Here is why Nilesh Shah is bullish on banking stocks but cautious on the IT sector

Nilesh Shah, Managing Director, Kotak Mahindra AMC, on Wednesday said that he has been bullish on the banking space due to the flows into the sector and going forward, "there will be higher yields on the portfolio".

“The real challenge for banking was not fundamental but from a flow point of view as most foreign portfolio investors were very large owners of banks, they had made a lot of money on these banks over the years and they were constantly selling. Slowly and steadily, the supply got absorbed as domestic investors kept on buying,” Shah said in an interview with CNBC-TV18.

Among the positive aspects are margins going up as a result of an increase in the interest rates while treasury losses have already been booked in the June 2022 quarter.

“Put all these things together, along with the consolidation happening in business, from a fundamental point of view, the banking sector looks good,” he said.

In the last one month, Nifty Bank has risen 9 percent as compared to the Nifty's gains of 8 percent during the period.

India's largest lender State Bank of India (SBI) on Monday said that it would benefit from improving margin due to a lag in deposit rate hike even as lending rates see a quicker transmission with an increase in the policy rate by RBI.

"All said and done, in the rising interest rate scenario, there is always a lag effect when it comes to the deposits and to that extent, the banks will certainly be benefiting from the situation," SBI Chairman Dinesh Kumar Khara said in an interview with CNBC-TV18.

On IT sector, Shah said that one will have to "look at the valuation and bottom-up story". According to him, IT still remains in an accumulation zone and one will have to select large-cap companies to build position during this phase.

He believes one will have to be prepared for extreme volatility in the new-age business companies.

“We are also learning how to value these companies. Every quarter these companies also evolve. There is a path to profitability but every quarter there will be adjustments. We have kept some positions in new-age companies, more from a learning point of view and over a period of time, we will be able to evaluate these companies in a far better manner like we value traditional companies,” said Shah.

One will have to pick the winner and cannot be sitting with the losers, he added.

Talking about inflation, Shah said that inflationary issues globally are leading to reduction in consumption but added that purchasing power in India is higher now as compared to the COVID-19 period.

“We do expect local consumption, albeit a little bit subdued, to slowly and steadily pick up with good monsoon and good farm income whereas global, led by Europe consumption, could be sluggish,” he said.