Daily Voice | Financials continue to be in a sweet spot, says Naveen Chandramohan of ITUS Capital

Q: Are you worried about midcap space given the stretched valuations?

I would need to contextualise this further. Today, the earnings yield of Nifty, Nifty Midcap and Nifty Smallcap differ by a margin of 20 bps (with Nifty earnings yield at 4.6). Effectively, what I am saying is you as an investor are not getting paid a risk premium to go down the market cap curve.

Moreover, there has been more than 1 lakh folios created in the last year in the mid and small cap space. Hence, I believe an investor needs to be prudent in adding additional capital here.

Q: Is the healthcare sector still reasonably cheap?

Healthcare is too broad and generic a sector. Within healthcare, hospitals have done well for a good part of 3 years now. The recent move in healthcare has come from the businesses who have a significant US generic exposure. This portfolio has had a structural downturn due to its commoditised nature of the business starting 2015 which resulted in earnings degrowth followed by a de-rating in valuations.

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Over the last few months, following shutting down of US based generic manufacturing companies, the pressure in price deflation has abated. This could continue for a while. However, I don’t believe there are signs for prices to increase yet.

For investors who want to allocate capital, they would have to take a company specific view basis understanding each drug and the portfolio. For eg: the last 3 months saw a shortage in the drug – Remdesivir which benefited those companies who were manufacturing this.

Q: Are you increasing exposure to life insurance sector?

At our fund, we had increased our exposure pre FY23 where the regulatory ruling on life put pressure on life insurance. Today, the valuation to mean has already happened. I would be a lot more selective today, and look only for pockets that shows growth in the Individual Non-single premium where the growth is profitable and sustainable.

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Q: Your take on the corporate earnings season that ended recently... Do you see strong revision in FY24 Nifty earnings estimate on the higher side?

The Q1FY24 saw strong earnings growth across capital goods, auto and financials. This growth came from either a topline (revenue) growth or a margin expansion. We saw growth from 200 out of the 500 companies in Nifty500.

FY23 saw earnings grow by high teens. I would look at FY24 to be a year where earnings grows in the double digits (which will be a good number on a high base).

Q: Do you expect robust credit growth in coming years? If yes, then is it better to be with private banks or PSU banks?

Financials continue to be in a sweet spot with robust deposit growth coming in alongside CASA growth for the banks. I believe the credit growth in the economy will continue to be in the mid-teens and this should drive the capex from a structural perspective.

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While valuations in PSU banks have reverted to mean, I would continue to allocate marginal risk in the private banks. The increased allocation will be driven by focus on risk management and allocations – which is a function of the people at the top who drive the bank. I look at growth and risk management as two sides of the coin, both being increasingly critical for banks.

Q: Do you think IT space still has more headwinds than tailwinds? Also, will the consolidation which we have seen in the past more than 19 months continue in rest of financial year too?

IT continues to show muted growth from a topline perspective but many of the companies in India have managed to maintain their margins without a significant deterioration due to cutting costs. I expect this to not change over the next 2-3 quarters.

I will not get too bearish on IT, as the narrative has switched to IT being in a difficult scenario because of AI and LLM taking over – If this narrative takes over significantly and we get a further de-rating in valuations, some of the companies will be an interesting buy. I would not be in a hurry to increase exposure today.

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