Banking sector offers buying opportunity amid FPI sell-off: Nilesh Shah

"Gold looks on a better footing. It has delivered great return like equity, but we will have to realise whether we will be able to liquidate gold or not," says Nilesh Shah, MD, Kotak AMC.


Gold and Nifty have given similar returns. I mean, why are we doing so much of analysis every day? So much of volatility. We look at macro, we look at rupee, we look at earnings, we look at PE. Life is so simple. Just buy gold, forget it.
Nilesh Shah: So, we will have to figure out when Indians decide to sell gold, who will buy. Today, gold prices are up because we are one of the largest buyer. Fortunately, for India, central banks of the world have become like our housewives.

They have realised that keeping money in dollar, yen, euro, renminbi, securities is risky, as Russian central bankers have realised. Now they have joined the bandwagon and they are buying gold as much as Indian housewives are buying.
So, yes, undoubtedly, gold looks on a better footing. It has delivered great return like equity, but we will have to realise whether we will be able to liquidate gold or not.



Now, the point is, where do you go from here? I mean, we always talk about equity markets, but let us first understand where is the earnings and economy headed and is it now time to be optimistic because the macro, the data points in terms of tax collections, oil, dollar index, the macro is getting better now.
Nilesh Shah: So, it is not about macro going down or earnings not growing. It is all about meeting expectation. At 22 times forward, earnings expectations were running in double digit. Actual earnings came at low-single digit, mid-single digit. In every quarter of this year, Nifty 50 earning per share is more than Rs 250 per share.

Overall, we are on our way to achieve 1030 Nifty EPS. The growth is likely to be mid-single digit over last year and that was below expectation, which is why correction has set in.

Now, expectations are low and there are reasonably good chances with good monsoon and improving domestic macros, we should be able to get somewhere around 1150 EPS for Nifty 50 next year. It is the earnings growth ahead of expectation which will drive the market upwards.

So, what should be our approach now, stay with the market or sell the market on every uptick?
Nilesh Shah: So, in the short-term market is like a machine. Money flow determines prices. In the long-term market is like weighing machine. Fundamentals determine prices. As of today, FPIs are seller. They have been selling quite consistently, quite aggressively, their side is well known.

No one is going to give easy exit to them by taking market up. If they are selling, market will continue to fall. As their selling stops, market will bottom up. And as their buying starts, markets will start rising.

Undoubtedly over longer-term fundamentals will play. This is fair value market where largecaps are below historical average. Mid and smallcap are still around historical average.

So, you should maintain neutral weight to equity. Give preference to quality over momentum. Give preference to high floating stock market determined prices versus low floating stock kind of manipulated prices and go for reasonable valuation over expensive valuation.

Be overweight largecap as small and midcaps are still trading at premium to historical average. Most importantly, do not buy everything in correction at one go. Keep on adding on a calibrated basis as FPIs are likely to sell for the near term.


But when you talk about largecap and when you talk about the large exposure on the markets, it has to be the banking space. So, is that the space that you would advise one to look at very closely given the fact that the valuations now are at a reasonable level and you have seen persistent selling in that space as well?
Nilesh Shah: Undoubtedly. The FPI selling in the banking and financial services space has resulted into valuations now trading way below historical average for many of the private banks.

The NPA cycle is under control. RBI is improving liquidity which will push up deposit as well as credit growth and barring banks which have exposure to microfinance/unsecured personal lending, rest of the banking system seems to be in a better position.

So, undoubtedly banking and financial services is one sector where one can look to add during this correction. The second space where we are bullish is consumer discretionary space. In the budget about one lakh crore tax rebate is given to taxpayers.

Eighth pay commission should put money in the pockets of government employees towards the beginning of next year. Both these two things will be positive for consumer discretionary.

We do not expect this class to spend money on roti, kapra, makaan, the basic necessities. We expect them to spend money on experiences like travelling, like tourism, like QSR, like education, like healthcare, like premium brands. So, consumer discretionary space is something which looks interesting apart from banking and financial services.


As a house you have been bullish on cement. As a house, you have been bullish on IT and consumer you have already outlined. Let us stay with IT. IT stocks have corrected 15% to 20%, some stocks are down about 30%. Why have IT stocks corrected and after the correction, are they a buy now?
Nilesh Shah: So, again, in IT stocks, it is all about expectation. There was fear that US might be slowing down. The Google searches on US recession has increased. So, we are probably looking at hard landing as well, that is direct impact on IT business. The second challenge is of technology. There are many IT companies which have significant exposure to BPO and clearly AI chatbot are taking over BPO jobs. Even programming is not far off and there are worries that AI related programming could take away many of the programming jobs.

Undoubtedly, in IT, there will be two kinds of companies, one which leverages AI to deliver better, cheaper, faster solution to customers. Now, if you are a large behemoth, to turn around the tanker is likely to be a bit difficult, but to turn around a speedboat might be easy.

We have been bullish, mid and small IT companies which are leveraging artificial intelligence, which has limited or no exposure to BPO, and we believe these companies should be able to gain market share as they provide better, cheaper, faster solutions to their customers.

The companies which are investing in developing AI related ecosystem, as many of the companies will develop their small learning modules, small language models, SLMs, they will also create an ecosystem which is closed loop and this opportunity could be as big as IT services industry. So, one will have to become bottom-up in stock picking in IT services.