Why Gurmeet Chadha is betting on these 4 banks in 2023

“I am also selectively looking at counters where the correction has been quite steep. Some of the CDMO names, some of the chemical names and selectively IT also because when the news is negative, you get better prices,” says Gurmeet Chadha, Managing Partner & CIO, Complete Circle Consultants

It’s the year-end. Would you profit-take at all considering that it seems like we are done with the best part of 2022 after making it to the all-time high and we are not repeating that anytime soon?
Not really, I am not really too much into year-wise performance updates. It has to be more fundamental based. So whether you are at year-end or not, if the underlying stock or business fundamentals change, then you have to take a call irrespective of the levels.

While the market made a new high, it is a divided lot, with balance at Nifty probably being 2000 and IT 15,000, pharma and CDMO being 13,000. So, it is a divergent market and probably FY23 would not be any different. It is likely to be a stock pickers’ market and we are evaluating opportunities. For us, it remains a buy-on-dips market.

I think India would be a preferred destination. The MSCI weightage of India has increased from 8% in FY20 to almost 16% now. China plus Taiwan is still 40-41% and so the near term risk could be some flows going back to China with reopening but from a medium to long-term perspective, the weightage of India would continue to go up and any dips are actually an opportunity.

One should keep some powder dry. The way the US Fed is tightening is unprecedented. It has done seven rate hikes in a year. The pace of the rate hike, the quantum of the rate hike and $200 billion plus of liquidity withdrawal will have some challenges. No economic model can mirror this. Some dry powder will come in handy to add on dips. That is our broader approach.

What is your take on the entire banking sector? The beaten down names like RBL Bank, Bandhan Bank, Yes Bank too are rallying. Does that worry you or is there some value to be seen in such names?
I think there is value. We discussed IDFC First a few months back and there has been a smart run up. I pointed to the fact that their loan book is now more retail with 70% book being retail, the infra lending legacy book is sub 5%, they still have some exposure to some high stressed accounts which I think hopefully if they are able to resolve better. I think there could be probably further rerating. Also a lot of high cost legacy borrowing which they had is being replaced by CASA and bank deposits which will have an impact on the NII and NIMs as well. So I think that is one bank which will continue to do well provided the two large stressed accounts are taken care of.

One has to be selective here because big mistakes in banking are made when credit growth is high. We have seen that in the past. So one has to see the loan mix in terms of how that is shaping up. In PSUs, we are restricting ourselves to SBI and may be looking at BoB at some point of time. We continue to be more focussed on banks like ICICI, HDFC, Axis with a view that we want a sustained credit growth.

Also the differentiator would be liabilities as deposit growth is just 10% and bank credit growth is 18%. Anybody with higher retail base, SBI for example, has Rs 3.6 lakh crore treasury maturing next year plus 45% CASA. If you look at their loan book, 80% is MCLR and EVLR linked with a three month and six month reset which means the bigger repricing of the loan will happen in H2 which will get reflected in both Q3 and Q4 numbers. So one has to go to level 2 and level 3 and it is easy to get carried away but these are the times where maximum mistakes are made.

Since it is very close to the year end, tell us your top three bets for 2023?
There are a little more than three. Among private sector banks, we continue to get overweight both on ICICI Bank and HDFC Bank and among PSBs, SBI. In midcap, we have IDFC in our portfolio.

We are also adding more weight to some of the defence bets which we have. The government has a target of $25 billion of export. This year has been very eventful and we are looking more at defence and defence auto ancillaries where consumable defence items are more.

I am selectively looking at counters where the correction has been quite steep. Some of the CDMO names, some of the chemical names and selectively IT also because when the news is negative, you get better prices.