Just because of the stock, HDFC bank came under pressure, a narrative got built, that the whole banking and financial services sector is facing headwinds. But the fact is financial service is a very broad term, it would be wrong to look at them with the same lens. Each segment is an industry in itself which is governed by an operating matrix which is very different from another. For example, a Housing finance company can be happy with 10 percent net margins, but for an average asset management company ( AMC) the net margin would be more than 30 percent. Similarly, a gold loan company is best of the NPA provisioning ability but the margins are not very high. The only common thing which binds the financial service sector is the GDP growth rate as the growth in all segments have a certain well defined relationship with growth in GDP.
Three years of underperformance when topped by a decline of more than 10 percent decline in stock price which erodes 1 lakh crore in market capitalization is surely going to create sentiment that all is bad with a bank and given it has been the biggest of wealth creators is bound to have rub off on other players in the sectors which may not be bank but because they are part of the financial service sector they tend to get clubbed together. But the fact is that just because one bank is facing headwinds does not mean the whole financial sector is facing the same. So be selective as analysts are bullish on many companies in the financial services space.
Market sentiment is quite exuberant based on steep increase in the prices of many midcap and smallcap stocks, large inflows into midcap and smallcap mutual funds, and huge number of new retail participants in the midcap and smallcap funds, Kotak said.