PSU banks a tactical buy, makes more sense to go for ICICI, Axis, HDFC, Kotak banks: Anand Tandon

As far as the banking stocks are concerned, there seems to be a consensus buy but how does an investor pick and choose because there is clearly a lot which is available in terms of the stocks, which are your top bets?
Yes, it is a consensus buy and we are seeing that in the market. The market is actually running away especially with the banks but there is no particular reason to change the strategy just because everybody agrees that that is where the earnings growth will come from, for the simple reason that that is where the earnings growth is.

In fact, if the earnings growth does not come from banks, then you do not have much to be bullish about in the rest of the market. You are clearly looking at a state where the banking balance sheets are clear, there is going to be an increase in the margins and credit growth has picked up fairly dramatically.

The only thing that will distinguish a bad bank from a good bank is the ability to put up credit and therefore it means being able to get liabilities cheap. So at this stage I would focus on the liability banks which have good franchises, which are able to get strong CASA deposit growth and without having to raise costs dramatically and that pretty much brings you back to the private sector banks.

So while an

or a BoB may naturally figure, I think it is again really the ICICI, Axis, , Kotak kind of banks which despite the valuations are the ones I would want to look at on a slightly longer term period. Since the public sector banks are cheaper, the immediate focus of action is on that because you want to try and play catch up but that is not really a great strategic pick. It may be a good tactical buy.

In just a few days we will be ushering in a brand new year. What is the big theme that you are betting on?
First of all the market does not know the calendar is changing. So you do not have to change your strategy just because the 31st has gone and a new year has started. To the extent that it does bring in new flows from the foreign investors perhaps there can be some effect on the near-term performance but it does not last very long because very soon we will be talking about the Budget and what is happening to the rest of the world and all of that again.

So essentially, one has to remain focussed only on one thing which is where the growth is going to come from. To answer your question in terms of sectoral plays, the one hope that you have is that the farm sector will do much better this year. The crop rates have gone up fairly significantly, there has been a strong increase in the sowing numbers this year and therefore the expectation is that rural incomes which have been somewhat subdued over the last few quarters will actually start to do well.
If that were to happen, then we are pretty much back to tractors, things like consumer durables, FMCG at least on the lower end. If that does not happen, then of course there will be a challenge because there is not that many other areas that you can be looking to bet on in terms of growth, especially given the fact that one is factoring in a kind of global slowdown and therefore most PLI sectors where you are betting on exports will find it difficult to grow and capex is also mostly on the back of PLI which will also have to slow down considerably.

The other sectors that I would look at includes IT because that has been one sector which has come off quite significantly and while the growth numbers will also be fairly subdued, on a relative valuation basis, it is not that expensive. So essentially, rural demand driven stocks and in terms of the exports, IT and pharma would be places that you may want to think about.

What is your outlook on the insurance space because that seems to be emerging as a very hot theme for the next year, going by the kind of moves that we have seen in the listed players’ performance. What would be your outlook on the listed insurance space?
It is a sector which has to be a part of our core portfolio. So rather than looking at it from a near term perspective, one has to look at it on a longer term basis. Insurance is still a number where most Indians are somewhat under-insured not in terms of the number of policies but in terms of the quantum of insurance and that has to increase as the wealth levels go up in the country.

Consequently, this is a story for multi years and with the banks being a major role player in terms of distribution and also in terms of ownership, clearly that is one sector which we expect to see continuing to grow over a long period of time. Now that said, there can be valuation challenges every now and then but if you were to look at it, on a slightly longer term basis the portfolio needs to include insurance companies and maybe HDFC or SBI have to be part of the core holding.

How are you looking to build on the entire capex theme? We are describing it as a manufacturing renaissance in India, India becoming a huge manufacturing hub. How would you like to play this theme within the equity markets?
There are two or three different ways that you can look at it; first of all, in terms of manufacturing where the government is actually trying to incentivise local production. And the other major theme that is emerging now is domestic defence production. The defence production is easier to play because there are clear companies which are there, at least among the public sector ones.

Unfortunately, the private companies which are involved in that are largely private so they are not in a public space and they would have been the ideal way to play. As far as the PLI companies are concerned. it is a view that we have to take on whether the global economy will do well over the next one year or not.

By and large, there will be a shift in terms of production in India but we still have a long way to go before we can become a serious manufacturing hub. There are still a lot of problems at the ground level in terms of making manufacturing easy. The other problem that we see is that in terms of infrastructure, while there has been a great attempt at trying to increase the speed and the quantum of the money going into infrastructure, the challenges are that the numbers are still slowing down and if you look at both the states’ spend as well as the central spend, they have not managed to keep track with their own forecasts. That will mean that the cost of operating in India will still remain reasonably high and therefore PLI will not be that big an incentive as it could have been.

So with all those constraints, we still have to look for those companies where there is a reasonable export market naturally. Other than defence, things like auto ancillaries would have been a good play if one assumes that the market is reasonably decent globally. This year, it will be a bit of a challenge.

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