Add midcap bank stocks with a 2-3-year timeframe: Sunil Subramaniam

The second aspect of recession which I would view as a positive from Indian markets is that in recessionary times, commodity and oil prices will ease up and India is heavily import dependent on oil and other commodities, and that would give a boost to our domestic economy in terms of less pressure on inflation and less pressure on corporate margins from imported oil related ingredients. I would say that India’s attractiveness in a QE world would be much better. So to me recession is not as threatening a word from an Indian market perspective, as otherwise one would tend to think.

Would it be fair to say that it is time to bet on domestic cyclicals rather than export faced sectors like IT and pharma in the current market scenario?

That will be correct to say because one of the reasons we are positive is because Indian economic growth is supply side, capex side driven and not globally dependent. I would say that yes, our focus is more on the domestic cyclicals.

What about the banking sector? There has been quite a bit of slip now, we are just going to break that 33,100 mark on the Bank Nifty as well. Would you want to talk more about this sector in terms of what are the internals which are working in terms of the tailwinds?

I would point out to the banking and financial services sector, notably the good quality banks and NBFCs because in the recent correction which has been led by the FIIs, selloff has led to a correction in the banking and related stocks. But in terms of getting growth back, domestic cyclical growth has to be financed by the banking system.

We believe that banks have used the opportunity of the last few years to lock on to long-term low-cost funds, whether it is from international or domestic sources, but most of the lending book of the bank is on a floating rate today – be it housing loans or corporate loans. So to that extent, we would see net interest margins of banks in a bullish domestic growth scenario to widen and hence I think banking represents a good play because there has been a good correction in their valuations too.

Are you going to stick with large private sector banks or are you also looking at PSUs and smaller banks in the banking and financial space?

Largecap private banks would be our first pick. Within PSU banks, there are also strong PSU banks versus the smaller PSU banks. Again we would tend to prefer size there because economies of scale are important and the thing with PSU banks is that from a valuation perspective, they have always been trading at a discount.

One should not get carried away by the discount in price to book which is the typical metric we use and we got to look at the growth potential as the way to evaluate a bank. So definitely good quality public sector banks of scale would also be in our portfolios.

What is catching my eye at the moment is the way the midcap and the smallcap index are deteriorating. The smallcap index has lost almost 3% from the highest point of the trading session, the midcap index has slipped almost 1% in trade. Given that this year is going to be very volatile, should one stick with largecap names or would you suggest bets on some broader market names which could be the potential multi baggers?

If you have a one-year timeframe, blue chip largecap holdings can be kept on hold. But if you extend the tenure to two-three years, then adding good quality midcaps would definitely add value to the portfolio because midcaps are generally more closely linked to domestic economic growth and that is where the future wealth creation will happen.