Daily Voice | PSU banks challenging dominance of private sector, says Alok Jain of Weekend Investing

Historically, PSU banks in India maintained a relatively steady performance, almost remaining stagnant for close to 12 years. However, recent trends indicate a dynamic shift. Market insights suggest that the dominance previously enjoyed by private banks is being challenged, as PSU banks start to gain momentum.

The renewed interest in PSU banks is, in part, a testament to the government's active push towards privatisation and operational efficiency within these banks. This proactive stance is not only enhancing the operational competence of these banks but is also positioning them for accelerated growth. This push by the government, coupled with the market's realisation of PSU banks' potential, has triggered a revaluation, making them more lucrative for potential investors.

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Are you bullish on the largecap private sector banks? Do you have exposure to midcap private sector banks as well?

Largecap private banks have been growing well in the last decade and some of them have gone far ahead in valuation versus their global peers. Thus, there can be phases of stagnation in some of them as they get challenged by the reforms in digital banking and online methods of transaction gradually changing the way traditional banking has been done.

The market share that the large private banks have enjoyed is certainly getting challenged and with the large base, it is increasingly difficult to grow at the same pace.

Another facet of this transition is the challenge posed by PSU banks to their larger private counterparts. Although private banks continue to exhibit robust growth, their current market prices, which some argue are relatively saturated, could hinder significant future price appreciation. This scenario underscores the hidden potential of certain mid-cap private banks which, unlike their larger peers, are not overly priced. The market perceives the elevated prices of PSU banks as a precursor to thier anticipated future earnings, a result of their ambitious growth agendas.

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Further, is the entire PSU space looking expensive now?

Given that markets always put the cart before the horse, as of now, the space will look expensive as the earnings are yet to catch up and the market is likely pricing in continuation of the current government and the growth agenda to continue.

It is very likely that whenever any space enters a high-growth phase, the earnings usually lag and catch up later. The current bet the market is taking likely is that ultimately government will be able to divest significant portions of its holdings and that these corporations would be as efficient and growth-oriented as the private sector.

Also read: Aggressive divestment drive triggers doubts on the fate of PSU stocks

JPMorgan will add Indian bonds to its emerging markets index from June 2024. Do you expect any major change in the Indian bond market?

A monumental shift in the Indian bonds market landscape is the inclusion of Indian bonds in JPMorgan's renowned index. The initial allocation pegged at a staggering $30 billion, is anticipated to burgeon over time. Such a move is poised to magnetise global fund managers, catalysing increased allocations and exposure towards Indian bonds. Such international recognition and participation are prophesied to bring about long-term positive reverberations in the Indian government bond market.

A potential outcome could be the compression of yields, further solidifying India's position on the global stage as a prominent emerging market. More than the fund flow, it puts India on a different pedestal and the confidence of investors in India will likely grow multi-fold as the currency may start to be seen as a mainstream one.

Also read: Inclusion of Indian bonds in JPMorgan index to help balance of payments issue, says Ambit's Sushant Bhansali

What are the implications if interest rates remain elevated through 2024?

Currently, India's economy seems resilient despite the prevailing high interest rates. This has been a surprise to many folks who were calling for demand collapse in housing. Contrary to expectations, sectors traditionally sensitive to interest-rate fluctuations like demand for real estate and automobiles have not seen any pronounced downturn. Yet, there is speculation that the apex of interest rates is near and that a decline is on the horizon by 2024. If this projection falters, it may pave the way for long-term demand uncertainties but, as of now, the concerns are not there.

A potential uptick in interest rates, even by a modest 100 basis points, could spell challenges. The US is also facing these challenges massively and with the 10-year yield near 4.5 percent already, the consumption of retail items is collapsing globally. India will not remain immune if this were to go up a few notches. This is especially true for sectors identified as high-growth sectors.

Do you think the railways and MNCs related to railways are the best bets?

The sectors that have been identified as high-growth such as railways while in recent times have witnessed an appreciation in the stock prices of both PSU and MNC railway entities, the immediate future may not mirror this trend.

However, the overarching sentiment remains optimistic, banking on the premise that the earnings will eventually align with the railways' ambitious growth charters. So, they may not be the best bets but may remain optimistic bets.

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