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Last Updated : Jul 11, 2020 01:18 PM IST | Source: Moneycontrol.com

'Banks valuations are cheap, be long-term investor in IT'

Nifty IT index P/E has corrected from a peak of 19x pre-COVID to 12x in March, currently it is trading at 18x level which will limit further ascent in the short-term.

Moneycontrol Contributor

Vinod Nair

A preliminary preview of Q1 FY21 looks very muted, down hugely on a QoQ basis and to be the worst quarter result of FY21. Q4 FY20 was impacted by the supply chain issue in China and stand-off in world demand.

Q1 FY21 will be heavily impacted by the lockdown in India and standstill of the world economy. These restrictions relaxed in a step by step manner by June-end, which will provide some sanity to some sectors and future outlook. Sectors like FMCG, Pharma, Agro and Telecom will stand out positively. While highest losers will be (BSFI) Banking Financial Services Insurance, Auto, Metals and marginally Information Technology.

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The initial results will be from IT, both Tier 1 and Tier 2 players are expected to post a revenue decline of 5 percent to 8 percent. Some IT segments were heavily impacted like retail (non-grocery), aerospace, hospitality, manufacturing, energy and automotive. Margins will be on stress despite rupee depreciation against the dollar, variable pay cuts, lower travel expense and overheads. The performance of IT stocks improved from May and recently too they are maintaining buoyancy factoring that the worst was digested in the fall of February to March. Concerns to demand and with respect to H1-B visa seems to have faded as the sector is approaching Q1FY21 with a fair amount of optimism as economy re-opens. Nifty IT index P/E has corrected from a peak of 19x pre-COVID to 12x in March, currently, it is trading at 18x level which will limit further ascent in the short-term. In the long-term, they are good investment proposition since the outlook for digitalization has increased, stable offshore demand, reduction in cost from work-from-home and INR depreciation.

The second sector on which we are going to see results is Banking and is set to report weak operational performance. Business impact for banks were significant during lockdown as there was no credit demand from retails and banks were reluctant to lend to corporates fearing asset quality risks. In the stock market financial sector was the worst hit during February to June as they were already under NPA stress. Post lifting of lockdown things have started to normalise. As per RBI, scheduled banks credit growth increased by 6.5 percent YoY and 0.3 percent MoM, as on June 19. Valuation of banks continue to be cheap compared to pre-COVID level by 30 percent, NiftyBank one-year P/B stands at 1.5x versus 2.25x, factoring NPA concern.

In banks, we should be stock selective as asset concerns depend on the segments, risk management and growth analysis of a company. NBFC, excluding gold loan companies, lend more to weaker section and wholesale funding. Small Housing Finance companies have liquidity constrains and high moratorium. The total moratorium is expected was about 60-80 percent during April which has reduced to 30-40 percent. While retail banking, especially for salaried segment, moratorium risk has reduced to single digit. However, stress could emerge from self-employed, MSME and low rated corporate segment category where NPA is expected to shoot up. Recent data from few private sector players indicate collection has improved with increase in advances, deposits and collections which is positive. For PSU banks non-interest income will be higher due to treasury gains as 10-year yield corrected by 25-30bps in Q1FY21. Majority of private sector players are raising capital or have plans to raise capital in the near term to strengthen their market share.

Broadly the market, mid & smallcaps are maintaining its positive trend. We expect this strength to be tested in the coming months since the overall outlook for Q1 is weak and prices have increased well from the low of March leading to high valuations. We expect some consolidation in the near-term, not a big fallout, and suggest accumulation as the best strategy in this situation, consistently buying with small size in the next 6 months. This strategy builds-in the benefit of upside and downside in the market, which is evenly built today given the varied situation of possibility of a large upside if economy prospers or if a second wave appears & vaccine development slows down.

The author is Head of Research at Geojit Financial Services.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jul 11, 2020 01:18 pm
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