Stock market: midcap banks, non-market leaders risk being ousted: Ajay Bagga

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Banks will survive and grow, but they will have to work with thinner margins, fewer branches, less footfall and more digitalization, says market expert Ajay Bagga.

Do you think the banking sector will struggle to develop? Could there be a reason for underperformance in some mid-sized banks?
I don’t think so and I’ll give you some historical reasons for it. We have seen this story many times. Even in 2000 there was a big upsurge when the internet boom was happening in the late 90s. The idea was Microsoft and Amazon and Apple will be the new banks and the banks will be terminated. Look what happened. After 20 years, the banks will buy back these fintechs.

“Buy now, pay later” is becoming a huge trend. Amazon and Flipkart offer uninteresting EMIs. I don’t know if these guys understand credit well, then there will be a price to pay. The guys from PE have very deep pockets. They only look at the gross values ​​of the goods and the resulting valuations. They don’t care, but the bank is not that easy to get in. It is a highly regulated segment.

We saw the case of China where peer-to-peer lending at one point represented a segment of market capitalization of $ 200 billion. Now he is wiped out in China. The same thing we saw with Ant Financial. We see this with the fortune products, which Evergrandes and the others were selling to unaccredited investors. So there will be a pendulum switch. What is welcome as customers is that banks have very large margins. Try to send or receive foreign currency. Look at the amount you are being charged. Look at the delays that occur. The government has mandated the SBI to manage all FCRA accounts in the country.

Look at the mess that SBI creates on this and it takes at least a week to see the funds. So those margins will be put under pressure and hopefully Revolut will come, which is a more powerful version of Stripe or PayPal. He is begotten in the country, but one of the bigger ones is going to redeem him. It’s not that they’re going to eat the banks for lunch. Banks will survive and grow, but they will have to work with thinner margins, fewer branches, less footfall and more digitization

Will midcap banks face the heat? Yes, they will. Small cap companies in all segments and non-market leaders in all segments will be squeezed out.

One change that has taken place over the past 18 months is likely to be in the mining and manufacturing sectors. Do you think it’s time to overweight infrastructure and metals as well as manufacturing?
Fundamentals and earnings are favorable. The metal pack was able to deleverage very significantly and pricing returned allowing them to benefit from good margins with commodity prices rising worldwide. We expect this to remain at least for the next several years. This is the turning point in the commodity cycle that we see after around 12-13 years. We remain very positive on metals.

On the industrial side, given the upcoming infrastructure construction that is already happening in the government sector, this will also be followed up in a year or two in the private sector. As the output gap narrows in the economy, industries will do very well.

The third segment is anyone providing in the history of real estate. Cement manufacturers, materials, tile makers are now suffering from rising gas prices but it will reset. They could possibly send it back to the final segment. As paint players have been able to do over the past few years, that will happen in this segment as well.

So cables, all providers in real estate will do well because the real estate cycle comes after almost nine years of underperformance. The market will probably assess growth over the next two years very soon. It is therefore a small window that must be caught.

Will there then be a limited increase or because the energy crisis seems to be global, there are still opportunities at stake?
The demand is there. The fundamentals are therefore there and these actions will continue to do well. At present, the shortages are due to various reasons. But the fact remains that the demand is there. If you look at the IEX, the marginal rate of energy exchange has increased on average to Rs 4.4 and in some pockets it has reached Rs 16 per kilowatt over the past week, especially on Friday, the exchanges reached Rs 16. There is therefore clearly a recovery in demand for electricity but the supply is constant and does not come overnight.

The second big thing is that commodities have underinvested in new capacity in the last 12-13 years since the last cycle peaked in 2008. So it’s not that existing players will be challenged in the short term. .

Third, we normally get coal from South Africa, South East Asia and Australia, but these prices are prohibitive and with the exception of NTPC which is on a cost plus basis. We see NTPC going up, but other generators are mostly stuck on price and unless CERC steps in and gives them advantages, as happened in China where the government allowed higher prices. when the generators were almost bankrupt.

Let the market take over, allow higher prices, because the cost of inputs to gas and coal power plants has increased dramatically, almost 100% in some cases. We need to allow them to charge consumers more. Otherwise, they will go bankrupt or simply shut down the plant. They don’t want to produce something and sell it at a huge loss. So it is also the economy apart from all the factors we have talked about. These actions will continue to do well. It’s the start of the cycle and the huge infrastructure spending, the huge electrification going on, the huge inbound demand and all providers in this segment will be doing well.


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