Large IT may perform better than large banks; second-rung BFSI, domestic consumption good bets: Digant Haria

It is really heartening to note that given the kind of volatility that we have seen in the recent past with respect to tariffs and slowdown concerns, it is fading away a bit. Are we out of the woods right now and do you believe that this sentiment and the FIIs making a comeback is here to stay and this up move can continue for some more time?
Digant Haria: The India specific correction started somewhere in September-October and by March, we were almost at the end of this correction. Our economy was slowing down, then FIIs first went to China, and then to the US in the excitement of Trump getting elected. So, by March, we were done and then in April, we saw one more down round of correction thanks to Trump tariffs. Now both the local as well as the global corrections are over. So, the worst is probably over because whatever happens to the world, lower crude oil prices and lower interest rates and lower commodities, have always been good for India and specifically smallcaps.

So, the worst is clearly over, but I would not say that we are out of the woods because we will still see a lot of volatility. When the US slows down, the world growth slows down and when world growth slows down, the PEs across the equity indexes have to mellow down. So, the worst is over, but I do not see the index making a new high or the economy roaring back again soon. That will take at least 6 to 12 months, but we are in a nice consolidation phase in terms of economy, earnings, and even probably the markets.

What is your take on the IT pack and specifically HCL Tech? After seeing over 20% correction recently, some of these brokerages are liking the kind of guidance that the company has given in such uncertain times, although the numbers looked quite mixed as of now. What is your understanding of the numbers within the IT pack? If you have any preferences, share them.
Digant Haria: IT rallied all the way till December or January thinking that if Trump comes, more tax cuts will happen which will flow as revenues to our Indian IT companies. They soon realised that the US may actually slow down and there is the AI disruption threat, which has anyway been there for the last 6-9 months. The IT pack has corrected quite significantly. A lot of them are in that 20-25 times price to earnings and 3% to 4% dividend yields.

So, on the face of it, the sector has become attractive and we are thinking of taking a call that large IT stocks in the next 12 months can probably give better returns than large banks. Large banks have already had their day in the sun. They have already run ahead of probably what the earnings catchup will be. So, on large IT, we are incrementally turning positive because valuations are comfortable, prices have corrected a lot and the changes are always gradual.

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It is not that suddenly AI will come and in one year everything will go to zero. These things never happen. So, HCL Tech, Wipro, and a lot of names are there and we are bullish on this sector. Numbers may take time to come, but yes, we should have a 12-month view and things will be okay.

What is your pecking order looking like? Also, how do you see some of these high beta names like Coforge, Persistent, even HCL Tech and Tech M moving up because in 2024, these stocks outperformed the largecaps like TCS, Wipro, and Infosys?
Digant Haria: I do not want to talk about outperformance or underperformance right now because we have said that we have already seen the worst of Trump but that does not mean there will not be more actions and more volatility. The IT index for the last many years has mapped what the Nasdaq does or what the US markets do. Until the volatility subsides, which will be by September-October, till the debt refinancing problem of the US reaches some sort of logical conclusion, it is very difficult to give a precise view on the numbers.

But logically, we think that we are hitting bottoms in lot of these sectors and yes, amongst the large pack, right now is not the time to differentiate A versus B versus C. Now, the whole pack should be a focus area for an investor with a 12-18 month outlook and then we can start differentiating after September once we have some more clarity on what the US is up to.

The consensus call that is coming right now is why not focus on some of the domestic plays and ignore some of the export-oriented counters given the uncertain environment and maybe the picture will be clear in the medium term. Within the domestic plays, which sectors do you like at this point in time? Maybe it is power, maybe it is consumption theory?
Digant Haria: There are two segments we are bullish on. One, in the banking space, the large banks have already rallied. But in this sector we expect rotation to play out. Like in the first roundm the HDFCs, Kotaks. ICICIs of the world rallied. In the second round, we will see the second rung stocks will probably lead the rally; something like an Equitas Bank or an Ujjivan Small Finance Bank or even AU Bank. They may not report good numbers this quarter, but the turnaround is very much there. Maybe in one or two quarters, we will see numbers turning around. So, this is one space which is say a micro finance heavy or high yield lending heavy, and this is one space which can beautifully turn around in the next few quarters. These are domestic-facing, they benefit from the RBI easing of liquidity and regulations. So, second rung stocks is what we have to focus on. We are focusing on these names I mentioned.

The whole domestic consumption revival has been talked about and somewhere in September, the monsoons will probably be good. So, domestic consumption is one sector we look at. There are multiple sub-segments within domestic consumption, like building material space, something like a Whirlpool which is in the consumer durable space, something in the dairy space. So, there are a lot of choices and yes, domestic consumption is a good hunting ground. So, these two sectors the second rung BFSI stocks, and domestic consumption.