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Dec 10, 2012, 07.16 PM IST | Source: CNBC-TV18

Cautious on PSU banking space: Tulsian

SP Tulsian of sptulsian.com, says that PSU banking stocks can see a maximum upside of 5 percent from current levels. Asset quality is a major concern for PSU bank stocks. I have a cautious view on the PSU banking space.

SP Tulsian of sptulsian.com, says that PSU banking stocks can see a maximum upside of 5 percent from current levels. Asset quality is a major concern for PSU bank stocks. I have a cautious view on the PSU banking space.

Also read: European markets may correct in next few weeks: SocGen

Below is the edited transcript of his interview to CNBC-TV18.

Q: What is the sense you get from the market now?

A: I don't expect the Nifty to move beyond 6,000 in December series on cash level and the Nifty Future can move to 6,035-6,040. In current resistance maybe 5,930 or 5,940 is not making it move further. The Nifty is not trading in a positive range due to profit booking which is taking place mainly in retail space. This trend is likely to continue for whole of this week unless and until there is any positive news either from Delhi or global markets. 

Q: We are seeing an 8.5 percent knock in Balrampur Chini . How would you approach these sugar stocks after the correction and news flow?

A: I think only today there will be correction in all UP-based sugar mills stocks and I will ot consider it to be too negative. The mill owners have made up their mind that the government will decide Rs 275 as the price while they have made it at Rs 280.  

The price of Rs 275-290, should not be read on the higher side of Rs 290, because Rs 290 is for the early variety, Rs 275 is for waste or residual, while Rs 280 is the price as against Rs 240, which was seen last time.

The price of Rs 34-35 will be held by the market in the free sale and if that trend continues, still the UP-based mills will make money. Optically, it is seen as quite negative at Rs 280 per quintal. There will be knee jerk reaction in terms of correction. These stocks may stabilize may be from tomorrow onwards. So, if one wants to enter into in these stocks, they can take a call on the UP-based sugar mills also at those levels.

Q: JM Financial has been up in the past week. Is it a banking license hopeful, is that what is keeping the stock up and buzzing or is there some other news involved with JM?

A: I think getting banking license is premature. No company can be considered for bank licensing prospects. In case of L&T Finance Holdings they have been in hunt for taking over the existing bank and that is keeping the interest alive. Maybe JM Financial is seeing good volume on delivery based and the stock is moving up. I don’t think this is purely because of the banking license hopes. A possibility of stake sale even cannot be ruled out. No specific reason can be attributed for the up move.

Q: What would you assume with regards to a valuation gap between the private banks as well as the public banks now? Do you think that it is a feasible option or rather a lucrative option to buy into PSU banks at this stage?

A: For valuations, I don’t know what criteria should be looked at. If you we the price to book then all PSU banks are ruling at a price of 0.8-1.2 even after a good run-up.

Larger banks like PNB and SBI are ruling in the range of 0.8-1.2. All these banks are ruling at a PE multiple of 5-8. They are much lower than what it has been or what is being applied for the private sector bank which is in the range of price to book of 1.5-3.5 and may be a PE multiple of about 12-20. So, definitely that gap remains there but asset quality is more of a concern.

When we take a call on PSU banks based on asset quality criteria then we fear that one company or sector can put a loss of maybe Rs 4000-5000 crore on aggregate basis having exposure of all PSU banks then probably the net worth of the smaller banks can get eroded by 15-50 percent.

After seeing past run up, I don’t expect more than 5 percent upsurge to happen in PSU banking stocks from here on. I have a cautious view on PSU banks itself. 

Q: What is your view on the intraday reversal that we saw in Sesa Goa ?

A: Difficult to pin point the reason. I maintain my view that it would be wrong to presume Sesa Goa now as a pure iron ore company because in its new avatar all the businesses of the Vedanta Group will get merged.  

Hindustan Zinc stake will come in post Sterlite merger and even the stake of Cairn will be parked in this company. So, this will become a natural resources company and the kind of hold they will have via the merger of Sterlite Industries in Hindustan Zinc, Bharat Aluminium Company Ltd. (BALCO) and other assets. So, the negative effect of iron ore, which has been coming in from Goa mines are getting negated by this positive move of merger of Sesa-Sterlite emerging hereafter. So this effect is partly getting negated by the positives on the Sterlite assets, which are going to get merged into the company.

Q: What is your view on NMDC and the possible 10 percent stake sale? It seems to be down and out for a lot of trading sessions and is down 2.5 percent today as well?

A: In the present value of Rs 150, around Rs 55 of the cash is lying in the books as on 30th September. The company has a cash balance of Rs 23000 crore. If the cash component is knocked off then we get a valuation of Rs 100 and the EPS of FY13 is expected at about Rs 19. It translates into an EPS of around 5 times.

If we look at the share pattern, 90 percent of the stock is held by the government of India, 8 percent is held by the insurance companies and mutual funds of which 6.5 percent is held by LIC. The FIIs have lot of appetite for this company because about 60 FIIs holds 0.6-0.7 percent stake in the company. But due to no float or even low public float of 0.5 percent it is giving a distorted valuation to the company. The fair value of the stock should be around Rs 175-180.

The government should first evolve a strategy to knock off the cash balance from the balance sheet. They have an annual cash accrual of close to about Rs 8000 crore so there is no need to keep that money on the books. It will be a better preposition if they first take out the money and then come out with the disinvestment. The government looks more keen to meet the divestment target of Rs 30000 crore.

I think it is a bad decision to exit or dilute 10 percent stake by the company at the present valuation. When the proposal was mooted the share was ruling at Rs 175-180 and that could have been the reasonable price. So, if government wants to, they should look for a price of Rs 180 or so.

Q: What is your call on Bharti Infratel IPO?

A: A discount of Rs 10 discount offered by the company to the retail investors is interesting and a good move by the company. The valuations, Enterprise Value Earnings Before Interest Tax Depreciation and Amortization (EV2/EBITDA), is at 10X times.

Global companies are ruling at EV2/EBITDA of 16 times. By this standard, the issue is reasonably priced. But when we calculate tenancy ratio and incremental revenue, which all companies are making. The profit margin of close to about 10 percent of the gross revenue, which includes the electricity charges, then the net profit margin is likely to improve going forward.   

On this front this issue is slightly valued on the higher side because per tower valuation also comes close to about Rs 55 lakhs.

I would have been happy to see a price band of Rs 210-220. I think retail, foreign and institutional investors should have a good appetite for this stock. One should buy this stock with 6-12 months prospects as anyway retail investors are getting a discount of Rs 10.

Q: We saw very sharp correction in most of these retail stocks today. Pantaloon is down 5 percent, Provogue has lost quite a bit. Do you think the rally or the juice of this FDI story is completely in the price now?

A: No, this has more to do with sell-on-news kind of thing. Because we have seen the huge run up at least in the stock like Pantaloon Retail and we are seeing profit booking coming in those stocks. I don't have a negative stance on this. Again, there will be rerun in all these stocks once the profit booking gets over and maybe the correction can happen by about 2-4 percent from hereon further. I am positive on retail stocks.

Q: Credit Analysis & Research Limited (CARE) is possibly up for subscription till tomorrow. Any sort of call that you would like to give on CARE?

A: I have a positive view on the stock. Crisil has a topline of at Rs 800 crore and the topline of this company si Rs 225 crore. Crisil's major portion of the topline comes from reaseach activity, which is a low margin business; they have a margin of about 26-27 percent while CARE has a margin of about 54-55 percent.

So, I am quite upbeat, quite bullish on the stock and I strongly advice that people should go for this stock and it should not be seen only from the listing gain. In fact the view should remain from a long-term point of view.

Q: It is Public Sector Undertakings (PSU) banks all the way be it Lakshmi Vilas Bank, Karnataka Bank, Dhanlaxmi Bank is it just a valuation story, which is lifting up all these mid-cap banks or is there something else and how would you approach them?

A: All these so called private sector banks, where no promoters are present or defined then the theme or hopes in the market is that they are all seen as a takeover target be it Lakshmi Vilas Bank or Karnataka Bank or sooner or later maybe the stocks like Dhanlaxmi Bank, DCB they all will come in that league.

So, I think it is not to do with the public sector bank tag, but more of the undefined promoters and the promoters having very low float and they are all seen as the prospective takeover target and that’s the reason we have been seeing this strong valuations or maybe the strong run up seen in the stock.

I think two stocks today I am not too sure about the Lakshmi Vilas Bank had a run up of 20 percent. People feel that a takeover or a change in ownership will happen once there is clarity on banking amendment laws. So maybe the stories will keep on getting added to these other banks as well.

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