Banks may not be sexy but are pockets of value; Buy defense, capital goods stocks lower: Nitin Raheja

The buzz is that banks aren’t really sexy. If you ask for a doubler in the next three years and someone says take SBI, people say something else. People don’t really believe that SBI will double in three years even though the growth is very high. It seems the flow is now directed towards the banks. What are your thoughts? You were bullish on banks last afternoon as well.
Nitin Raheja: We have been bullish across the sector for some time now. Unfortunately, it is an over-owned sector, especially as it is a very liquid sector and was over-owned by FPIs. There was a time years ago when there was this 20% ownership limit, there was a block of banks that traded at a premium, which we called the FII block. Now, it has reversed as they have been selling to India for the past few years.

On Tuesday, SBI’s Dinesh Kumar Khara spoke about how strong banks’ fundamentals have become in terms of capital adequacy ratios, with overall credit costs falling to all-time lows. I don’t see the banking balance sheet as strong today as it was in the last decade. If we are going to talk about strong economic growth, as you said, clearly banking is the sector that is going to participate. When it comes to participation, one of the reasons the Nifty or the index has such a large share is the sheer size of the profitability coming out of banks.

If you take out the PSU pack, private sector banks are trading at valuations that I haven’t seen in a very long time. So, I think this is a very interesting place, where everything has gone up in the market, the value is clearly here.

Outside of banks, which we’ve already addressed, where do you think the profit taking will happen? Today we are seeing serious amount of profit taking in smallcaps and midcaps, capital goods, some consumption and defenses to name a few. Is there a trend?
Nitin Raheja: It is very difficult to tell whether this is a trend or profit taking. Don’t forget the old adage that markets can be more irrational than you can be solvent. The point is that many of these names that you’ve talked about in defense trade at very rich valuations in capital goods. But having said that, clearly, the business visibility is also very strong for each of these names over the next two or three years. So, even if you see a correction, it will be like improvements that need to be bought.

For example, in many of these companies, which are focused on execution or based on the order book, if a quarter is delayed or there are some issues as far as execution is concerned, we can see improvements there. But clearly, because the long-term story is so strong, we will see them bounce back very quickly. But the margin for error in these businesses is very small at the moment. We’re more comfortable with a lot of consumer discretionary names, where structurally it’s a 5-10-year story that’s happening.

Over the last two-three days we have spoken to some of the best minds in the Indian ecosystem from Corporate India, Mr. K.V. Dr. Kamath, IMF. Subramanian; Of course, earlier he was also the CEA, and the issue that is coming out is that the model of economic development of the country, they are trying to grow above the average, anywhere in the range of 6% to 7%, but in a higher trend. With a moderate inflation environment of 4.5%. If that actually happens, how does that affect the capital market in three to five years, say, 2030, in your view, a scenario between now and 2030?
Nitin Raheja: Clearly the capital market is seeing a very strong trend going forward. You will have these periods in the capital markets where valuations are slightly ahead of fundamentals. But I think the key important fact is, look, I think somebody made a very valid point at the conference yesterday, which talked about the fact that the capital market has two legs to it. One is PE re-rating and the other is growth. And he talked about how the PE re-rating was mostly because when we compare it to historical.

So, a lot of it will be driven by growth and the faster the growth and the better the growth, you should see the capital markets trending upwards. But you will have times when you go into a consolidation phase or there is a global event that affects the markets in the short term. But structurally, if you look at where we are and capital markets are a proxy for GDP and growth, you see it’s a good place to be, it’s a great way to compound your money.

More importantly, as far as the whole equity culture is concerned, I think the average Indian’s household wealth, equity is barely around 5.8% or 6%. So, I don’t think we are over-owned as far as equity goes. And as an asset class I think the biggest change in my opinion has been in Covid. You’re in 2020 in Covid and you’re a digital economy that’s well-connected using national ID cards, connected to online brokerages, and anyone coming into 2020 and this young population is risk-hungry, that’s in the money. And in the money big time. I don’t think this group of people is moving away from equities as an asset class.

I think we’re just going to see more and more conversions. So, A) you have growth, B) you have increasing demand for equities as an asset class and also, if India becomes an asset class globally, you will see India’s weighting increase in MSCI. Don’t forget we are at 18% and China is down. But if we are going to grow fast, there is no reason why we should not increase our weight in MSCI and that means more money will come to India. So, overall, I see a good time ahead from a capital market perspective.