As financials rally, market moving on to PSU banks


Market taking some of the profits off ICICI, Axis and deploying incremental money to largecap PSU banks like SBI

and Bank of Baroda. There is interest in smaller PSU names as well, said Siddhartha Khemka, VP – Head of Research (Retail), Motilal Oswal Financial Services Ltd, in an interview with ETNOW.

Edited excerpts:

There’s a runaway move on financials. Is it time to switch out of Axis, ICICI and maybe deploy part of the profit taken out from those names and dip into some of the PSU banks. Do you think the rally would continue with these names and would be restrictive in nature?

We have been recommending private corporate banks for quite a long time and they have now gained a lot. While we see the momentum continuing on these stocks, I think the market is doing something of what you suggested. The market is taking some of profits from the likes of ICICI, Axis and deploying incremental money to some of these PSUs where the preferred ones are largecaps like SBI Bank of Baroda. But interest is incrementally going towards the smaller PSU names as well.

For fresh investors, the risk-reward in Axis and ICICI is a little bit unfavourable. The upside looks limited. New investors definitely should look at the SBI and BOBs of the world. For investors who are already holding Axis and ICICI for a long term, can continue to hold these stocks. Traders can definitely look to book partial profits.

How would you prioritise? What would be on the top of your radar?

As a house, we prefer to recommend private corporate banks. However, given that they have already moved up quite a lot in the past couple of weeks, any fresh investments we are now suggesting would be incrementally in some of the smaller names. For example, an RBL Bank in the private space and SBI and Bank of Baroda in the PSU space.

Are there any particular names you are looking at — IT, overall as well as a strategy at this point? Are they better picks in the market right now or are they steady bets?

IT has been quite a volatile sector because the rupee has moved up and down. Yesterday, there was an RBI forex swap, due to which the INR gained and that led to a bit of correction or pullback in some of these IT names. Today again they are finding strength. Fundamentally, for the last four five quarters, they have consistently reported strong earnings growth and the outlook for the growth for the next one year has been pretty strong.

IT has been a preferred pick from a long-term investment perspective. Some of our preferred IT picks includes Infosys which trades at a significant discount to TCS. We believe that the growth is catching up to the market leader and hence the valuation should also catch up, now that there is stability in the management as well as in the top leadership.

Another preferred pick is Tech Mahindra which is again consistently doing well in the IT space, valuations are comfortable and that would be on a longer term basis. If you look at the other opportunities in the market, one space that we have been liking is the consumer durable names, given that summer is up and we are seeing the temperatures rising sharply across the country.

That apart, election is due and generally elections is a quasi stimulus to the overall consumer names, especially FMCG as well as consumer durable names. So, stocks like Havells, V-Guard, Voltas are also in focus and that is something that looks interesting from the next two to three months perspective.

What about names from the infra baskets? Are you interested in L&T or some of the smaller names?

As a house again we are recommending to stay away from infrastructure as a sector till total clarity emerges on election front. It is one of the most volatile sectors during the time of elections, given that some of these names have linkages to some of the other political parties.

On an overall basis, L&T is a preferred pick. It is a quasi play on the Indian infrastructure story. Incrementally, the order book as well as the execution has picked up. However, the stock price has not been moving a lot over the past few months basically because just before elections, we see a stagnation in new orders.

Once the elections are done and the new government ushered in, we will see a bunching up of new order inflows which should drive once the election outcome is there. Apart from that, there are smaller names like Ashoka Buildcon and KNR Construction as well as Sadbhav which have some interest, but at this point in time, just before elections we would rather remain underweight on these names and wait for clarity to come about, before increasing any weightage on these names.

What would you be doing with HPCL, BPCL and IOC?

That is a dilemma, specifically if you look at oil and gas sector and the oil marketing companies (OMCs) are very sensitive to the movement in crude oil prices.

There is a looming threat of a production cut by the Gulf countries which is resulting in oil price rise and that is impacting the oil marketing companies. However, given that the overall correction that we have seen, our preferred pick in that pack is Indian Oil Corporation (IOC) mainly on the back of the strong cash flows that we expect over the next few years as well as the market leadership.

While we do have a buy on BPCL, the upside there looks limited and we have a neutral rating on HPCL given the weaker cash flows, the capex that is still there and the weak financials compared to others.

Do you have any select bets in real estate space?

We cover some of the select names in the real estate space. There has been a lot of structural changes from the government side. The recent GST-led initiatives that the government has taken and we have recently got clarification in where the new rates are applicable.

That puts a lot of focus back on the real estate companies. On ground, we are seeing incrementally only marginal uptick in volume offtake. It is something that will happen over time. It will not happen overnight.

Coming to specific picks, we do not have coverage on DLF and that would be difficult to comment but there are other picks that we like definitely in the real estate space; first is Oberoi Realty, which is a Mumbai-based real estate player with a very light balance sheet. They have a very strong revenue growth as well as profitability.

They are present in the niche Mumbai market which has seen significant strength overall. The other player that we like is Brigade, a Bangalore-based player and the third is Phoenix Mills, which is a quasi play on retail growth in India.

While it is a real estate player, it is more about retail space growth. There again we see significant addition to the overall retail space plus the growth that we envisage in the demand for the retail space should help these players in the overall retail space.

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