Jul 20, 2013 01:51 PM IST | Source: CNBC-TV18

Banks' NIMs may dip 10 bps on RBI moves; TCS top bet: HSBC

The gradual fall in the rupee is in sync with the strengthening of the US dollar and also the drawdown of the currency itself given that India is running a massive current account deficit

In an interview on CNBC-TV18, Jitendra Sriram, MD & Head of Research, HSBC India, said the gradual fall seen in the rupee is in sync with the strengthening of the US dollar.

According to him, if the Reserve Bank of India (RBI) wanted to hike rates, it would have done so directly and had not beaten around the bush by trying to do the spread on the LAF corridor. “The basic objective of the RBI was to prevent people from borrowing from RBI and then using it to hold up dollars,” Sriram said.

Also Read: Deal pipeline strong; see stable Q2FY14: TCS

Sriram also sees 8-10 bps dip in net interest margins (NIM) for banks on the back of recent RBI measures. He cautions that asset quality for banks is likely to worsen in the near-term.

TCS continues to remain his top pick in the IT space. "Thursday’s results show a 6 percent dollar growth, which is a very good number to post in this kind of a challenging environment," he added. The country's largest software services exporter posted a 16 percent year-on-year rise in net profit in the first quarter of 2014.

He further added that India's energy sector desperately needs investment to augment domestic sources otherwise CAD will be a perennial worry until and unless the imported energy bill is curbed. Until the local production is incentivized it is going to be tough.

Below is the verbatim transcript of Jitendra Sriram’s interview on CNBC-TV18

Q: What have you made of the Reserve Bank of India’s (RBI) tightening moves which got diluted over the past two days? Are you expecting that things are going to get worse because of money getting dearer and are you pushing back some of your earnings estimates?

A: If I look at the basic objective of the RBI it seems to be more to curb the speculation in the rupee. If they wanted to hike rates I think they would have done it the direct way, they would not have beaten around the bush by trying to do all this spread on the liquidity adjustment facility (LAF) corridor and so on. So I would actually estimate that the basic objective was to prevent people from borrowing from RBI and then using it to hold up dollars and so on. So to that extent I think it does bring about a certain degree of lower speculation into the rupee which is a positive.

Also Read: What is MSF? How MSF hike will help curb rupee volatility?

I don't think the RBI is too bothered if there is a gradual depreciation of the rupee in sync with the drawdown of the currency itself given that we are running a current account deficit (CAD). And flows have not probably staked up to that, USD 300 million per day run rate in the near term which is what we require from a longer term perspective to sustain our CAD.

So yes from a strategy perspective there are two things one needs to look at, one is the fact that a lot of corporates which are leveraged and probably have a fair amount of it as rollovers from the commercial paper market would probably be stressed in the near term. So it is wise to avoid those kind of names at this juncture.

Second is from a banking perspective there is a small element of negative that I would expect may be about 8-10 bps of net interest margin (NIM) compression coming in because of this act. However, do remember that closing one arbitrage probably opens up another in a sense that people who have surplus SLR or surplus liquidity will obviously be able to borrow from that USD 750 billion window and then be able to deploy it in call and CP paper where yields are much better now in the domestic bond market that is so they would be able to make some additional spread there. So it is not like a one way street there for the banks.

Q: Tata Consultancy Services (TCS) seems to be in a league of its own with excellent numbers yet again. You are overweight on that stock, tell us about how much more of an upside you think it could bring about post the numbers?

A: I do agree TCS has consistently been a surprise package for the last so many quarters. It has consistently beaten analyst estimates, there has been a steady upgrade and that is the one name in the technology space which forms part of our top picks in a sense that is the name you are most constructive within the IT space.

We do think that there is more upside from here on and given that you have seen yesterday’s results show something like a 6 percent kind of dollar growth. This is clearly a very good number to post in this kind of challenging environment.

Q: What have you made of the banking stocks because we did see some bit of negativity as far as even HDFC Bank was concerned, as far as asset quality was concerned, repeated in other smaller banks as well, Axis Bank coming as an exception? Does that change your picks in the banking space, what are they?

A: I would agree that the asset quality tends to be a lag indicator in a sense that even after the economy probably bottoms out and starts recovering I think asset quality will continue to deteriorate at least for one-two quarters before it turns. It is like a trailer following a truck so the truck engine might turn but the trailer still takes some time to follow through. So from that aspect I would not be too worried that you are seeing the economy probably at a bottoming out phase so you should see some acceleration here on and I would say that this asset quality may worsen for the near term.

We are underweight on state owned banks as a result because we do think a lot of these sticky assets will be kind of a headwind for them. Coming specifically to some of the private sector banks I think the base is too small to really worry about if net NPL’s go up from 0.2-0.3 percent. I think it could just be one account gone sour or something like that, it is not something to really draw a trend out of it.

Q: The big trigger later this evening and what will react to on Monday is Reliance Industries numbers. What are your expectations this time and do you think it would be a trigger for the market at all?

A: If I look at today there are material results, there are three index heavyweights which are actually going to post results, Reliance, HDFC, Bajaj Auto so you have three index names today. However, specifically on the first name you asked, I think more than the result it is probably going to be linked with more clarity on what happens on gas pricing because the government did come out with this committee report that they have accepted it, they are going to go with this average price across various energy hubs.

Then there was some flip-flop on it in a sense that whether they are going to fully implement it and so on. So if that comes about I think the entire sector will actually look up that it could induce a lot of investment into this space and India desperately needs investment into its energy sector to augment domestic sources. CAD is going to be a perennial worry until and unless we actually curb this kind of imported energy bill that we are paying. So until we incentivize local production it is going to be a tough ask.

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