Kunal Shah of Carnelian Capital shares insights on the current market trends, focusing on key sectors such as information technology (IT), real estate, banking, and non-banking financial companies (NBFCs). Despite a muted second-quarter performance in the IT sector, Shah suggests that valuations, especially in large-cap IT, remain in the comfort zone. In an interview with Moneycontrol, he discusses the promising outlook for real estate stocks, emphasising the importance of playing through ancillaries rather than directly investing in real estate.
Additionally, Shah delves into the impact of the Reserve Bank of India's crackdown on unsecured loans, particularly on NBFCs, highlighting potential challenges for players like Bajaj Finance. Top banking and NBFC stocks, including SBI Card, Bajaj Finance, HDFC Bank, and ICICI Bank, came under selling pressure after the Reserve Bank of India (RBI) tightened norms for personal loans and credit cards to check the unbridled growth in this segment. The central bank has raised credit risk weights on unsecured consumer loans by increasing the capital requirements for such loans, as concerns have been growing over these borrowings. Edited excerpts of the interview:
What is driving so much interest in IT stocks despite a muted Q2 show? Following a meeting with seven IT firms, Jefferies has said that the near-term growth outlook remains weak as demand uncertainty persists and revenue leakage could increase in Q3. Do you think valuations have run out of the comfort zone after the recent upmove?
Frankly, I don't feel that IT valuations are no longer in the comfort zone, except for a few stocks in the mid-cap space. Valuations in the mid-cap IT space are in the euphoric zone or have caught up. There's a lot more valuation comfort in the large-cap IT space. Coming to the demand scenario, somewhere we believe that the bottom for the demand scenario is already in place. We only expect improvement hereon.
We saw some large-cap IT names already commenting on the call that the second half (H2) would be better than the first half. Yes, some IT names did cut their guidance, but the order book wins will have to be seen for the revenue to come by in the next financial year. So that's the take on IT — except for mid-cap IT names, large-cap IT seems to be in the comfortable zone.
Realty stocks are on solid ground. We saw earnings comfort, strong pre-sales, and healthy demand for luxury homes. This has played out well for companies like DLF. The Nifty Realty Index surged almost 5 percent last week. Do you think there's more steam left for this rally?
The sense I get is that for high-ticket loans, there is obviously some bit of demand, and in tier 2 and tier 3 cities, there is a little bit of demand for small-ticket loans. But with the rising interest rate scenario and housing EMIs (equated monthly instalments) going up, there is a bit of a question mark over the sustainability of this demand. When it comes to listed players, there are very few large national real estate players. So, in a way, it's better to play through ancillaries, which will benefit because of the uptick in real estate demand, rather than directly playing the real estate plays, in our view.
Also Read: Banking Central | RBI cracks whip on unsecured loans again. Will digital lenders get the message?
Your thoughts on the banking and NBFC spaces. Following the RBI's crackdown on unsecured loans, Nifty Bank, some private banks, and PSU banks took it on the chin. Experts believe that NBFCs will be more impacted by this crackdown. In light of that, what are your thoughts on the NBFCs, particularly Bajaj Finance, where the RBI clamped down on two of its products?
There has been robust credit growth for banks and NBFCs in the unsecured space because they have been focusing on personal loans and related unsecured loans, which have been growing at a robust pace. The RBI did mention a few days ago that they are seeing some stress in loans of ticket sizes less than Rs 50,000. So, this was going to come in some form or another. Well, it's bad for NBFCs in comparison to banks, largely because the cost of funds for NBFCs is a little higher. With this, capital adequacy requirements will go up, costs will further go up, and temper down the growth that we have been seeing in the banks and NBFCs for unsecured loans.
Coming to Bajaj Finance, yes, in the short term, there will be headwinds for new client additions; approximately 22-23 percent of the new client additions were through these two products. As for the cost of funds, it’s not such a big issue for Bajaj Finance, but it has more to do with the growth and the clampdown on these two new products, which will have to be seen going ahead.
What’s your big takeaway from this earnings season? Which sector really stood out for you, offering both earnings and valuation comfort?
Pharma was one of the sectors that came out with very good numbers in some pockets. Along with that, easing pressures in the US market aided profitability growth. So I think pharma should continue doing well for another year or so, and valuation comfort is also there in certain pockets in this sector. So pharma for sure stands out when it comes to the quarterly numbers.
A few auto names also came out with a decent set of numbers, and the momentum should continue for them. A few pockets in auto and auto ancillaries also did very well. Banks, we believe, are in a fair value zone with economic growth set to pick up pace and the net interest margin (NIM) pressure behind them. We expect them to join the rally very soon. So that's another pocket that looks reasonably valued and should continue to do well.
The next one would be IT, where numbers are not all that good but somewhere we believe that earnings will bottom out in a quarter or two and there is money to be made in that pocket as well.
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