Daily Voice: Are private-sector banks trading at cheap valuations? Ladderup’s Raghvendra Nath sees…

Reports coming in for today mention that Raghvendra Nath, MD at Ladderup Asset Managers, stated he has not noted private-sector banks trade at such cheap valuations as they are at present.

“If you look at the top three or four private-sector banks, all of them have extremely firm balance sheets and good lending profiles. One of the key reasons for the de-rating has been sluggish expansion in bank deposits, which was a direct fallout of other asset categories performing well,” he stated in an interview with Moneycontrol.

In the meantime, Nath believes festive demand this season should be moderate and not significantly different from last year. Demand in the consumption sector has remained stable so far, but the monsoon deficit has affected some regions more severely, which could impact demand in those areas, he stated.

According to Nath, the framework announced for insurance firms and distributors has come as a big shock, as it puts into question the very fundamentals on which insurance businesses are built.

“Even if the paper is implemented partially, the industry will still have to relook at the way it has been conducting business,” Raghvendra Nath stated.

How do you view the current challenges and supportive factors of the equity market, which has remained in a consolidation phase?

The current consolidation phase in the market has been fuelled by various macroeconomic factors such as the US-Iran conflict, sharp INR depreciation, sudden gain in crude prices, and El Niño-led monsoon deficit, which have impacted market sentiments adversely. We are additionally seeing some tapering of consumption demand because of the sharp gain in chip prices that have affected a wide range of products, including phones, air conditioners, fridges, etc.

In essence, there are multiple factors that have contributed to the lack of positive sentiment and the continuation of this consolidation phase.

That stated, the medium-term outlook for Indian equities stays bullish as the overall economic expansion is quite firm with range-bound inflation. Other than this, there is increased activity in both the manufacturing and services segments of the Economy. The trade deficit is likely to taper downwards, led by exports and a stable Indian rupee.

Do you think the lack of high-expansion sectors in the large-cap space is contributing to its underperformance?

As things stand today, almost 40 percent weight in Nifty is contributed by the Banks, Oil & gas, and IT services. All these three sectors have not performed well in the past few quarters. The banking segment has been impacted by slow deposit expansion and NIM compression.

The oil&gas sector has been impacted by the geopolitical situation, and the IT services sector has become a victim of the global surge in Artificial Intelligence. One can say that Nifty is not reflecting truly what is happening in the broader economy right now.

Do you think energy transition, platform firms, and manufacturing will stay key high-expansion areas to focus on?

The energy demand in India is likely to stay very firm over the next decade. The overall size of the economy, the changing demographics, climb in Income marks, acceleration in manufacturing activity, advent of Data Centers, and rapid urbanization all require substantial energy needs over the upcoming years. As a result, firms that are related to the energy sector can benefit from these high marks of expansion.

On the other hand, while the platform firms are experiencing high expansion right now, we expect consolidation to happen in this sector in the next few years, and as a result the rate of expansion should be much less than what we have witnessed in the last few years.

The manufacturing sector keeps benefit from the China+1 strategy. Most of the developed world today is looking at alternate sources for manufacturing outside of China, which means that Indian manufacturing can keep participate and get more share of global trade over the next five to ten years. All of this can help India reduce its trade deficit, gain its export competitiveness, and help stabilize the indian rupee as well.

Do you expect festive-season demand to stay optimistic? If yes, are you betting on the auto and auto ancillary space?

I think the festive demand in this season should be moderate and not significantly different from last year. The demand in the consumption sector has been stable so far, but the monsoon deficit has affected some regions more severely, which could impact demand in those areas. Additionally, moderate income expansion and pressure on corporate margins and profitability could weigh on consumption.

Are private-sector bank valuations looking attractive at current marks?

Yes, definitely. We haven't had private-sector banks as cheap in terms of valuation as they are now. If you look at the top three or four private sector banks, all of them have extremely firm balance sheets and good lending profiles. One of the key reasons for de-rating has been sluggish expansion in Bank deposits, which was a direct fallout from other asset categories doing well.

Gold has given multibagger returns since COVID. Equity markets have had a massive run-up till September 2024. And even the real sector did extremely well. When such rallies are happening in the other sectors, the banks would obviously get softer allocation from the financial savings of the households.

That stated, these factors have changed meaningfully as far as banks are concerned. Gold prices have been static for the last 1 year. Equity markets have been in a consolidation phase for the last 2 years or so. The real estate sector is additionally witnessing subdued expansion after a five-year run. This should shift some of the household savings towards bank deposits, which means better NIMs for the banks compared to the last 2 years.

If rhetoric around an AI slowdown builds up, could it be positive for India?

Yes, but this shall largely stay rhetoric for now. Let us be clear that the AI story is in its ascendancy and is accelerating, not decelerating. The capital investment going into AI infrastructure by the global mega firms is only going to gather momentum, at least for the next couple of years. This means there could be periods of volatility globally in this segment, but a sustained slowdown is not anticipated anytime soon.

Having stated that, if such a slowdown were to happen, India could be a beneficiary in the medium term, as India doesn't have any firms listed in the equity markets that are purely dependent on the AI theme.

Additionally, do you believe there is ample value in Indian IT firms at current marks, despite the prevailing expansion concerns?

Indian IT firms serve some of the largest corporations on the planet, and that service backing is not going to stop because of AI. In fact, AI may bring in more opportunities, as firms shall require implementation of various new tools and software, and businesses are able to generate new ideas, segments, and activities because of AI.

Moreover, I think most of the IT firms have enough intellectual capital to navigate the new scenario and transform their businesses to fit the new reality. At current marks, where they are trading at historically low valuations, and most of them offer attractive dividend yields, I feel IT services would be a good value play.

Have you observed whether the pricing of the most recent IPOs has been rational?

The IPO market will always be a mixed bag. Since the market sentiment is not as good as it was two years back, pricing has become a function of investor demand. But high-quality firms that can catch market participants' attention will obviously try to get the best prices possible.

What is your view on the recent regulatory proposals for insurance firms and distributors?

The framework announced for insurance distributors and insurance firms has come as a big shock, as it puts into question the very fundamentals on which insurance businesses are built. Since this is a consultation paper and another month has been given before it takes the form of regulations, how much of these proposals get implemented will be known over the next month or so.

But looking at the nature of the proposals, I think even if the paper is implemented partially, the industry will still have to re-look at the way it has been conducting the business. This is why the market is fearing very sharp cuts in the earnings estimates of insurance firms as well as insurance distributors.