Valuation never a concern for SBI, it still trades under book: Chakri Lokapriya

SBI results were great. The NPAs have showed an improvement, the provisions are fairly good and the capital position is very strong,says the CIO & MD, TCG AMC.

Talks are going on about how a restructuring is required for the hospitality sector and that there is going to be a focus on that. Meanwhile, SBI results have come out. The financial space picture is looking fairly intact and asset quality is improving. They are also talking about the moratorium scene being intact at least for the moment.
Restructuring in hospitality, restaurants, malls, real estate is much needed as activities have halted in these sectors and will take some more time to come back to normalcy. A restructuring package is vital for these sectors as in other countries and this will allow the credit flow not to be impeded and it would help meet the asset quality of the banks. Third and most important, it will allow flow of credit to these troubled sectors.

Against this backdrop, a restructuring will bring a much needed enthusiasm into the sector and clean out a long pending issue.

Coming to financials, SBI results were great. The NPAs in SBI’s case showed an improvement. The provisions are fairly good, the capital position is very strong and the moratorium presents a good picture that people who can pay are actually coming back to pay.

What is your outlook on SBI? Also, what is your take on Sun Pharma? Would take heart from the fact that the operational performance has been better and that the exceptional item was already factored in?
If you look at SBI, the numbers were clearly good and it looks like the economy is coming back, at least it shows the underwriting discipline of SBI. Their capital base is very strong, their deposit base has gone up. Credit has been weak, in line with an economy under lockdown. The moratorium, which has been a niggling issue in the minds of investors, is turning out to be better than expected simply because people are beginning to pay up.

Valuation was never a concern for SBI. It still trades under book for being the nation’s largest PSU bank and one of the largest banks but the need to become a white knight has held the bank’s valuations where they are. Almost all kinds of risks are priced in at the current levels.

Sun Pharma top line numbers were a marginal miss. They would have spent on R&D in this quarter because this is the time companies are racing to come up with some kind of a vaccine and almost every big pharma company has some related R&D expense related to Covid.

The margins clearly were better and this is a trend repeating itself across the entire sector. This is partly one time because in this quarter, there was not much domestic India related SGNA sales. Sun Pharma has underperformed the other pharmaceutical companies for quite some time now. At this point, it is beginning to look attractive but I would still not go all in.

What do you think is the reason for the underperformance at HDFC Bank? Also, while the Street is not looking at Aditya Puri selling 95% of his holding as a negative move but one has seen HDFC Bank under pressure since.
Yes, there is going to be a leadership change but it is a story well understood. HDFC Bank is looking at an internal candidate and waiting for RBI’s approval. If RBI does approve the internal candidate, then it will just be smooth sailing. You would not have somebody from the outside come in and take a relook at all the books.

In any case it is an extremely clean bank and so there is nothing to worry about the bank in itself. Banking as a sector in general has seen a rotation away because what hurts banks, benefits the other sectors. If there is a moratorium and if it hurts the banks, then the company which is taking moratorium has some kind of a leeway but fortunately moratoriums are turning out to be better than what the Street feared.

But I think I would not read too much into HDFC Bank. HDFC itself is going to do a fundraise for about Rs 15,000 crore, a combination of both equity and warrants and it is a very good sign that they are raising growth capital.

HDFC because of the lockdowns could not do much business because its retail units were shut and therefore its loan book growth rates have come down a little bit reflecting that for the lockdown period but overall it is a market category leader and they are going to raise a fairly good amount of capital. I would not read too much into it.

The other space which also continues to hold out and this is a discovery the market made much ahead of Covid was speciality chemicals. Now with the boom in APIs coming in and the stocks performing well, where do you see an opportunity to invest in a confluence of both?
This sector has done extremely well and will continue to do well. A confluence of two picks -- one is agrichemicals with companies like Coromandel, SRF and UPL -- all diversified companies. They have a good component of both domestic as well as international revenue. You will have some amount of benefit because outside India the lockdowns were not as severe.

Companies like UPL which has a strong presence in about 40-50 countries would have fairly robust earnings going into the rest of the year. And it is a market leader.

Third, if you look at companies like SRF they have both chemicals as well as speciality chemicals. All these companies will benefit to a good extent and as the shift away from China happens. These are companies with presence on the ground, with distribution networks in place and they can very easily grab the market share which is coming their way. The outlook remains very strong.