Largecaps offer stability, but real alpha lies in midcap space: Ajay Srivastava

“PSBs always kind of flatter to deceive you in the end because valuation wise I think they are dirt cheap, they are rock cheap, you cannot get cheaper than this, price to book for less than one PEs and five or sevens or thereabouts and so there is nothing which tells us that why you should not buy a stock which is so low valued, but also tells you why it is lowly valued,” says Ajay Srivastava, CEO, Dimensions Corporate.

Let us first start off with a salute to the Nifty Bank and what a move it has been, it was a consensus on the street and led by ICICI Bank, HDfC Bank, others now playing catchup, it is really picture perfect.
Ajay Srivastava: It has been a great move. It surprised a lot of us at this point of time to be honest because even in the current context to see this kind of uprise when the earning growth is in, like HDFC Bank is single digits, ICICI is lower middle digits, it is still a surprise, but it is a welcome relief if you ask me in the market because this is one index which has not done well for most investor over a period of five to seven years.

So, after a long time it has come back. I think HDFC elephants just prove the fact that sometimes stability counts and I am the first person to acknowledge that maybe riding elephant is better than riding horses.

But the question is do you now broaden and go a little bottom up within banks, do you look at PSBs or do you continue to add positions to your existing private banking names?
Ajay Srivastava: PSBs always kind of flatter to deceive you in the end because valuation wise I think they are dirt cheap, they are rock cheap, you cannot get cheaper than this, price to book for less than one PEs and five or sevens or thereabouts and so there is nothing which tells us that why you should not buy a stock which is so low valued, but also tells you why it is lowly valued.

PSU banks are a difficult proposition because they do not compete in the market, they are there spread over historical, they are losing their market share, at the end of the day you do not bank with the PSU stock, maybe SBI leave it aside for a minute, but by and large the people of India or at least the HNI segment do not bank with these banks.

So, future-wise is less than perfect, valuation-wise it could not have been a greater story to buy into and it may well turn out to be, when I do not know but the fact remains they one of the cheapest stock in the Indian financial market, now it is up to you, you want to hold it for how long and wait for the government to do something to the banks or just piggy bank on a private bank and says these are banks today which are so beautifully positioned because there is no foreign competition in India.

Actually there is no foreign competition in any of the banks in India unlike any other sector barring telecom perhaps. So, therefore position-wise private banks look a lot better, valuation one cannot argue, there is no argument to say why you should not buy PSU banks, it is incredibly cheap but well you have to be patient with them.
Are you comfortable adding positions to your current private banking portfolio and if so where?
Ajay Srivastava: If you ask me this week, answer is no. We are not going to add any more positions to any of the banking portfolio at this point of time because it is a runup, as I said the earning are still single digits, yes there is interest rate scenario which is going to be quite benign for them, but so is the interest scenario where inflation is down, demand is down, economy is going to grow at 6% or 6.5% as per RBI estimate.

So, it is not that it is going to be a gang buster economy at this point of time. What may happen and that is what is happening today that a lot of people who had lost faith in the index over the last five-seven years are now getting back in the index, so you are seeing a lot of new demand coming of people buying it, whether you are going to make a good return out of it on this pricing, my doubt remain that unless the broad industry kind of grows, the banking will give you 20-25% return, but demand can surprise you, a lot of people are underinvested in this stock, a lot of mutual fund are underinvested and therefore you could see a surprise, valuation-wise I would not but just on demand-supply perhaps market catchup could give you good return.

Definitely this particular rally has been led by the largecaps but given the correction in the mid and small end of the market, what is your sense that how are they going to behave in the next six months to one-year time frame, do you believe that they offer more lucrative investment opportunity at this point in time or would you still go ahead with the largecaps?
Ajay Srivastava: It has been very simple, if you look at from the lows the so-called accursed segment of small and midcap has actually offered a fantastic return.

It is about 30-40% returns in lots of stock which have come around. So, they are volatile stocks, they will give you higher beta, definitely give you higher beta and you cannot build a portfolio on largecap, no matter what the consensus is, leave aside a couple of segments, they will be slow, they will give you growth, definitely give you growth, but the fact remains that your big money will be made in identifying the winners for tomorrow which is from the mid and the large midcap segment.

A midcap is a misnomer in India because of sebi’s classifications but fact remains that those will give you the beta return no matter what anybody says and last five years have shown you very clearly that where the indexes have gone in terms of largecap and smallcap. The answer is you can beat them but you cannot defeat them.