Go for safe plays in largecap IT and bank stocks: Dipan Mehta

31 Dec , 2021 By : monika singh

"For investors who are underweight IT, this is a good time to get into this sector which is quite safe and has reasonable valuations. Go for the largecaps where there is safety rather than some of the small and midcaps where valuations are higher," says Dipan Mehta, Director, ElixirEquities.On Reliance Industries NSE 0.57 %Some amount of uncertainty around the succession plan may have mildly dampened the sentiment, but these are great opportunities to enter into a stock like Reliance. It is a great long-term story and with the consolidation and the tariff hikes which have taken place within the telecom industry, Jio becomes that much more valuable and of course the retail business is doing exceptionally well. I would say that even the oil to consumer (O2C) business is doing well because of its cyclical nature and we are in an up cycle at this point of time. That division also should be contributing significantly to the profits.

So on a fundamental basis I do not think there is any uncertainty as far as Reliance is concerned and we are seeing a good trajectory in profits outlook for the next few quarters. Corrections are good opportunities to enter into Reliance. Having said that, it is a company in which we and our clients are interested in On
RBL Bank

The uncertainty over RBL continues because two major questions remain unanswered. The first is why has RBI appointed an additional director on the board and second is if there was a succession plan, why was that not informed to the shareholders? What has the board done as far as the succession plan is concerned? If Mr Ahuja’s term was not going to be extended, what are the backup plans? So there is a bit of greyarea over there and the market does not like any sort of uncertainty. RBL Bank has had its issues with the NPAs the way they have spiked up after the management has consistently maintained that they run a clean book but despite that, the provisioning and the NPAs and bad loans have shot up. So it is a bit disappointing.

I think the company will now be in a bit of a defensive mode and one can forget about it expanding its balance sheet and growing its credit book unless there is a complete handle on the NPAs which may or may not have been discovered completely as yet. There is a lot of commonality between RBL Bank and Yes Bank at this point of time and that causes only more nervousness.
On NBFCs including gold loan companies
By and large, banks and NBFCs have been very disappointing and it is difficult to pin an exact reason for that. We thought that with the revival in the economy post the lockdown being relaxed and at the same time all the NPA issues for banks and NBFCs being behind them, good provisioning, we were looking at a blue sky scenario but that is not reflected in the stock prices. So maybe there is some deeper malaise or reason which we do not know at this point of time.

The way the virus is spreading and the way the lockdowns are coming back, I would like to get a bit cautious as far as the market and the bank stocks and NBFC stocks are concerned. They are cheap but they can certainly trade lower. We have seen in bear markets that bottoms can be anywhere and so one has to be a bit cautious and within banks, one is still better off with the larger banks and the likes of ICICI, HDFC and Kotak. Those are the safe plays.

Maybe one needs to be in safety at this point of time. Also, this whole RBL Bank fiasco has certainly dampened the sentiment for a lot of small banks, NBFCs as well as this new RBI circular about provisioning by NBFCs where even if there is a delay for a day or so unless the full loan is repaid they cannot be classified as a performing asset so that may lead to higher provisioning norms for NBFCs. So there is some amount of I would say caution, fear as far as banks and NBFCs are concerned and that is being reflected in stock prices and I think it is not the right time to play contrarian, I think just stay put and wait and watch how the sector evolves. And if you do not have some of the larger banks, the safer ones then this is may be a good opportunity to increase exposure to such large banks the ones which I have named the likes of Kotak, ICICI and HDFC Bank for that matter.

On IT sector
We are seeing flight to safety and IT is one of the safest sectors. Also, it will be the first off the block when it comes to reporting numbers and some amount of pre result buying cannot be ruled out, although it is a seasonally weak quarter. Some of the challenges like rising attrition and rising employee and contractor cost may get partially neutralised in this quarter’s earnings and the underlying momentum. New deal wins and new order books remain very strong and robust. So we are very positive on IT and certainly the bus has not moved on as far as buying fresh into IT stocks is concerned.

For investors who are underweight IT, this is a good time to get into this sector which is quite safe and has reasonable valuation at this point of time. When it comes to specific stocks, go for the large cap ones again where there is safety rather than some of the small and midcap ones where valuations are higher.