Find out: Why KR Choksey Sec prefers auto to banks

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Find out: Why KR Choksey Sec prefers auto to banks

In a market that can be phrased 'stock-specific', Deven Choksey, Managing Director of KR Choksey Securities feels the times when investor interest was in the banking space is passé. The flovour now, according to him is the auto and the auto-ancillaries spaces.

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In a market that can be phrased "stock-specific", Deven Choksey, Managing Director of KR Choksey Securities feels the time when investor interest was in the banking space is passé. The flavour now, according to him is the auto and the auto-ancillaries spaces. In an exclusive interview with CNBC-TV18, he cites explanations for the same.

"Banking stocks have been doing well. Also with most of the banks pricing their loans on base rate basis, the growth in terms of margins is going to be strong. Valuation-vise too the banking space is not trading in an expensive range. However, the investors who at one point in time were more interested in accumulating banking stocks are now probably looking at some of the auto stocks like Tata Motors. Even some of the non-index stocks are also being looked at particularly from the auto ancillary space like Subros and Bosch," he explains.

Below is a verbatim transcript. Also watch the accompanying video.

Q: Interesting dichotomy between the midcap side of the broader market and the index what are you witnessing at your trading desk? How are people approaching the market?

A: Every single day you are finding a different kind of a view coming out from most of the customers. At a particular point of time where they were more interested in accumulating banking stocks. Now probably the flavour is reaching to some of the auto stocks and particularly to big names like Tata Motors within the indices space.

Even some of the non index stocks are also being looked at, particularly from the auto ancillary space like Subros or even some funds have also started accumulating companies like Bosch . You are finding selective stock picks happening on a given day into the market place. That is where we are finding these companies which are giving you the inherent valuation strength.

A Tata Motors kind of company gives fantastic amount of comfort. You are having about forward 8 times price earning (PE) ratio and the company is probably entering into the league of around Rs 10,000 crore profit base going forward. Definitely one would like to increase the weight of this particular stock into the portfolio. That is where we are seeing though some funds are still skeptical. People are finding more and more comfort with the kind of valuation which Tata Motors kind of company is giving.

The main point here is that whether it is an index stock or midcap stock, we are basically seeing actions largely driven by the fundamentals of the company and where the valuations are comforting people are taking actions ahead of the other market plays.

Q: What have you made of the recent frenzy in the public sector banks and if you had to pick one or two of the smaller names which ones would you go for?

A: For the first time most of the banks are going to be pricing their loans on the base rate basis. That is where you are going to see some amount of growth coming in as far as margins are concerned for most of the banks. Those banks which probably have a larger bulk deposits and which they can reprise it probably they would have a larger advantage to talk about in form of higher margins coming to them. At the same time the higher current and savings account (CASA) ratio should help them.

If you want to pick up few banks within the public sector undertaking (PSU) banking space it would be Bank of Baroda (BoB), Punjab National Bank (PNB) and Bank of India (BoI) wherein you are seeing the CASA rates of around 35-40%. At the same time the valuation wise these banks are trading not so expensive. They are trading on a forward price to book value of around 1.5 -1.7 times which is probably not an expensive proposition at all. As a result of which some amount of rerating is taking place.

As of now only 10% of the bank loans are on base rate basis, which over a period of time is going to expand. It probably would protect the margins of the bank. When there is a rising trend probably in the interest rate scenario. You definitely see a better advantage coming to the bank. That is where some actions have taken place into the PSU banking space wherein people have started giving their re-rating kind of an option to some of these banks and have started buying then in the portfolio.

Q: You mentioned the relatively bigger ones like BoB, PNB what about the smaller PSU like UCO Bank , Dena Bank , Syndicate Bank , Vijaya Bank . Which of these do you think stand out the best?

A: I am not too sure whether I would go with any of these smaller ones because I am not too comfortable. Of course valuation wise I am definitely comfortable because at its current valuations nothing can go wrong with these banks. But I am not too sure about how exactly they would go ahead and start pricing their loans etc. They would probably catch up with some of the bigger PSU banks.

That is where I have put across my choice on some of the relatively larger and bigger names. We would feel more comfortable, first option should be given to the larger banks and then probably some of the smaller banks. The market is having a fancy at this point of time, so for which it is accumulating. Valuation wise you cannot go wrong, so one would justify that part of the action for some of the players who want to accumulate some of the smaller PSU banks in their portfolio.

Q: Do you see any risk because in the last one year we haven't seen this kind of an open interest particularly in stock futures while the Nifty is not going anywhere, do you see any signs of a technical overheating in the stock end of the market?

A: It's a good point to debate upon. We have been constantly watching this particular data and always have been finding that this particular trend of higher amount of open interest getting built up. Against which the volatility stays at a historical low level. It is probably sending a signal, that yes, people want to see the market going up, but it is not going up because of the kind of technical position of the market at this point of time.

The only way in which one can look at this market is yes, there could be risk if largescale sell off takes place, for any reason or some amount of money getting pulled out of the system. But on the other side, with this kind of position already built into can with volatility staying at historically low levels currently, in my view there are all the more chances for market to go up than come down.

For market to go up, you would require some amount of triggers and that should be fresh trigger coming from large and heavy weight stocks and they are missing currently. It's probably a matter of time wherein you are going to see some amount of action happening on that front that is what my take would be.

Unless you are going to see large sell off, we would probably believe that we are on course to 5560 as far as Nifty is concerned and that is where the long position buildup in the market with higher amount of open interest created could probably get justified at some point of time.