Valuations of PSU banks look attractive: Lotus India AM

Lotus India Asset Management has come out with a new fund offering, or NFO, called Lotus India Banking Fund. It is an open-ended banking sector scheme. The fund offering opens for subscription on May 19 and closes on June 17. The minimum application amount for the retail category is Rs 5,000.

Tridib Pathak, CIO-Equities, Lotus India Asset Management, said the quality of Indian banks has improved dramatically, irrespective of the farm loan waivers. “Over the last few years, we have seen stupendous amount of improvement in the quality of overall banking and financial space in India, especially now when we compare it with the rest of the world or probably global financial markets. We do find that PSU banks are coming up quite attractively on the valuation front.”

Excerpts from CNBC-TV18’s exclusive interview with Tridib Pathak:

Q: Give us few dynamics of your banking fund and why you chose this time to launch the banking fund in the market? You feel some semblance of value has returned or are there still a lot of headwinds in the banking space?

A: At Lotus India, we are in the process of creating a whole basket of offerings. Within that, we thought it was opportune time right now to go ahead with our banking fund as there are no unrealistic expectations from the sector currently and valuations are extremely attractive.

For the next two-three years and coming off from an underperformance recently, it’s very clear that this is a sector which has secular growth potential. There is no issue about that. Our economy is under banked. Quality of Indian banks has improved dramatically, irrespective of farm loan waivers. Over the last few years, we have seen stupendous amount of improvement in the quality of overall banking and financial space in India, especially now when we compare it with the rest of the world or probably global financial markets. We come out quite well on that front and this is not going to go unnoticed.

Contrary to expectations about nterest rate hardening or maybe high inflation going forward, what we have realised and what we want to put forth is the fact that banking presents a sector which has consistent profitability. It is very surprising to note that over the last 15 years, net interest margins of banking companies have been almost stable at around 3% irrespective of interest rates cycles. The reason is very simple; it’s a complete pass through sector. Because of the nature of the business, banking is a good pass through mechanism. So, consistent profitability is not an issue and valuations look extremely attractive right now.

Q: There is a possible increase in bad loans. SBI and ICICI Bank have already showed their numbers where there was a severe bad loan pressure Do you think the first year could be a difficult year of performance for your fund?

A: A lot of the negatives are already there in the price, probably much more than the necessary price. Coming to valuations, we did a simple analysis of reverse Discounted Cash Flow (DCF) on the banking stocks. We found the implied profit growth in banking companies which is implied by the current share prices and is just about 9% for the next 10 years and 9% per annum, whereas these stocks have shown around 21-22% profit growth over the last five-years. So, we are not talking of an extremely attractive proposition out here from a valuation standpoint.

Farm loan waiver is around 80% regional rural bank and Co-Operative banks; it doesn’t touch the Schedule Commercial banks to that extent and is just about 20-25% of the total bill. The government has indicated that they will be compensating. But it is not very clear and the worse case impact is hardly 3-4% of book value.

Q: From the banking space, are you leaning towards the PSUs as more value plays in spite of a weak Q4 or more towards the private banking space? Do you have any views on the real estate space and the capital goods space?

A: Our banking fund is essentially a banking and financial services fund. So, we will be investing in a whole host of opportunities; not just banking. It is an actively managed fund and is not an Exchange-Traded Fund, or ETF, or a passively managed fund.

It will invest in banks, Non-Banking Financial companies (NBFC) and other financial services participants like proxy insurance plays and mutual fund plays and so on. Within the banking space, we have a process through which we decide our stocks on scoring and ranking system. We do find that PSU banks are coming up quite attractively on the valuation front.

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