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Move over IT, new age stocks! Banks to regain leadership in next 2 qtrs: Dipan Mehta

Niche NBFCs and beaten down PSU banks and private banks will get the maximum return. Now these are not the best banks but they are the best in terms of an investment opportunity from a risk return profile., says Dipan Mehta, Director, Elixir Equities.

How you are choosing what to do, how you are choosing price action should be acted on? Jubilant Foodworks came out with a 28% store on store growth and the stock is 8.5% in the red!
It is because expectations were built for higher. Also during the earning season, a reality check is done as far as valuations are concerned by many investors and certainly valuations are on the higher side for such companies. If the earnings beat is not significantly higher than what analysts expected and on a bad day like yesterday, one could certainly have a correction but that does not take away the fact that it is a great business, market leader and once we have some amount of correction in the stock — 10-15- 20% — there will be a good entry point from a long-term investor’s perspective.

While there may be short-term corrections because of technical factors, the long term story is not affected. In fact, the prospects have just got better. Their management commentary talks about new store openings and that has always been the growth driver for Jubilant Foodworks. Same store sales typically are high single digit to low double digit and the real alpha as far as top line, bottom line comes from expansion of stores network.

Besides Jubilant, what else would you be tempted to buy in a decline if there are any raw material cost concerns and that is why the stock falls?
Specifically because material prices are going up, the best strategy would be to go for the basic material companies — ferrous, non-ferrous metals; petrochemical companies; basic chemical; speciality chemicals. These are the ones which will clearly benefit from inflation of their end product prices and because of the demand situation, they will be able to get away with higher prices especially aluminium companies and even steel companies to an extent although there are some issues with cement companies.

But that is a well discovered stories. So in the entire space of manufacturing, I would be a bit cautious and selective and if you do want to get into some of these companies, consider infrastructure, engineering and construction and real estate companies which are having robust earnings growth and very good earnings visibility on account of new projects and new launches.

But the best sector to look forward to over the next three-four months with full conviction would be the banks and NBFCs. I think the worst is over for the sector and with the economy revving up, there would be significant improvement in net interest income and credit books. Also a lot of the provisioning for NPAs is over and done with and so credit cost also will come down.

It is a perfect blue sky scenario for banks and NBFCs — be it large banks, small banks, PSUs. I think across the board, we will see a very good period for that sector and that is where I think investors should focus on. You could go for some of the riskier banks and NBFCs as well which have been under stress because they will take this opportunity to beef up their operations and their profitability and you could get a good outperformance in some of the underperforming banks and NBFCs as they get their balance sheet and profit and loss in order.

We are very positive and we feel that in the next three to six months, the banking sector could regain leadership at the expense of technology or some of the other new generation stocks.

When capex picks up banks will always outperform. Would you go the classic way and buy corporate banks and PSU banks because they do the heavy lending when it comes to corporates and the SME and MSME sector because their ability to take risk and ability to give large loans would be much greater than what small private banks could do?
Across the board the sector will do well and my gut feel is that when the sector does well, it is typically the tier-2, tier-3 players which tend to do exceedingly well. First of all base effect and smaller size means that they can grow higher and show very high earnings growth rates.

Secondly, at this point of time, a lot of the problems are behind them, banks like IDFC First, Federal Bank, AU Small Finance Bank, IndusInd Bank have all had their share of problems as far as NPAs are concerned and provisioning more or less over and done with. That could mean they can show exceptional performance going forward.

Within the PSU banks, we are more positive on PNB, Union Bank, Canara Bank, Bank of India rather than SBI which has been a stellar performer and first off the block as far as that particular sub sector is concerned.

Then we have some of the beaten down NBFCs and we particularly like microfinance companies like CreditAccess Grameen and also gold loan companies. So niche NBFCs and beaten down PSU banks and private banks will get the maximum return. Now these are not the best banks but they are the best in terms of an investment opportunity from a risk return profile.

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