financial services: Will next leg of rally come from financials and private banking stocks? Gurmeet Chadha answers

“It is important to preserve what we have made. Last two-three years the returns have been very-very good. So, maybe a little more prudent and balanced approach will ensure that we preserve these returns,” says Gurmeet Chadha, Complete Circle Consultants.

Not pure play commodities, but commodity stocks definitely, and in particular metals after China talking about a slew of measures and a fair amount of rate cuts as well coming in in the remainder part of the year too, that sort of instilled a sentimental move on metals. But would you look at it from an investment point of view?
Gurmeet Chadha: We got to be more tactical when it comes to metals and commodities. They have announced a host of measures which clearly tells you that now they have to resort to more stimulus to revive the economy.
And also, traditionally, if you see a weak dollar in the rate cuts, I am not saying weak in like absolute sense, but a relatively weaker dollar is always positive for commodities.

So, a multi-asset approach is advisable at this point of time. Valuations are stretched in a lot of pockets. NSC Small Cap for example trades at 35 times earnings. If you see almost 50% of the stocks are seeing EPS downgrades. So, valuations are stressed. And at this point of time, if you can diversify towards A) precious metals, which is gold, silver is both probably precious and industrial and some maybe ferrous and non-ferrous, as well as bonds.

So, rate cuts, stimulus from China, relatively weaker dollar is always positive for commodities and also bonds. I think bonds, if you will see a softening of 50 to 100 basis points. I have been making these points for the last six months. A lot of us value track equity returns. The bond returns are also in double-digit in the last 10 years. So, it is important to preserve what we have made. Last two-three years the returns have been very-very good. So, maybe a little more prudent and balanced approach will ensure that we preserve these returns.

What is the sense on the likes of Paytm, Nykaa, PB Fintech?
Gurmeet Chadha: So, we have been constructive on PB Fintech. Maybe there is a bit of a professional bias because I come from financial services. A very asset-light model. If you see now an online sourcing of insurance, 90% plus are now being sourced from the Policybazaar platform. In fact, HDFC and ICICI earlier were not part of the platform and such is the power of the platform that they also have signed up. Paisabazaar has been leaking less. I think it has been leaking money a little bit, but now I think that is stabilised. So, in terms of online, in terms of client lending, almost 20-25% leads are now coming from there.

And in insurance, when you are a distributor, the commissions are upfronted. So, when you are an insurance manufacturer or an insurance provider, the gestation period is long. You become breakeven over a five-seven-year period. As a distributor of insurance, you tend to upfront in some of the policies like endowment and assured payback, the payouts are in excess of 50%.

So, it is a great marketplace. Valuations were a little stretched. As you will see periodic profit booking, so that is something which is there in the portfolio. I have been discussing Zomato with you for a long time now. It has done pretty well.

My sense is quick commerce has a lot of long legs. All put together, look at Zepto, Blinkit, and even Swiggy Instamart put together, quarterly run rate of quick commerce is just about 2,000-2,500 crores. I think this figure could be 4x, 5x, 6x on a quarterly run rate.

And here you are not really deep discounting, you are actually charging a convenience fee for quick delivery. So, you are basically integrating with the local ecosystem, which is your mom and pop stores and kirana stores which politically also makes sense. So, for us, it is Zomato and PB Fintech as far as the new-age businesses are concerned.

Do you track this one, IEX, any view?
Gurmeet Chadha: We had some exposure, we exited this last year for the same reason, too much of a regulatory overhang. While in between few quarters, volume showed a bit of a surge. So, they operate in different segments and it was showing some traction, but there are more better opportunities on the power value chain.

Look at the power generation demand is now likely to breach all-time high during Diwali, it reached an all-time high
figure during peak summers. So, the generation itself will grow at about 12%. I think NTPC is still very favourable priced, at about 18 times, 4-5% dividend yield and you have an NTPC Green IPO now which could lead to some value unlocking and they have huge capacities coming up on the thermal side.

They are market leader both for generation as well as the store capacity other than the green energy. We have seen Tata Power doing pretty well in terms of both the thermal portfolio as well as on solar panels. Then, you have other, the grid makers like Power Grid, the cable and wire, the transformers, insulators. I think there is a very secular demand on the entire power value chain and you would prefer where there is less of regulatory overhang and more valuation comfort.

Just wanted to get your sense in on IT because a lot of question marks were raised post the Fed rate cut. You did have a down day also for IT on Friday. What next then?
Gurmeet Chadha: My sense is we got to be more selective. Recently I was reading a report that data is moving back to devices. More than 40% exit is happening from cloud. So, this is a space where disruption is the new normal. And my sense is we need to probably track US economy better and see if the financial system there and overall deals from there are showing any signs.

My sense is US looks like a little soft right now, so you got to be more selective. We are more focused on where we are getting good dips like KPIT, which is more an automotive software. You also look at some of the new-age names like Zomato. You look at some of the largecap names if you get some dips, like some HCL Tech or Tech Mahindra.
But there is very little valuation comfort. If you buy IT services at 30, 40, 50 times, the near-term returns would be disappointing. So, we are right now neutral and more constructive on financials. I think Nifty at a new life high, so congratulations to everyone.

Do you think the next leg of the rally will actually come from financials and the private banking names at that?
Gurmeet Chadha: You will see a lot of treasury gains. With G-Sec yields now, like if you see from the last quarter, it is down like 30 basis points, which translates to about 2% or 3% absolute gains on what you are holding. It will lead to some stability in NIMs. NIMs have been under pressure as rates were going up. It is a little more positive for NBFCs because they are more dependent on wholesale sources in terms of cost of funds and that is why we have seen a bit of a leg up in some of the NBFC names you just took.

I think some of them are still subdued. There is one name we really like is UGRO which does only MSME lending. They have proprietary in machine learning model, which is something very similar to what cibil is for individual.
They developed something very similar for MSME. They did a fundraise of 1200 crores, but that has not really led to any change in market cap trades below book almost and then there are even better names like Poonawalla and Bajaj and some of the other names.

So, I think NBFCs should be focused. Gold NBFCs could come back. And of course, PSU banks. I think there is a lot of value comfort there. A lot of them are at book or below book and I think they have not really participated as much. So, once you have better quarterly earnings, more stabilisation in terms of credit deposit ratios, I think the PSU banks and some of the tier I banks may join the party soon.