SBI Q3 to lift mood for PSU banks: Dipan Mehta

Dipan Mehta, member, BSE and NSE says that the market may move either way if there is a rally in the run-up to the Budget and adds that SBI's announcement of the NPA cycle reaching a bottom signals lower provisioning for banks  result in higher profit-levels. Sudarshan Sukhani of s2analytics.com advises investors with short positions to take partial profits and maintain a positional view of the markets sliding.

Also Read: Jan WPI inflation at 6.62%; experts say too early to cheer Below is the edited transcript of Dipan Mehta’s analysis on CNBC-TV18 Q: What would you attribute this weakness in the market in the past few trading sessions especially with the bourses being completely delinked from global events?
A: It is a bit surprising that despite the good news flow today at least with the ease in inflation rate, the market failed to rise. But thereafter, the market traded significantly lower than when the inflation rate was announced.
The market returned to its trading range of 5,800- 6,000 after trading briefly above 6,000 for a few trading sessions. Perhaps the only reason that can be attributed is the mild slowdown in FII inflows dampening the market already kept in check by domestic institutional selling.
Though this does not sum up the present position, investors can expect some fireworks with the Budget coming up towards the end of the month that may offer opportunities for the market to breakout of this range hopefully on the upside.
But if the Budget proposals are not up to the market’s expectation, then there could be a breakdown as well. I think investors have to be prepared for a move either way from this narrow trading band. Q: What is the downside you expect for the February series? How much further could the market fall from this 5,900-level? Do you think the orientation of the market has changed from the 'buy on dips' recommended at the start of the year to a 'sell on every rally' market?
A: I don’t think the orientation has changed. I think it still remains a 'buy on dip' market but investors are starting to get very selective. After some risk-taking in late December 2012 or early January 2013 in the purchase of some cyclicals or infrastructure stocks, the focus has shifted to defensives and companies with stability in earnings and visibility have performed well.
The market has gone back to what worked in 2012 and the experimentation with cyclicals from the not-so good quality of stocks category is over as far as the investors are concerned. My view is that the market should not significantly correct from these levels, at least not until the Budget and maybe when the Budget nears, expectations will start getting built-up and there could be some pre-Budget buying. Q: What do you make of the results announced today especially that of State Bank of India (SBI)? Did it disappoint in terms of expectations for asset-quality, in particular?
A: SBI’s results were more than what the street expected and the management commentary appears to be positive especially the announcement that a bottom has been reached as far as the NPA cycle is concerned. If the NPA cycle has reached a bottom, then certainly SBI could deliver better performance going forward along with most PSU banks where huge provisions have been made for nonperforming assets.
If there is a slight uptick in the economy, improvement in sentiment and a few sticky accounts are taken care of, then maybe from the June quarter, the provisioning could start to lower. Overall, if the economy does improve then the volume in the banking sector will also look up.
So investors should factor-in a better 2013-14 for public sector banks, but with this earning season for the banking sector as a whole and the PSU-bank segment in particular not being impressive, investor should wait for another quarter before they start piling up on PSU-bank stocks again. Q: What have you made of the results announced by IVRCL, GVK Power and GMR Infra? How would you react to these stocks?
A: Investors have more or less exited most of these stocks a long time ago. This complete lack of investor interest represents problems facing the sector at this point of time such as projects failing to take off, cost overruns, increase in interest-rate and rise in working capital that have affected the performance of most engineering and construction companies. Q: You don’t expect too much of a downside in the market from these levels. What do you think could be the trigger that could take the markets higher in light of the widespread disappointment?
A: I think there are two-to-three events that could change the market trend and the key trigger could be the run-up to the Budget. Other triggers include oil marketing companies mustering support to increase diesel prices by 50 paise.
In the Budget, the market is keenly looking forward to the fiscal deficit that has actually being achieved for the financial year, what the finance minister projects for the next fiscal, the GDP at current prices and the government debt-to-GDP ratio.
These have become far more important than the actual Budget proposals because the Budget now remains more of a macro indicator of what the government will project going forward. Another trigger for the market is the end of the earning season that will enable investors to look beyond and forward to the Budget and improvement in the economy with the lowering of the interest rates and a positive RBI policy.
The fact of the matter remains that the market has to start believing that interest rates will fall, the GDP will look up and macro-problems like the high trade and fiscal deficit have turned the corner. If there is conviction on these trends, then there could be an increase in inflows from the domestic sector as well. Q: What is your view of the market not paying heed to the macro data such as the 6.6-percent inflation for the month of January? Have the markets stated to reconcile with the fact with such a high current account deficit and it would possibly be a non-negotiable factor for the RBI when it wants to be more aggressive on rates?
A: The trade deficit has snowballed into a considerable problem to deal with as compared to last year. Investors need to be hopeful regarding the trade deficit as well as the inflation data.
All these problems are in a way interlinked and with inflation under control the other aspects also should see a turnaround but when exactly that will happen is a difficult to say.
The most important aspect to watch out for is the rupee because as of now it is holding steady. Any sudden spike could really affect FII sentiment.