nifty: Kotak Mahindra Bank’s positive results signal potential for a broader market recovery: Sandip Sabharwal

“There has been a huge valuation adjustment while the bank has continued to grow and the internals do not look bad at all given that they have a higher ROA than many other private sector banks,” says Sandip Sabharwal, asksandipsabharwal.com.

What caught my attention was Kotak Mahindra Bank numbers. I think after six or seven quarters, they are looking okay. Has the tide turned because if Kotak is turning, HDFC Bank would also turn.
Sandip Sabharwal: There can be a difference between Kotak and HDFC Bank because Kotak grew advances by 15%. HDFC Bank’s advances growth is just 5%. So, in that context, absorbing the high increase in deposit costs combined with opex increases, so HDFC Bank might find it tougher in the near term. But the stock is also not done well. Like most of the private sector banks have been hibernating and specifically Kotak Mahindra Bank, I was looking at the chart yesterday. It is at the same level as it was five years back. So, there has been a huge valuation adjustment while the bank has continued to grow and the internals do not look bad at all given that they have a higher ROA than many other private sector banks. So, I would think that Kotak Bank results are encouraging and if we get some news flow on the removal of digital restrictions, etc, which the RBI imposed a long time back, we would have expected them to be gone by now, but it has taken some time, so that could be an additional trigger.

So, overall, we have seen stress on the balance sheets for private sector as well as public sector banks. But they are manageable vis-a-vis what we saw in previous cycles and that is the positive part of it.

So, are we moving into that perhaps patch of the market where the fallen angels would be at play, which is Reliance numbers were decent, Kotak Mahindra Bank seems to be okay. So, is it time to start looking at, like, if I may use the word rather loosely, the yesteryear darlings of the market, Reliance, Kotak, HDFC Bank, and they could now start making a comeback and the year really could belong to the fallen angels?
Sandip Sabharwal: HDFC Bank, like I said, it might still take time till credit growth picks up but Kotak and Reliance, yes, because Reliance results also were positive and outlook seems better than what it was for the last one-and-a-half years. Kotak, we already discussed, valuations have adjusted and the management has also indicated a plateauing of the sort of write-offs, etc, which is a positive. So, I would think that these are under-owned stocks, not much ownership, and because they did not do as well. So, they should be able to outperform and I think that is the story of this result season.

Overall, as I see the result season, the positives are weighing higher than the negatives in terms of delivery because expectations itself are quite low across a vast swath of sectors and that should help the market stabilise unless and until we get something disruptive in terms of taxation in the budget which we have no idea of.
Now, to the big picture question which everybody is talking about, the weakness in rupee is getting more and more pronounced, the strength in the dollar is getting evident. Are we in for more of this churn and which could extend itself well into a couple of months for 2025, which is weakness in rupee, strength in dollar, selling in emerging markets and India gets it?
Sandip Sabharwal: Emerging market selling, so India has been hit disproportionately, the outflows out of India are very huge relative to other markets, like 45,000 crores has already gone out in January and that indirectly, it is the liquidity in the system also because foreign investors selling as they pull out money, then that much liquidity also goes out of the system and in a tight liquidity scenario, that is not good for the economy per se. Now, the rupee should have been at these levels much earlier than what it came to, because nothing is absolute, it is all relative. So, if the dollar went up 20% against the Mexican peso, 20% against Brazilian real, 4% against the yuan, how can the rupee be stable when we are a trade deficit country? So, the rupee had to adjust, I think that level of adjustment has happened. So, from here on, it is back to normal fundamentals.
I do not see a severe decline in the rupee going forward after this adjustment of 3% has happened and I do not see an appreciation cycle also, like typically Feb-March are good for the rupee and generally, because a lot of inflows, year-end inflows for the financial year come in, a lot of remittances get bunched up end of the year. So, normally, rupee does not decline much in Feb and March.

So, let us see how that goes. But overall, it will be a trend and if foreign investors do not get deterred by some taxation issues, which could come up, so that is the biggest fear today, that will taxes go up further, will that deter foreign investor flows further?

So, I think that is the bigger concern. If that does not play out, I am not so much concerned about the rupee per se and its impact on outflows. I think outflows have been more due to growth and taxation issues.

Since you are on the subject of growth, I wanted to analyse some of the earnings with you and considering a large part of the largecap IT earnings is now behind us, what is your sense on what the prospect for IT stocks are and whether or not you would be buying into any of these now that a major chunk of the earnings are behind us given that it is such a mixed bag, you really cannot sort of draw up any sectoral trend if you will.
Sandip Sabharwal: So, there are two things, one on large deal wins, except for TCS we have not seen acceleration, we have seen actual deceleration for Infosys, Wipro, etc. On the other hand, we have had positive commentary by these companies on discretionary spending, pickup of spending on BFSI, which is the largest segment for them.

So, there are mixed news flows and given the fact that many of these stocks did so well vis-a-vis the Nifty, like the IT index last year, if I remember, went up three times than that of the Nifty, then they need a substantial delivery of outperformance to keep on performing. So, the results reflect that stocks could be more muted in the near term rather than have a big upside.

The entire EV supply chain, not just the main frontline production companies, but the supply chain as well is now getting a lot of thrust. We have seen at the Bharat Mobility as to how many companies are now wearing towards a larger size of EV in their production pie as well. Anything exciting that you may have spotted?
Sandip Sabharwal: Like the trend we are seeing is that most of the companies are getting EV ready. They want to come on with the EV models, but they also are watching for the markets to absorb and be ready for the EVs. So, in two wheelers, we have seen adoption being faster than in cars actually. So, I think that is the trend we see that most companies seem to have recognised that longer term they have to be in these segments, but they do not want to be aggressively pushing this segment till there is a consumer pull coming through and that is the trend we are seeing in, like China has gone whole hog into EVs, but except that, most of the other developed economies also if we see, the trend towards EVs after picking up substantially has stagnated somewhat, so that is what we will see, but the key is that most of the companies who were in denial about the EV revolution eventually happening are now accepting this.