What do you make of the cuts we are seeing in the broader markets today?
Some profit taking is normal and healthy in my view. The bad bank news was getting priced in. Bank Nifty was probably the one which was lagging the broader markets. One needs to be a little careful and selective now. We have had a stellar period. From March lows, Indian markets are up almost 150%. We have done very well compared to global markets. In fact, we crossed the $3.5 trillion market cap yesterday. The UK market cap is about $3.6 trillion. So some breather is warranted and one should be careful in terms of putting fresh capital and seek allocations where there is earnings support.
There are still some pockets which deserve some merit with a medium to long term view. Our market cap to GDP now is well above 125%. We are 27 times earnings on a trailing basis, about 4.5 times book value. So on every parameter, things are slightly higher than long-term averages and some judicious asset allocation is probably the need of the hour.
What are your top recommendations about the midcaps?
APIs in CRAM space continue to look good because here the sourcing mix and the China plus one theme will take a longer period as gestation period for getting approvals is longer. We like some of the names in specialty chemicals where we are already seeing this import substitution play out like Deepak Nitrate, etc.
Something like
is still reasonable and in fact has corrected around 10%. The Q1 numbers for the finished dosage and custom synthesis business were very strong. API was slightly muted but that is the nature of the game. It is a bit of a lumpy business. They have a clear FY23 target of about a billion dollar revenue. They are focussing on this non-ARV business. The antiretroviral (ARV) makes up 66% of the mix. They intend to increase the non-ARV business significantly. They have the growth levers in place for that.
We like some niche names in banks, where because of some stress asset resolution this year, there could be an opportunity. SBI for example still trades at about 1.-1.3 book value. Restructured assets are 11.8%. The fresh slippages amount are better than some of the private banking players and it is probably one of the only PSU banks which has actually gained market share both on the liabilities and asset side. So being selective but as I said, there are some opportunities from a medium to long term perspective.
The risk around banks is what we know about the asset quality front. Would you consider looking at banks which have a healthier corporate loan book because that is where there seems to be a lot of excitement and capex seems to be picking up? I am not sure how much retail credit growth is expected to pick up?
We would take a more comprehensive view. I get your point on the corporate loan book focus. In fact, the smarter banks like HDFC, ICICI are doing that and I would look at how strong is the liability asset composition. We want to see banks where the credit cost guidance would be met and they have a good track record in terms of credit underwriting standards. So we would stick with the top ones.
For example, ICICI Bank has seen a very silent, granular turnaround. The retail book is now already more than two-third, still at about slightly less than three book value on an FY23 basis, great initiatives on the digital banking front. This entire focus on this RAM which is retail, MSME and others is noteworthy. Even HDFC Bank has been a bit under the weather, with a change of guard and issues with RBI on the card front affecting the fee income. It is still a -very solid franchise with Rs 17 lakh crore balance sheet. It has not done as well as the other constituents of the Bank Nifty.
So we would stick with the top ones and there are better opportunities in niche financial names, asset management companies, depository companies as we go along.
