Bank and IT sectors should lead the way for market going ahead: Mahantesh Sabarad

“Although a lot of bad news is associated with commodity prices going too high or dollar strengthening receded too fast, we still have to catch up with that last leg of the rate hike cycles and probably that last leg will now have a duration of six months. Once that is over, there will be certainty and the markets will start reacting positively,” says Mahantesh Sabarad, Independent Market Expert

What is your assessment on the overall market given the fact that you do have the expectation that maybe we would have seen a further breakout that has not quite played out in today’s trading session. Where are we going to see leadership emerge in the market?
The market is headed higher generally speaking simply because there are many events behind us. We have had this interest rate cycle worry and now we are closer to the end of the interest rate rise cycle. We were in a worry mode in terms of what would happen to the global commodity space, particularly linked to the war which is ongoing in Ukraine.
Those worries have now receded quite a bit. And the expectation now is that as the capex cycle starts building up gradually, the corporate results will look far better and therefore the market should go higher. What would lead the corporate results in terms of growth is banks which have been doing wonderfully well in terms of posting their results and that momentum in terms their earnings growth will continue unless the only bottleneck that I see is on the deposit growth front.
There is not enough deposit growth happening. The second sector to lead the way, should be the IT sector because we have had a lot of worry linked to the pandemic, digitisation wave and we were worried about what is going to happen with the interest rate cycles in the US.
All those worries are now receding and the IT sector should start doing well. We were also worried on the currency depreciation front, if you recall a few months back those worries are no longer there. I clearly believe that these are the two sectors that will lead the way for the markets ahead.
« Back to recommendation stories
The wealth erosion that we have seen in some of the new age tech stocks is rather alarming and valuations as well. When some of these companies listed at prices which many argued were very unjustified. What is your stance? Do not touch them with a barge pole, be very selective or go all in?
New age tech is an altogether different kind of sector and cannot be mixed with the traditional tech services of IT services companies that we have had in our market. The new age tech companies have their own kind of worries which are not linked essentially to the tech stack that they have or the tech proposition that they have. It is all linked to the underlying demand environment that they are into.
If you take Zomato, or fintech companies or , all these companies have an underlying exposure to a sector which is a real economy sector. So those problems exist and they were running ahead in terms of the valuation. Plus, there is a selling pressure that we are seeing globally as well on the new age tech companies.
My general observation would be that one has to be very selective about the new age tech sector exposure you want to have. The first and foremost homework that needs to be done is that it is the underlying real economy exposure that they have and only then one can proceed. Also, the selling is kind of over. I will be very selective in choosing any of these companies.
Would you be tempted to chance your arm in some of the smaller PSU banks? I am not talking about or even , I am talking about , Central, . The logic could be they are small in size which means in this kind of a market they can really grow their balance sheet fast?
Let me put it this way. They are not really small from a market cap perspective. They are quite large and do not even form a smallcap kind of company. The share price of some of these banks is very low but market cap wise, they are a decent size. From a business size, business volume size, they are quite decent.
Some of these banks have had mergers that have happened in the past and that made their balance sheet better or bigger and therefore their outlook remains quite good. What has happened is just as the other set of banks have witnessed NPA reductions and NIM expansion and also witnessed credit expansion in general, the same phenomenon is catching up with these banks, although with a bit of a lag. I tend to believe that now they are in a phase where their fall is probably linked to the valuation ratio. Even from a valuation ratio perspective, they are not too challenging for some of these banks.
I would like to draw your attention to what happened to steel stocks. The government has opened the window of exporting again. Today one cannot export because the price differential may not be supportive but this is a new window that has opened up. Whenever prices go higher, steel companies can export again but markets are ignoring that. Why?
The regulation needs to be stabilised because the market likes to discount that more than anything else and what we are generally seeing right now is a lot of uncertainty. On one hand, the coal import duties were being imposed on the other hand, steel export duties are being withdrawn and the cycle is not stabilising.
So there is uncertainty in the market and the market does not like to discount uncertainty. Only when there is a certainty and that is viewed as positive and the markets go up. If that is negative, the markets will definitely go down and that is what we are seeing when it comes to the steel market.
Let me put it this way. Although a lot of bad news is associated with commodity prices going too high or dollar strengthening receded too fast, we still have to catch up with that last leg of the rate hike cycles and probably that last leg will now have a duration of six months. Once that is over, there will be certainty and the markets will start reacting positively. But one thing is there at least the bad news associated with the steel sector is not there any more.
One high risk high return idea and one steady compounder which you would not sell for five years?
The high risk idea, the long one right now is the automobile sector, particularly the auto ancillary sector. If I were to take the automobile sector, then it is the two-wheeler sector. It has been quite a few years that the two-wheeler segment has been going down in terms of volume.
The top lines are not growing too fast and there has been this risk from the commodity side. So, they are not given great returns but I feel they are at the cusp now that the pandemic is over, the economy is stabilising, jobs growth is happening and rural economy is starting to do better.
In such a situation, we should see the two-wheeler sector doing well and associated ancillary sector should really start doing better.
So, I would reckon that would become a kind of high risk strategy at this point. You would not associate two-wheeler companies with high risk but that is what is happening. Deviation is happening between say Bajaj and Motor. Broadly that is where one should be and some of the ancillary sector, particularly global ancillary sectors, can potentially do better.
Railways, roads or defence are three areas where the government is committing capex. As percentage, roads are highest followed by defence and railways. But of late, markets are excited about railway stocks. Is there merit in buying railway stocks, especially the ones which are owned by railways?
I think the railway capex story is quite good but then direct exposure to railway services companies is doubtful from an investor’s perspective because there is this whole regulation coming into picture.
One would rather play the railway story through the capex angle, where a lot of companies are available which directly benefit from whenever there is a capex growth on the railways side. It could be both railways capex as in new projects as well as ongoing capex of the maintenance side.
I would rather look at those plays on the railways side than look at , kind of companies or any of the others and would reckon that there are quite a few companies on the braking system side, coaching side or signal equipment side, which will tend to benefit from capex.