SENSEX NIFTY
Apr 26, 2013, 07.09 PM IST | Source: CNBC-TV18

Bullish on pvt sector banks, buy ICICI on dips: Dipan Mehta

Though there is a bit of disappointment in ICICI Bank’s numbers because of higher provisioning, it has been an outperformer compared to the rest of the market for the past several months, says Dipan Mehta, Member of BSE & NSE.

Though there is a bit of disappointment in ICICI Bank ’s Q4 numbers because of higher provisioning, it has been an outperformer compared to the rest of the market for the past several months, says Dipan Mehta, Member of BSE & NSE.

Mehta is extremely optimistic on private sector banks as he expects interest rates and the entire monetary policy to get conducive. He suggests buying ICICI Bank at any meaningful correction.

He says that the upcoming RBI policy and commodity prices are the major triggers for the market now.

Also read: Low FII flows temporary; book profits in Infy: Dipan Mehta

Here is the edited transcript of his interview with CNBC-TV18.

Q: What is the recommendation on ICICI Bank post the numbers?

A: There is a bit of disappointment because of higher provisioning, but the other underlying data seems to be positive. In any case, our outlook for private sector banks is extremely optimistic so I would look at buying ICICI Bank at correction with a disclosure that we have investments and recommendations in the bank per se.

Whatever the policy is, the bank has followed strategies which have paid off and ICICI Bank has been an outperformer compared to the rest of the market for the past several months. Now interest rates and the entire monetary policy will get even more conducive.

My sense is that ICICI Bank and other private sector banks should start doing even better. So, I would be positive on the sector and the bank per se.

Q: What would your analyses be about the result season till now? Do you think it was better than expectations, average or below expectations?

A: I think it is very early days and usually all the good results come through in the first half of the earning season and then we have the disasters and the accidents coming in later.

So, let us keep our opinion on the earning season for the time being. Let the exact number come through for most companies, and then take a call whether the earning season was good for the market or not.

However, more than the earning season, the bigger story is the drop in commodity prices and the longer oil trades in the narrow range of around USD 100 per barrel or so, I think more and more investors will now get optimistic and enthused about Indian markets. So, that and the Reserve Bank of India (RBI) policy, are going to be the big triggers for the market.

Q: The big story in the broader markets this week was the aviation space and the deal that fructified with Jet-Etihad. Jet is up 20 percent this week, but even SpiceJet has moved a whole lot. Would you put money into either of them?

A: That’s a difficult question to answer because these business airlines have not had such a great track record when it comes to creating value for minority shareholders. Having said that, the valuation at which the Jet deal has been done has been fantastic and that does tend to show that there is a appetite for at least strategic partners to come in at such significantly high valuations.

Certainly SpiceJet also could be in the queue if a deal were to take place, given the background of the promoters and the nature of the business. If I think the largest carrier is doing it then the others in the industry also would like to follow suit.

So, I think market is justified in upping SpiceJet prices. But from an investor point of view, I don’t know whether it makes sense to enter at these levels. At the end of the day it is quite event based, whether a deal will actually take place in SpiceJet as well and in Jet also there is still that lingering expectation that an open offer would take place, which is why also the stock has gone up as much as it has.

However, for a long-term investor point of view, the industry still remains quite challenged, although some fundamentals have improved over the past few months. I don’t see them creating sustainable value over a long period of time.

So, I would be kind of neutral-to-negative and maybe if the stock prices rallies further from these levels, then would even advice exiting the stocks. It is difficult to take a call. But I am broadly negative on the sector.

Q: Did you manage looking at the Siemens numbers? What you would possibly extrapolate to the sector as a whole?

A: We stopped tracking Siemens a long time ago. Siemens and ABB both have not delivered consistently and they have always been disappointment whenever the results come through.

Maybe some fundamental changes have taken place in the industry where they are not able to gain market share or capture the sales, as they were maybe a few years ago. Maybe the competition has increased and maybe the market share of Chinese imports has increased.

So I would say both Siemens and ABB are going to be laggards in the market. A lot of volatility also has come through in their earnings. They are not gaining traction as far as their new product introductions also are concerned.

So I would say that investors would give it a miss. In any case, both these stocks, especially Siemens, are not very richly valued. I do not know why one should be paying such a high PE multiple for a stock or a company which consistently disappoints when it comes to the numbers.

Q: In your opinion, how do you see the markets trade? Do you expect them to be within this range of say 5,500-5,900 or do you expect a formidable breakout and possibly see 6,000 back on the Nifty and sustain there?

A: There are the few assumptions and the most important one being oil prices. If oil prices continue to trade within USD 1 or USD 2 of the USD 100 per barrel price and the Reserve Bank of India (RBI) follows through with a 0.25 percent cut in interest rate, which is almost is getting discounted, then the market has a really good chance to scale beyond the 6,000 level as soon as the monsoon starts setting in, because that’s another factor which is going to be quite positive considering all the forecast, which are projecting an above average monsoon.

So, I think that if oil prices are under control and politically we don’t have any knee-jerk situations or any kind of mid-term poll situation, then markets will scale to higher levels. There is lot of liquidity in the financial markets now, with Japan also undertaking massive quantitative easing programme.

After a long time, the fundamentals of the Indian economy also seem to be improving, not because of anything that the government has done, but because of good fortune as far as oil prices are concerned. So my sense is that we have a good chance of breaking past the resistance, which has been bogging the market down for the past several months. So, I would optimistic over the short-to-medium term.

Q: Next week is the big trigger for our markets, the RBI policy on May 3. What is the expectation this time around? Would you trade in any of the rate-sensitives from now until the policy, or do you think the run is done on many of the rate sensitives like autos and banks?

A: No, if the market has to scale beyond this 5900-6000 Nifty level, it will be the banks which will take the leadership position and scale to even higher levels. In that context, the performance of the PSU banks and how their quarterly numbers are will be extremely important. But banks, non-banking financial companies (NBFC) should take leadership positions.

Because the big story as far as India is concerned is that if interest rates do go down, then the banks benefit and some of the other interest rate sensitive sectors also benefit. We have seen a correction in IT which was doing well a few months ago, but then the tide has turned over there.

So I would say that interest sensitives will lead the market, and as far as RBI action is concerned a 0.25 percent cut in interest rate is already discounted. But what their commentary is as far as their future policy is what is being watched quite keenly and if their stance indicates that they would look at further rate cuts, no doubt they will put it subject to inflation coming off, oil prices staying low, gold prices remaining under control and Current Account Deficit (CAD) being in reasonable limits.

So, subject to the assumptions also if RBI comes forth and says that there is space for further cut in interest rates to around 7 percent or below then the markets will take it extremely positively. Historically we have seen that whenever repo rate starts going below 7 percent or so that is when we usually have a spectacular bull run in our markets and we are getting to that level.

So far, the cut in RBI rates has not yet got translated to actual interest rates in the banking sector in terms of deposit rates or lending rates. So as and when that follows through we will have very solid reasons for the market to scale higher. So let us just keep our fingers crossed. What RBI says is the most important trigger for our markets.

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