- Are the markets safer for investors at this valuation level? –T Mallikarjunappa
In terms of valuations, currently the Indian market is trading at a marginally higher band of the long-term cycle. The premium valuation has moderated. For example, Nifty50 index, from the peak of 22.5x, one year forward P/E has reduced to 19.5x. The 5-year average is about 18.5x. The long-term outlook for Indian market is positive and sectors which look promising are IT, Pharma, Consumption, Capital Goods, Renewables and Manufacturing.
2. Please share your outlook on IT, BFSI and Consumer Goods — Sethumadhavan U K
Outlook for Indian IT sector is positive supported by improved pace of business due to digitalisation. Whereas new deals from BFSI, communication, healthcare and hi-tech continue to drive growth. However, supply side issue continues to be a concern causing margins to slip in the short-term. However, it is expected to subside in the next few quarters. Currently, IT stocks are trading at a premium valuation hence volatility can be expected in the short to medium term.
Banks have been underperforming for the last 1-2 years due to persistent decay in asset quality, lack of credit growth and continued FII selling. However, during Q3FY22, we have seen most banks improving their asset quality supported by strong traction in collection efficiency and disbursement growth. We believe that this momentum will continue in the coming quarters due to improvement in banks financials. We have a positive long-term outlook on the sector and recommend fresh positions in top and upcoming private players considering reasonable valuations, strong balance sheet, credit growth and improvements in economic growth.
In the NBFC space, housing finance companies are seeing strong demand pickup supported by government impetus and economic recovery. While most gold finance companies are facing competition pressure. We also remain positive on life insurance companies considering the high growth potential, increased awareness for protection and improving market share by private players.
Q3FY22 revenue of growth was strong on the back of higher realisation, however, inflationary pressures have hurt earnings momentum. The sector was trading at a premium valuation of avg. ~40x-50x range. Post results the sector has seen some consolidation (~23% correction). We expect input cost to stay at higher levels in the near term, while pass through of cost, will lead to gradual improvement in margins. Given lower inventory in channel, good summer, and recent consolidation, we remain cautiously optimistic. Stock specific investment will be the key here.
- Can we buy PSU banks at current level, and can we expect a further upside in FY 2021-22? — Kantharaja V P
PSUBs financial performance has improved during the recent quarters with gradual improvement in asset quality and coverage ratios. We expect credit cost to moderate going forward resulting in improved profitability. Currently Nifty PSU Banks are trading at P/B of 0.7x compared to Bank Nifty at 2.1x. This gap can narrow in the future.
However, we prefer Private banks than PSUB which are bound to lose market share in the future due to weak business model and competitive position. We suggest you to invest in high quality Private Banks and NBFCs than in PSUBs. PSUBs performance is also expected to be volatility on a medium to long-term basis due to consolidation and capital requirement.