Mayuresh Joshi, Head of Research, MarketSmith, says “our take is that PSU banks still offer a reasonable amount of risk reward. A lot of cleanup has probably happened. As the rate cuts will start happening even in the Indian context in the second half, the NIM expansion will be very-very obvious and the expectations in terms of reasonable advances grow, deposit growth continues for this space, along with strong provisioning in capital adequacy for a few of these banks. So, Bank of Maharashtra, Bank of Baroda, State Bank… within the PSU theme, PSU banks offer a little bit of a better risk reward scenario.”
It seems the finance ministry is not really in favour of regulatory intervention in the markets and is talking about strong growth visibility for the Indian economy for the next three years to come and a buoyant equity market thereof. Would you say tactically one should be extremely bullish on PSUs and maybe not bother about valuations at this juncture?
Mayuresh Joshi: I think there are two aspects here. One, if you look at how India is placed both from a macro and a micro perspective. Obviously, most of the parameters that you are looking at are in terms of the fiscal deficit and the current account deficit as a number to start with is looking very buoyant at this juncture and the expectations in terms of the glide path that the exchequer has put forth in the next two years getting fiscal deficit close to that 5.1% mark is going to be an extremely attractive figure as far as foreign investors are concerned. The second aspect is obviously in terms of very stable tax collections. We probably see the number come out. Direct taxes have increased almost 19% year on year. The assumption that the exchequer has also taken forth an exponential year is a little bit on the lower side both in terms of nominal GDP and the tax collections.
But even if we are able to continue this growth going forward and the expectations in terms of the huge capex spend that the government has embarked upon is expected to continue over the next five years, the expectations of private capex coming in, the expectations in terms of gross fixed capital formation going northwards, these are all positive signs in terms of how the micros will then play out.
Corporate earnings have held up pretty well. Corporate leverage is probably at the lowest level that we have probably seen in a decade, the banking NPAs are at the lowest level that we have probably seen in a decade as well and therefore the robustness in terms of micros also will play out. So, yes, the growth story for India continues.
To answer your question on the PSU pack, structurally, over the next five to six years whether you take PSU defence, PSU power or PSU banks as a theme, while the power and defence names have moved a tad bit too much, again from a valuation perspective, compared to its longer-term standard deviations as well as expectations in terms of what can probably go wrong, the only thing that can probably go wrong is execution because the order of books of both these sectors are pretty robust and the book to bill extremely strong and with strong visibility over the next five to six years.
But execution miss, if any, might just pull down the valuation because the price moment has been too sharp. So, within this pocket, our take at MarketSmith is that PSU banks still offer a reasonable amount of risk reward. A lot of cleanup has probably happened. As the rate cuts will start happening even in the Indian context in the second half, the NIM expansion will be very-very obvious and the expectations in terms of reasonable advances grow, deposit growth continues for this space, along with strong provisioning in capital adequacy for a few of these banks.
So, Bank of Maharashtra, Bank of Baroda, State Bank… I think within the PSU theme, PSU banks offer a little bit of a better risk reward scenario.
What about the real estate sector? Where do you see realty space moving? We have seen a very good run-up here. We are seeing a run-up coming in. We have brokerage notes on Brigade Enterprises; Prestige Estate, the land that they have acquired in the NCR. We have seen both these stocks buzzing in trade. Is there value left in real estate and is it time to look at it?
Mayuresh Joshi: The real estate pack has moved up quite significantly and again, we are in the midst of that six-seven-year cycle that we are speaking about as it typically navigates through this cycle. You are going to get your patches of some kind of downturn that these stocks will face. But two things that I clearly watch out for specifically in the entire pack.
One, in terms of the inventory build-up that I have been seeing across tier I, tier II towns, That has started to build up because of oversupply that is probably happening, specifically in terms of a lot of redevelopment that are happening in urban and semi-urban areas. This is one aspect from a risk perspective that I will probably watch out.
The second element is in terms of any input cost inflation that probably comes through. But to offset this, when we talk about interest rate cuts happening, because it is extremely sensitive in terms of how the rate cycle will move and a lot of borrowers are probably looking at this rate cycle very intently.
Any move on the rate cuts by the RBI in the second half of this calendar year will definitely bring in more strength to the sector as a whole. So, within the space, very frankly, anybody holding on to a DLF, a Godrej Property should continue holding on. But ancillaries is something that one should focus upon. So, to that extent, our take is plywood players, laminate players like Greenlam Laminates, Century Plyboards.
A lot of input cost inflation had hit their margins really hard in the last three to four quarters. They are just coming out of that entire inflationary scenario. And as the deflationary aspect gets played out on the margins along with expectations of very stable volume growth that comes through and strong operating leverage getting played out, these ancillary stocks should start showing some element of strength.
Again, the housing finance companies as an example, PNB Housing, very frankly, I think if you probably look at the entire construct whether it is PNB or LIC Housing, again if you bind that with the rate cut scenario, I think a whole host of expectations in terms of further movement when it comes to the individual disbursements, asset quality pressures have come down for both these players quite drastically and I think that entire perspective can also get played out through the housing finance route.
So, my take is that anybody holding on to the core real estate players can hold on. The ancillary players is something where any pullback can be seen as buying opportunities.
Some of these pharma names and very specific names that are beginning to now look up. Anything that you would like from this space?
Mayuresh Joshi: So, we continue holding on to Sun and Dr Reddy’s in our portfolio, so that is a very clear disclaimer. What we also would like to put on our buy watch list on any pullback would be Natco Pharma within the broader markets. Now, our take for Natco Pharma is that the branded generics market and the FTFs that Natco Pharma has, the para IVs, around 14-15 in the pipeline across the therapeutic chain, whether it is oncology or diabetes, where the expectations in terms of pricing and margins, both are expected to remain strong as approvals come through in the next few quarters.
Obviously, the kind of margins that Natco works around, there was a dip in margins in the previous quarter at 38.5 odd percent, but the large part of the market participant belief is that the margin should stay around that 39% to 40% range.
Now, with more launches expected to come through in the next few quarters, better margin launches with strict timelines, my take is that numbers should show significant amount of earnings propensity on the higher side and therefore, top line growth, margin expansion will lead to EPS growth which is quite significant over the next two to three years. Both in terms of the EPS and RS rating and as parameters that we see at markets with any pullback onto the stock can be viewed as a buying opportunity.
