Banks to emerge super-sector in next 2 quarters: Pramerica

Sonia: Yesterday it was quite disconcerting to see some of the PSU banks succumb to so much selling pressure especially after Punjab National Bank's (PNB) results. What do you do with that pocket now?

A: The results as far as the PSU banks are concerned were a bit disappointing but let us accept that they are representing what the story of the past was. Things are changing for the future and particularly some of the points which are emerging at the horizon vis-à-vis the credit policy which the central bank has done needs to be taken note of.

In the last credit policy, the central bank came up with a recommendation where they allowed banks to own more than 10 percent in the companies. If you see yesterday’s credit policy, they recommended that once a management change takes place then in that case for two years that particular asset class cannot be recognized or need not be recognized as an non-performing asset (NPA). What it means that they are moving towards a direction where defaulting won’t be easy. Now, these are the things which are going to make the cost of funds lower in the economy; that is point one.

Two, if you see, Latha was yesterday pointing out from the RBI credit policy came that it is the first time that the central bank is working to ensure that the rupee doesn’t appreciate. Rather they are keen that if rupee continues to remain at the current level.

If you recall post 2008, this is the first time when a rate cut resulted in rupee appreciation. What it means is that the hedging cost of currency is going down which means the cost of funds are coming down. So, structurally it is a very big positive which is taking place for the economy and particularly for the banks and therefore I would overlook what happened in the results. I would rather concentrate on what is happening in the future. Therefore we continue to remain positive on the banks.

Sonia: How do you approach banks now, do you increase allocation in the private sector banks or do you buy some of the PSU banks that have fallen quite a bit?

A: It will be combination of both. When the cost of funds comes down and the banks are able to take advantage of the credit growth which in our opinion is just two quarters down the line, it is noticed that whenever in the past the cost of funds come down the economy gets into the investment phase. When that take places practically every banks is going to benefit.

The valuation support is there on the public sector side but there will be some more negative news flow which will keep on the public sector side in terms of the existing NPA, etc. So, one will have to balance the portfolio between the two but the entire sector is very attractive at this point in time.

Latha: Besides financials what else would you play for the India growth story, as you said the earnings represent yesterdays performance so if you want to bet on tomorrows performances what other than financials?

A: As I pointed out that the cost of funds are coming down which result in investments, we need to sift from the consumption-led story to the investment-led story. So, there will be a lot of capex which is around the corner, may be two to three quarters down the line when it will start. So, every corporate which gets into capex, all the capital goods, construction companies, anything which is more focused on the local side all those sectors are going to emerge the leaders in the current year and that is where we are focused on.

Sonia: Wanted your view on how to approach some of these upstream companies like Oil and Natural Gas Corporation (ONGC), etc if this new subsidy sharing formula is put through?

A: It is a good proposal. It remains to be seen whether the finance ministry accepts it. It will be good for the corporates but let us accept that government will have to take into cognizance the fact that the crude oil prices are not going to remain at this level forever. So, they will have to frame a policy keeping in mind when it goes up.

As an investor when we see that, if the crude oil prices go up then these companies are going to suffer in the current proposal. So, today it might appear to be very good for the company but one will have to take a call on the basis of what comes. I don’t think it will be accepted as it is, there will be some modifications which will take place because in certain situation it is not good for the company and in certain situations it is very good for the company. So, we will have to wait before we formulate a view on this.

Latha: How are you approaching real estate and FMCG companies?

A: As far as real estate companies are concerned, we are quite negative. We do not expect any kind of price hike in that particular sector. In fact we are focused on the companies who are on the very mid-sized or low-end where the housing finance companies or the companies who are constructing. However, generally most of the listed space you find that the luxury houses are part of those things and there we are very negative and we do not own any one of those stocks.

As far as the FMCG is concerned, the companies are doing well but the valuations are too high. So, we are using all these opportunities when the results are coming and the stocks are moving to gradually reduce our exposure to this particular sector and sift to the sectors which we believe are going to be the leaders for the current year and that is the capital goods and construction, etc.