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    Banking sector will continue to do well: Gautam Duggad

    Synopsis

    ​So it is our base case that this sector will continue to do well and it is amply reflected in our model portfolio where PSU banks have been the single largest overweight for us for more than a year running now.

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    But it is a very interesting sort of a sector where we have seen a lot of deals which have happened, some of the new listings which have happened and the general awareness about health and some of the allied opportunities which are coming up in the diagnostic space, the pharmacy space, the online pharmacy space.
    "Consumption is in a bit of a moderation right now barring two or three subsegments. You look at consumer durables, consumer electronics, even consumer staples for that matter across the board there is a moderation," says Gautam Duggad, Motilal Oswal.

    I want to begin talking about the entire banking space. We have got the earnings from a couple of public sector banks, Bank of India as well as Bank of Maharashtra. Does that give you the confidence that whatever the Street was pencilling in terms of a complete revival as far as the space is concerned? What is your take and which are the biggest bets from the public sector banking space?
    Just two days back we have put out another note on PSU banks where we were arguing that despite the sector having done so well, the ROAs are just about approaching 1% and it will still be lesser than the peak ROA of the 2004-2013 cycle. What has changed in the last four or five years are two, three things. The sick quality cycle picked out in 2018 when the total provisions of the top seven public sector banks in India were about 2.3 trillion rupees. From there, the provisions have come down to just about Rs 86,000 crores in the last five years.

    Now what it has done to the public sector banks’ profitability is that it has moved from a loss of Rs 60,000 crores in 2018 to about Rs 90,000 crores profit in 2023.

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    Going forward, we expect this profit to go up to 1.1 trillion in next year 2024 and then 1.3 trillion in FY25.
    Now obviously as a consequence of this, the return ratios have also become far more robust than strong for PSU banks. Many of these PSU banks are expected to cross 15, 16, 17% ROE going forward.

    So it is our base case that this sector will continue to do well and it is amply reflected in our model portfolio where PSU banks have been the single largest overweight for us for more than a year running now.

    We have about 7% weight allocated to PSU banks in our model portfolio versus the benchmark weight of 2.5%. And to address your first question, the early results do give you that sort of a confidence that the sector is going to do well. And it is not just PSU banks as far as numbers are concerned, we are expecting private banks also to do well. If you look at the numbers in financials for just the Nifty companies, there are 11 Nifty financial companies in Nifty actually. So their profits bottomed out in 2018 at a profit of Rs 45,000 crores. And this year as we end FY23, this profit will close at 2.1 trillion. So it is almost a 5x jump in 5 years for the 11 financial companies in the Nifty put together.

    So private banks are also doing well, PSU banks are also doing well, NBFCs are also doing well, the entire space has picked up so much so that in FY23, when you look at the total Nifty profits, we are expecting a 13% profit growth in FY23 for Nifty. 72% of this growth is coming only from financials. So to put it other way, without financials, the Nifty full year earnings will grow at just 5%.

    So it would not be far-fetched to say that this is the only sector right now where visibility of earnings, profitability is the highest. Every other sector has something or the other which is troubling. This is one, oasis is in a desert for the last four or five years, very steady, stable and this is the only sector where we have seen an earnings upgrade as well in third quarter.

    I do not know how many bottom-up stories you are looking at but for instance when it comes to consumption, we were just looking at the disappointment on a Delta Corp today. The fact that their overall as well as gaming margins have seen a fair amount of slide, almost about 600 basis points. We find it a little hard to believe going by the cues outside their casinos in Goa but that is not quite translating into their numbers.
    Unfortunately I would not be able to comment on that because we are not tracking it. But the top line is a different thing which we are seeing even in hotels. Almost all hotels are booked out till 31st of March whichever city you go in. Your airline has been seeing a surge in bookings for last eight-nine months. So, some of these sectors are very tricky where top line can be misleading and your margins are totally divergent from what your anecdotal evidence is or channel checks are suggesting.

    The broader point is that consumption is in a bit of a moderation right now barring two or three subsegments. You look at consumer durables, consumer electronics, even consumer staples for that matter across the board there is a moderation. You look at the volume growth of some of the big consumer staple companies for last five-six quarters, it has been hardly 2-3% and this moderation is not going to change immediately in my view because rural is still not out of the woods.

    So, first half of CY23 is going to remain challenging for lot of the consumption companies. Of course, there are going to be some honourable exceptions like Titan and Metro and Vedant Fashions but they are just that exceptions. Right now the bigger trend is that there is a moderation in demand which is reflected amply in their volume growth. If you marry that with what the RBI is projecting for the economy itself, they are talking about a 4.4% GDP growth into 2H FY23 and the full-year FY24 real GDP growth assumption is also around 5.2% to 5.3%.

    So, we are living right now in the short term a very moderate economic growth environment which is in a way reflecting in the consumption demand as well. And our own prognosis is that there may be a single digit nominal growth in GDP for FY24. If it happens, it will be the lowest in many-many years and it will definitely have repercussions for corporate top lines and in term consumption demand and so on and so forth.

    What is your reading of the IT earnings? Is there a case now which makes them a buy given the deep correction or will you still wait out for a couple of quarters to get that clarity as far as outlook for FY24, client budgets, etc, is concerned.
    It is a peculiar case where everyone except the ones who are running the business have a view on recession. The companies in the last two or three quarters have been demonstrating a very healthy performance. Some of them have raised their guidances but ones who are tracking that are still very preoccupied with the macros and recession. So there is a dichotomy there. We like IT, especially the largecaps, very rarely you get a combination where earnings growth is 10-12%. ROEs are very high and payout ratios are almost boarding 85-90% and these are companies which have survived all the macro crisis of last 25 years.

    There is ample evidence to that if you look at Y2K, 9/11, GFC, tapper tantrum, COVID, our IT companies especially the big ones, large-caps have emerged stronger after every crisis. In between there will always be a quarter or two where macro picture will dominate the conversations. But I find after the recent correction of CY22 especially the largecap IT are very attractive on valuations given the construct of earnings growth, payout, ROE and free cash flow conversion that you get in the sector.


    The top bet in that sector then, is it largecap, any midcap name?
    Our entire allocation in IT in our model portfolio is allocated to three largecap stocks which is Infosys, TCS and HCL Tech. Midcap IT, we still find on a relative basis a bit overpriced. Of course, the growth is slightly higher there but the kind of context that I just mentioned on some of these balance sheets and cash flow characteristic, I think IT largecap offers a relatively far better risk reward versus the midcaps.

    What about the entire hospital space, that was also coming back in focus? There was increased clamour about medical tourism coming back, the balance sheets of all the companies look a lot more healthy, there was this entire buzz around consolidation, valuation re-rating as well. Do you endorse that view and if yes, again in the hospital, healthcare sector which would the top bets be?
    Our top bet in hospitals is Apollo Hospitals which incidentally also a part of our model portfolio. We have written a detailed note on it a couple of days back where we are arguing about the rising occupancies, ARPOB and operating leverage and then some of the digital opportunities which are inherent in that specific company. So all of that put together offers a very good opportunity from a slightly longer term perspective. I know the stock has done well over the last three years and therefore from a near-term perspective the valuations might be bit pricey.

    But it is a very interesting sort of a sector where we have seen a lot of deals which have happened, some of the new listings which have happened and the general awareness about health and some of the allied opportunities which are coming up in the diagnostic space, the pharmacy space, the online pharmacy space. It makes the sector very attractive from a slightly longer term to medium term perspective. We are putting our bets on Apollo Hospital.




    ( Originally published on Jan 18, 2023 )
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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