PN Vijay bets on banks, suggests 6 stocks

In the private banks, he maintains buy call on ICICI Bank , IndusInd Bank and Axis Bank . In the public sector banks, he would go for Bank of Baroda , Bank of India and Allahabad Bank .

Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos.

Q: By the end of this month, we will have hit another credit policy. The banks have started leading. How would you approach some of the financials now?

A: There appears to be a concerted effort by central banks world over to cut rates and put liquidity into the system. I think the renewal of the Twist in the US was the first shot. Yesterday, within a space of two hours, Bank of England, ECB and the Bank of China cut rates. China has cut rates for the third time in six months. So, the idea appears to be to bring bond prices down and bond yields up.

If India is getting more globalised, inspite of high agricultural due to supply constraints, the RBI would renew its rate cutting. They frontended the rate cutting in March by 50 bps. So, one would anticipate that if manufacturing inflation keeps below 5% as it has done in the last two or three months and bond yields close to 8.1%, down from the very high levels four or five months ago, it should make RBI cut rates. I think that’s a thinking that’s working on bond players and stock players for investing in banks.

Also, let’s not forget this is dividend time. If you look at yield charts of Indian stocks, the PSU banks standout. The yields are phenomenal, 6% and so on. If you look at the adjusted book values to market prices, many top class ones are hovering around 1-1.2%. So, the valuation argument is also supporting banks. I am not surprised that Indian banks are following global trends and also anticipating further loosening of policy. I expect banks to continue to lead the present rally that we have been seeing for the last few weeks.

Q: Next week, we are getting to earnings season as well. The kick-off is the dicey one, with technology starting things. How do you think it’s going to go for techs?

A: It’s not going to be good. Tech is going to report very tepid earnings, especially in dollar terms. They would get the benefit of the crash in the rupee that we saw last quarter, but the extent of the benefit would depend on the hedging policies. Some have very open hedging policies. Some have very over hedged policies. So, the rupee earnings would depend a lot on that.

At the dollar EBITDA level, there is surely going to be some sluggishness. I would make HCL Tech an exception because most of the large Indian IT stocks follow a similarly similar model whether it’s Infosys , TCS , Wipro , they concentrate on the BFSI space that too in the North American continent. That has been very sluggish. Capital expenditures there have been very sluggish. So, given these factors, I expect IT to give a muted start to the Q1 of 12-13. Fortunately most of the market thinks that way.

Q: The coordinated action that came out from the ECB yesterday and the tone that came out from Mario Draghi have sparked some concerns that the worries will continue, atleast for a while till the rest of the year. Are you worried that the global markets will continue to put pressure on any kind of upside that the Indian market might have from hereon?

A: The worries remain. There is no denying the fact that the South European economies are in serious trouble. We are going to have issues cropping up every time. So, we are going to have all these skirmishes down the year for next 12 months. The point is that the European economies right now are out of ICU, let’s put it that way. With Germany also playing ball in the last summit allowing ECB funding to go directly to Spanish banks, there is a feeling that the fire can be controlled. That’s all that India needs actually.

The action is shifting to Indian. I think India can do a lot in terms of improving the investment-to-GDP ratio, improving productivity and sectoral performance quite easily. Today, the Indian market can stand a bit of volatility from Europe. If it doesn’t get major upheavals, it should be on an uptrend purely based on Indian fundamentals. In other words, the uptrend in India substantially for the next six months depends on what we do in India, not what’s happening in Europe or the US.