Banks remain a good structural bet: Gautam Duggad of Motilal Oswal

Banking sector is still a good structural bet and remains convinced about the underlying long term value migration in favour of private banks, says Gautam Duggad of Motilal Oswal

Continued liquidity from DIIs coupled with pick up in FII flows (especially in January) along with healthy start to the earnings season has resulted in rally in CY18, says GAUTAM DUGGAD, head of research for institutional equities at Motilal Oswal Financial Services in an interview with Pranati Deva. He also adds that banking sector is still a good structural bet and remains convinced about the underlying long term value migration in favour of private banks.
 
Markets have been on a bull run since the beginning of the year. What do you think are the main reasons behind this rally?

 
Continued liquidity from domestic institutional investors coupled with pick up in foreign institutional investor (FII) flows, especially in January, along with healthy start to the earnings season has resulted in rally in CY18.
 

What are your expectations from the budget? Do you see the rally continuing post budget?
 
We expect the government to encourage rural spending and also drive capex. However, we don’t expect it to go overboard with spending push. We expect fiscal deficit targets to be pushed by one year given that FY18 has seen a structural and transformational reform like goods and services tax (GST), which is still settling down.

 
What are your index targets for December 2018?
 
We do not have index level targets. That said, we believe if earnings delivery is in-line with expectations, markets have more room for a rally even as valuation do not offer much comfort. Support from lower cost of capital is no longer there post the rise in bond yields. Therefore, for market valuations to sustain, the earnings delivery is important.
 
Midcapshave been a laggard despite the buoyancy. What is your outlook on this market segment?
 
Mid-caps have had a fantastic three years in a row and are not trading at significant premium to large-caps. We prefer large-caps over mid-caps from a top down perspective. Within mid-caps, our preference remains with growth stories with visible earnings and good quality management.

 
What are the sectors you are betting on currently? Do you think banking space is a good bet right now?
 
We are betting on consumption recovery, cyclical recovery in banks and early signs of pick-up in private capex. We think banking is still a good structural bet – we remain convinced about the underlying long term value migration in favour of private banks. From a tactical perspective, we expect corporate-oriented banks to outperform retail ones in CY18, as non-performing asset (NPA) resolution gets momentum coupled with massive recapitalisation of PSU banks.
 
Information technology (IT) stocks have also been on a rise. Is the worst over or they are just going with the momentum?

 
The IT space is benefitting from recovery in US markets along with rising share of digital business. Secondly, valuations in this segment are still reasonable after the underperformance of last two years. So they are catching up. Also, the earnings season for IT companies has been a positive one with good outlook for CY18.