Sep 25, 2012, 04.13 PM | Source: CNBC-TV18
The market is cheering up government's move to bail out State Electricity Boards debt. Analysts feel that the package is a positive sentiment upmove for the capital goods sector.
Rahul Singh (more)
Head- Equity Research, StanChart Securities | Capital Expertise: Equity - Fundamental
So, to make the best use of the rallying power and banking stocks, here are some of the best picks of Rahul Singh, Head of Equity Research, Standard Chartered Securities.
Below is the edited transcript of the interview
Q: How do you look at the power distribution companies loan restructuring package? On the back of this, would you get positive on the PSU banks or on the power generation companies or do you think they have already run up?
A: I think it’s definitely a positive move especially because it’s now linked to some kind of a stronger quid pro quo than what was there last time when the central power sector utilities were bailed out in 2002. While it does change the credit worthiness of state electricity boards (SEBs), and that particular issue gets resolved to some extent, some of the issues surrounding the fuel risk and the individual assets, which are standard for utilities, do not go away with this. We would be a little cautious in extrapolating the positive from this to the utilities although the capital goods companies could benefit a bit more than the individual utilities if the projects pickup.
Undoubtedly, we definitely see it as a positive on banks. We like the PSU banks. We thought that they would lead the rally and they are leading the rally and this could also provide further fuel to that rally. We like Bank of Baroda (BoB) and Punjab National Bank (PNB) amongst the public sector undertaking (PSU) banks.
Q: Why would you be more positive about the capital goods companies in the power generators? The power generators are little hopeful that their buyers, the SEBs, will now be solvent enough to buy a little more power. But does that mean that anytime soon these will go into expansions? Does any of this indicate that capital goods players will find orders coming their way?
A: Right now, the improvement will be mainly on account of sentiment. The immediate project flow may not improve but the outlook or the expectations of projects picking up might go up on the basis of this. Also, I am looking at it more as a package so I am not looking at power in isolation.
If you look at what is happening on the national investment board and the NIB setup and the thrust on the infrastructure projects apart from what has happened yesterday, those things, as a package, look better rounded for the capital goods companies. This might be lead to a sentiment improvement for capital goods companies rather than for the utilities, which have their own issues. Each company is struggling with its own set of standard assets or fuel related issues or both. There is little bit of a subjective difference between both.
Q: Based on these administrative reforms, how much of an incremental upside do you hope to see in the market beyond 5,700 levels now?
A: If you look at the overall index PE, it’s about 14-14.5 times already. We could probably go to 15 times but I have my reservations on whether it can breach that kind of multiple because what we have to understand is that the cost of equity in India is still very high. We do not see the 10-year government securities (G-Sec) going down soon below 8 percent.
As long as that is the case and till the time we go back to 6-6.5-7 percent kind of 10-year bond yields, which is the risk free rate in the economy, I do not see the major rerating over the market as a whole. But does it mean the individual sectors cannot do well? That is not the case. We will see certain sectors going up 10-15 percent even from here even while the index might remain static and we have seen that.
One would have thought that the index would probably be higher than what it is today. But for the decline in the FMCG, pharmaceutical and the IT stocks, one has to understand that some of the valuations in the FMCG, pharma and IT might have been higher than what they deserve because of the scarcity premium which is also going to go away. I am not very finicky on the market levels and it is treacherous to project a market level because it’s a sum total of so many diverse movements happening today across sectors and stocks.