Daily Voice | The financial situation is still in good shape, says Naveen Chandramohan from ITUS Capital

“I believe credit growth in the economy will remain in the mid-teens and structurally this should drive investment.”

“Today I would be much more selective in the life insurance space and only look for areas that are showing growth in individual non-single premium, where the growth is profitable and sustainable,” says Naveen Chandramohan, founder and fund manager of ITUS Capital in an interview with money control.

In terms of corporate earnings, he expects FY24 to be a year of earnings growth in the double digits (which will be a good number on a high base).

Naveen, who has over 16 years of experience in the financial markets, believes the financial sector remains in good shape as banks’ CASA growth is matched by robust deposit growth.

He also expects credit growth in the economy to remain in the mid-teens, which from a structural perspective should drive capital spending.

Q: Are you worried about the mid-cap market given stretched valuations?

I would have to contextualize this further. Today, the earnings yields of Nifty, Nifty Midcap and Nifty Smallcap differ by 20 basis points (where Nifty’s earnings yield is 4.6). What I’m saying is that as an investor, you don’t get a risk premium as you go down the market cap curve.

In addition, more than 1 lakh folios were created in the mid and small cap space in the last year. So I think an investor needs to be careful about providing additional capital here.

Q: Is the healthcare sector still reasonably cheap?

Healthcare is too broad and general a sector. In the healthcare sector, hospitals have been doing well for a good three years. The latest move in healthcare comes from the companies that have significant stakes in generic drugs in the US. This portfolio, due to its standardized business nature, experienced a structural downturn from 2015 leading to a drop in earnings followed by a downgrade in valuations.

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In recent months, price deflationary pressures have eased after US-based generic drug makers closed. This could go on for a while. However, I don’t think there are any signs of prices going up just yet.

Investors who want to allocate capital need to take a company-specific perspective and understand each drug and portfolio. For example: in the past three months there has been a shortage of the drug remdesivir, which has benefited the companies that made it.

Q: Are you increasing your exposure to the life insurance sector?

In our fund, we had increased our exposure prior to FY23 when life insurance regulatory regimes put pressure on life insurance. The mean value has already been evaluated today. I would be much more selective today and only look for areas that are showing growth in the non-single premium space where the growth is profitable and sustainable.

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Q: Your take on the recently ended corporate earnings season… Do you see a sharp upward revision to Nifty’s FY2024 earnings estimate?

The first quarter of fiscal 2024 saw strong earnings growth in capital goods, automotive, and finance. This growth resulted from either revenue growth or margin expansion. We saw 200 of the 500 companies in Nifty500 grow.

In FY23 we had a profit increase in the high teens. I would envision FY24 as a year of earnings growing in the double digits (which will be a good number on a high base).

Q: Do you expect robust credit growth in the coming years? If yes, then is it better to work at private banks or PSU banks?

The financial sector remains in good shape as banks’ CASA growth is accompanied by robust deposit growth. I believe credit growth in the economy will remain in the mid-teens and structurally this should drive capital spending.

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While valuations at PSU banks have returned to midpoint, I would still assign marginal risk to private banks. The increased allocation is driven by a focus on risk management and allocations — which is a function of the people at the top running the bank. I see growth and risk management as two sides of the same coin that are becoming increasingly important for banks.

Q: Do you think IT still has more headwinds than tailwinds? Will the consolidation we’ve seen over the past 19+ months continue through the rest of the fiscal year?

From a revenue perspective, IT continues to experience subdued growth, but many companies in India have managed to maintain their margins without significant deterioration due to cost cutting. I assume that this will not change in the next two to three quarters.

I won’t get too pessimistic about IT as the narrative has shifted to that IT is in a tough scenario due to AI and LLM adoption. If this narrative clearly holds and we see another downgrade in valuations, some of the companies will be interesting buys. I would not be in a hurry to increase presence today.

Disclaimer: The views and investment tips expressed by investment professionals on Moneycontrol.com are their own and not those of the site or its management. Moneycontrol.com recommends users to check with certified professionals before making any investment decisions.

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