Large private banks, consumer staples top bets in this market: Girish Pai

Private banks look fairly interesting from a valuation standpoint, says Head of Research, Nirmal Bang.
If we look at other parts of the market, there is a huge amount of uncertainty, be it banks, IT or oil and gas.
Let us talk about the prospects of the IT sector. Do you think the potential loss in revenues that we would see from the top five IT companies may be capped at around 2%? That is what some reports seem to indicate; around $300 million because in the past, we have seen about 1% to 2.5% top line growth in dollar terms in the fourth quarter. What is it that you are anticipating in terms of the fall out?
So for the fourth quarter specifically, we would think that there is anyway going to be 15 bps to 100 bps impact because of the lockdowns that have happened both in India as well as the US and Europe. So we are expecting a weak quarter. A 4Q has typically been the second weakest quarter in the fiscal; typically 3Q tends to be the weakest quarter. So from that standpoint, we are not expecting any great numbers to come through from the quarter per se.

But I think the market is going to be focusing not so much on the quarterly numbers. I think the focus is going to be more towards what is going to be the FY21 revenue growth and margin picture; which is where we think that the consensus numbers still are fairly optimistic. We are factoring in something like 3% to 4% US dollar revenue decline for the industry because we think that unlike this economic situation we have, the US and Europe is going to be far worse than what one has seen in the 2008-2009 global financial crisis. We could see US GDP growth at 3% or even below that; I am talking about negative 3% or even below that.

So we think that the markets are not pricing that in. If you look back in history, in the 2008-2009 time frame we have seen PE multiples or some of the stocks go down to as low as mid single digits and Infosys which was the bellwether stock at that point in time was in the high single digits. So we are not there yet. So I would think that we are going to see multiple such cases where people are going to get bearish and bullish alternately. I would agree with the previous guest’s view that we will probably see a longish period of earnings correction and market volatility. Last 2008-2009 was a 15-month long kind of bear market. I would probably think it is going to be at least that much and within that 15-18 month kind of a bear market, we will probably see multiple short-term rallies.

So that is what I probably think will come through for even our market and within that, IT will probably underperform right now. It is not visible; the customers in IT firms do not have visibility on how things will pan out for them. So one of the things I worry about is we do not even know what the first order impact is let alone the second order impact. So that is going to be visible in a few months time, which is when the consensus numbers on revenue growth are going to come off and we think that there is going to be more pressure on the IT services firms. So we are cautious about the sector. We have been cautious on the sector for a fair bit of time but we continue to remain so.

HUL has nearly $71 billion market cap. It is more than half of its parent Unilever’s market value. How are you reading into the kind of move that we have seen for HUL since the beginning of the year? The stock has gained nearly 33%, it is the second best performing consumer staple stock after one of China’s companies with respect to the overall valuations that the company commands. It is one of the most richly valued in its category. What is the story when it comes to HUL?
If you look at the market, the market participants and institutional investors are rewarding companies where there is visibility on revenue and profits. Within the market, I would probably think consumer staple companies and pharma companies are probably those specific areas where there is a slight bit of certainty on the earnings picture. If we look at other parts of the market, there is a huge amount of uncertainty, be it banks, IT or oil and gas; there is a lot of uncertainty.

So I would think that there is money that is gravitating towards stocks like HUL and some of the other consumer names, which are probably moving up in price. So I would say that is what is driving up the stock. Yes, multiples are looking fairly rich. I think it is trading at somewhere close to 50-52 times FY22 earnings. This is including the Glaxo Consumer numbers. So in the near term, say next 6 to 12 months, it will still continue to be a favourite of ours. Consumer staples is an area where we think you can actually conserve and protect capital. But looking beyond that, I would be a little bit more worried about the consumer space and consumer staple space specifically because valuations are fairly rich. So I would say 6 to 12 months, I would still be overweight but beyond that, I would worry about the kind of valuations we are sitting on right now. Our overweight is more from a capital protection perspective.

At a time when things are still a little uncertain, we are still awaiting to hear whether or not there will be a stimulus package or whether or not the lockdown will be extended. In light of that, what is possibly looking like it might still be insulated? Would it be outside of pharma, perhaps tech? Is that where you would be looking?
I do not think tech is insulated. The two areas where I think from an earnings perspective they are relatively more insulated are consumer staples which I talked about when I spoke about HUL. The other is pharma where I think there could be some earnings upsides or at the best things are going to be stable out there.

But from a valuation standpoint, I would probably think that the private banks or especially the large ones are looking fairly interesting. I am not saying that they have hit a bottom as yet but from a valuation standpoint, if you take a two-three year perspective, my sense is that they have reached a value zone, especially those which have got fairly substantial subsidiaries in insurance and asset management and elsewhere. I would probably think that those are the kind of companies which one should be investing in at this point in time.

So if you are going to ask me to take a bet at this point in time and deploy some amount of capital, I would probably do that in some of the large private sector banks; be it ICICI, Axis, even SBI some extent. I would put my money in HDFC Bank. So these are the stocks where I think valuations have come off quite a bit. I partly sense there is going to be a new NPA cycle building up. We have had a 10-year situation of NPAs being cleared up because we see a lot of other things that were done; probably we are on the cusp of another NPA cycle which could involve retail and MSME, which is probably what has kind of priced into the financial stocks at this point in time. But two to three year bets, I would still take on the large private sector banks.





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