Here’s why Pankaj Tibrewal is bullish on financial stocks

“And when the loss pool comes down or moves from loss to profit, the aggregate headline profit growth seems to be very large. And that is what is happening in this year, FY24 and probably early part of FY25, which is exciting the market,” says Pankaj Tibrewal, Kotak MF.

It is a great point that the profit pool is with large cap and market cap right now in terms of the division is with small and mid caps but what about the absolute earnings growth? Large cap, according to estimates, will grow in the region of about 13 to 16 or 14 to 17% depending on the estimate you have. But for mid and small cap stocks, that number in terms of the rate of growth is far higher. So it is a shift which I think market could prioritize.
Excellent point. Look at two data points; the first one, if you look at profitable companies, apple to apple comparisons, you have seen a de-rating in large caps and a sharp re-rating in mid and small caps. However, the aggregate number gets completely misrepresented because there is a lot of loss pool which are sitting in mid cap index and small cap index. And when the loss pool comes down or moves from loss to profit, the aggregate headline profit growth seems to be very large. And that is what is happening in this year, FY24 and probably early part of FY25, which is exciting the market.

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But what we do is we normalize those earnings which are more volatile in nature. Let me give you a small example. If there is a telecom company which is a part of mid cap index and it reports a loss of say Rs 60,000 crore last year, and if that loss comes to Rs 30,000 crore, suddenly you see that the headline mid cap earnings growth is looking very strong.

But you need to normalize that because you know that probably that is not where you will go and invest in. I am giving you a small example in that respect. And there are many other companies, even in the small cap index, which had a bad last couple of years. They are moving from either loss to profit or the loss is coming down. So you need to adjust for that. And hence, I think that the differentiation or the difference between large cap growth and then if you adjust the mid and small cap, index growth is not that very large.

Where in the mid cap space, you have mentioned manufacturing as a theme, you mentioned financial as a theme, you think that we are in for high growth and valuations, they are supportive, because manufacturing is not cheap. With the exception of private banks, nothing is cheap in this market where you are getting a comfort that okay, I am still getting it cheap and the growth looks decent.
Very limited pockets of that kind of opportunity to be honest with you. Financials are one space which is quite reasonably valued. And look at one data point. If you bifurcate NSE 500 universe, which is largely what market represents into two buckets, which is BFSI and non-BFSI. And BFSI are 77 stocks and non-BFSI is 423 stocks.

Today, the non-BFSI bucket is trading at an 85% premium to the BFSI bucket. That means that the entire non-BFSI space has been massively re-rated over the last 12 to 18 months or 24 months. Whereas the BFSI, despite of delivering strong earnings growth, has not seen that re-rating.

On the contrary, there has been some de-rating in the large private sector banks. So I think that is one space where a lot of comfort could be derived on and they are delivering on numbers. The second point, if you look at from an overall perspective, if you look at this quarter numbers; till day before yesterday, 90 companies have reported out of the NSE 500 companies, that aggregate profit growth is about 28%. And if you bifurcate between BFSI and non-BFSI, again, out of that 90 companies, 28 companies in BFSI space has delivered 40% earnings growth.

And the rest 62 companies on non-BFSI have delivered 18% earnings growth. So it has not been that large. And the third most important point, do not forget that in this quarter, whatever little the numbers have come through, we are not seeing any top line surprises positively. And do not forget that the base quarter last year was the worst margin corporate India has seen in their last 20 year history.

So margin expansion is happening but there is no joy in the top line growth of all the numbers which have been reported. As you move into the third and fourth quarter, raw material, crude have all started inching up and we need to keep a close watch on how the margin trajectory spans from here.

So very little pockets where you think you can go with very high conviction, where valuations are also supportive and growth is also happening. Markets have become smarter in re-rating it very fast. And financials are the one place where we are seeing that opportunity is there, especially in the larger cap banks.

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