What has been your read on the entire banking pack? The MFI segment pressure seems to be consistent across the board—of course, larger in magnitude for companies with a significant portion of their book in MFI exposure. How should investors approach banks right now? Do you see it as a bottom-up play? Do you buy the dips after earnings, or stick with the leaders?
Dipan Mehta: One of the biggest disappointments this earnings season has been the banking sector. We expected net interest income and pre-provisioning profits to improve, but that hasn’t materialized for various reasons, despite interest rate cuts and better liquidity conditions. We also thought that provisioning for NPAs would move in line with, or slightly above, the growth in pre-provisioning profits—but that hasn’t happened either, which is a real cause for concern.
If you strip out the earnings growth coming from some PSU banks, a large number of NBFCs and private sector banks have clearly disappointed. My understanding is that this industry is becoming highly competitive—a “red ocean”—making it very difficult for banks to sustain the kind of growth rates we were used to four or five years ago.
Although banks carry significant weight in the Sensex and Nifty—which is one reason why these indices aren’t moving up—their earnings growth isn’t impressive. Going forward, investors may need to look beyond this sector to achieve outperformance versus the broader market. Of course, there could be cyclical improvements due to lower interest rates or a strong festive season, but the era when large-cap banks delivered assured 15–20% growth seems to be over.
And that’s the problem—you rightly highlighted the massive weightage banks have in the indices and other metrics. Where do you see the next leadership emerging from? Not in terms of weightage necessarily, but at least forming a significant portion of the market?
Dipan Mehta: That’s a tough one. Banks aren’t impressive right now, and the software sector has been disappointing, stuck in a secular stagnation with low single-digit growth. Pharma has performed well, and many companies have given good returns, but the threat of tariffs hangs over the sector, limiting the ability to assign higher valuation multiples.
That leaves capital goods. While there is some earnings volatility, companies like L&T, KEC International, Kalpataru Power, ITD Cementation, and Afcons are broadly performing well. These companies are engaged in building infrastructure and capacity within the industry, and they remain an engine of growth. Investors could consider being overweight in this sector.Additionally, the power equipment, solar, and wind power segments have reported good earnings and are performing well. While their weightage in the Sensex and Nifty is small, they could emerge as leadership sectors. There’s also a potential upside in two-wheeler companies due to a better monsoon and revival in demand.Cement did well last season too, but it’s cyclical—profits were higher, but volume largely disappointed. So, overall, while there are pockets of growth, it’s challenging to point to any industry that’s consistently performing exceptionally across the board.