No need to worry about asset quality of banks from 12 to 18 month perspective: Sunil Tirumalai

"On asset quality, it does not seem like we should be worried at least from a 12 to 18 month perspective. If you look back, historically, asset quality cycles have been the bigger drivers of banks performance than just margins," says Sunil Tirumalai, UBS Securities.

What about factors like buybacks? Could that change the way how IT stocks should be approached now because these companies are generating cash and doing buybacks.
Yes. So that gives you good support on the downside, I mean, I would tend to think of buybacks plus dividends as distributions. Looking at distribution yields they are at interesting levels and they provide downside support, which basically means that if they correct too much, then you can actually start buying them for that mean reversion. But on a fundamental, perspective, I think the picture does not really look good.

A lot of banks are saying that there is no problem with the credit cycle, the 14 could become 13 and 15 could become 14 but the credit growth for FY24 looks solid. And when I look at brokerage opinions, whether it is UBS or Morgan Stanley or others, they are of the view that banks have reached the peak of their earnings. Do you think we are in for surprise there?
I think the peak of margins is what I think I would definitely agree with and that is what even our banks team have been talking about. On asset quality, it does not seem like we should be worried at least from a 12 to 18 month perspective. If you look back, historically, asset quality cycles have been the bigger drivers of banks performance than just margins. And you would be worried on the stocks if they were trading super expensive at a big premium and hence even the correction on margins is a big risk and you have to get away from the sector. I do not think we are at such a situation right now so we actually have banks as one of the most preferred places for us in the market primarily because given the kind of nominal GDP growth that we have in India and the penetration levels so you will get decent credit growth.

We should be more focused on the asset quality cycle and that is where we should be kind of comfortable from the next quarter to 18 months perspective. And I would not use the margins peaking and coming off as a big sell argument on the bank sector. I think the valuations are quite compelling, given the context of where the valuations are in the rest of the sectors.

Get in a sense as well as to what your outlook is for earnings as a whole, what makes you pessimistic and of the view that we are likely to see big earnings cut in FY because just this morning we were alluding to the fact that yes, Infosys may have been a big washout in terms of one of the big tech Nifty numbers that came out but by and large, you cannot use the same brush to stroke the entire gamut of Nifty companies? It's not across the board. So what makes you confident that we are likely to see those earnings cuts?
Let me rephrase myself. I am not talking about very big earnings cuts going forward. I would say that consensus is today for FY24. By the time we end FY24 we should probably have seen about 5 or 6% earnings cuts, which is par for the course. That is how normal behaviour is. What I am talking about is that the level of earnings growth that we are talking about in India looks reasonably ordinary compared to the kind of earnings growth that we are getting in other parts of the world.

And hence, for example, over the last 3 to 6 months other than the technology sector in emerging markets, which is basically semiconductors etc, it has seen sharp earnings cuts.

Most other parts have actually not seen cuts. They have actually seen increases, while India has continued to see some cuts, so that is the visibility and strength that is actually available in other markets whereas in India, that confidence on growth outlook and earning sustainability I think that is a bit weak.

So I am not talking about risk of very sharp earnings cuts but, it is just that the earnings growth outlook is not as attractive as it is other markets.

Day after day, some of these railway stocks are seeing a lot of traction in trade, a lot of progress for instance, on the Vande Bharat trains, coaches starting production, etc. Wanted to just understand your view on this theme as a whole. How are you looking at the promising prospects that have been doled out by the government for sectors like defence and railways and infrastructure?
I think the government is one entity that is definitely doing a lot of capex, I mean, we have not found much evidence of private sector and private corporate doing a lot of capex and neither are the commentaries indicating that a big upside is seen.

It makes a lot of sense to look at opportunities in the government capex space. I think our team likes, without getting into stock names, our team definitely likes the defence area.

It likes the metro area etc and we do have positive bias on the industrial space as a whole. There are some pockets of private capital, corporate capital expenditure, which can lead to some niche opportunities where our team is positive on. But I think at an aggregate level, it is the government space for capex which is really making sense right now.