PSUs as well as PSU banks can be an exciting one-year story: Deepak Shenoy

“The bad promoter syndrome has not yet set in PSU banks and so we are all happy. I am invested in some of them. As long as growth is maintained, we are okay. It is when growth gets to an extreme that one starts worrying that bad lending will come back,” says Deepak Shenoy, Founder, Capital Mind.

What is your take on public sector banks like the Union Bank of India, Punjab & Sind Bank, Central Bank, Bank of Maharashtra. They are all up anywhere between 3% and 6%. If somebody has missed the stellar rally of 50- 60% last year, what should one do now?
Honestly if you go pre-Covid and then look at the prices, they are not much worse off in the sense of if you had bought it at that time, it would still be underwater right now. Only the last six months have been kind of very kind to them and I would say at this point, some of these stocks are looking interesting.

Fundamentally, post results they looked interesting but they have got capital now. They have also got the ability to lend. We are seeing credit growth at 16% or 17% now. The December 30th number was about 15%, which is still quite high. We have not seen 15% since 2013 or so.

Credit growth has finally come back and in that sense, these banks are still valued at a price to book of less than one. The question is do you believe their book values? I think today they may be a little more believable but in another few years, we might find that the lending practices in some of these banks could go back to the earlier relatively lax standards and defaults will come back and hit them as NPAs in some way.

So being a little more picky about them, a little down the line let us say end of this year or next year may be useful but right now, it seems like an interesting pack to play a really short-term story. A one-year story with the market seems to be exciting and this is across PSU as well as PSU bank stocks.

The bad promoter syndrome has not yet set in and so we are all happy. I am invested in some of them. As long as growth is maintained, we are okay. It is when growth gets to an extreme that one starts worrying that bad lending will come back.

Is that the worry that growth has come to an extreme end with expensive valuations in some of these high PE names? We have already seen what has happened with Nykaa and IRCTC but I can say the same about an Info Edge, Pidilite or United Spirits. The last month was harsh on them. Similarly, among the big boys – Bajaj Finserv is down 15%, Bajaj Finance is down 11%, Kotak Mahindra Bank is down 8%?
Indeed. I would say you probably named them from top to bottom in terms of valuations but generally, in some of the startup names, it is just a funding winter and the fact that some of the venture capital companies in some of these names need to exit and exits are coming in one a week or something and piling on a lot of pressure on the stock price by selling in the market or doing some deals.

We wrote an article about this. The growth of these stocks which have given us 10X returns, 10 years ago. Three-fourth of the returns have come from PE expansion, only one-fourth of the returns have come from earnings growth. So essentially, a lot of expectations are built in some of these stocks. If they were to correct even 30-40%, one would just reach a reasonable valuation, especially in some of the names you mentioned so we will end up seeing some of that happen.

In FMCG names, the valuations are high and growth has not ever gone that much. It has been 12-13% and so the expectations of 25-30% growth are simply not there. With the financial companies, Kotak and Bajaj have demonstrated some of this growth but that growth is also slowing. In that sense, yes there is a healthy PE correction right now.

In the longer term, as long as they are smart companies, if there is a crisis they will be the ones that will be able to ride out that crisis better because they have relatively strong balance sheets. Till such time there may be a valuation correction.

Why this underperformance all of a sudden in Reliance?
It is the strangest thing, I cannot explain it. We own a fairly large position in it. One of the things that we are looking forward to is seeing how their refining margins are. Everybody is talking about how Reliance is buying oil from Russia and selling it to the US, it has to show up in the margins and in the numbers this time. So I am looking forward to that.

The retail numbers might be lesser than usual. In general, retail has been a little sluggish in the last quarter. Jio should do considerably well. That part is going to be much better because some of the gains that they have is from price hikes that have happened last year.

So some of it will show up on a year-on-year basis quite decently this year. I also think that Vodafone-Idea is losing market share quite considerably and it is benefiting both Airtel and Jio and so there is going to be better performance there. However, right now, a lot of speculation is on what happens if the stock demerges, when does this Jio financial demerger happen and all the other parts they have been talking about.

That is where the stock will be in a range until there is no clarity on how things move going forward. But this is an incredibly interesting business for us. It is one of the most innovative companies in the Nifty50 in terms of technology. We talked to some of the vendors of Reliance on the technology front and were astounded by the scale at which Jio operates and even the retail business.



I like the business but I think it is going to take time. This is more of a special situation than stock right now. It is going to take some time until the demerger and then the sum of the parts is greater than the whole.