Gautam Duggad on why IT stocks are a must buy in this market

Secondly, many stocks have rallied 20-30% from their respective lows, but they are still 15-20% away from their respective 52-week highs. In the meanwhile, the market has reached a new high. Second, fundamentally IT over the last two decades has handled and negotiated many macro crises brilliantly, whether it was Y2K or 9/11 or GFC, taper tantrums, Covid so even if there is an elevated pressure on order book because of few quarters of a slowdown or recession I think that would be the time to add IT stocks and not sell.

We have an overweight position on IT for the last three years in our model portfolio. At the margin in the last three quarters, we completely removed midcap stocks because they were trading at a very high and unsustainable premium in our view of large cap IT. Our preference and bias clearly remains towards largecap where the cash flow, payout, and of course, free cash flow conversion matrices remain rock solid, and stocks are available 20-25% still below their respective highs. So this continues to remain an overweight stance for us

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ET Now: Where within banks are you finding preference? Is it the PSBs which have performed much better in terms of the stocks year to date, or do you think it is now the bottom-up stories, the banks which have not participated in the rally are likely to do better.
Gautam Duggad: We have an overweight stance on financials and this remains our single largest overweight in the model portfolio. 1.5 years back, we significantly increased the overweight on PSU banks. In fact, today, the single largest overweight across our model portfolio is on PSU banks. We have about 7% allocation to PSU banks in our model portfolio, since more than a year now.

We have

and BoB, as far as PSU banks are concerned and we have not gone below that so far. We also have private banks, but in the near term, there could be some more catch up, which can continue to happen on valuations of PSU banks as a pack because private bank trade has played out in the last 12-18 months, and private banks numbers have been on an improving trajectory for the last three years already.
Several PSU banks have started improving only 2-3 quarters back, and we clearly see more room for them to go ahead, whether it is on credit growth or credit costs and valuations, despite the recent run-up most of them are still below 0.8, only one or two PSU banks have crossed one-time price to book.

So while we like private banks, we see that there is some more alpha which can be had from the PSU bank trade. In the last five years, financials, part of the Nifty profits have gone up almost 5x from Rs 45,000 crore in 2018 to about Rs 2.1 trillion this year in 2023, and we are expecting another 20% growth in FY24 on that elevated base. So we continue to remain positive on financials as a pack, within that our preference as of now, as reflected in our model portfolio, remains with PSU banks.

ET Now: What’s stopping you from looking at the mid-tier banks? Are you waiting for a sustained improvement in earnings?

Gautam Duggad: No, not necessarily. You cannot have all the stocks in the model portfolio. We prefer a strategy where our biases and preferences are reflected in a very concentrated way in few names rather than scattering the width around multiple stocks. So we have 5% allocation to SBI, 2% to

and rest of the names in PSU banks, they are more or less a trading kind of bets where you have to be very swift as far as entry and exit is concerned.

In SBI and BoB, we think we can take a slightly longer-term view given the way numbers and specifically ROAs are panning out. Most of these banks, whether it is SBI or BoB or even some other names, sitting on 70-80% of the provisioning coverage ratio now, and some of them are almost about to hit 15-16% ROEs, but as far as the allocation goes we are comfortable right now with these two names.

ETNOW: We interacted with the management of earlier and they were pretty confident that capex is picking up all around and that the on-ground situation as well is looking quite good and those seem to be the sound bites, that we are getting from several corporates within this sector. How are you looking at playing this entire theme?

So capex has been a theme for a long period of time now. The reflection in numbers, however, has started happening only in the recent past, and even here, the numbers are very-very patchy.

They know you have a few sub sectors where you can clearly feel that capex is picking up, but if you look at it at a system-wide level, if you go by the RBI data, the seasonally adjusted capacity utilisation is still around 74.3, which is not what you will call as a big capex boom which is happening. So my way of playing some of these themes within the broader infra space is you take a very concentrated exposure towards various subsegments. For example, we have exposure to cement, we have it towards capital goods through L&T, a big overweight on L&T, we have big overweight on

and then we are also using real estate as also a play on capex because end of the day household capex, central government capex, state government capex and some of the other leasing developments that we have heard real estate also allows an entry, a vehicle to play the capex theme.

As far as the more some of these recently buzzing themes are concerned, things like defence, things like railway capex currently we do not have coverage on those names, so I will steer clear of making comments on them, but they have done well too in the last 12-18 months so unless somebody has an exposure to those themes entering it now when the stocks have already run up 3x to 4x I think the risk reward will incrementally look slightly less favourable even though the broader theme of capex will play out over next couple of years.