Shreyash Devalkar, Head-Equity, Axis MF, says “rather than calling out a segment like PSU versus private versus NBFC, etc, I would like to more focus on which end use or which end segment these lending entities are catering to and the outlook on the credit growth in those segments along with the asset quality.”
Incrementally macros appear very stable. RBI Governoe in a special interview to ET Now said that closer to 8% GDP is what they are working for this fiscal. Earnings season is just over. Elections dates would come out by mid-March. Is the market already pricing in the outcome?
Shreyash Devalkar: We have always observed that when it comes to big events, like elections, markets tend to move up prior to that and in that context, the movement of the market in the last one month, three months, more importantly, and sixth month if you observe, then yes, it is getting broadly priced in. It is very difficult to time that whether it is going to get factored in per se as far as the event is concerned before election or after election or not. But more important is one should look at it more from the CY24 point of view what next three months, six months down the line, budget, and after that the developments, within the companies and the announcements when it comes to infrastructure as well as investment in various sectors including power, etc. So, it is not going to be only about election, it is going to be about election, the actions taken post that, through budget, and even by various ministries which are going to be formed after that.What is your view on this entire private banks versus NBFC debate because the latest actions by RBI has made people believe that banks are better placed and at least for the next six to eight months the trade should be go long private banks and maybe take some profits off the table for NBFCs. Your view?
Shreyash Devalkar: When it comes to banks versus NBFCs, it is more to do with practices since the banks has been governed by and more importantly, more regularly observed by RBI for a long time. In the case of NBFCs, in the broader set, that has not been the case.
In that context, if you look at why and where we are finding some issues, we see that credit growth is mostly driven by retail credit and unsecured loans where there are multiple ways in which even the regulators are trying to judge whether this credit growth is sync with or not the overall GDP growth and then whether it should be that way and whether this money is getting used not in some other activities like markets, etc.
The trade is not about banks versus NBFCs, in my opinion. It is more to do with the practices and which are the attractive segments in that. So, when it comes to valuation, definitely banks have underperformed a lot in last one year or so and that is definitely one of the reasons why they are performing. Actually, when we say, only private sector banks have underperformed and in that also a few of them. The PSU banks have done extremely well. You notice that even NBFCs initially did well and after that it underperformed. So, more than calling out a segment like PSU versus private versus NBFC, etc, I would like to more focus on which end use or which end segment these lending entities are catering to and the outlook on the credit growth in those segments along with the asset quality.
The other thing we wanted to understand was whether there is a tactical call, to have higher allocation or give weightage to largecaps at this juncture because it is a very case specific thing. But, mid and smallcaps at large are getting a little toppish.
Shreyash Devalkar: Already this trade is playing out though we are not really able to observe it in that manner. So, on a six-month basis. already the large versus mid versus small the differential is 2% to 3%. Normally it is 15% to 18%, that gap is narrowing now. The largecap index is around 15-16% and mid and small is about 18-19%. That gap is getting narrowed. Actually, on the three-month basis, only midcap is outperforming and the largecap and smallcap indexes performances are the same and on the one month basis, the largecap is outperforming both mid and smallcaps.
So, this trade is playing out. There also, there is one nuance that at a broader market level, the PSUs — banks or other PSU entities — are outperforming a lot and their weightages and respective indices are different. So, typical midcap index would have 15% by weight PSUs and that is where you notice that midcaps in the last three to six months are outperforming the large and smallcaps. In largecaps, the weight is somewhere around 10-11%, while in case of smallcaps, typically the weight would be 5-6%.
So, ex of PSUs, the returns are closer when it comes to all the three categories and that is where the asset allocation by way of calling it out at large versus mid versus small that phase is getting over already.
