Amit Khurana, Head of Equities, Dolat Capital, says “we believe a broader correction of up to double digits on the Nifty should be par for the taking and within that, you will see some of the sectors probably correcting more. Banks seem to have largely corrected. Consumption, domestic staples in particular seems to have largely corrected. But some of the other categories which have done absolutely well, for example, hotels or for that matter jewellery, some of those discretionary consumption stocks, autos have done pretty well. So, those could possibly have a higher level of correction and on any dips, we intend to add to the positions. At this time, some of these categories look pretty richly valued.”

What is your take on the PSU pack? Even from the top, we have not seen much of a fall come by even after today’s fall in the Nifty PSE or for that matter in some of the individual names too.
Amit Khurana: Yes, that is true. The kind of performance that we have seen from the PSU pack has been quite stupendous to say the least and we have also been sort of surprised. I think the re-rating has been so stark in some of the sectors. But when you look at it objectively from here onwards, most of these names across sectors, capture a fair amount of optimism, a fair amount of earnings and valuation re-rating. In particular, PSU banks are something that we have downgraded today. We believe that most of the rally, especially in midcap PSUs, ex-SBI, was largely led by the earnings which were led by recoveries, very muted credit costs, which we believe has a very high probability of going to mean reversion. So, the credit costs mean reverting for 2025 and 2026 will imply much lower earnings growth.

Most of these PSU banks now trade at one time plus price to book which we believe is fair. So, we have downgraded PSU banks as a space. Some of these franchises also have very low buffers for any system level shocks. While we are not building that as a base case, but any eventualities that may work out over the next 12 to 18 months, some of these banks are not adequately provisioned for on their P&L.

Therefore the risks are elevated as we call it. But then, there are other pockets of the PSU universe where we still believe there is value. For example, city gas distribution companies are in a much better situation and we believe the market is underestimating the volume uptake that some of these franchises will show. So, it is a very stock specific view that we are taking. But in general, the re-rating has been fairly rich and therefore one needs to be more cautious.

Any view on Shriram Finance?
Amit Khurana: We have been bullish on the stock. The reaction today is more on the inclusion in the Nifty. There is a lot of versions going around the Street. I would probably refrain from giving a view from that perspective. But fundamentally, we have been more bullish on Shriram Finance than some of the other CV financers.

But separately, what is the view on Vodafone-Idea and the telecom sector as a whole? The fund infusion is being talked about. Would it be material enough to change the fate of the company?
Amit Khurana: That is right. We do not have a rating on Vodafone, but from a telecom sector perspective, I think this is one name which has had very serious structural challenges. The management has been pretty committed, and, of course, then the government support came in. So, we have been backing up Bharti, which still remains our preferred pick on the sector. The level of the fund infusion and, of course, the time that it will require for this franchise to turn around is considerably longer and therefore, we have been sort of keeping it on the sidelines. So, Bharti is what we played on the telecom side.

What are your positive biases in the market right now, sectorally?
They have not changed really much. We are still bullish on some of the discretionary consumption categories, in particular real estate, where we believe that the demand traction is extremely strong and largely consumption led demand, so that has its own sort of ramification. We have been bullish on cement, except for the caveat that the near-term valuations look pretty stretched and I think the market has been pretty optimistic on volume numbers, whereas we have been slightly, shall I say, more conservative.

But even then, this sector remains one of our favourites to add to our positions on every dip for that matter. On banks, we have been very bullish, but I think the markets just seem to keep derating the franchises because of concerns on NIMs and this entire higher interest rate regime, which earlier we thought will possibly start unwinding from June onwards, but the latest policy from the MPC seems to suggest it more moving towards August as the first rate cut scenario and therefore the concerns on banking names continues to play out on the negative side, but we believe that the sector is in pretty reasonable attractive valuations, especially the frontline largecap banks. When I said earlier, it was more on the PSU banks where we feel the valuations are a little on the higher side, but on the frontline private sector banks, we remain extremely bullish. And then, some of the other sectors show some initial signs of bottoming out, but we have not yet upgraded them, we are still neutral. But chemicals is one space where we believe the inventory corrections, the pricing corrections are very much captured and hopefully over the next quarter or two, we will start seeing better evidence to upgrade the sector at large. But now we are still neutral.

Within the insurance pack, do you like anything? Whether the general insurance or the life insurance because whether it is HDFC Life, whether it is ICICI Pru, ICICI Lombard, they are all seeing quite a bit of up move today and LIC too had finally reached that four-digit mark.
Amit Khurana: We do not have formal ratings on these stocks. We do not cover insurance formally, but there has been some news flow which has been sort of suggestive of a government taking proactive measures to increase insurance penetration. So, we have seen some level of client-level interest, but officially we do not have a stance on any of these franchises.

What is the view on the IT sector? Do you think the note that came this morning from UBS talking about how TCS can actually lead versus the peers has some credence?
Amit Khurana: Yes, we have been sort of debating this internally as well. We are still neutral. IT was another candidate which we were looking to do a potential upgrade. But our take is that the evidence does not still point towards a potential for an upgrade. But I must make a distinction here. We believe that the largecaps are in a much better position. In fact, our view on midcap IT still continues to be negative, considering that the PEG multiples are closer to 2.4, 2.5. In some cases, even three times.

We have been wary of midcaps in particular. But largecaps, at a certain price point, will be an interesting one to look out, especially considering that they have underperformed and largely the narrative has been captured to whatever extent the concerns were. But at this stage, we are still neutral. Rather than playing the IT, we are playing more on the digital themes, some of these names which are more domestic stories so to say on the B2B side or on the digital side.

What is it that you are making of the ongoings at Paytm right now? Vijay Shekhar Sharma resigning as part-time non-executive chairman at the PPBL board, so sort of clearly giving an indication that he has not got all his claws into the company anymore and if need be, he is willing to step down.
Amit Khurana: Yes, these are developments that we have been watching very closely. Paytm was one of the stocks which was in our preferred-picks universe, but we took it out this quarter. There were two reasons for that. One, the level of uncertainty on the regulatory front now raises the risk element for the entire franchise significantly. So, therefore, we took it out.

And then, of course, these developments will probably have a bearing as to how the investors perceive Paytm as a business model, and the entire management initiative to make sure that the growth sustains on the other parts of the business. There are some other developments which are also likely to come in the public domain as per the management guidance, which will give a sense as to how the move to the third-party banks will work out and that will be an important development from our perspective also because if the transition works out seamlessly over the next few months, then the confidence may return to the company and therefore, the risk premia that the market is today demanding on this as a franchise may sort of normalise.

But at this stage, the regulatory overhang will continue to sort of keep the performance a little capped and as we go along, one will have to revisit the entire hypothesis. We have yet maintained our buy on the stock, but the preferred picks universe, it is out of that, that is a clear mention I want to make.

Whirlpool aside, which of course has now sort of risen up from the session lows, where is it that you are seeing valuation peak within the market?
Amit Khurana: Well, it seems to be across the board, I must say that. In fact, you see the PSU pack, which we have discussed earlier. You see some of the midcap companies, whether it is domestic consumption, whether it is hotels for that matter, retail or jewellery. Of course, footwear has not done so well, so they seem to be at the bottom rung of the entire curve, but their earnings are not supportive. It is very difficult to decipher beyond a level because this market keeps buying into dips.

My sense is this, that in the Nifty, you will possibly look out for a double-digit correction, that has been our call which we published today in the strategy piece. We believe that a broader correction of up to double digits on the Nifty should be par for the taking and within that, you will see some of the sectors probably correcting more. Banks seem to have largely corrected. Consumption, domestic staples in particular seems to have largely corrected. But some of the other categories which have done absolutely well, for example, hotels or for that matter jewellery, some of those discretionary consumption stocks, autos have done pretty well. So, those could possibly have a higher level of correction and any dips. We intend to add to the positions. But at this time, some of these categories look pretty richly valued.

Are you saying that there could be a double-digit correction in certain pockets of midcap and smallcap?
Amit Khurana: That is right and at the Nifty as well, we called it out today.

Oh, double-digit correction in Nifty as well, that is quite stark. So, you are expecting that it could go below 20,000 at some point of time.
Amit Khurana: The point we are trying to make is that 8% to 10% correction is a par for the course. Also, look at it in the context that in the last 12 months Nifty has done a fabulous run. We have gone up by almost 25-27% returns on the indices, larger indices in the last few months. So, 8-10% correction is par for the course and that will make the entry levels pretty attractive and some of the individual stocks attractive enough.

Remember, we are still quoting at a significant premium to the long-period averages. Now, a long-period average, all these things have come into play on expectations of a third term for the Modi government, continuation of the PSU cycle, the rerating cycle which is continuing right now, and a whole lot of other positive optimism captured and a large part of that was also the fact that the interest rate cuts would start sooner than later.

All those factors have been largely captured and there are now situations where one may build in a scenario of a rate cut happening not in May or June, but possibly in August. So, all those revisitings of those hypotheses will play out and possibly trigger a 8-10% correction.

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