SBI’s numbers and the management commentary were extremely bullish. The Street has liked the numbers. What is next for SBI?
Yes, so I think SBI is placed like ICICI Bank in one way where the value of the subsidiaries of SBI keeps on going up because the subsidiaries are doing reasonably well and that keeps on adding value to the overall some of the parts’ valuations. The banks have come out with good results this time, especially on the net interest margin front, where they outperformed despite very low credit growth. That was very surprising because that means that they are really saving on CASA deposits and that is they have huge money lying there at very low cost.
Going forward, credit growth needs to come back for the stock to do well. SBI is a stock where valuations are still really cheap. So purely on valuations, one can argue that the stock should be much higher but the credit growth needs to pick up and as the credit growth picks up, the credit quality needs to sustain. If they can do that over the next one year and sustain the quality of their book with the credit growth picking up, we will see further rerating in SBI.
The year ahead may not be a repeat of what the year gone by has been because most of the experts that we have been talking with say that a maximum of 12-15% index return is what one should make happy and satisfied with in the year ahead. Your view?
The expectation should be brought down substantially. I have a midcap product. The return YTD itself has now crossed 70%; these are abnormal returns and cannot sustain. I think the return expectations should be brought down substantially for whoever is coming into the markets now. Over the next one year, return expectation should not be more than 10% to 15%.
Which sector is going to be a leader in the year ahead?
It is tough to identify the leaders but whenever markets do well, some financial stocks obviously do well. In financials, ICICI Bank is best placed. The bank did well and the stock ran up to Rs 850. Now it has corrected around 8-10%. It is still in the value zone. So overall, the market could correct, but it is a very good company for people to own because not only are they sustaining credit growth, they are gaining market share and also able to hold on to their asset quality as well.
In the case of M&M, last one year has been tough for autos because of wrong cost pressures and rising inflation. That is one company which should do well.
There is a new procurement policy which favours higher quality companies over just L1 bidders. I would think that better quality infra capital goods companies will do much better and in that space, obviously L&T is the leader of the pack. There are many other construction companies which are high quality. They should do well over the next one year.
Pharmaceuticals have underperformed as opposed to what they did in 2020. Where do you position pharmaceuticals now? Do you think the sector is going to continue to underperform?
I do not think we can make such a generalised assumption. On the largecap side, both Dr Reddy’s as well as Sun Pharma offer opportunities. Dr Reddy’s has been outperforming the rest of the pharma space in terms of margins etc. which it has been delivering. It is well placed and investors should have some allocation in that.
Sun Pharma is something that we own. The results were good and I believe they are pretty well placed and valuations are not very demanding. Pharma used to be a very demanding sector as far as valuations go, but today the valuations are much lower than most of the other sectors.
How would you look at the Q2 results so far?
The results have surprised on the upside where expectations were low. We saw some of the auto companies deliver better than expectations and then those stocks ran up. As far as IT goes, it has been a mixed bag. TCS disappointed but many others outperformed.
Capital goods and infra companies have done well in terms of performance but in terms of margins, there has been a pressure which could ease off going forward. In the case of banking and financial companies, results have been good in terms of asset quality and overall earnings as a whole have been somewhat lower than the expectations. When I read through a lot of reports of analysts, I see most downgrades are very small like 2% or 5% in earnings, rather than upgrades. On an overall basis, the growth of earnings this year as per the consensus estimates was around 40% plus. At this stage, companies earnings growth in the second quarter is around 24-25%. The second half will be tougher because it was relatively normal last year and normal year to normal year comparison will happen this time. Elevated expectations is the challenge for the markets.
