Why Ashi Anand feels more comfortable with largecap IT valuations

Between largecap and midcap IT companies, when it comes to pure IT services, we find valuations in pure largecap a little more comfortable, says Ashi Anand, founder and CEO, IME Capital. Edited excerpts.

What trends have emerged in post-earnings sectors, particularly in the NBFC space? Stocks with low MFI exposure outperformed, while stocks with high exposure to Piramal Enterprises, strategy shift from retail to wholesale and stressed assets are under pressure. Will this trend continue for some time?

What we are seeing very clearly in the NBFCs and the financial sector as a whole is that after two, three or four years of very strong asset quality across various segments, you are clearly starting to see certain pockets of stress. Now, the good thing is that these are quite different in certain segments. Microfinance is clearly one of them and the markets are beginning to realize this.

Every few years some sort of problem comes up and you see big asset quality problems crop up. It’s important to value and account for that when you’re building your long-term model. Therefore, any microfinance markets stay away from it but another obvious area is unsecured consumer loans. You have, for a certain period, strong runaway growth and certain pockets are clearly under stress. Now the good thing is that most of the big banks and big NBFCs, while they have unsecured loans, they are very small parts of the overall pie and this is where the issue can mostly be resolved. In fact, by and large, banks and quality NBFCs are the market space that we find most interesting at the present time.

Why is the IT sector experiencing significant volatility, with it being the biggest gainer month-to-date but also the biggest loser week-to-date? Does this volatility stem from external factors like the US elections and India’s outward-facing IT companies? Should investors invest in IT, and if so, should they focus on blue-chip IT firms or explore midcap IT stocks?

If you are looking at IT, there are a few important things to understand.. There are only certain parts of the market where valuations are still reasonably attractive. Probably banks, IT, pharma, these are some of the pockets where valuations have been done really aggressively. IT as a pack has not really done very well and this is understandable given that the global economy has been weak, discretionary demand has also been weak. Now, as we head into a rate cut cycle overseas, it’s still early days in the Trump presidency.

However, if Trump manages to help turn the US economy around, you probably have very high quality companies that are trading at reasonably attractive valuations and are ultimately very cost and quality competitive globally. So, it is a space that is definitely interesting from a long-term perspective. But to see a more sustainable move, you clearly need to look at the U.S. economic recovery and increased business confidence in IT spending that the U.S.

Between largecap and midcap companies, when it comes to pure IT services, we find valuations in pure largecaps a little more comfortable. However, there are some very interesting companies when it comes to engineering, ER&D services and that is one area where overall offshoring momentum is still very high. It is much more nascent than where we are. IT services have actually matured, with growth rates in the low teens at best, but ER&D is a space that can grow sustainably for a long time. So, if we are looking at midcap IT companies, we prefer to look at ER&D companies as compared to plain vanilla IT services.