In its monetary policy review the Reserve Bank of India said that it might consider some assets of public sector undertaking (PSU) banks, which can be re-valued as capital considered part of Tier-1 requirement.
Anup Bagchi, MD and CEO of ICICI Securities, told CNBC-TV18 that although valuations of PSU banks are attractive at current levels but he will wait a couple of quarters before buying into PSU stocks.
He further said that most investors are still overweight on Indian market and there could be another minor sell-off which might lead Nifty to a 7200 mark in near term.
Below is the transcript of Anup Bagchi’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Sonia: Before asking you about the conference, I just wanted to get a word in about what the Reserve Bank said in today’s policy and the impact on PSU banks. The RBI is considering some assets which can be revalued and part will be considered as a capital towards meeting the overall Tier-I requirement. Would that have a positive impact for PSU Banks, at least in the near-term?
A: My view on PSU banks is that obviously, there is pressure on provisioning and, but one does not know. In an overall asset scenario, what is real provisioning and what will be the real loss. And this confusion is what creates negativity around PSU stocks. PSU bank stocks. So, that to some extent also puts pressure on the capital because many people think that there is not enough capital to take this kind of provisioning.
So, any capital relief will provide a relief rally, but ultimately as far as valuations of PSU banks are concerned, more clarity on Asset quality, if one takes provision and by and large, if the market starts to believe that this is almost the end of the provisioning, and if capital gets put to bring back the capital adequacy, these are all essentially, they have a strong liability franchise.
On the asset side there are issues which if it gets fixed, there is no reason why they do not become a good buy because at the end of it, if you look at the valuations at which they have traded, they are getting traded. Maybe you can knock off a few more because of provisioning, but economically at the asset level, clearly if the assets are weak and if market gets that confident that accounting wise also it has by and large converged, I think, there is a case of looking at PSU banks seriously. But, my view again is that one should look at the larger stronger PSU banks more closely.
Sonia: So, you are saying at some points, PSU banks do become attractive, but the question is, is this that point? Do you have the confidence to buy PSU banks now or will you rather wait it out for a few quarters?
A: I would say once maybe we will have to wait for a couple of quarters, market has to get confidence that the majority of the provisioning and the weak assets is getting reflected in the results, either by way of guidance or by way of actual accounting, quarterly profit and loss (P&L). And that there will be adequacy of capital.
Once this confidence comes back, there will be quite a few takers for the larger stronger PSU banks, because at the end of it, they have a strong liability franchise. If one side of the balance sheet gets fixed and if the valuations are attractive, why not because this is a game of risk reward and one must understand, it is not just reward, so as the perception of risk reduces, people will play for reward as well.
Today, however, I must say that people are being defensive and they are obviously, attributing risk to these balance sheets which is why perhaps, there is not so much of capital allocation being done to this micro sector of the economy and of the index of course.
Anuj: If there is further redemption and further outflows, what could be the low for this market? Could we head back towards 7,200 or maybe even lower than that? Where do you see the flow for the market?
A: We could be heading towards 7,200 and there are all reflection and consensus, as you know market, these are all on the momentum, they talk numbers. But the worse that I heard is around 6,800-7,000 is the worst I heard. But, generally people think that near about 4-5 percent from here, there is a bottom, there is no fundamentally any reason for India to fall, except for this redemption. That is the general feeling in the market.
Anuj: What about consumption stories which are the only bright spot in this market? Asian Paints has done well,Marico has done well, do you see more buying here?
A: Yes, that is the place that you continue to play on the upside, on top of it, I feel that, everybody is getting concerned about rural distress and we think that this time around, there will be focus on farms because at the end of it, 50 percent of the population is in that sector.
There are two benefits, one is input prices have fallen and that is aiding the margins, so you will see, you have already seen margin jump and commodity prices are not going to jump up in a hurry. And brands which have pricing power, they are not reducing the price in a hurry. So, to that extent, you will have margin expansion which is already happening. That is number one.
Number two, the rural distress spill-over will go off because crops are better, that is what we understand, the crops are going to be better. And there is focus by the government and in the Budget towards rural sector because large population resides there. So, it will continue to do very well.
If you look at paints for example, as an industry, which we illustrated, they have got pricing power, their input costs are lower and they are investing in capacity expansion as well as in distribution in Tier-III, Tier-IV towns, so obviously they are quite optimistic and their balance sheets are very strong.
So, even if they lever out a little bit, it does not matter, you do not have to invest only through an internal accrual, you can pick up a little bit of debt, which fortunately, they will not because their balance sheets are so strong. So, I think they are investing for growth which is a good sign. So, it is a good space to be in.