Unmesh Sharma, Head of Institutional Equities, HDFC Securities, says “we are not in a bubble zone for sure in the markets. Exuberance yes, especially in the mid and smallcaps. The theme which has played out is you should buy the laggards. This is a very typical, very close to the peak of the bull market themes which play out. Also the nature of the money has changed.”

What do you make of the market set up right now? Come the RBI policy or the budget or even earnings for that matter, there is a clear sell on rally which is at play here. Do you expect this kind of texture in the markets to continue that we have made a bit of a peak already and it will be a lot more sideways in consolidation for the very immediate term?
Unmesh Sharma: That is the billion dollar question but we have had a very stellar run in the latter half of last year and it ended on a very positive note because the expectation that there will be some volatility related to politics is gone with the state government elections in December. What you would have noticed is that there was very frantic activity in December with FPIs who generally go quiet in that month actually seeing some very heavy buying.

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Having said that, there are three risks which were there at the start of the year which continue to remain there even now. Okay, I will talk about the positives later but I will tell you what the key risks are. One was the fact that usually a lot of the positivity around elections comes through only after the election results are out or just about just before that. This time, the market has priced in a large part of the positives assuming that the election results are already in so that is one.

The second is that if you look at the Indian macro within a global context, while we are quite a standout you know especially as an option to China but also because of the strong macro here as well as twin balance sheets. There are no major issues. But at the same point in time, the global there is a lot of uncertainty and one big change which has happened in the last month is the fact that there was a large expectation that the rate cut cycle in the US in the bond market was what was priced in was that there would be a cut starting in March but now with the incremental commentary and the data on the inflation that has got pushed out to June. Now, the RBI policy has not changed anything but at the same point in time, in the global context, there is a change in view which we had expected.

Third is that the market’s 21 times of FY25. Now what that tends to do is accentuate all these moves. So on a very small change in earnings expectations given where the PE earnings, PE as well as EV/EBITDA multiples are, we see exaggerated movements in stock price which is exactly what has happened. So that has kind of spooked the market.

What is your view regarding the private banking space and banks as a whole to be honest. They have been underperforming for the longest time. There is not a big challenge when it comes to the earnings or valuations as such. What then explains the underperformance?
Unmesh Sharma: So there are two things. One is that the private banking space historically has been dominated by the FPIs just because of the sheer float which is available. So anyone who takes a macro call on India needs large liquid names to participate in. So there has been a technical matter of the fact that with FPI kind of with the exception of that short period in November-December and maybe even early January. If you look at it, they have been selling. Second, while some banks have done better than others I think the story that at some point in time the rates cycle will catch up and the NIMs will start to peak out and maybe even compress at the margin has started to play out. This time around, I think the big issue which has been seen has been around the deposits because I think what has started to happen is that at the macro level across private banks the view is that if the deposit growth is not outpacing the asset growth then at some point in time the runway for delivery of consistent growth kind of goes down. In that context, I believe that it has gone a little bit too far on the large private banks which is why in our model portfolios we have ICICI also even SBI for that matter not just private but also SBI. I think the large banks may have gone a little bit too far but at the same point in time that is what is impacting them in the short term.

I also want to get a sense regarding the PSEs as a whole. Defence, railways, power, power financiers have seen a very sharp up move and even OMCs for that matter. Would you venture out and still recommend a buy on some of these PSUs or is it a case of clear bubble and over exuberance now?
Unmesh Sharma: We are not in a bubble zone for sure in the markets. Exuberance yes, especially in the mid and smallcaps. The theme which has played out is you should buy the laggards. This is a very typical, very close to the peak of the bull market themes which play out.

Also the nature of the money has changed. If you look at a lot of the historical analysis that we do in India on what happened in flows in various parts of the cycle is a little bit different this time because a very large flow is coming in from the domestic investors and the themes that we are seeing playing out there is one buy laggards buy stocks which have momentum. So, some of the moves get exaggerated. If you look at PSUs, we split them between the banks and the non-banks because they are very different sectors.

In banks, one of our largest overweights is SBI. We believe that in a model portfolio which is generally multi-cap we believe there is no real reason to go beyond the large caps like SBI or BoB down the chain so as to speak. That is why we are generally there and you can capture most of the upside there as well without having to take the full volatility risk. That is why we are comfortable.

We believe that within the PSUs we are quite selective. OMCs have been positive, though it has recently downgraded IOC and HPCL because of the sharp run-up in valuations. Needless to say, that could go up a little bit more. There were two reasons for that. One is that crack spreads on especially autos, for example, was in the mid-20s. I used to cover oil a long time ago myself and I do not remember these numbers being in double digits. So this is quite stellar.

Can that continue? The answer is, at some point in time, it has to cool off and that is actually what has started to happen. So, on the OMCs, maybe there is a little bit of juice left in the trade, but we believe this is the last leg of the rally on that front. We do like those names, but at this point in time, we would advise caution. What we do like in the PSUs is the gas utilities.

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