Indian banking sector a value buy today due to low valuations: Geojit Financial Services

The risk is that if the current health crisis extends to 2021 then fiscal parameters will also turn bad.

August 30, 2020 / 08:50 AM IST

Vinod Nair

The key Indian benchmarks are up by more than 50 percent in last 5 months. This rally was initiated by largecaps, which are underperforming today, due to peak valuations.

In the past month, Nifty50 is up by 4 percent, Midcaps by 13 percent and Smallcaps by 18 percent. Mid and Small caps are currently outperforming since they are much cheaper compared to largecaps. They will also lose their attractiveness, although it is very difficult to pinpoint the time, price and factors that will change the trend.

Nevertheless, we do not expect a deep correction in India similar to the situation seen in global financial crisis, when market recovered to the pre-fall level and corrected by 30 percent. India is much better placed today when it comes to factors such as Debt-to-GDP ratio, fiscal deficit, banking system and inflation. The risk is that if the current health crisis extends to 2021 then these fiscal parameters will also turn bad.

As an initial reaction in the stock market at the start of the lockdown, largecaps plummeted by 40 percent and mid & smallcaps by 50-60 percent. As the disease spread globally and the economy was shut down, uncertainty prevailed over when the economy will be allowed to re-open.

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The intervention of the policymakers helped to reign this uncertainty and brought in a lot of liquidity with financial measures. Today, the market has recovered most of the lost ground while economy is also open but with restrictions.

In this market rally, there is a worry that investors are not concerned about the price they are paying versus the risk associated with the stock. This attitude, to neglect due diligence, is being powered by the high amount of liquidity in the market, which is again supported by high demand from FIIs. FIIs have turned very positive on emerging markets and India is in the top list of beneficiaries, with monthly inflows at high levels. Additionally, this time FIIs have bought into Mid & Small caps too which was not the trend earlier like during global crisis.

Some data points which the market will review in the coming week is India GDP, GST outcome and the US Fed announcement.

Domestic GDP is expected to fall by 20 percent to 25 percent, on a YoY basis, due to the national lockdown. This will not impact the sentiment of the market since uncertainties were already factored in the market fall of February & March. Economic scenario has also changed for the better led by policy intervention in India and overseas. GDP data is expected to improve, on a QoQ basis, from next quarter onwards.

GST council was expected to review the gap in state compensation, which is addressed by the government by arranging funding requirement with RBI. Auto industry GST rate, which is 28 percent, is expected to be reviewed for 2 wheelers, in the future. As per the Finance Minister, two-wheelers are used by the low and middle income class and should not attract sin tax.

This is expected to provide about 10 percent price benefit to consumers, which will support high demand supported by post monsoon and festive season. Although, stock valuation of 2-wheeler stocks is on the higher side today, but will be positive on a medium to long-term basis.

US Fed chairman's statement was in-line with markets expectation. Fed is concerned about the uncertainties in the economy, high unemployment and low inflation. Unemployment is at 10 percent while historical medium-term range was 3.5 percent. Inflation is at 1 percent while the long-term target is 2 percent. As a result, the quantitative easing policy is likely to remain accommodative and not reduce the liquidity in the market, which is very positive.

In a nutshell, all the economic data points will not negatively impact the market and should help to maintain the current trend of the market. Today, we feel that the Indian banking sector is a value buy due to low valuations and better prospects for the economy. Even before COVID-19, banks were weak and under pressure from legacy NPA problem, which got worse during lockdown and the subsequent moratorium on loan repayments.

Bank financials are likely to improve, going forward, due to the re-opening of the economy, stoppage of moratoriums and restructuring of loans, which will lead to outperformance, compared to the market.

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.
Vinod Nair is a Head of Research at Geojit Financial Services.
first published: Aug 30, 2020 08:50 am

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