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Daily Voice | PSU banks with strong advantage of very strong liability franchise look attractive, says Shriram Life Insurance CIO Ajit Banerjee

Upside risk to inflation momentum cannot be discarded all together and can arise from supply concerns in food, wide trade deficits and rising services inflation, but with a slightly lower probability.

November 19, 2022 / 01:40 PM IST

"PSU banks have the strong advantage of a very strong liability franchise. From the valuation perspective, PSU banks look attractive at this point in time," Ajit Banerjee of Shriram Life Insurance says in an interview to Moneycontrol.

The top-tier private sector banks are trading at 2.5-3 times price-to-book (P/B), whereas most of the PSU banks, excluding SBI, are available at 0.6 to 0.8 times P/B.

Hence, considering all aspects, PSU banks are well poised to grow, backed by rising expectation of a strong credit growth, the Chief Investment Officer (CIO) with more than 29 years of experience across sectors such as investments, financial control, and management accounting, among others, said.

As for equity, Ajit feels the markets have reconciled to the fact the Russia-Ukraine crisis is going to linger on for a long now, and the world has to live with that and its ramifications.

Hence, “if no new geo-political crisis flares up or a pandemic-type crisis erupts, then, keeping our fingers crossed, we can assume that the worst is behind us,” he says.

Edited excerpts of the interview:

What is your view on the consumer sector, especially after muted earnings?

Domestic consumption is making a strong comeback, traditionally one of the main drivers of India's economic growth. This is great news for businesses of all sizes. The inflation levels in India were driven quite significantly by the increase in prices of food, cereal and palm oil, among others, which have very recently started moving southwards.

There is always a time lag with which input costs, both higher/ lower, set into the overall pricing structure of products. Hence, the benefit of lower input costs is expected to reflect in the coming quarters, and help improve the P&L of the consumption sector.

India also received normal monsoon this year with some geographical dispersions, which is expected to revive the rural demand, which has been quite dormant in the recent past. The government has also announced higher MSPs (minimum support prices) recently, which would help revive rural demand, accompanied by a good rabi crop harvest, going forward.

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Hence, going forward, we can expect revival in the earning potential of this sector.

Do you see a peak in the interest rates cycle well before March next year, given the falling inflation?

Year-on-year (YoY) inflation has fallen by a notch in October, which is in line with expectations. WPI has fallen to single digit (8.4 percent YoY) and CPI has fallen below 7 percent at 6.77 percent. Base effect did play a large role in October though inflation momentum has also undeniably cooled, averaging 0.4 percent over the past six months, which is ~4.8 percent annualised.

Sequential inflation in both headline and core CPI (seasonally adjusted) eased below 0.4 percent MoM in October, which, if sustained, will ensure headline CPI moves towards the 4 percent target inflation level.

Upside risk to inflation momentum cannot be discarded all together at this point in time and can arise from supply concerns in food, wide trade deficits and rising services inflation, but with a slightly lower probability.

Therefore, there can still be some rate hikes (not steep though) by the RBI in the next MPC (Monetary Policy Committee) meeting. Perhaps a 35-bps hike in the next meeting with a slightly dovish tonality can be expected, followed by another hike of 25 bps leading to a terminal rate of 6.5 percent.

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What is your call on PSU banks after a good set of quarterly earnings and rising expectations of strong credit growth, going ahead?

The asset quality across the banking sector has improved significantly with a long required clean-up done. Credit growth is picking up; most of the PSU banks are also seeing a decline in their credit costs, and loan growth is picking up. The PSU banks have the strong advantage of a very strong liability franchise and that is priceless in the current tight liquidity environment, with liquidity getting tightened and there being a mad rush for deposits. Therefore, the PSU banks are quite well positioned.

From the valuation perspective, PSU banks look attractive at this point in time. The top tier private sector banks are trading at 2.5-3 times price-to-book, whereas most of the PSU banks, excluding SBI, are available at 0.6 to 0.8 times price-to-book. Hence, considering all aspects, PSU banks are well poised to grow, backed by rising expectation of a strong credit growth.

Do you still see the possibility of worst-case scenarios in the coming months?

Globally, inflation has been persisting now for a significant period of time. Initially, most of the central banks felt that this inflation is transitory in nature, but it turned out to be quite sticky. This has led to actions being taken by central banks on taming the inflation on a war-footing basis.

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While the peak inflation is expected to be past us, but still the spill-over effects are felt. Commodity prices are coming down, supply chain blips are getting normalised, and China is expected to relax some of its stringent Covid norms. Some sanity is expected to prevail on the price levels.

The markets have also reconciled to the fact the Russia-Ukraine crisis is going to linger for a long now and the world has to live with that and its ramifications. Hence, if no new geo-political crisis flares up or a pandemic-type crisis erupts, then, keeping our fingers crossed, we can assume that the worst is behind us.

After September quarter earnings and management commentaries, do you think earnings in the coming quarters will be much better than the earlier ones?

The management commentaries are mostly positive for the majority of sectors for the coming quarters. These are broadly keeping in mind the revival of both rural and urban demand, both for non-discretionary and discretionary products, raw material costs coming down, supply chain issues getting further sorted, and no further steep hikes in interest rates by the RBI being announced other than those already priced in.

Given the falling inflation and rising hope for less-than-expected interest rate hikes, do you think one should start betting on IT stocks?

Based on the management commentaries, it can be inferred that from a medium- to long-term perspective, global and domestic technology companies have indicated that the structural demand for digital transformation remains intact, even though the near-term volatility remains. Early signs of this are visible through the trend around increase in contract duration, especially in connection with cloud technology.

Digitalisation and increasing reliance on technology are irreversible trends. Companies will continue to invest more on their IT infrastructure, even though there may be temporary cuts.

Significant growth may come from cloud-based services where Indian IT companies are working with global giants.

Hence, from a long-term perspective it is prudent to stay invested or increase calibrated exposure to the IT sector.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Nov 19, 2022 01:40 pm