Mid and small-sized banks may deliver healthy returns over next 3-4 years: Pankaj Murarka

“If we own a good quality company or good quality business and even if it is down for a year or so, one should stick with it with a medium to long term horizon as one will get healthy returns over a longer period of time,” says Pankaj Murarka, CIO, Renaissance Investment Managers

In the last 10 years, you have preferred largecap banks and stuck to ICICI or any of the largecaps. Now you think midcaps have seen a re-rating and that is the space one has to focus on, especially after the IL&FS crisis,when a lot of smaller banks and smaller NBFC saw various issues. Do you think there is interest in this segment finally?
Yes absolutely. Last five years have been really challenging for the banking sector in India. Initially between 2014 and 2017, we had this whole big NPA cycle and then we had a mini financial crisis with the IL&FS crisis snowballing into a complete bail out of Yes Bank and after that, we had a Covid driven lockdowns and stuff like that which impacted the entire economy but had a disproportionate impact on medium and small enterprises.

So clearly, banks who have gone through all of that, effectively have been very resilient and strong and some of these mid and smaller-sized banks have had a very healthy or reasonably healthy asset quality despite all the challenges they have seen over the last five-six years.

I clearly think that over the next three to five years, some of the mid-sized and smaller-sized banks will do really well in terms of their growth prospects and in many cases, the asset quality is pretty good and comfortable and many of these banks are reasonably well capitalised. So some of the mid and small-sized banks will deliver healthy returns over the next three-four years.

For years, you have been looking for stocks that can give you consistent returns for 10 years. Out of the 5,000 stocks for the last 10 years, every year there are only two stocks. Pidilite is one. Are you surprised?
Yes that is quite thought provoking in the sense that India is a very large market and very diversified now. We have over 5,000 listed stocks and when you look at such a long period, 10 years’ of positive returns every year and then the count is only two. That effectively leads us to the fact that as investors, one should focus on high quality and despite that. More importantly, the bigger message for investors here is that it is not necessarily that the stocks have to give positive returns every year; one is okay with a few down years and can still make reasonably healthy returns over 5-10 years.


This means if we own a good quality company or good quality business and even if it is down for a year or so, one should stick with it with a medium to long term horizon as one will get healthy returns over a longer period of time. It is just not possible to make a positive return every year on a long-term cycle because as the data shows, only two companies came up with 10 years’ of positive returns every year out of 5,000 odd companies.

Do you expect most of the offerings that will come in the new year, be it from loss- making companies or profit-making companies, the pricing will be better than last year?
Absolutely, I think one, companies will be more reasonable when the bankers are pricing their IPOs because you want to make sure that you are pricing it reasonably so as to leave something on the table for investors and not misprice it to the extent that you have significant price erosion and significant losses for small and minority shareholders as we have seen in case of some of these companies which went for IPOs during the course of the year.

Investors should be careful while they are investing into new IPOs because these are companies which do not have a significant track record as listed entities and which is why it is important to do one’s own share of due diligence and do some primary research at least before committing one’s money because at the end of the day, that is the nature of the capital market.

It is the nature of the beast that if you do not do your homework well or if you invest into stock in a good company at a wrong price, you can still end up losing a lot of money.