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Vetri d’Uti bets on banks to play on the next growth cycle


The stock markets have not been kind to the bulls, the Nifty50 since its high of 18,600 has lost more than 1000 points and for the first time in November, Indian markets are underperforming global markets.

To discuss market dynamics and understand whether underperformance is just a passing incident, CNBC-TV18 sat down with market veteran Vetri Subramaniam, Group President and Chief Equity Officer at UTI Asset Management Company Limited.

He said: “Banks have fallen significantly behind the market lately and were hit the hardest at the start of the pandemic. This is an area where we believe there is actually significant value now. So from a value perspective, finance, lenders are part of the market that we love, but we are selective.

“Our feeling is that this is the story of a group of financial institutions that are effectively gaining market share by exceeding credit growth by a margin of a year and a half or even 3: 1 in their growth figures. This kind of consolidation will continue, ”he said.

“These banks have been proactive this time around in terms of provisioning. They have raised capital preemptively and they are very well positioned for the next cycle of growth, ”said Subramaniam.

The market may be a little worried when it examines the fact that credit growth for the entire banking industry, as data comes from the RBI, is only around 7% year-on-year, but if you think about how the economy will grow over the next three to five years, then pegging at that 7 percent is wrong, he noted.

“I’m glad people aren’t so happy with the 7% credit growth as it gives us a good opportunity to build positions there for eventual credit growth that we believe will occur. In addition, due to the consolidation that has taken place, we believe that these companies will in fact be able to gain both market share and profitability over the next growth cycle, ”he said. declared.

As for the market, he believes valuations are tough and therefore investors should moderate their return expectations.

“The most crucial thing to keep in mind is that returns for the past year or even the past 18 months are not indicative of the kind of returns the asset class can generate over the next three to five. years. Don’t take what happened over the past year as the benchmark for what can happen in the future, ”Subramaniam said.

When asked if there were any dangers to the rally in terms of a very steep fall, he said: “There are two ways to think about this. point, which then causes the market correction, could come from anywhere. “

He added: “It may not necessarily be rushed. The market exploits excessive valuations in several ways: one is the sharp drop in prices, and therefore valuations; the other is that the market is exceeding the profit figures. then stock prices stop reacting to earnings growth, and as a result, they effectively deflate in valuations by going nowhere, over a period of time. So we don’t really know which of these will actually play out.

As for the tipping points, which could cause this, he said many of those risks are reasonably well known.

“Some of the challenges that our economy as well as the world economy will face are well known, primarily the normalization of fiscal and monetary policy, although the combination may be different from economy to economy. . It is now. These are the events that are outside, say, the middle of the range, that are really the big concerns and if you had to think about it, a concern would be whether the Fed, as well as Are all the central banks around the world late? So this is from extreme to extreme risk, ”he said.

He added, “The tail risk to worry about at the other extreme is really that given the events that have happened in China, the slowing growth there, is it possible that the second Global economy is in fact showing a very weak growth performance and, as a consequence, is reducing the overall growth outlook. In my opinion, these are the two extreme risks with very different message types, but these could be the surprises that rocked the market. “

On new age stocks like Zomato and Nykaa, Subramaniam said, “There are two ways to look at them, one is the most common is that it’s all a bubble and as soon as they start to normalize , all hot air will come out of it.However, when you look at numbers like 1000 EP or 10-11 times the sale price or 20 times the sale price, what we are missing is that in the end in fact, these are the companies with a significantly strong growth outlook and a very long growth path. “

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“So without going into the individual names, we have to be careful. Therefore, by simply extrapolating the number of valuations and using that as a reason, some of these companies might surprise us in terms of growth. But I admit that the bar is high. It’s not the valuation that’s the issue, but the fact that when I look at the value of the company, if you put 20 billion 30 billion in the value of the company today, then the type of demand rate that it will have to generate over the next few years is very high. And history has taught us over time that only a few companies will get there, ”he said.

“Even though there are 20 of these consumer tech companies and all of them benefit from these reviews, it wouldn’t surprise me if in 10 years we found out that out of this basket of names, only one or two actually deserve them.” , but it’s something we’ll find out over time. Right now we’re trying to figure out how these business models are actually evolving, ”Subramaniam said.

He further stated that they had made an offer on some of these names like Nykaa, Zomato, Policybazaar, and in all of those they were among the anchors.

Regarding IPOs, he said: “We are dealing with a flood of IPOs and it is not easy for your team to go through 24 companies, to go through the HRDs. We have therefore been very selective with regard to the IPOs that we have chosen to participate in. But these exposures are currently less than 1% of the portfolio’s exposure. “

For the full discussion of the interview, watch the video


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