Banks A Safe Bet For At Least One More Year, Says Aditya Birla Sun Life AMC's Mahesh Patil

India's economic recovery could be delayed as interest rates could remain high for a longer period because inflation is falling at a slower-than-expected pace, according to Mahesh Patil.

However, there won't be any major downturn in earnings, though consolidation is likely, the chief investment officer at Aditya Birla Sun Life Asset Management Co. told BQ Prime's Niraj Shah. "Growth is decent at the crust of a K-shape recovery, with some sensitive sectors such as housing and consumption potentially impacted by further interest rate hikes."

Overall, equity market sentiment and valuation multiples may be impacted and may remain subdued for some time, Patil said.

Banks and Financials

This sector hasn't seen any major negative impact due to the rate hike, and the credit growth has been fairly good and may continue to be in the low teens next year, he said.

Banks would be able to handle higher interest rates for a long time because they benefit from net interest rate margins, he said, adding that the credit cost side appears to not have any major challenges, he said. Moreover, corporate balance sheets look good, according to Patil.

Patil prefers private banks to public sector lenders because, after the recent corrections, both their historical multiples and the current return on equity look good.

For non-bank lenders, the benefit of low interest rates on the borrowing side is getting delayed a bit, which would lead to margin growth in the next fiscal year, he said. "The performance of NBFCs will be determined by subjective factors such as the sectors to which they cater and the dynamics of the sector."

Consumer Sector

In terms of discretionary consumption, the sector remains appealing over the next 10 years, Patil said. Discretionary consumption increases as per-capita income rises, he said.

Last year, margins were hurt by the increase in commodity prices and a reduction in urban consumption, he said. Therefore, the sector is in the process of slow recovery, with demand expected to pick up later in the year, he said.

Healthcare

Patil is positive about domestic pharma and organised hospital chains. Pricing pressure and high competitiveness in the U.S. doesn't favour generics, he said. The performance of the pharma space will be very company specific, he said.

Constructive On

Banks remain safe for at least one more year, Patil said. I.T., auto, utilities, industrials, capital goods, healthcare, and hospitals look good from a long-term perspective.