In an interview to CNBC-TV18, Parag Thakkar, Head of Sales, HDFC Securities along with P Phani Sekhar, Fund Manager - PMS, Angel Broking shared their outlook on whether the recent run up in private sector banks is justified.
Sekhar feels private sector banks are promising a fantastic growth and good valuations despite the latest run up.
From a long-term perspective, he likes ICICI Bank and Axis Bank from the largecaps. As a thematic play, companies such as GIC, LIC and Indiabulls Housing are high on radar from the midcap space.
Meanwhile, according to Thakkar, IndusInd remains the best pick from the lot. However, he also prefers ICICI Bank, as they can continue to grow at 20 percent and their CASA has grown more than their loan book.
From the midcaps, he sees 30-35 percent upside in Aditya Birla Nuvo. In addition, he is upbeat on Texmaco Rail and Jindal Steel.
Below is the verbatim transcript of Parag Thakkar and Phani Sekhar’s interview:
Q: 8400 couldn’t quite hold on there but what is an investor coming and looking for now, is he saying he is going to stick around or is he booking profits?
Thakkar: My point is long-term view remains bullish because we have got excellent combination of lower Brent oil, lower commodity prices, very strong intent government plus good liquidity globally because of Europe, Japan, China all pumping in money, so, long-term remains fantastic.
However, because market has rallied significantly and some pockets we are seeing lot of momentum for example non-banking financials companies (NBFCs) today they are all up between 4-7 percent. This kind of moves after such big moves, so, it gives me a little bit of discomfort.
So, what I would say is that I would not look to buy aggressively in this market and be very selective.
Q: What is your view on financials because the last leg has been led by financials, we can break it out into public sector and private sector banks and NBFCs? Would you differentiate between them?
Sekhar: Both of them look good although NBFCs in selected areas like home finance or microfinance are relatively stronger as compared to those in the infrastructure space. Other than that private banks also across the board are looking good. The biggest factor that goes in their favour is they are promising you fantastic growth, maintaining the profitability and valuations despite the run up are fair when you compare it with the rest of the market. So, they are good for more, maybe another 10-12 percent at least before you see the first serious correction and to that extent I believe that they will lead the market.
Q: On your list you have only one private sector bank as a buy at this point in time, is that because you think the others have run up a bit too much or do you believe that this is just the best pick of the lot – IndusInd Bank right?
Thakkar: IndusInd remains the best pick of the lot because as I keep on saying that out of the Rs 60,000 crore book, first of all Rs 60,000 crore book itself is a very small book as a percentage of system. So, that gives them benefit of small size and then can grow aggressively when the times are good.
Q: It is basically a base effect more than anything else.
Thakkar: Base effect and plus Rs 15,000-18,000 crore of the portfolio of Rs 60,000 crore is a high yielding portfolio which gives them above 15 percent yield and that is coming out of a complete mess – commercial vehicle (CV), LCV cycle, construction equipment. All this is emerging out of a complete bottom. So, if it reverses then credit growth in that area can accelerate and these are very highly profitable.
Q: So your best pick in financials as of now is IndusInd based on both fundamental potential and valuation?
Thakkar: Yes, valuation is 3x book but that is okay because earning growth is going to be 30-35 percent. Second of course is ICICI Bank. ICICI Bank there are so many triggers ahead because if Insurance Bill is passed they have a large value over there plus they are very well capitalised. So, they can continue to grow at 20 percent and don’t dilute.
Q: How strong is the pipeline and management at IndusInd because lot of analyst we talk to are very bullish on Sobti so is there a key man risk there?
Thakkar: I think that issue is sorted out. Reserve Bank of India (RBI) has given permission for his extension.
Q: Isn’t this the most expensive banking stock? Even more expensive than HDFC Bank? The run up in ICICI Bank, the valuation of IndusInd, don’t they at this point in time make you feel as if however good they are they are not worth it?
Thakkar: Valuation anybody can see and tell you that it is trading at three times book or 20 times PE. However, the portfolio if you see that portfolio offers you a lot of value because a bank with a 34 percent CASA has one third of its assets, which is emerging out of bottom that is very high yielding. Last quarter if you see their CASA has grown more than their loan book growth. Their core fee income was more than their loan book growth. So, if this continues and it gets a push due to economy because GDP growth as it moves up from 5 percent to 6-6.5 percent I think the earning growth can be very interesting.
Q: You have your favourites amongst financials, what are they?
Sekhar: All of them across the private sector banking spectrum look good. You can pick among the largecaps like Axis Bank, ICICI Bank.
Q: You are saying even at these prices for ICICI or as we were discussing for IndusInd it is a good idea for investors to buy in?
Sekhar: Those looking to construct a long-term portfolio because investors in the longer term perspective look at three things which is growth, profitability and valuations. So, if we talk about growth then even in the last three years that were pretty challenging most of these banks delivered 18-20 percent bottomline growth. As economy turns around the growth will only accelerate simply because of lower provisions and bad asset write back that happened during this stressful times.
On profitability terms they have been able to maintain 18-20 percent return on equity (RoE) in case of HDFC and Axis and around 15 percent in the case of ICICI Bank. Most of the other private banks have been in the band of 15-18 percent.
On valuation parameters the frontline or the largecap private banks have been trading at around two times book which is not very expensive considering you have 20 percent potential growth plus a 18-20 percent RoE.
Combined all this with say 20 percent weight in the Nifty for largecap private banks and you will know why investors are still flocking to them. So, I don’t see how they are either overvalued or they can correct meaningfully from these levels. If the entire market corrects they might correct but from a longer term perspective they are fantastic compounding instruments.
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