Canara Robeco MF favours large private banks, sees selective opportunities in AI infrastructure stocks

Shridatta Bhandwaldar, Chief Investment Officer - Equities at Canara Robeco Mutual Fund remains constructive on large banks amid a rising interest rate environment and is selectively adding to Indian artificial intelligence infrastructure players following recent market corrections.

Credit Growth In Focus 

He said, “When you look at the financials, we are constructive given that right from the credit growth to the net interest margin (NIM) challenges that the banks faced, and there is no credit cost challenges as of now. So when you look at the setup, generally the interest rate increasing setup is good for banks, and at the margin could be adverse for NBFCs.”

The banking sector presents an attractive setup as credit growth rebounds strongly, tracking upwards of 20% compared to the 9% to 10% levels seen at the same time last year. Rising interest rates generally benefit banks, and the industry is currently facing no credit cost challenges.

Large private banks and large banks in general have massively underperformed, leaving them available at valuations between 1.3 and 1.6 times price-to-book.

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This valuation, combined with incrementally increasing top-line growth, is expected to bring operating leverage at the margin. The dynamic will reduce pressure on net interest margins over the next three quarters as interest rates increase and credit costs remain controlled, auguring well for the earnings growth trajectory.

Will IT Sector Bounce Back?

For non-banking financial companies (NBFCs), a rising rate environment could be adverse as the cost of funds increases at the margin. Consequently, the fund house is focusing predominantly on Tier-1 NBFCs, where incremental funding challenges will be less pronounced and companies can demonstrate differential growth over the broader sector.

On the information technology sector, the recent recovery is viewed as a tactical bounce driven by low valuations and under-ownership rather than a structural rerating. IT is a mature sector undergoing a technology transition across a large part of its businesses, making it difficult to build structural earnings growth upwards of 10% for most companies. Top-line growth is expected to remain in the 3% to 8% range based on recent results.

"So as of now, we are in a camp that wait and watch," Bhandwaldar said. "The margin of safety is a lot. Keep watching the incremental numbers, how they pan out. If there is a surprise in terms of incremental growth that is coming from the AI part of the portfolio, then you actually jump in or then you start building larger positions."

Addressing concerns that further rate tightening could hurt sensitive sectors such as automobiles and real estate, the impact must be evaluated alongside prevailing economic conditions. With gross domestic product (GDP) growth tracking at or above 7% and corporate earnings expanding in double digits, exceeding 15% in the latest quarter, the negative effect of higher rates on the broader economy is limited.

He added, “But if the earnings were to start deteriorating in the coming quarter, given the pass-through of the raw metal prices and energy prices, then there would be a relatively more meaningful impact on some of these sectors and consumption because then people start worrying about their cash flows in future.”

In the capital goods and industrials space, global hyperscalers and AI labs may face valuation pullbacks because the monetisation of transformational technology remains back-ended. Infrastructure cannot be created at any cost with the expectation that consumers will immediately pay, meaning the monetisation of these projects will suffer at the hyperscaler level.

However, the recent correction in Indian AI infrastructure support players presents selective buying opportunities from a one-to-two-year perspective. Investors must evaluate competitive positioning, supplier replacement risks, pricing power, and margin levels.

Canara Robeco has been participating in these infrastructure names for three years and is using the recent pullback to re-add to specific positions where margin excesses are not built in.

For the entire discussion, watch the accompanying video



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