UTI favours Indian banks; shuns telecom, realty

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Banks should outperform the broader market in 2010 as the economy rebounds and credit growth improves, a fund manager at UTI Mutual Fund said on Thursday.

Harsha Upadhyaya, who manages about USD 1 billion for the firm, said he also favoured oil refining and marketing firms in his UTI Opportunities Fund but was wary of telecom and realty sectors.

The fund manager said he started betting on oil firms six months ago on hopes India would deregulate fuel prices. He also raised exposure to banks, given their attractive share prices.

"Valuations have corrected in the last six months or so," Upadhyaya said of domestic bank shares.

Indian banks trade at a 12-month forward price to earnings multiple of 10, compared with 14 times for the broader market, according to Thomson Reuters StarMine.

Banks are also expected to record an earnings growth of 15%, according to StarMine SmartEstimates that assigns weights to analysts based on their forecast history and calculates the weighted average of their estimates.

Upadhyaya, who allocated nearly a fifth of his USD 260 million opportunities fund assets to financials, said bad loans were no longer an issue and he expected banks to improve margins as deposit rates had dropped sharply in the last one year.

"If you look at the industry today and the economy today, I think we are definitely off the bottom. So in a recovery stage, definitely asset quality issues, as we move forward, should subside," the Mumbai-based executive said.

"Also, when credit growth is likely to pick up, it should not be a problem to pass on 35-50 basis points kind of a hike," he said. "I think that is when these banks will get re-rated."

ICICI Bank and State Bank of India are among top-five holdings of his opportunities fund.

India's bank loans rose 14.8% on year as of January 29 and is expected to pick up as the Asia's third-largest economy grows at about 7.5% in the fiscal year that ends on March 31 and accelerates in the year through March 2011.

Oil & gas

Upadhyaya, who has invested 12% of his opportunities fund assets in gas and petrochemicals firms and counts Hindustan Petroleum Corporation and Gas Authority of India among his top-10 holdings, said he expected government to free fuel prices to move with market rates.

"Although this news is being there for the last 10, 15 years, we believe that government is pushed to the wall and it's likely to do something very soon," he said.

Fuel pricing is a sensitive issue in India, where the government sets retail prices of petrol, diesel, cooking gas and kerosene to help control inflation and protect consumers, particularly the poor, from sharp fluctuations in energy prices.

"Yes, it's a tough issue because the political consensus will be difficult to get but I think the government is in a position where it can take decisions on its own," he said.

However, telecom and real estate are two sectors that Upadhyaya has shunned in his opportunities fund portfolio in the last nearly two years.

"We didn't understand the valuation of that sector," he said of realty firms, adding shares of telecom firms have corrected but he still did not see the sector favourably as rising competition and tariff war hurt profitability.

"I don't think the actual issue of profitability erosion has come into the numbers," he said, adding the telecom firms still had two to three tough quarters ahead.