Bank stocks | Nilesh Shah: Three reasons why bank stocks will outperform Nifty: Nilesh Shah

Dalal Street veteran and Kotak AMC’s MD Nilesh Shah is of the belief that bank stocks are going to outperform Nifty as the net interest margins (NIMs) of banks are expanding, NPAs are at a 10-year low level and the credit growth is getting consolidated in the hands of bigger players. In this interview with ETMarkets, Shah also talks about market valuations and shares his formulae of picking stocks in a declining market. Edited excerpts:

How do you survive a bear market?

In a bear market, the most exciting thing is that you will be able to pick stocks at much below their fair value and the money which you can take from a bear market to a bull market will be the maximum. So think of this bear market as an opportunity to make more money. If there was no bear market, investor return would have been far far lower.

How should one go about picking stocks in a declining market? Should investors pick stocks that have fallen the most or the ones that have proven to be resilient?

In a bull market or bear market or range-bound market, you have to buy stocks which you believe are available at a discount to their fair value. Investment is an art and not a science. I may believe that company X is available at 30% discount to fair value and someone else may believe that it is trading at 0% premium to fair value. If both of us have the same opinion, then how will that trade happen?

The stock market is a place where the seller thinks that he is making money by selling and the buyer thinks that he is making money by buying. Only then transactions will happen. No matter what kind of market you are in, as long as you buy stocks which are representing good businesses where the return on capital is more than cost of capital, run by good managers who won’t cheat you or take you for a ride, and are available at good valuations and where there is a good margin of safety, by and large, that becomes a good stock pick.

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We know about the impact of Fed rate hike, inflation, war, etc. Do you think that all the devils are known?

It’s like a cricket match. When you go to play, you know that a bouncer can come, an off swing or an in swing can come. At the end of the day, when you go to a pitch who knows what will come? The same thing is in the market. You will have to be ready for whatever the bowlers throw at you. It is the nature of the market that it keeps on discounting various scenarios. The moment Russia-Ukraine tensions happened, it started getting discounted. Today, the market would have undoubtedly taken into account higher oil prices, inflation, Russia-Ukraine tension, US Fed rate movement and corporate profitability. The market is the collective wisdom of people. It invariably discounts all the known things but there is always an unknown thing which comes and hits the market which we were not aware of.

Do you think Nifty is reasonably valued at 16,000?

Nifty at about 16,000 would be 19 times forward earnings post this windfall tax. So it looks like a little above fair value but nearer to fair value compared to let’s say in October 2021. This is the market where you will be equal weight to equity allocations based on your risk profile, time horizon and objective. And if the market continues to correct, it could be time correction because if 6 months down the line the market is at 16,000 it would have become cheaper because earnings would have gone up. So there could be a time correction.

There could be price corrections as well. If 16,000 Nifty becomes 15,000, then there is a price correction. It could be both – time and price correction. So in the correction phase, keep increasing your allocation to equity.

How has your outlook changed for bank stocks in a rising interest rate environment?
Banks are generally the beneficiary of higher interest rates as the net interest margin expands. Obviously, there is a cost where higher interest rates do impact the mark to market on the portfolio. But at this point of time we believe that benefits of rising interest rates or your net interest margin will be far more than the mark to market losses on your portfolio.

More importantly, banks are having 10-year low NPAs and most of it is provided for. And then the final part – there is consolidation happening in the banking sector in terms of growth where 2-3 public sector banks and 4-5 private sector banks are grabbing bulk of the credit growth. There is consolidation, NIMs are expanding, and NPAs are low. I think all these put together, creates a huge opportunity for the banking sector to outperform the market.

Which sectors are bullish on at this stage?

Besides banking, the other sector which we are bullish on is manufacturing. In 2014, India had 3-4 mobile handset manufacturing factories generating abt Rs 22,000 crore in revenue. We were net importers of mobile phones to the extent of $8-10 bn. Fast forward to 2022, we are the largest manufacturers of mobile phones in the world. We produce more mobile phones than South Korea, Vietnam and the USA. Today there is mobile production value of Rs 2,22,000 crore. India is now an exporter of mobile phones, including the iPhone 13 which is now made in India.

What happened in mobile handset manufacturing can also happen in other manufacturing areas. Indian manufacturing is becoming competitive because our labour cost is lower compared to the rest of the world. From the infra deficit stage, we will become infra available. The government is also supporting the creation of a manufacturing setup. There are challenges in terms of logistics and power costs. But because of the advantages, we are becoming competitive.

The China plus one strategy is also forcing large MNCs to seek diversification out of China. The whole world is available to them. A few of them are coming to India. If you put all these things together, India will become part of global supply chain management. The government is encouraging manufacturing in India. The PLI scheme will make it more rewarding. What we did in mobile handsets will get replicated in many sectors. Collectively, we call it the manufacturing theme where we are bullish.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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