SEB bailout: Don't bet on stocks for long-term, says Irani

The approval of a rejig plan for state electricity board (SEB) is a breather for power companies and public sector banks. Mehraboon Irani of Nirmal Bang Securities told CNBC-TV18, the restructuring plan was the need of the hour, but critics may claim it as a one-time settlement. This move is positive for the entire sector sentiment wise.

Lanco Infra has huge outstandings from some SEBs in the seven states covered in this plan, so it would benefit from it, he added. Amongst public sector banks and power finance companies, Punjab National Bank, Oriental Bank, PFC and REC stand to gain in the short term. However, one should not take a bet on these stocks from long term perspective because they are still fundamentally weak, he cautioned.  "Sentiment-wise, a small correction and people who were feeling left out, would end up having a trade. If there is any correction, we could see some further rally coming in these types of stocks, but at the end of it all, taking a longer term bet right now is a little bit premature," he added. Below is the edited transcript of Irani’s interview with CNBC-TV18. Q: How you would approach this news that has come in overnight from the Cabinet Committee on Economic Affairs (CCEA) and what kind of stocks would you be incrementally bullish on now? A: It was much needed step and the market was expecting it. Most of the stocks in this sector had run up pretty sharply. Critics will claim it as a one-time settlement like what happened in 2001 or 2002, but it was needed. The total losses of discoms are nearly Rs 1.9 lakh crore. It should be a huge positive sentiment-wise for the entire sector. But a company which stands out to benefit from it is Lanco Infra. It has huge outstandings from some of the SEBs in the seven states, which are covered in this plan. On the whole, it should be a huge positive for the entire sector. All companies in the sector which have gone up could continue to move up a little bit further. But at the end of it all I personally feel the success of this entire recast will be felt only if the State Electricity Boards learn to be financially more viable. For this there needs to be constant hike in power tariffs, which could have an inflationary impact at the end of it all and there should be abundant availability of coal in the future. Transmission and distribution losses should also be curbed. If all these things happen, great, otherwise let’s hope it doesn’t end up as a one-time settlement for the SEBs. Q: Is there any specific bank or banks that you like? I am including all the lenders, PFC-REC. Many of them have seen a run up in recent time in recent days, but is there anything that you will still chase? A: I would say that this was on the cards. Most of the PSU banks had gone up. PSU banks had exposure to SEBs, people were discussing about the debt recast goes for the SEBs, so these stocks started moving up. Stocks like Punjab National Bank and Oriental Bank along with the two power finance companies PFC and REC definitely end up as gainers. The market always goes up ahead of news, so buy on rumours sell on news. I don’t know if there could be a correction in the share prices. From a longer term bet, they are still on a fundamentally weak wicket, but sentiment-wise, a small correction and people who were feeling left out, would end up having a trade. The risk trade could come back in this particular sector. If there is any correction, we could see some further rally coming in these types of stocks, but at the end of it all, taking a longer term bet right now is a little bit premature. Q: For the other developments that we are getting on the political firmament there seems to be a heightened expectation of perhaps new bank licenses, maybe a push for faster clearances for infrastructure projects, maybe infrastructure funds. The papers are bristling with perhaps new initiatives that the government will plan. Is all this adding up to any buy ideas for you? A: Certainly yes, I think. There are reasons to remain positive on the market in the short-term at least. The markets were a clear function of global liquidity. India was included in the markets when I am saying that at global markets apart. The fact of the case is two months ago or less than six weeks ago, if we were talking of reforms we were laughing at it thinking about policy paralysis. The way reforms are coming and the way the tone of the Prime Minister has changed, people are looking forward to more and more reforms. There is a general feeling of left out happening right now among market men. After a 7.3 percent rise in the stock indices this month itself and considering that we are at the expiry of the F&O session there could be some volatility and correction. But I do feel that people are going to warm up and come up with fresh money to buy into stocks on every decline right now. I don’t think we are going to fall apart in a hurry. As far as reforms go, people are looking at renewed optimism. It would make sense to look at the EGoMs which were set up when Pranab Mukherjee was a Finance Minister and nothing much happened. If you look at the way things are happening right now, the EGoMs which were left unfinished are now being attended to. I would now like to look at the railway stocks, especially with the TMC out, a new railway minister is going to come into place. I would like to look at stocks like Texmaco or Titagarh Wagons, I prefer the former.  I would like to look at the fact that the FDI is coming in pharma, so which are the stocks which can attract attention ultimately. People need to focus on these things. There could be a change. There could be a change in sector. There could be a change in focus from one sector to the other, but at the end of it all, money should continue to come into the market. So declines, people are going to look at as an opportunity right now.