stocks to buy: Why Quantum AMC’s George Thomas prefers largecap IT and private banks

How do you see the market set up given the kind of good policy announcements on the China front? How do you see the fund flows moving into India for the next six months? What sort of a return expectation can one have on the index level?
George Thomas: When we look at the current valuations across the broader markets, so generally if you look across sectors, most of the sectors are trading near full valuation. So, there is very little room in terms of upside from current levels. This is true for most sectors barring financials and certain select names in specific sectors where the recent past has not been very exciting.

Coming to the China policy announcement, in the past few decades, China was aggressively building its infrastructure and in that kind of an environment, if we look at the consumption patterns, metals and commodities would be consumed on a fairly large scale in that phase of development. But our sense is that peak infrastructure development is behind us.

If I were to take a next five-year view, even though they have announced fairly good stimulus measures, those may not result in consumption of metal or any other commodity to the extent that we saw in the past decade. In the post Covid period, that was a synchronised stimulus across the globe.

Globally, the other parts of the world were growing fairly good and again that coincided with a period where the inventory levels were fairly weak across the globe. That may not be the case in the next four-five years, but it is a possibility that that sliding trend on commodity prices could be arrested with the recent announcements, but we do not feel like this could be a case where you would see massive spikes in commodity prices.

But coming to the flows, with where the valuations lie in China at this point, there could be some possibility that some of the FII flows could be diverted to China. But having said that, Indian markets with the DII money which has been flowing quite reasonably well, the markets might get some support from those DII flows.We are going to hit the results season and you have been bullish on the IT space. From the earnings perspective, how do you expect IT earnings to pan out and which could be the great performers in this particular quarter? The market participation has been a lot more in the mid as well as the small end of this particular sector, while the large caps were lagging behind a little. What is your view on the overall IT space?
George Thomas: In IT, one cannot have a very prolonged period of low tech spending because that gets back to how the business performs because IT systems have become fairly important from an overall perspective. After many quarters of muted growth, our sense is IT spending has to pick up and that has been the trend that we have observed historically. But if Gen AI and things were to pick up, probably the hardware spenders could see fairly rapid growth in the initial phase and that would follow on with the IT service players for those integration demands and things. Incrementally, we think things should improve from here on. The order books for most of the IT players have been fairly robust. Our sense is that the clients have been waiting for how the macro environment shapes up to push the pedal on those discretionary spends and our sense is with the rate cuts and all have started, this could be a time where we could see some acceleration in IT spending.

We are fairly positive from a growth perspective from the current levels. Incrementally, things should look better from where we are today. We are more positioned towards the largecap names which would benefit in large end-to-end integration deals. Some of the mid and smallcap names have been factoring too much of positive news and valuations are slightly on an expensive side compared to what could pan out on the earnings front.

Also help us with your take on the financials as well. Do you find valuation comfort in this particular sector, believing that though the index is very near its all-time high levels, very selective counters are hitting those all-time high levels for themselves. Do you believe that there is a valuation gap and one can benefit out of it?
George Thomas: In the last few years, the major problem that has been haunting this banking sector or the financial sector is, one, the liquidity was not abundant and therefore credit growth, there was a wider gap between credit growth and deposit growth. And number two, the credit cost across the board was benign. So, when a credit environment is quite benign, what typically happens is you may not end up differentiating a bad lender versus a good one.

Our sense is that both these cases would normalise going forward, so the credit environment continues to be benign, but there could be some bit of normalisation which we could see in the next few quarters. If we look at the current profile, some pockets like MFIs or credit cards are seeing some bit of stress coming up. In that kind of an environment, we would see the larger private sector banks which have a better underwriting skill standing out.

Number two, as the liquidity in the system gradually improves, we would see that the gap between credit growth and deposit growth narrowing and that would benefit them in terms of the incremental margins and stuff. In a falling interest rate environment, it may not be very tough for the banks to raise deposits. They may not have to raise deposit rates from here on to accumulate more and more deposits.