Cheap valuations make PSU bank stocks a good trading opportunity

Except for large public sector banks, the rest of PSU bank stocks are trading opportunities, says Shibani Sircar Kurian of Kotak Mahindra AMC in this interview. Edited excerpts:


What is it that you are making of the market temperament now? After clocking fresh highs, we have again got into a limbo.
The market could remain rangebound in the near term. As we get into the earnings season of the first quarter of FY22, the full impact of lockdowns seen in the months of April and May would be felt. However, we must also remember that market has had a great run over the last one year. The broader market participated this time around and the mid and smallcaps also had a great run.

In this kind of an uptrend, it is almost normal for markets to take a breather. Therefore, some degree of a near-term consolidation could be possible. However, the earnings cycle appears to be extremely strong.

Even in fourth quarter of FY21, most of the numbers were either better than consensus estimates or in line with consensus estimates. In the listed universe, the PAT-to-GDP ratio has moved up from almost 1.6% to 2.6%. That clearly means the corporate earnings cycle is turning. We have seen that companies have been deleveraging their balance sheets. More importantly, their cash flows are improving. Therefore, the near-term valuations appear stretched at the upper end of the valuation band. That might be due to some near-term consolidation. One must look out for the earnings season and expectations of earnings for FY22.

Do you think that investors should look at the entire healthcare and diagnostic space closely? Is it poised for long-term growth?
Our approach to healthcare, diagnostics and the entire pharmaceutical space has been extremely stock specific in nature. We believe that there are pockets of opportunity even today. The domestic formulations business went through a period of lull because the focus shifted towards COVID-related drugs. As a result, both acute and chronic segments saw growth coming off.

The industry numbers have started moving up now. They are close to double-digits. Therefore, we expect that as the economy starts to recover, the domestic formulations business would also start to see normalised growth coming back. Margins have been very good for the sector as a whole, primarily because of cost cutting. We have exposures in this sector and we treat it as a defensive in our portfolio.

What do you think of the rally in PSU bank stocks?
Except for large public sector banks, the rest of them are trading opportunities. The valuations are extremely cheap. However, we have noticed that except for the larger public sector banks, the rest have been losing market share, both in terms of loans as well as deposits.

Therefore, from a core profitability as well as from an ROE perspective, these banks have been reporting numbers which are significantly lower than that of large private sector banks.

On the overall asset quality front, the corporate cycle seems to be turning around. Therefore, corporate NPLs which were one of the key drivers of higher credit cost in the last 5-6 years seems to be coming under control. Corporate asset quality pressures will start to abate for public sector banks. However, the improvement on return ratios will be a slow and gradual process. So for us, public sector banks, as a whole, remain a trading bet.

We have exposure in large public sector banks where we believe that they have maintained the market share, the growth is fairly intact and the benefits of corporate asset quality cycle are also there.

In this cycle, large banks, especially large private banks, are better placed because of higher capital and higher provisioning that they have been carrying on their balance sheets. Some of the larger corporate banks will also benefit because of lower credit cost.

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