Vikas Pershad’s Top 3 Sector Bets For FY27 | Why He Is Underweight Private Banks, IT And FMCG

Added: 2026-05-13

[00:00:00]We got Vikas Prasad, who's a portfolio manager, Asian Equities, M&G Investments, joining us on this leg of the show. Vikas, thanks so much for taking the time. Good morning to you from where we're at. Uh what would you say uh and it's been a little while since we spoke to you last.

[00:00:17]So, the the question that I have for you is do you do you see a situation where fundamentals have shifted uh and you've had to adjust your expectations for FY 27 when you think about corporate earnings? Because other people have adjusted them lower, and some are pegging it at the single-digit or high single-digit growth in FY 27.

[00:00:41]Uh good morning. It's good to be back. A lot to talk about. Yes, in the short term uh I think we necessarily need to, in aggregate, reduce our earnings expectations. But, what has been encouraging is the dispersion that we've seen in the markets, opening up up to opportunities for stock pickers. But, also, we have seen acceleration accelerated growth, especially in the small- and mid-cap space among the names that we've been looking at in some of the defense names, in some of the precision manufacturing companies, in diagnostics, and healthcare services, where we are overweight still. But, we have seen some causes for optimism in some of the BPOs.

[00:01:17]Those names have gotten hammered in Q1.

[00:01:20]IT services and FMCG are different stories. Perhaps we can talk about those later. But, it remains a stock picker's market for long-term investors. And that is what is exciting for us about India today.

[00:01:30]Okay. Uh so, I want to delve a little deeper into a few of these pockets, and uh you know, Neeraj will come into uh maybe some more stocks that uh I I might not touch on. But, BFSI as a cohort uh IT as a cohort, these have seen significant selling pressure, not just because of fundamentals, but also because of the kind of FI ownership and the fact that these are large liquid stocks that have been hammered and sold into because the view on the country as a whole has shifted.

[00:02:04]Is there an opportunity or do you think that you would give it a pass for now, wait till things settle at the fundamental level?

[00:02:12]Well, to that group, to that pair, I would also add FMCG, large liquid, not as well owned by foreign institutional investors, but also these are not the same companies, they don't have the same growth profiles that they did once upon a time. Now, to return to the banks, we are less likely we are more lightly positioned in private banks than we have been in over a decade, uh since 2013, actually. NBFCs we've had we've added over the past few months. And in IT, heading into earning season, we'd actually reduced our holdings further.

[00:02:43]We've been underweight for almost 2 years. Uh we were underweight heading into earning season. I saw no reason during the most recent earning season to increase our holdings there or to reduce those underweights. And so we our positioning there's is likely. As you mentioned, FIIs hold these names. Uh in absolute terms, the growth profiles are different, but also relatively, India is a very different market from when the private banks used to be the the leaders in the market and the IT services as well. There's nearly 7,000 listed companies now. We spoke about this earlier that India might not have the mag 7, but it has the mag 7,000. So it that's that's very fertile grounds for long-term active investors, and there are so many choices. It's no accident that from the March lows, we have seen such a strong bounce back in the small and mid cap space. The pace might not be sustainable, but the direction we feel is You're you're hunting in the broader markets, but I wanted ask you specifically about the private banks because you mentioned that you're at the lightest in quite a while. I'm wondering why that is because some might argue that if the if the interest rate cycle has bottomed and there is an expectation and people penciling the possibility of two rate cuts going forward of 50 basis points then one can argue that the net interest margins might have bottomed out and could head northwards and the valuations are not challenging.

[00:04:06]Valuations are not challenging. They have They have fallen. Same thing for the IT services sector, but that's a different situation. On the private bank side, well, if we start with financials more broadly, NBFCs, we own more of those now. We have taken some profits there also year to date, but we own more of those now than we have in the past.

[00:04:22]And if we look beyond the large private banks, we see better alternatives.

[00:04:27]Private The public sector banks also we have some exposure there. Given some of the earnings, we're not surprised by how those names have traded, but on the private sector banks, it's an absolute call. The growth profile has changed.

[00:04:40]While the credit sector the system credit is healthy, the names might have bottomed as you mentioned, but it's also a relative call. We're seeing better opportunities elsewhere. Elsewhere, healthcare being one of them. Healthcare broadly defined, domestic pharma, dialysis, hospitals, uh healthcare services. So that's the the exposure that we might have had three or five years ago in the financial sector has moved to healthcare and precision manufacturing and defense and and then some. And I don't see that changing in the near term.

[00:05:11]Mhm.

[00:05:13]Um because uh I uh y- you have a great perspective on this sitting where you are and and that's why I'd love to know uh every update from an from a large language model company, be it OpenAI two days ago or for that matter or day before yesterday or Anthropic as it has done consistently leads people to believe that uh this could this one more death knell in the IT services space portfolio.

[00:05:42]Companies that we speak to, IT companies that we speak to, naturally so, but say that an acquisition a small acquisition here or there, or an announcement doesn't kill the IT services business model because that will stay. You need IT services to deploy AI across businesses and banks, healthcare, etc. I'm not going to go the AI way at the drop of the hat.

[00:06:03]Is the market too pessimistic on the prospects of IT service companies, or is this realistic reaction to that to that cohort?

[00:06:15]Well, there's a few things to unpack there. One is I've been investing in these companies since Y2K. And one thing we should give them credit for is over the past quarter century, they have reinvented themselves again and again. They they have come back as as the leading companies do. And in this space, they have done the same thing. I do think that the the pressures on the businesses now in aggregate, and there's some dispersion because there are so many listed companies and they're not a monolith. There are many different kinds of businesses within what we call IT services.

[00:06:47]There will be some winners that emerge, some companies that do incorporate or adapt to these changes better than others. And it's not that we are zero weight all the names. We do have some exposures, the net exposure that I'm referring to where we're underweight. But, I think these headwinds are very very real. I don't think the cost structures also are suited for this new generative AI token agentic world that we are in. And in the over the next, let's say, six to eight quarters, I think it'll be difficult for these companies to adapt, which is why you see, despite earnings that were slightly in line, slightly better, or slightly worse, depending on the company, relative to expectations, you've seen a continued derating because the market is still waiting to see how the sector adapts and which companies adapt better than others. Dividend yields are mid-single digits for some of these companies. We're seeing P/E multiples that we haven't seen in over a decade. And they still continue to compress. So, again, it's an absolute call. The growth profiles are different for these companies. They will remain different. But, also a relative call as well. There's so many options in India now. And amidst the dislocations we've seen post EU-India trade deal, US-India trade deal, the budget, the war in West Asia, this we see a lot of opportunities for long-term investors. Also, if you put it into the regional context, year-to-date in dollar terms, Korea has outperformed India by 100%. Taiwan has outperformed by 60%. Japan has outperformed by 40%.

[00:08:13]These moves continue to widen, but they're not sustainable. The The drivers that made India the best performing market in the world for a quarter century remain largely intact. We'll get through this. Uh the current stresses on the on the market. And then India should resume its double-digit earnings trajectory in aggregate. And then you have some sectors that will do better than that.

[00:08:34]And many companies that will do better than that yet still.

[00:08:37]Uh Okay. Okay. Okay. Um The The The other aspect is uh because that a few people are saying that some of the product companies which are in the right space uh could actually do well. So, healthcare product tech companies, banking product tech companies, and there are multiple examples, smaller ones at that, but they've got a huge uh or or a huge sense of experience into how to deliver these, and they will use AI to their advantage, and there the growth might be strong.

[00:09:11]Could that happen even if the broader IT space were to kind of meander along?

[00:09:16]That's fair, and I'm glad you brought that up again because I didn't address your earlier point about this explosion of AI usage over the next few years in calling for even more IT services in pockets. But, that's that's still small. If you look at the AI revenue, and each of the companies in India will define it differently. If you look at the what they call their their AI revenue, it's still small as a percentage. It might be growing rapidly, but again you have the same problem that in aggregate the the revenue base is challenged, the cost structure is challenging, and so you should see continued pressure on profit growth for the next couple of years perhaps.

[00:09:51]And that's what's getting factored into valuations. Now company specifics, yes, we we are seeing increased AI adoption.

[00:09:58]It's not broad based yet, but if you start with the with the hyperscalers are doing and five companies in aggregate might spend a trillion dollars next year. Uh >> [clears throat] >> that number two years ago was $250 billion.

[00:10:09]There will be a payoff on that at some point. There will be winners that emerge. And and India is not necessarily going to be a net loser in all this in perpetuity. Uh there will be winners that emerge from India as well in the software space and in the hardware space.

[00:10:23]Interesting. Uh because if globally the commodity players are going to be watched out for very closely, uh I'm wondering whether you think uh the the metal pack in India is something to focus in on because you've seen for example for the ferrous players already price increases that have been taken. And and any increases on the raw material side, on the cost side are being passed on very quickly.

[00:10:49]Uh do you do you see opportunities in in the in the metal pack in India?

[00:10:55]We do. We have exposure here. Now we have high hurdles for sustainability. We pay very close attention to companies' carbon footprints and as you know these the sector is is very carbon intensive.

[00:11:06]So our universe might be a little bit smaller than that of a domestic investor, uh but but yes, your your logic holds its own. Over the past month and a half or so we have increased our holdings in this space where we can. And given the disruptions that we're seeing, it's plausible that the the rallies here continue.

[00:11:26]So if you if you were to splice that further and understand the the restrictions that you might have based on your on your models etc. But would you be more favorable towards growth in ferrous or non-ferrous? And if you delve deeper into non-ferrous as well, what are the factors that you see panning out?

[00:11:49]Well, we have we have exposure [snorts] to both. And the I think the outlook The outlook is positive on on our time horizon for both given the the disruptions that we're seeing across the region. And the the ability So, the one of the issues that we is important is the ability to pass through costs. And when we look at sectors where we're still seeing the that ability, this is one of them both in the ferrous and non-ferrous. And so, for for the names on which we can have exposure, we do have exposure and we have grown that.

[00:12:19]Okay, because the the other question is at least my final question to you today.

[00:12:23]What is it that you will absolutely avoid in the Indian markets?

[00:12:29]Well, it's hard to say in in aggregate. I would say where we started, the large-cap FMCG names still struggling, IT services names in aggregate still struggling. And in in private banks, we're we're still we're holding fire for the most part. We've not gone very aggressive there. So, I think the capital that we would have allocated to those names, we have shifted elsewhere. Healthcare is is easier, more opportunities there. Defense, precision manufacturing, auto components, a lot of excitement there. And then of course, it's very stock specific. If you look over the past month and a half, you would you would be surprised at some of the names that have rallied. Some of it might have been because they had been so beaten up from the September 2024 levels, and there might be some bouncing back, but so many opportunities in India for an investor with a long-term horizon. I think if you stay away from the the largest caps and you do your homework and you sit right you you bet right and sit tight and you wait for a few years.

[00:13:29]The the absolute returns from here should be pretty healthy in India.

[00:13:34]All right and look forward to speaking to you about that hopefully when that starts playing out because thanks so much for taking the time. Pleasure having you.

[00:13:43]Always a pleasure. Thank you.

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