Banks, NBFCs among India's most attractive financial bets: Kotak's Pratik Gupta

Pratik Gupta, CEO and Co-Head of Kotak Institutional Equities, sees banks and non-banking financial companies (NBFCs) as one of the most attractive areas of the Indian market, helped by strong inflows through Foreign Currency Non-Resident (FCNR) deposits. These deposits provide banks with low-cost, long-term funds, giving them more room to lend and reduce reliance on expensive wholesale funding.

“These are a massive windfall for the banks. It's low-cost, long-term, no CRR SLR, very attractive terms,” Gupta said. He expects some near-term pressure on net interest margins for a quarter or two, but believes the additional funding will give banks more room to lend and cut expensive wholesale funding.

His preference within the sector is for large private banks, although he expects the broader financial services space, including NBFCs, to benefit. CRR is Cash Reserve Ratio and SLR is Statutory Liquidity Ratio

Gupta is less positive on the broader market in the short term. September is expected to see heavy equity issuance, with a large number of initial public offerings (IPOs) as well as possible stake sales by promoters and private equity investors before the October earnings blackout. With foreign investors still largely underweight on India, he expects some of the IPO money to come from domestic investors, leading to rotation from the secondary market.

Foreign investor sentiment towards India has improved at the margin, but Gupta says most investors remain cautious because valuations are still high relative to earnings growth. India has also significantly underperformed emerging markets this year, prompting some investors to reduce their underweight positions, although broad-based bullishness has yet to emerge.

On cables and wires, Gupta remains cautious. The entry of a large new player (Aditya Birla Group) with aggressive capacity expansion plans comes at a time when existing industry capacity utilisation is already around 70-75%. More supply could therefore put pressure on margins, while valuations of many stocks remain high.

“Still time to be cautious. Although I would say the initial impact has already been felt with some of these stocks coming off, but we're not there fully as yet,” Gupta said. He believes investors should remain cautious at current valuations as additional capacity enters the market.

Gupta also sees limited near-term upside in large-cap IT services. While the worst of the downturn may be over, weak revenue growth, artificial intelligence (AI) related revenue deflation and pricing pressure continue to weigh on the sector. He remains more positive over a three-year horizon, while mid-cap IT remains a stock-specific opportunity.

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Among other sectors, chemicals remain on his cautious list due to weak demand, excess supply and expensive valuations. He is also staying away from oil marketing companies and most oil public sector undertaking (PSUs), with some exceptions.

Power and data- center stocks remain attractive over the long term, but Gupta believes valuations have risen too far too quickly. “Overall, we're quite positive in the long term on some of these power and data center plays, but we think valuations have run up too much. So, time for some of these stocks to take a breather.” He therefore sees a more neutral stance as appropriate in the near term.

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