Positive on banks, auto in a multiyear basis: Dipan Mehta

“I am very positive on banks and I think they have a long way to go. Hopefully, the reversal of the NPA cycle is two, three years away or so. We would have learnt some lessons from the last credible NPA cycle which we had which led to the IL&FS fallout. The top tier banks should be part of the core holdings and a lot of trading opportunities in PSU and tier-2, tier-3 banks,” says Dipan Mehta, Director, Elixir Equities

I get a sense that I will get a nod from you if I make this comment that banks have a long way to go and if I compare the two year picture, IT stocks have still outperformed banks which means banks have a long way to catch up?
Very interesting analysis.I like the way you go back to pre Covid and you are right; at that point of time, just before Covid, banks were a beleaguered lot and there was a lot of uncertainty around NPAs because of Covid and even then provisioning cycle was not over and done with.

There were also a lot of question marks on credit growth given the situation and the way the capex cycle was positioned.

But now we are seeing an absolute blue sky scenario for banks where whatever resources the banks can raise or an NBFC for that matter, they should be able to lend it. The bad loans have not yet started. They are in the growth phase just now and it will be a while before they get into a situation where the NPAs start to inch up or move up.

So the next one or two years are going to be exceptionally good for banks. I have always advocated that at least 35-40% of the portfolio should be in the banking sector. And there is so much of choice over there and once the interest rate cycle in India steadies, then we will see bonds also flattening out and some of the pressure on bank profits on account of trading in G-secs will also dissipate going ahead.

So I am very positive on banks and I think they have a long way to go. Hopefully, the reversal of the NPA cycle is two, three years away or so. We would have learnt some lessons from the last credible NPA cycle which we had which led to the IL&FS fallout. So, we are very positive over there and the top tier banks should be part of the core holdings and a lot of trading opportunities in the PSU banks and the tier-2, tier-3 banks.

How do you approach autos next? The year gone by has been very selective when it comes to auto performance. TVS Motors, M&M have given about 50% odd returns and then Tata Motors has languished?
We are very positive on autos, especially Maruti. It is going to see some exciting new models and some of the existing models like Grand Vitara. There is a huge demand for that and if they keep up the supplies going over there. Overall, input prices have flattened out and with higher volumes and lower raw material cost, we should see a good improvement in the operating profit margins as well.

The lending scenario is decent which means that cost of ownership, cost of operation is just about stable. In a country like India, where we still have a long way to go as far as four-wheeler EVs are concerned. Companies like M&M, Maruti still have a good runway for growth. I am very positive on auto per se, valuations are reasonable and it is a great play on rising consumption within India and that is one trend that we are very positive on a multiyear basis.