See interest in midcaps; upbeat on PSBs like SBI: IDFC Sec

Other sectors such as textile and consumer consumption stocks too are seeing a lot of interest.

He is also bullish on the public sector banks space. Damania believes that the earnings growth cycle for PSBs is than private sector banks. He has become very positive on State Bank of India and also likes Bank of Baroda. He adds that loan growth has been slower than deposit growth for PSU banks.

On the latest Cabinet rejig, he believes that it brought impeccable ministers to key posts.

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Below is the verbatim transcript of Anish Damania’s interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy

Latha: What is the first sense you are getting from the bunch of investors you are speaking with? The second quarter earnings were not very flattering but they are willing to wait?

A: 600 people have registered for the conference. Just to give you a sense a lot of people, most of the people have asked for a lot of meeting with midcap companies which probably either they have just heard about or probably have not heard about. So we have about close to 175 companies doing one-on-one and group meetings. And we have about 15 CEOs so that makes it close to about 190 odd companies at our conference. So it is a huge event and we are seeing slots go full for almost every company which we have. So it is that kind of participation, tremendous response, close to about 40 foreign institutional investors (FIIs) across all geographies which are participating in the conference. So their feeling is that India story is going to run more and midcaps is where major focus is at this point of time.

Sonia: Has the conviction to add more money into India increased in the recent three-six months and if yes, what could be the triggers for that?

A: If you look at it year to date (YTD) foreign institutional investors (FII) investments are close to about USD 15 billion in equities and about USD 25 billion in debt but when I look at the recent past, over the last one month we have seen flows of close to USD 2.5 billion. The FII money continues to keep on rolling in and with this launch of QEs etc by the Japanese right now, we are seeing increased vigour in some of the stock which they already own which are in the pharma and banking space and the second thing is into the midcap space. So, I am seeing a lot of interest coming back in midcap space or renewed interest in midcap space after a lull about two-three months back.

Latha: What is the sectoral preference – midcaps or otherwise from the bunch of investors you have been speaking with?

A: We have representations in terms of companies across various sectors given the number of companies coming in. It’s a huge representation across sectors and we have found that wherever there is a niche area and wherever companies are looking at good earnings growth ahead – that has found solid participation irrespective of which sector it is in. So, you might find participation coming in, companies like pipe companies; they were out of flavour for a very long period of time and now suddenly despite the fact that they have not done so well in the recent past, there is an interest (a) because of valuations and (b) because of expected earnings growth there, so we are seeing. We are seeing a lot of interest in some of the textile names, in continued consumer consumption stories. So that continues across the board. I see wherever earnings growth continues and wherever we have semblance of earnings growth with lower valuations, people are willing to look at that.

Sonia: You have such an impressive line-up of speakers at your conference, there is Suresh Prabhu – Minister of Railways, Sunil Munjal of Hero Motocorp, Deepak Parekh – HDFC, etc. With respect to Suresh Prabhu what is the sense you are getting? He has great credibility especially in power reforms etc but now with his new portfolio how optimistic is the market?

A: Very optimistic. There are a couple of major things which this cabinet reshuffle has done – brought in defence minister Manohar Parrikar and induction of Suresh Prabhu into the railway ministry. Two major ministries are being taken by two men of impeccable goodwill and character. There is a lot which people are expecting. I am sure as time rolls by you are going to see a lot more things come out of these two men in terms of what they are going to do for their respective ministries.

Latha: Did you get that sense from the investors that they are watching out for some turnaround in railways, is that a widespread expectation?

A: It is not only a lot of investors who want to just crowd into honourable minister’s room but it is also the corporates who are saying that okay give us some time off from some meetings I am sure to attend this session as well. So it is a huge interest for that particular session.

Latha: What did you make of the earnings of Q2 as a whole, where there more hits than misses?

A: We are actually a little muted in our expectations, we had expected about 7 percent growth in earnings and about 5 percent growth in sales at the start of the quarter. Probably we are among the lowest on the street, however, the market is actually little lower than that as well. So when I look at the Nifty 50 and the BSE 30 companies, sales growth is hardly 1 percent and profit growth is hardly about 3 percent. However, when I look at midcaps, growth is a lot stronger. Infact when I look at the 175 companies which are coming to our conference, they are all those companies that have reported their numbers, sales growth is 4.5-5 percent for them and profit growth is about 11.5-12 percent for these companies.

There is a huge skew towards midcaps in our conference given the number of companies that are coming up. So one can see that within the spectrum the larger companies have shown lower growth but as you go towards the midcap and the smaller cap, those companies have started to show a very high level of growth.

Sonia: What is the sense you are getting about why some of these pockets, for example public sector undertaking (PSU) banks; yesterday the day belonged to State Bank of India (SBI). What is driving some of these stocks now?

A: We have become very positive on PSU banks over the last one-and-a-half months and two or three key reasons for that is what we are seeing is that - loan growth has become now slower than the deposit growth and this has happened after a very long period of time which means a liability franchise which is actually an asset of a bank is getting its pricing power back. So that’s one thing which probably will get factored in as time goes by. The second thing is that now lesser exposure to the economy means the NPA cycle will probably over the next one-and-a-half years continue to fall and this excess money is getting invested in government securities which today are available at a higher rate of interest which means as inflation cools down, we are going to see sharper fall in interest rate environment which will benefit all these banks. Therefore, what I am saying is that on the net interest margin (NIM) side, I am seeing some protection on the trading portfolio probably it will surprise the market and NPA cycle can fall faster than what most people think and over the last two years a huge amount of provisions have been made for PSU banks.

So the earnings growth cycle for PSU banks looks to me to be better than even the private sector banks and even in this quarter that’s what it has turned out to be. Incrementally return on equity (RoE) will improve for public sector banks. So what I see is that the huge valuation gap which exists between private and public might narrow a bit as we go forward but it seems to me that the market is talking about now sharper cuts between February and April by as much as 25 bps in each of those months. So that’s the reason probably why we saw one sided move in some of the PSU banks plus if you look at State Bank of India numbers, they have turned out to be better than probably what people expected.

Latha: So is that the pick of your pack State Bank of India?

A: Yes SBI and Bank of Baroda. In PSU banks, we like that basket but right now because it is still early days into calling the NPL cycle to be falling, we prefer to stay with larger banks. So we like SBI, Bank of Baroda and Bank of India in that order. If one wants to go to the midcap we like Union Bank of India.