Daily Voice: Ambit's Nitin Bhasin explains why banks are set for outperformance from here on

Private consumption demand which forms nearly 60 percent of GDP appears to be under stress. There is a clear slowdown in urban demand going by high-frequency indicators and rural demand recovery appears to be tepid. This is happening as real wage growth in rural India continues to languish while formal sector jobs growth - which drives urban consumption - is showing clear signs of fatigue. The weakness in consumption demand is the main reason for our lower GDP estimate for FY25 (6.5 percent) than the consensus (~7 percent).

Do you think China is still not a long-term investment, even though the bank announced stimulus measures to stimulate the economy?

There is a lot of overhang of the property crisis and local government debt, which are structural. Moreover, the domestic demand conditions have failed to improve despite Government attempts. Having said that the Chinese Government has responded with a massive stimulus, trying to change sentiments. Continued follow-up by the government on this stimulus would be a key variable as investors have positioned thrice in the last 2 years to gain from this anticipated upmove and have been disappointed.

From a valuation perspective, the Shanghai Composite index stands at 15.3x TTM PE marginally above its 5-year average of 14.6. However, earnings are depressed growing at only 2 percent over the last 4 years, and at normalised earnings, multiples would look more attractive. So, yes if the bank delivers on the stimulus and is able to work out the structural impediments, China can be looked at as a long-term investment.

Do you expect more FII outflows from India in the coming weeks?

Our investor interaction does not seem to suggest that China inflows can precipitate FII outflows from India. Empirical evidence suggests that the correlation of FII flows between India and China has been significantly positive, suggesting that flows in India and China often come together. EM equities do well post Fed rate cut and FII flows in India are usually positive over the next 3/6/12 months.

Additionally, India is expected to be the 2nd highest contributor to incremental GDP growth over the next 5 years and has been one of the fastest-growing emerging economies over the last decade. Amidst elevated global uncertainty, forward estimates are amongst the most sustainable with a 15 percent upgrade in 1-year forward EPS estimates since August 2023. India remains one of the most attractive EMs (emerging markets).

Is the IT sector in the early stages of recovery? Does this mean it’s time to accumulate multi-bagger returns in the coming quarters?

Growth in IT services bottomed out 3 quarters ago and we are likely to see a modest and not a sharp recovery to at or below pre-covid levels as
1) Macro is not supportive, wherein Tier-1 IT growth has mirrored S&P 500 revenue growth, is likely to show only a modest acceleration from 4 percent in CY23 to 6 percent in CY24/25. Developed market GDP growth is expected to slow in the US; and stay sluggish in Europe/UK and client financials suggest slowing revenue growth in BFSI/Retail/Energy and stability not a rebound in Telecom.

2) Insourcing remains a theme with captives (GICs) outperforming IT services providers by 5 percent CAGR over FY18-24, which could continue.

3) Business-wise, just as digital was a story of gain in new and pain in legacy, so will be the scenario that plays out in Gen AI, where productivity will have to be passed on and

4) IT services growth might be crowded out by wage hikes for internal IT staff, consumption-led spending (cloud)/Gen AI investments and SaaS, captives, and even start-ups competing for the same spend.

5) Deal flow in a scenario of rising duration is still not supportive of a sharp rebound with negative last 12-month deal flow growth at TCS/HCLT/TechM/Wipro/Cognizant/Mphasis.

Further, margins will likely be flat to down as operational scope is limited and deals are dilutive. With valuations in the sector at a ~40 percent premium to the market, stocks build a much sharper rebound hope. So return expectations should be kept modest. A risk remains that in the past, IT stocks have remained resilient during Fed rate-cut cycles.

Are private banks available at reasonable valuations?

Yes, private banks stand out in terms of valuations. On our Sectoral Market Capitalization vs PAT Contribution, it stands out. PAT contribution of private banks to the NSE500 universe is ~14 percent, while Mcap contribution is only 8 percent. With FY25 expected to be a year of earnings normalization, Banks are at a confluence of reasonable valuations and strong earnings growth. Additionally, never in the last 2 decades, when the Bank Nifty/Nifty ratio slipped to -2 Z-score, has Banks underperformed the following year. Currently Bank Nifty has just one PSU Bank, SBI. Banks are set for outperformance.

Is it the right time to buy PSUs across various businesses?

Currently, PSUs’ profit contribution towards NSE500 stands at 34 percent, which is the highest since June 2013 whereas market capitalization contribution stands at 17 percent. Therefore, it’s not a profitless momentum. The sharp outperformance was backed by real profits and if FY25/26 RoE (return on equity) remains sustainable in line with consensus estimates, the rally can continue. Instead of recommending PSUs as a whole, we prefer PSU Banks which stands out on asset quality and credit cost in the current cycle. Many of the infrastructure especially defence PSUs appear to us very expensive given not-so-easy to achieve execution momentum.

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