Rajesh Kothari on top three themes to bet on for solid returns

21/06/2024

"Coming to private sector banks in particular, the growth is going to be strong in FY24, particularly second half, in terms of the loan book growth," says Rajesh Kothari, CIO, AlfAccurate Advisors.

Let us start off with banks, exactly what our experts were talking about because seems like that is where valuation comfort is. The FIIs clearly making a comeback and their first port of call is private banks. Do you believe this is going to be a sustainable move?Rajesh Kothari: Well, I think entire banking and finance if we divid it into multiple sub-segments, so we have private sector banks, then we have PSU bank, then we have NBFCs, and then there is something called others, which includes insurance, asset management companies, wealth management companies and exchanges.

So, what we do is that we look at from growth perspective each of the bucket and then within that, of course, each of the companies and accordingly construct the portfolio.

Coming to private sector banks in particular, the growth is going to be strong in FY24, particularly second half, in terms of the loan book growth.

Net interest margin can be a little bit under pressure, but that is true for the entire sector be it a PSU bank or be it a private sector bank.

But I think in last four years, the PSU banks’ profit growth, because of the lesser credit cost, was significantly higher than private sector banks.

Next three years that gap is not going to be big. In fact, the private sector banks actually can do better than public sector banks in terms of the overall earnings growth because the bulk of that benefit of credit cost is already behind us.

So, private sector banks should do well from here on. I do not see any reason why they should not do well. Of course, valuations are comfortable, they are already compressed in last three years, so that is another positive thing in terms of the margin of safety. So, can they deliver 15-18% profit growth on compounding basis over next two-three years? I think that is a high possibility.

We are, of course, very bullish on automobiles and auto ancillaries. And consumer discretionary was our favourite from last four years. Incrementally, we are even getting positive a little bit on the consumer defensive.

So, these three themes are going to play, if you ask my personal view, going to do much better compared to the other segments, be it IT, be it healthcare or be it banking. So, on a relative basis, I think the auto, capex and consumer are the top three themes to play compared to the other sectors.

Purely on a market cap basis, does it seem like that the focus has now moved to largecaps because of the FII participation picking up as well and maybe we see at least a time-wise consolidation if not correction when it comes to the mid and smallcaps?Rajesh Kothari: I think the stock price is a mirror of earnings growth. It is a slave of earnings irrespective of market cap. So, what is most important is the underlying profits and underlying ROCE and, of course, underlying profit growth.

So, what we do internally is that instead of looking at market cap, we look at the profit buckets. So, if we look at India out of 5000 listed companies, there are roughly about 600 companies, only 600 companies, which makes profit in about 90 to 100 crores plus, that is it. There are only 600 companies and that becomes basically our universe.

Now, of course, from the definition perspective, only top 100 is called largecap. It means 82% is actually mid and smallcap within that 600 companies.

So, if you look at our AAA Budding Beasts, which is a mid and smallcap PMS offering, often our clients say that probably it is only mid and smallcap PMS which does not invest into any small company by profit size because we invest actually only into leaders.

So, looking at the company from the profit size perspective gives you a lot of different insights rather than just looking at the market cap, number one.

And number two, just because company large by market cap, that does not necessarily mean that it cannot grow. There are a number of examples, be it a Titan or be it a Trent or many capital goods companies, there are extraordinary returns despite they are large in terms of the market cap. So, I think we need to look at profit size and underlying ROCE and, of course, underlying earnings growth. These three things are critical for stock to deliver returns, irrespective what cap it is.

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