about 15 times EV/EBITDA. We have seen this so many times in the past that if you suddenly started paying those kinds of valuations to something like a cement business which is slightly commoditised. Consolidation can lead to some pricing pressure in the interim because there will be capacity addition.

So you have to be careful in terms of what you pay. We are more constructive on this overall home improvement, not really cement per se but players in cables and wires, in sanitaryware, in tiles and other home improvement themes.

What we are seeing is that probably in the last nine years, we have had the highest house registrations. Mumbai for example, had the highest in the last month in terms of property registrations. So, we are going for bigger homes, the rented guys are going for their own homes. There is a broad home improvement theme playing out.

So we like PolyCab and a few other pipe makers. We like PolyCab because the valuation seems to be more reasonable vis-à-vis others, there is a clear B2C shift. The B2B segment is recovering well with revival in housing and infra and their fast moving electrical goods (FMEG) segment is now growing almost 35-40% for the last four years. The management has a clear Rs 20,000 crore kind of a top line goal for the next 2-3 years and there is visible growth of 20% with better return ratios.

Which are the spaces you are considering investing into at this point of time?
Financials and banks seems to be more of a consensus and for the first time probably, we are seeing the consensus playing out where ICICI and others and even HDFC has started moving a little bit. Probably the bigger movement will happen once we have clarity on the inclusion in the MSCI Index and may be post the merger is done.

We are also looking at telecom. My view is more medium term and not immediate. We will have a Jio listing at some point of time and Bharti also is looking good in all segments. ARPU is inching closer to Rs 200 and the free cash flow is exceeding the payments for the first time after a long gap.

Their annual payments now are like Rs 22,000-23,000 crore and the cash flow would be around Rs 33,000-34,000 crore which gives them some room to deleverage, making them a rerating candidate. I think the industry is now consolidated, there is discipline in pricing and so the sector looks pretty good. It has a lot of digital assets including the payment which is profitable. At some point of time, maybe we should do that and we are selectively looking at being a little contrarian in IT. When the news is bad, one can get good businesses at reasonable price. But here the journey could be a little longer with some shorter pain.

China plus one theme or Adani Group of stocks?
We missed out on Adani. We like a couple of their businesses like Adani Wilmar. It is a strong name in the food segment. Fortune as a brand has done very well and especially in oil they have more than 23% market share.

They are also getting into a lot of ready-to-eat and other categories which are quite unorganised including pulses, spices etc. It is something similar to what Tata Consumer is doing. Adani Ports, especially with the market share increasing, they are successful with whatever acquisitions they have done including the Krishnapatnam Port.

I am pretty constructive on logistics as a sector. We have to see where Concor goes in terms of diversification. These are the two names we track. On import substitution we continue to like is chemicals and some of the electronic names which were discussed earlier at length.