ETMarket Fund Manager Talk-More upside left in PSU banks as best in that class still reasonably valued: Spark Asia Investment


MUMBAI – The Indian banking sector exited its worst-ever downcycle after Covid, which led to a major clean-up in the balance sheet across the board.

But it’s public sector banks that have seen an almost 360 degree shift in earnings performance, and this reflects in the stock prices, as many of them turned multibaggers since the pandemic.

Despite the rally, many of the PSU banks are still reasonably valued, believes P Krishnan, CIO and Managing Director, Spark Asia Impact Managers.

“On PSU banks, the best in that class are still reasonably valued. They have upside left when we look at our framework of valuations viewed against growth/RoE/RoA outlook,” Krishnan said in an interview with ETMarkets. Edited excerpts:

After the stellar rally in benchmark indices in the last 5 months, how comfortable are you with the valuations?
Firstly, the valuations have expanded by a lesser margin than the 16% rally, as nearly half of the year has elapsed and valuations should always be referenced with time. There is earnings growth with time. Two, the market had yielded negative returns in the 15 months prior to this rally, bringing valuations below the 2021 levels.

Three, there is a deep valuation divide in the market. There are pockets of comfort and there are segments which are heavy.

Your flexicap fund has given over 26% returns in 1 year. Could you share the performance of your multicap portfolio since inception and what is the stock-selection approach?

We are sector agnostic, market cap agnostic, if there is adequate liquidity, and are open towards investing in private and PSU stocks.

We have no bias towards or against cyclicals or secular growth sectors. Our stock selection is based on our assessment of how well a business can leverage off India’s growth story over 1-3 years, whether the management is capable and well-aligned to minorities, whether the price we pay is reasonable and whether we understand the risks in the stock well enough for us to undertake the journey with the stock in a safe

In terms of sectors, could you share the top exposures in the multicap fund?
BFSI is the top sector. However, BFSI has about 38% weight in Nifty. For now, our weight is lower than that.
The rest of the exposure is spread across several pockets. We have a bias towards sectors that are geared to the next leg of India’s economic growth which we believe will be led by a balanced mix of investment-led growth and by consumption.

The midcap and smallcap stocks are the flavour of the season. How has this favoured your portfolios?
We increased the mid/small cap weight steadily from the end of FY22 to the end of FY23. We have about half the portfolio in these categories, give or take.

Many of these stocks have contributed to the performance over the last one year and indeed over the last four years.

Post the Q1 earnings, which sectors are you bullish and bearish on?
Q1 results did not spring any meaningful surprise on us. Our thesis of steady economic growth of 6-7% over the next few years is intact. Select financials, capital goods/engineering, real estate and manufacturing are places where we see opportunities.

We continue to be underweight in IT services and expensive consumer stocks. While consumer incomes have grown steadily, the consumption basket for families has expanded much faster. Uneven growth is inevitable. Throw in high valuations and this is not a good mix.

What’s your take on the BFSI sector? Do you think PSU banks will continue their outperformance over private banks?
On BFSI, India exited from its worst ever down-cycle after the Covid recession. The upside from credit quality improvement has played out. The drivers going forward are sustained credit growth and reasonably low credit costs.

However, some level of exuberance may have crept in. To that extent, the sector may take a breather. Our read at present is that there is more to go after a phase of potential consolidation.

On PSU banks, the best in that class are still reasonably valued. They have upside left when we look at our framework of valuations viewed against growth/ROE/ROA outlook.

Outperformance is a relative call and on that, the view is stock-specific. Selective out- performance is possible.

What’s your PMS’ strategy for generating alpha returns?
Pick stocks where there is a clear grasp of potential alpha drivers and risks. Focus on performance drivers over 1-3 years and keep that focus clear.

Go where the growth is and will be flexible.

Listen more to the market and less to market watchers. Have some level of paranoia. We can never be far away from a potentially damaging investment mistake.

(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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