Let us begin by discussing IndusInd as well. You think that perhaps the best of this one is behind in terms of performance and it is only going to worsen from here on, at least for the immediate term?
Sandip Sabharwal: What we have seen in financials is that many of the financials were under stress. So, whenever people feel that there is some stress building up, those stocks are as it is underperforming. And the results have come subsequently and justified whatever the markets were thinking. So, there is some stress at the lower end, there is some stress on the unsecured lending book, etc, and which has also been contributed by higher rates and tight liquidity which RBI has kept. So, it is not that this has happened without that. It is important that RBI starts using policy now because otherwise the stress will rise further. But nevertheless, this was something which was expected. Now, credit costs for banks have been going up. But if you look at it, they are still low by historical standards and quality of the bank books still very strong relative to history. It is just that the last few years very high quality and recoveries have made many analysts, etc, think that that was the base case and this is going to continue. Normalcy is returning. There will be some NPA buildup. There will be some write-off increases, etc. But overall, if the banks can still maintain a good balance sheet and reasonable profitability, it is good. So, stock prices are adjusting. So, this quarter as the stock prices of financials adjust, they will get some opportunities to buy.What is the take on ITC? I mean, of course, not a pure play FMCG company, but FMCG has actually been resilient surprisingly, amid all the challenging environment and the demand conditions and this comes just in the backdrop of what we have heard from Unilever.
Sandip Sabharwal: So, marginal outperformance, but the margins have been under stress. So, results in terms of profitability and outlook for the future in the near term seems to be much lower than what most analysts are expecting and the stock has been a big outperformer overall. Like in last few weeks, it has obviously given up around 10%. But then overall, it has been a bigger outperformer in the FMCG space. So, I would think that no big triggers for any significant upside in the near term for ITC.
What is the shopping list looking like? And when is it that you would start buying into any of the names that would be on that?
Sandip Sabharwal: On the largecap side, Reliance has corrected 20% from the top so that is coming to some reasonable range. Consumers like HUL, it is off 20% from the top, so another 5-10% if it corrects, it could come into reasonable range. So, from largecaps now, we are looking at 12% to 15% kind of returns because of market valuation. So, wherever stocks correct in a manner where we think we can get those kind of returns, I think that could become reasonable. L&T is in the reasonable zone, but if there are some weak prints in the results, etc, and if it corrects a bit more, that could be in the range. Markets have given up reasonable gains from the top. But I still think that there could be still possibly 3% to 4% more to go in terms of the corrective move, let us see. And then I do not see an immediate, very sharp up move again. So, there is some consolidation, then there will be up move. We are in a zone where the long-term investors will get time to buy into stocks they like at prices at which they want, which was not present for the last year or so when there was spiralling up move across, especially in the small and midcap segment.
But what about midcaps? What is it that you would be adding more of or buying afresh?
Sandip Sabharwal: Whenever there is visibility of growth and outflow. So, on the infra, construction side, stocks like NCC, Ahluwalia Contracts which we hold, but for fresh buying, we were waiting for the corrective move to play out somewhat and that has played out in the near term, some weak prints, etc, in terms of near-term results are leading to some corrections. So, these stocks look reasonably placed. Then, stocks in, let us say, the power, transmission, equipment side, like KEC, Kalpataru Power they are also pretty well placed. So, on corrections, those could also be reasonable bets. UPL, the global agrochemical cycle is sort of recovering, but we need to see conclusive proof. So, UPL ran up after the last results, it has given up most of the gains. So, I would like to watch out the current quarter results to see visibility of recovery and that would be a reasonable contrarian bet, but I would wait out for the results to come out.
It appeared, let us say, last couple of quarters that banks have a good runway ahead. But if I look at the kind of commentary, numbers we have got, let us say, from IndusInd Bank or Kotak, even HDFC Bank, concerns on NPAs are coming back, at least on the microfinance front, on the unsecured loan front. So, while it appears that banks are in a good shape, but now things are looking shaky there.
Sandip Sabharwal: I had been pointing this out for a long time why financials are underperforming, because of the tight liquidity which RBI was maintaining and higher rates, it was imminent that there will be some deterioration in asset quality starting and which will continue next year also. But it is not so bad. What we need to recognise is that because, like I was earlier saying, last three-four years, the NPA write-offs, asset quality improvements, and the overall asset quality has been so good that people have got used to it.
But even the current credit costs, which many of the banks are indicating, they are not very high by historical standards. So, despite what is happening on the consumer sentiment side and the tight liquidity constraining credit and impacting growth, the financials are reasonably placed. So, I would agree with what Nooresh was also saying that as many of these financials possibly correct or consolidate, it will be a good opportunity, especially on the larger financial side to buy into those stocks which have corrected a lot.