Positive on OMCs, pharma; overweight on pvt banks: Emkay

Dhananjay Sinha Head - Institutional Research, Emkay Global Financial Services feels reduction in deposit rates would help induce margin upsides for PSU banks but the house is still cautious on PSU banks because of their low credit growth.

According to him the private banks will grow business much faster than PSU banks. So the house is overweight on private banks, especially ICICI Bank . However, amongst PSU banks they are only positive on Bank of Baroda.

State Bank of India today cut the deposit rates for 1-3 years to 8.75 percent from 9 percent, while for the period of 180-210 days; it has hiked the rates to 7.25 percent from 7 percent. The house continues to remain positive on oil marketing companies on back of expected reforms and disinvestments. The reduction in crude prices has been an added advantage says Sinha.Meanwhile with all the current happenings in the pharma sector, the house continues to be positive on the sector.

For the market per se, he expects higher volatility going forward because the market has run up significantly ahead of the fundamentals.Below is the transcript of Dhananjay Sinha’s interview to CNBC-TV18’s Ekta Batra and Anuj SinghalAnuj: A word on PSU banks, we had State Bank of India (SBI) in the morning coming out and cutting interest rates on fixed deposits. How would you react to that, what is your call on PSU banks?A: We have been pretty cautious on the PSU banks. I think things like deposit rate cuts etc would not really matter too much. On a standalone basis one would assume that the reduction in deposit rates would actually help induce certain upside to the margins but I think the important thing to notice is that reduction in the deposit rate is happening on the back of the fact that bank is not seeing enough credit growth and the business of the bank is to actually lend. So if the lending growth is not really happening then it is quite likely and we are seeing that in the numbers where credit growth as a system has actually declined to something like 10.9 percent. The benefit on the margins will not really be sustained. So that is an important thing and we also have to understand that after Q1 growth numbers that we have seen on GDP and IIP we have seen first month of this quarter showing a considerable decline wherein the IIP growth was just half percent and export growth was fairly flat. Also if you are looking at the credit growth numbers; I would say that some of these numbers would also have certain implications for the asset quality issues which continue to be a concern for the PSU banks. We have seen in Q1 results those concerns were prevailing and those concerns will extend even in the Q2 numbers. So, we are cautious on PSU banks. Within the PSU banks, we like Bank of Baroda. We have been overweight private bank and ICICI Bank has been our favourite. So, from a structural standpoint also we think that the private sector banks will actually grow business much faster compared to the public sector space. Ekta: Your thoughts on the entire oil and gas space and would you see any more incremental upside in the likes of Bharat Petroleum Corporation (BPCL) which has run up over 95 percent year-to-date?A: Yes. I think we have been constructive. We were rather positive on the oil segment and even ahead of the reduction in the global crude prices we have said that since the government will be dependent a lot on disinvestment and since disinvestments will happen more proactively in the oil sector, and government will do these reforms. Therefore, from a reform standpoint that Oil and Natural Gas Corporation (ONGC) and other oil marketing companies (OMCs) will do well. Moreover, this reduction in the crude oil prices has come as an additional boon for the oil sector. So if the crude prices continue to remain soft, it will continue to add certain positivity to these companies.Ekta: Venus Remedies is now down 15 percent and that stock had gained over 36 percent on a year-to-date basis. Would that make you a little worrisome in terms of may be the midcaps going ahead of their fundamentals and there could be some more sort of accidents such as Venus which could take place?A: The market has actually run-up significantly ahead of fundamentals and people have picked up some of the midcap names without really having some fundamentals just because there was flavour for midcap companies. However, it is likely that there could be reoccurrence of volatility for more macro reasons. Venus Remedies is a pharma stock and we are generally positive on the pharma stocks. We think that within the pharma space the stock should actually do well. And it is possible that there will be certain midcap stocks over there which can also continue to do well. But otherwise the whole cyclical components of the midcap stocks can be more vulnerable. We have met several midcap capital goods companies recently and we see that there is a considerable amount of paradox in terms of how the market has been viewing the investment cycle and the expectations around it, and what these companies are going through or what they are expecting. So there will be certain amount of realignment and that would imply higher volatility going forward.