Big banks may struggle, but smaller credit plays set to outperform: Nilesh Shah

Economic Times

24-06-2025

"These are some of the categories or sectors or individual companies which have done really well, especially in the recent months or in the last one years. So, we continue to be very-very positive. Financialization of savings, financialization of the economy is not just a multi-year kind of an opportunity, it is a multi-decadal opportunity and I believe it is one of the most strongest investment themes that India as a market has to offer to investors," says Nilesh Shah, MD & CEO, Envision Capital.
ADVERTISEMENT But why is that category not doing well? Well, as a theme, it is logical. As an idea, it is safe. As a concept, these are good companies. But if one looks at even the grand old daddy if I may use the word United Spirits, it has not created wealth the way other stocks have created in last five years.
Nilesh Shah: So, clearly, first is, within the entire consumer space, it is probably United Spirits maybe over the last three to five years and we own a few stocks in the space, so just a disclaimer including United Spirits. So, over the last three to five years clearly United Spirits has delivered reasonably good returns.
It has delivered returns which are ahead of a lot the large consumer companies. So, to that extent, it has done pretty well, not too bad both in absolute terms and relative terms. But obviously the homegrown players like Radico Khaitan which we have been owning as well for a very long time, they have done exceptionally well.
So, yes, and United Spirits itself has been going through a lot of rejig in terms of its business strategy, its portfolio, it has kind of shedded its portfolio, what we call as the popular segment, and is now substantially a premium kind of a segment.
So, to that extent this itself has basically taken some time, it has taken a lot longer for the business to now stabilise itself. But clearly will it be able to grow substantially higher than the category? I do not think so because its base is so large, its market share is so large, so the big boys will find it or the big giants will find it very difficult to grow at a substantially higher pace. It is obviously the homegrown ones which are going to do relatively better.
ADVERTISEMENT So, from a three-year standpoint, what is looking like a theme where whether it is a midcap idea associated with that theme or with that template, but you see earnings visibility of 15% to 20% on a CAGR basis.
Nilesh Shah: Yes, absolutely. I mean, I think that has really been the segment where most of the tier II, tier III companies across sectors have been growing at that kind of pace whether we start with IT services or consumer or some of the cap goods companies, those are on a very broad basis companies are growing in high teens which is a great situation to be in in context of where the economy is growing at 6-7% in real terms, 10% to 11% in nominal terms and the earnings of the large companies or the Nifty companies are probably at best growing in high single digit or maybe low double digit or the early teens versus that clearly across sectors we see the next level of companies growing at significantly higher pace. So, that is a great kind of situation to be in.
ADVERTISEMENT What about your view on financials? Last time you were very bullish on financials. They have seen quite the runup before geopolitical action took over. I remember, you being positive on IDFC First Bank as well. Does that conviction continue?
Nilesh Shah: Yes, I think across the board financials, banks is a great place to be in. Of course, we all know that their balance sheet condition is amongst the best. We have not seen balance sheets which are as strong. Clearly, the growth continues to be there, especially for some of the smaller banks, some of the specialised credit plays and some of the other verticals within financial services which have been growing extremely well, be it online investment platforms or online insurance distribution platforms or online payment fintechs. These are some of the categories or sectors or individual companies which have done really well, especially in the recent months or in the last one years. So, we continue to be very-very positive. Financialization of savings, financialization of the economy is not just a multi-year kind of an opportunity, it is a multi-decadal opportunity and I believe it is one of the most strongest investment themes that India as a market has to offer to investors.
ADVERTISEMENT
So, what is a better idea, stick to let us say stock broking firms or buy AMCs or buy into intermediaries like NSE and CDSL or it is time to go back to banks?
Nilesh Shah: It will have to be a combination of both. There is really no overlap. When we talk of banks, there are credit plays, banks of course will benefit as s long as we see the markets continue to be strong, that will continue to attract lots of capital. It is an easy place to deploy significant amount of capital for managers. So, to that extent the big banks will continue to kind of do relatively fine. But more importantly specialised credit plays will do very-very well. Clearly with falling interest rates, especially NBFCs, HFCs will continue to do very well. Smaller banks again have a strong possibility of outperforming, especially smaller banks which have built a critical mass. So, this as a pack will do very well. And on the other hand businesses which are linked to capital markets, businesses linked to online insurance distribution or payments as a space will kind of demonstrate growth rates beyond the 20-25%. So, I would still believe that a portfolio approach works better. A combination or a bouquet of high-quality franchises within the financial space will continue to deliver market beating returns.
ADVERTISEMENT
What about your holdings when it comes to the entire capital market theme. Angel One is a stock that you have been bullish on, but that stock has not done all that much YTD in the last six months. Do you continue to hold and other than that capital markets what is looking good right now?
Nilesh Shah: It has probably actually done relatively well in the last three to four months after a selloff that it had witnessed about 12 months ago. Clearly, a lot of the sell-off was based on a lot of the measures that were taken to bring slightly more kind of calmness in the derivatives market and some of the other regulations which were introduced or policy tweaks which were introduced to ensure that capital markets become a more efficient and a more safer place for investors and traders. So, as a reaction to that, some of the capital market oriented companies did kind of get impacted. But we clearly believe all that is behind us. Valuations are still reasonable especially for the online investment platform. Just to talk about Angel One, yes, we continue to own it. We have been owning it for a long time and we intend to kind of keep owning it.
Just to put things in perspective, very recently Groww got valued by private equity players at a significant premium to essentially what some of the other publicly listed online trading platforms are trading at. So, it just shows what long-term investors are looking at as far as this category goes, as far as this space goes. So, to that end, it continues to make sense to own some of the market beating leaders out there.
(You can now subscribe to our ETMarkets WhatsApp channel)