IT Stocks Cautioned: Quest's CIO Rakesh Vyas Turns Bullish on Banks, Consumption Ahead of Earnings!

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AuthorAarav Shah|Published at:
IT Stocks Cautioned: Quest's CIO Rakesh Vyas Turns Bullish on Banks, Consumption Ahead of Earnings!
Overview

Quest Investment Managers CIO Rakesh Vyas is cautious on IT stocks due to slowing growth but sees limited downside. He is positive on banking, financial services, and select consumption platforms like Zomato and Swiggy, expecting improving margins and visibility. Vyas anticipates a broader earnings recovery in Q3, driven by BFSI and consumption, favoring smaller private and PSU banks.

Quest Investment CIO Prefers Banks, Consumption Over Cautious IT Stance

Rakesh Vyas, Chief Investment Officer and Portfolio Manager at Quest Investment Managers, has outlined his sector-specific investment strategy ahead of the crucial earnings season. He maintains a cautious approach towards information technology (IT) stocks while expressing a constructive outlook on the banking and financial services sector, along with select consumption-linked businesses.

The Core Issue with IT Stocks

Vyas explained that his portfolio has remained underweight on IT companies for some time, citing a noticeable slowdown in growth. Geopolitical factors and broader global uncertainty are identified as key pressures impacting demand for IT services. Although valuations have seen some adjustment, the price-to-earnings to growth ratio for the sector still appears elevated, according to Vyas.

Despite these concerns, Vyas believes the potential for significant downside in IT stocks is limited at current market levels. He noted that cash flow yields have improved, making the space more attractive from that perspective. His preference within the IT sector leans towards companies demonstrating strong growth, with a selective interest in mid- and small-cap firms rather than large-cap IT giants.

Coforge Acquisition and Execution Focus

Regarding Coforge, Vyas acknowledged investor concerns about its valuation following a recent acquisition. He highlighted the potential overhang from a Qualified Institutional Placement (QIP) aimed at debt reduction, though he sees the stock-swap component as a positive move that aligns stakeholder interests. Vyas pointed out that the stock has already seen a correction and has a history of consistent growth. The key factors to watch will be the company's execution in driving growth and expanding margins.

Food Delivery Stabilises, Quick Commerce Heats Up

Vyas shared a constructive view on prominent food delivery platforms, Zomato and Swiggy, differentiating between the dynamics of food delivery and quick commerce. The food delivery segment has stabilized into a duopoly, leading to expectations of improving margins and clearer earnings visibility. He anticipates Swiggy might achieve faster margin improvement in the near term, as it currently trails Zomato in profitability.

Quick commerce, however, remains a highly competitive arena, described by Vyas as the "actual battlefield" due to the entry of numerous players. Nevertheless, he believes Zomato's Blinkit and Swiggy's Instamart possess an advantage owing to their strong capital backing. Profitability timelines are becoming clearer, with Swiggy's contribution margin expected to turn positive within the next four quarters. For Zomato, break-even in quick commerce is projected within the next two to three quarters.
Vyas confirmed both Zomato and Swiggy remain in his portfolio. He has trimmed his Zomato holdings at higher price points and reallocated capital to Swiggy, indicating a growing constructive stance on both businesses due to moderating competitive intensity.

Earnings Recovery and Banking Sector Focus

Looking ahead to the third-quarter earnings season, Vyas forecasts a broad-based earnings recovery, with market-wide growth projected between 12% and 13%. He sees earning traction improving incrementally as the quarter progresses, with consumption and the Banking, Financial Services, and Insurance (BFSI) sector expected to be key drivers.

Within BFSI, Vyas anticipates Net Interest Margins (NIMs) to bottom out in the fourth quarter, a trend expected following the Reserve Bank of India's recent 25 basis points repo rate cut. He also projects credit growth to strengthen over the next four to six quarters, supported by robust retail demand and higher-ticket consumption in sectors like automobiles and real estate. Concerns regarding asset quality appear manageable, with the RBI showing increased comfort concerning credit growth. Foreign strategic inflows into lenders further bolster the positive outlook.

Consequently, Quest Investment Managers is shifting its preference towards select smaller private banks and Public Sector Undertakings (PSUs) over large private lenders. Vyas highlighted that these smaller entities often derive a significant portion of their assets from the retail or MSME segments, areas showing stronger demand trends.

Impact

This outlook suggests a potential rotation in investor preference away from some IT stocks towards BFSI and select consumption players. Companies with strong execution, clear profitability paths, and robust retail/MSME exposure are likely to benefit. The shift could lead to increased volatility in IT stocks while providing support for banking and food tech sectors. Overall market sentiment might improve if earnings recovery meets expectations. Impact rating: 7/10.

Difficult Terms Explained

  • CIO (Chief Investment Officer): The senior executive responsible for managing a company's investment portfolio.
  • Portfolio Manager: A professional who manages investment portfolios on behalf of clients.
  • Underweight: An investment recommendation suggesting that a particular asset, sector, or stock is expected to perform worse than the overall market.
  • P/E Ratio (Price-to-Earnings Ratio): A valuation ratio that compares a company's stock price to its earnings per share, indicating how much investors are willing to pay for each dollar of earnings.
  • QIP (Qualified Institutional Placement): A method by which listed Indian companies can raise capital from a broad set of qualified institutional buyers without offering new shares to the public.
  • Stock Swap: An exchange of shares in one company for shares in another company, often used in mergers and acquisitions.
  • Food Delivery: A service that allows customers to order food from restaurants via an app or website for delivery.
  • Quick Commerce: A business model focused on rapid delivery of goods, typically groceries and convenience items, within a very short timeframe (often 10-20 minutes).
  • Duopoly: A market situation where two companies dominate the market.
  • Contribution Margin: The revenue remaining after deducting variable costs. It contributes to covering fixed costs and generating profit.
  • Break-even: The point at which total costs equal total revenue, meaning no profit or loss is made.
  • BFSI (Banking, Financial Services, and Insurance): A broad category encompassing all companies involved in financial services.
  • NIMs (Net Interest Margins): A profitability metric for banks, measuring the difference between interest income generated and interest paid out, relative to assets.
  • Repo Rate: The interest rate at which the central bank (e.g., Reserve Bank of India) lends money to commercial banks, typically against government securities.
  • Basis Points (bps): One basis point is 1/100th of a percent (0.01%). Used to express small changes in percentages.
  • Credit Growth: The rate at which loans provided by banks to customers increase over a period.
  • Asset Quality: Refers to the risk profile of a bank's assets, particularly its loans, indicating the likelihood of default.
  • MSME (Micro, Small, and Medium Enterprises): Businesses classified by size and revenue, forming a significant part of the economy.
  • PSU (Public Sector Undertaking): An enterprise owned by the government.
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