There is still some steam left in PSU bank valuations: Madhusudan Kela

I think there might be some hidden jewel out there on the tourism side, whether it is on the services or the asset side.

All worries related to public sector banks (PSBs) on governance, technology and credit costs have diminished as they have become as good as any other private bank, veteran investor Madhusudan Kela said during a conversation with Moneycontrol. Kela also spoke about the interim Budget and themes and sectors where he finds opportunities. Edited excerpts:

Madhu Kela’s top three bets: PSU banks, pharma, tourism stocks

What are your first views on the Budget?

It was an event which in a way was a little special because we were in an election year and it was expected that they would be far more populistic than they have been, but their intent to curtail the fiscal deficit this year and also give a two-year guidance of 4.5 percent is actually very heartening. This will lead to a reasonable amount of borrowing and liquidity for banks and private sector companies to look for their requirement of capital. The other thing is the continuation of all the good work which has happened in the last 10 years. Fourth is the stability of taxes, which is very important. In the last two years, they have not made any big changes. Even if they have made changes they have all been positive.

Is there any juice left in banks now with the yield curve falling about 10 basis points? Will you still prefer only the PSU banks or banks in general?

In my 30 years in the market, if you look at the last three years’ performance of the overall Bank Nifty and a lot of private sector banks, PSU banks by margin have overperformed significantly compared with their private sector peers. I am a big believer in markets and trends. When I look at public sector banks, are they overvalued today? A lot of public sector companies are trading at 30-50 PE multiples. Public sector banks are still below 5 PE. If I take a two-year forward view, either that portion of the market is significantly overvalued and that has to correct significantly or they have to correct to come to some median level. I'm not trying to compare a different company with a public sector bank in terms of PE multiple but still, there has to be some resemblance. All the worries related to PSBs on governance, technology and credit costs have diminished as they have become as good as any other private banks. So in terms of valuation, I still think there is some value for them.

Govt’s Rs 50,000 cr divestment plan to not have any impact on PSUs: Madhusudan Kela

Do you see value in any of the other PSUs apart from banks?

We find value in some oil companies. I obviously feel in the short term there is a little bit of valuation discomfort in railway and even in select defence stocks. But I think there is still value in some pockets in the PSU segment... and if they truly come and divest even two or three companies in the next 12 months, then obviously, we will all change our opinion, including me, and we'll start looking at PSU companies from a different lens.

Which other companies do you find value in?

We are still looking at a lot of infrastructure companies, specifically in the EPC space. We are positive in select financial stocks. We are also looking at private banks which are very attractive in value. We are looking at pharma companies. If you look at the pharma companies' results in the last two-three quarters, all large-cap pharma companies have made their life high, and it is one sector which has kind of underperformed. On a bottom-up basis there are still a lot of opportunities in this market.

What about IT?

Selectively, yes. We have invested in two or three mid-sized IT companies. And surprisingly, it has done far better than what I would have expected.

What are the other points that stood out in the FM’s speech?

The one point which I picked up was inclusive growth. If you look at her opening statement on what has been achieved in the last 10 years, it makes you really bullish on India. One statement that I would pick up from her speech is that there is tremendous potential for the tourism sector. And they are also starting to talk about religious tourism now. I think there might be some hidden jewel out there on the tourism side, whether it is on the services or the asset side.

You have always been bullish about the pharma sector. As an overall opportunity, it continues to be a very small portion of the index. Do you see that expanding?

It is already happening compared to where we were 10 years ago. In 2009, the value of the entire pharma sector was half the valuation of DLF, which was Rs 2 lakh crore. That (pharma sector valuation) is now more than Rs 10 lakh crore market cap. In a way it has done well in the medium to long term and I remain very positive on the sector given what is happening geopolitically – our ability during the COVID time to produce a vaccine for such a big disease in 12 to 18 months. So I think there will be pockets of opportunity including domestic.

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