Gautam Duggad of MOFSL likes both private and PSU banks as risk-reward is attractive for both. PSU banks’ valuation look cheap as growth differential between private and PSU banks is narrowing, he said in an interview to Moneycontrol.
Further, he likes IT in its entirety, both large as well as mid-caps. "We hold Infosys, HCL Technologies and LTIMindtree in our model portfolio in Large Caps and also like Persistent Systems, Coforge as top mid cap picks," said Gautam Duggad, Head of Research, Institutional Equities at MOFSL who has more than 13 years of experience in the Indian equities.
On the equity market, according to him, while a good part of correction may seem behind, some undershoot cannot be ruled out.
Do you think the margin of safety has significantly reduced in midcap and small-cap stocks due to the domestic slowdown and global uncertainty?
The changed environment of slowing economic activities and corporate earnings growth in past few quarters has altered risk perception for mid and small cap segments. SMIDs (small and mid caps) are trading at significant premium relative to their own history and Nifty50 - implying lower margin of safety in the altered backdrop. 9MFY25 earnings for Large-Caps and Mid-Caps under MOFSL coverage grew by just 3% and 8% YoY, respectively, while Small-Caps declined by 18% YoY, following strong growth of 19%, 24%, and 13% between FY19 and FY24.
Which sectors are providing opportunities in the midcap segment after steep fall?
After the steep correction in midcap names across sectors, certain segments are selectively offering attractive opportunities where long-term growth prospects remain intact. In current environment, high potential mid-caps need to be identified on bottom-up stock picking basis and not on top-down basis. Several stocks in the overweight sectors of our model portfolio offer good opportunity, in our view. We maintain an Overweight stance on BFSI, Consumption, IT, Industrials, Healthcare, and Real Estate sectors.
Are the valuations of private banks really more attractive compared to PSU banks?
The valuation gap between private sector banks and PSU banks has narrowed in the past few years. Private banks have de-rated significantly as few bellwether private banks have undergone painful time correction. PSU Banks, historically traded at a discount to private banks but have re-rated significantly due to improved asset quality, strong earnings growth, and better capital adequacy. However, PSU banks’ valuation also look cheap as growth differential between private and PSU banks is narrowing. Benefits of lower credit cost is now in the base. We like both private and PSU banks as risk-reward is attractive for both.
Have you started adding exposure to large-cap IT stocks?
We had added large-cap exposure in July 2024 itself when we upgraded the sector to a Big Overweight stance. We believe IT offers a decent defensive positioning given strong cash generation and predictable growth. While large-caps IT are trading at a discount to midcaps, we like IT in its entirety, both large as well as mid-caps. We hold Infosys, HCL Technologies and LTIMindtree in our model portfolio in Large Caps and also like Persistent Systems, Coforge as top mid cap picks.
Do you think the government needs to do more (apart from the Budget announcements) to support domestic growth?
Both the government and Central Banks are striving to stimulate growth through fiscal and monetary measures and regulatory easing. While government has rightly pivoted towards supporting urban consumption through tax benefits of Rs 1 lakh crore, it needs to restart its infrastructure capex drive in right earnest.
The spending capacity for infra seems to be constrained at various last mile points – this needs to be addressed. Also, it needs to stay committed to improving the ease-of-doing business across sectors and segments by giving faster approvals, cutting bureaucratic red tape and addressing any other regulatory constraints etc.
Do you still foresee a further 5% correction in the equity markets from current levels due to global uncertainty?
Key indices (Nifty, Midcap, Smallcap) have declined 14%/18%/21% from their peaks, reflecting broader earnings slowdown. Current bout of correction is in line with the median correction seen in past decade. While a good part of correction may seem behind us, some undershoot cannot be ruled out. Valuations have corrected by over 15% to 19.2x, 28.5x, and 21.0x, respectively, from September 2024 highs, but Mid and Small-cap indices still trade at a ~30% premium to their historical averages and could see further adjustment.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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