Don’t run after all the underdogs; PSU banks are where the juice is: Digant Haria

After a very short phase of a correction, several PSU bank stocks were the top gainers in Tuesday's trading session. Today on Wednesday they are trading with minor cuts and some of them have seen intraday recovery. This is worth noting for two reasons. First, all PSU banks are sitting with a decent amount of gains for the last five months, and even then they have not witnessed a sharp decline. Second, on Tuesday, the breadth of the market was weak. Suddenly PSU turns into an outperforming set of stocks. It signals a couple of things. First, because the banking sector is probably the best proxy play to the Indian economy. It appears the view on the street is positive on economic growth. Second, rather than taking exposure to an individual sector, taking exposure to PSU banks which are still among the lot that are available at relatively cheaper valuations is a trade on the street. But should one ignore the private banks? Probably not. They have their trajectory and just because they have not performed on the street it does not mean their core business model has some issues.. It's just another phase that shall pass.

While PSU banks stocks have been doing well for more than an year, it is the divergence between the performance in the PSU and private sector banks which has brought more limelight on PSU banks. Given the fact that stocks have done well and comparisons are bound to be made with the fact that just a year back they were quoting at much below what they are quoting today, will this performance sustain. The answers to this question would not be in black and white, but in probability and possibility. The fact that these banks have gone through a process of restructuring and reconstruction for almost seven years, through which they have braved covid, mergers and changes in process in how the decisions in terms of lending are made their balance sheets much more believable. This is not to say that in future there would be no NPA’s but the fact is the probability of the sudden shock of NPA’s shooting up has gone down. So, before taking a decision it is better to look at what has changed on the ground both at macro and micro level for this part of the Indian banking sector.

Foreign institutional investors (FIIs) have spent around 40% of their Rs 13,000 crore investment in Indian equities in June on financial stocks, but banks and other financial shares have failed to perform over the past month, indicating domestic investors and mutual funds are selling off holdings to generate profits. Analysts suggest domestic investors are investing in smaller banks and non-banking financial companies, adding the financial sector is sufficiently diverse to support such investment. HSBC recently described India's financial sector as an investment destination for the current decade.

After a phase of correction, there have been signs of some respite both in private and PSU banking space. In the case of the private sector, except HDFC bank which is still quoting close to its recent lows, others have been able to start their upward journey once again. In the case of PSU banks, in the last two days of volatility movement, they have been the ones which have been able to recover faster indicating continued interest in the space. Now this is again a risker trade but for traders, it is time to keep a watch on private banks as they might see a bounce back when FPI’s turn net buyers. Also this would mean that Bank Nifty which has underperformed may make a strong comeback. Yes, there will be higher volatility in short term, but if induced by volatility if one is taking any sell decision in the private banking space, one should remember that the banks in question have created wealth in the long term and even the best of the wealth creators go through a phase of consolidation due to factors like over ownership and what might appear to be a phase of under performance.

“The defence space excites us. HAL looks very good. Railway capex, again, as a theme, has a lot of legs, we are seeing very strong demand for Vande Bharat coaches, for wagons, as well as for the wheels. Titagarh is something we track. So be a little bit selective here.”

Probably banking is a word which many may not like to hear given the fact that the fall has been led by the banking sector. But the fact is short term market moves are different from what is happening in the real business. In the case of PSU banks, there has been an improvement in performance in the last two quarters. Yes, there will be some cyclical pressure on margins but beside margins there is more to PSU banking space, which is credit off take that too from large private corporates. Given the higher probability of capex cycle is likely to revive, these banks are much better placed due to the size and skill set to lend to such sectors.

Capital Mind's Deepak Shenoy says now is a good time to invest in stocks despite some unexpected bad numbers from some companies. He sees significant growth in sectors such as chemicals, railways, defence and infrastructure, and despite scepticism about a rally in midcap and smallcap pricing, he is investing more. He sees Reliance Industries as a sum of the parts valuation.

Banking sector is expected to face challenges in the next two quarters as net interest margins (NIMs) are likely to compress due to cost pressure and repricing of deposits. However, credit growth is expected to remain strong and non-performing loan (NPL) pressure will be weak, leading to low NPL provisioning. Jyotivardhan Jaipuria, Founder & MD, Valentis Advisors, prefers corporate banks over retail banks as they are relatively cheaper on the price-to-book basis and expected to see big earnings growth in the next few years.