Next one to get re-rated? 7 PSU banks with upside potential of up to 38%

After years of under performance, in the last one year, both at an index level and individual stocks levels, PSU banks have seen much better price performance. Though even after all this performance they are still far below the level where they used to trade. So If one goes by what analysts are saying, it will be extremely stock specific. The story has a list of banks with PSU banks with Strong buy, Buy and Hold recommendation

In the correction that markets saw in the last four trading sessions, the financial sector stocks, right from banks to other players also declined. But if one looks at the magnitude and the internal breadth of the sector it was much better as compared to a month back when the market correction was started by HDFC bank. There was a bit of profit booking in the PSU bank space, but once again after a small corrective move, things were back with a strong intraday recovery. The way things are panning out in the industry with regulatory tightening taking place, there is very likely that we might see a divergence in performance of different segments of this sector which has the highest correlation with the GDP growth. Better balance sheets and strong franchise are likely to be the differentiating factors. The factor which is largely technical in nature is the shareholding patterns that will also impact the performance of the stocks from this sector.

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.

While the prime minister Modi flying in tejas has brought HAL into headlines. But there is more to it, the defence sector has seen a transformation and the street has been re-rating the stocks from this sector. Policy initiatives by the government led to changes both in the actual working and perception of defence sector companies.Their order books are brimming, stocks have outperformed the broader market indices and institutional interest has been growing in these companies. The question is whether this re-rating will sustain ?

Robin Arya says: The consistent flow of monthly SIPs indicates a tremendous opportunity in the broking and wealth management space. Defence is another sector we see with the potential to change dynamics and deliver significant returns in the next 3-5 years. Volatility ensued post-budget, but Nifty managed to hold crucial support levels.

If one looks at how the policies have panned in the last nine years. It is clear that one by one every sector has been looked upon and if that sector has been getting government subsidies in any form, the government has tried to improve the delivery mechanism of that subsidy by plugging leakage in a manner that the right person gets the subsidy and the government gets the intended result. In the case of the fertilizer industry, it started with urea getting coated with neem which was not a financial measure but had a financial impact. Similarly, there were some measures which in the short term impacted some fertilizer companies but over a period, there has been a clean up going in the industry. Will the street be having a re-look at them ?

While they come under the broad umbrella word of “Chemical sector” the fact is that each specialty chemical company is literally an industry itself with its own operating matrix of supply chain and demand. There are some companies where the trouble in China means big bonus, while for others it might mean supply chain issues which means that their production in India’ get impacted. At this point there are many parts of the chemical industry which are facing headwinds due to oversupply and dumping by China. But are well prepared given multiple changes which some segments of the chemical sector have seen in India in just the last three years. We look at the stocks where analysts have “hold” recommendation at a time when chinese headwinds are blowing.

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.

It might surprise many of you, ask your driver, your help at home, or the small chai shop owner how much interest he pays when he or she takes an unsecured loan taken in the private loan market. He or she might be paying four to five times more than the interest rate which any regular bank charges on an unsecured loan. That is what led to the birth of microfinance companies, now many of them are small finance banks. They are providing lending at the lowest end of the pyramid. Their interest rates were higher than normal banks would charge, but would surely much lower than what private money lenders in these parts of the country charges. That is where the opportunities are present for these small finance banks. After a phase of tough regulatory challenges, they have emerged stronger.

More transparent accounting, a calibrated policy approach and relatively realistic assumptions have resulted in credible Union budgets. These have done a worthy job under tough circumstances, although our public debt burden now requires reduction.