Fears over Indian inflation spiking are being over-stated and this could open the door to increased lending in the banking sector, Citywire A-rated Kunal Desai has said.
Desai, who runs the Neptune India fund, told Citywire Global the recent rise in bond yields, prompted by inflation concerns, was not a long-term threat.
‘Inflation will undershoot the central bank’s expectations. As rates are further cut the fears that led bond yields to shoot up as an initial reaction will get watered down,’ he said.
‘The monsoon will be more important in influencing the rate cycle in the coming months. Given the improvements in irrigation and investment we don’t expect the impact on inflation to be as dark as it has been in previous years.’
Desai believes the lower-than-expected inflation will lend itself positively to wholesale banks as more corporate sectors approach them to extend credit.
He is optimistic that the sector will be a key beneficiary of the ‘significant macroeconomic turnaround’ expected on the back of the budget measures unveiled last quarter.
This includes a reduction in the fiscal deficit target by 3.9% in the year to March 2016. Desai has expressed this with 25% allocation to financials, compared to the MSCI India benchmark index’s 17.5% weighting.
‘We expect a resurgence in corporate health which lends itself very nicely to improving asset quality in the balance sheets of a number the banks in our fund.’
In the past few weeks, Desai has been opportunistically focusing on mid-cap financial companies based on recent market corrections in India. ‘We are looking at profitability and opportunistically buying when we do see weakness in stock,’ he said.
He cites the example of SKS Microfinance, which has a market capital of just under $1 billion (EUR 890 million), as a company which he plans to invest in further. He currently has 1.2% exposed here.
Desai said the company has experienced improved profits under regulatory corrections and ticket size extensions in recent years. He projects a growth pipeline in excess of 30%.
But when it comes to India’s IT sector, which is particularly popular for its global competitiveness on the back of the strong US dollar, Desai believes a more selective approach is necessary.
He has allocated 17.5% to the sector, 5% less than the benchmark, and focused on companies with the strongest systems for servicing the financial sector.
‘IT companies outperform because of digital capabilities for serving the big banks better than their peers- we are seeing a move away from legacy enterprises towards more digital, social and contingent systems.’
The Neptune India fund returned 85% in Indian rupee terms over the three years to the end of May 2015. This compares to a rise of 77.4% by its Citywire-assigned benchmark, the CNX Nifty TR, over the same period.