See deep value in SBI, like from 3-4 yr horizon: PhillipCapital

PhillipCapital finds "deep value" in country's largest lender SBI from an earnings point of view, says Manish Agarwalla, Co-Head of Research, Banking and NBFCs of the firm. He likes the stock from a 3-4 years horizon. In an interview with CNBC-TV18, he also talked about IndusInd Bank and Shriram Transport, which he said can benefit from an upturn in the commercial vehicle lending cycle. Below is the verbatim transcript of Manish Agarwalla’s interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.Anuj: This is a sector which has been buzzing both banks and non banking financial services (NBFCs) doing well. Let us start with State Bank of India (SBI) which has seen a bit of a re-rating after the last quarter numbers? At Rs 210 do you think the risk reward is still favourable?A: SBI we still see a value in the stock. What we understand that large part of recognition is over for the bank. Now the next phase is about the recovery and up gradation. So, obviously recovery and up gradation takes its own time and those are gradual in nature. What we understand that government is trying to resolve some of the large projects whether it is by putting money through equity funds and so and so. Probably that would expedite the recovery process to some extent. Once that happens and probably we see that the momentum in terms of earnings growth will catch up. Still we believe that probably FY18 would be the year where we will see the significant jump in the earnings. Probably FY17 would be the year where resolution take most of the time and probably the major difference will be in FY18 when we see a credit cost coming down. To add to this probably during this period we will see a consolidation happening within the SBI group where the subsidiaries would be merged with the parent. Probably the benefit of those consolidations whether it is the cost side or in terms of decline in cost of deposit and so on so will flow in over a next two to three years timeframe. So, we like the stock from a three to four years horizon probably we see a deep value in the stock. So, that is our call on SBI.Sonia: The other stock that you have picked up has been a darling of the market IndusInd Bank but that stock is up 40 percent since the lows in February. It has gotten a bit expensive now. You would not be a bit cautious at these levels. You expect some more of an upside?A: IndusInd Bank is compounding growth story. Now if you look at the [commercial vehicle lending] sector as a whole, we have a large part of the sector being dominated by public sector bank which is more or less dormant at this point of time. Probably lot of growth opportunity emerges in that space though not necessarily in most of the customers of IndusInd Bank would be of say public sector banks but at the same time lot of foreign banks which are actually bringing down or reducing their size in India. So, there is a lot of growth opportunity whether on the funded side or a non funded side which will drive the earnings for the IndusInd Bank that is one part. Secondly, in terms of retail we see quite pick up in the demand in the retail side so we understand that IndusInd’s retail proportion should increase going ahead. This will mean not only margins accretive but at the same time the credit cost in the retail business is also coming down. So, both these factors augur well for IndusInd Bank and we see IndusInd Bank as compounding growth story. Anuj: Let us talk about NBFCs as well so many of these stocks have done well. Your pick is Shriram Transport Finance?A: Again our call on Shriram Transport Finance is on the commercial vehicle cycle and the construction equipment cycle. If you look at the activity which is going around whether the irrigation side, road side there has been quite pick up in the activity on that front. Even on the construction equipment side if you see the original equipment manufacturer (OEM) data, so the growth in the OEM data has been quite robust. So, now we are at almost historical high level in terms of OEM sales whether it is backward loader or it is an excavator or so. We see a strong demand pull coming from that front at the same time the credit cost in that business will also come down. We have seen that the utilisation level of the vehicles improving both on the CV side as well as the construction equipment side which will improve the earnings of the borrowers. So, we are quite upbeat on the stock as well.