Buoyancy in banking sector will fade out; Hero Motors a value buy: Dhananjay Sinha

"Hero Motors can be a value pick because it has actually not done much and there is a possibility of better agri scenario going forward, especially a sort of a positive outlook from the rabi season," says Dhananjay Sinha, Head of Strategy Research and Chief Economist, Systematix Shares.

How much more can PSU banks go? While SBI and BoB and Canara Bank are going up, what explains the price action in Uco Bank, Bank of Maharashtra, IDBI Bank and Central Bank. Is it a rising tide?
Generally, the mood has been positive for the banking sector, in particular the PSU banks. I think the underlying assumption is that there has been sort of a rebound in credit demand at a systemic level so we moved up to almost like 17-18% at the recent peak and because of that the results have been good, there has been an increase in spreads and banks have been taking higher risks as well.

Generally, there is a sort of a recovery in credit growth and that is translating into sort of a significant upswing as well as profitability of banks are concerned and that sort of contrasts the decline in the non banking sector. Clearly investors are trying to reap that opportunity and there was a certain kind of an undervaluation perception that was there so all those things have actually translated into an upswing.

For the PSU banks particularly, I would say that the cash balance and the SLR ratio was much higher. As a result, the expansion in leverage because of that capital and the fact that you had a countercyclical buffer by way of lower CD ratio etc translated into operating leverage for PSU banks.

So SBI and other larger banks have actually been in the forefront and the other banks are actually catching up. The point is whether this cycle will sustain or not is something that we will have to see especially given the context that 80% of Indian companies excluding banking sector were actually seeing contraction in operating profits and that could translate into high credit demand and we have to see whether this kind of dichotomy will sustain or not. If it does then I think the buoyancy in the banking sector will sort of fade out as we go forward.

Where within auto do you find comfort to put fresh money to work?
The auto sector has been doing pretty much well. There is a buoyancy in volume growth and there is also premiumisation that is impacting positively on the overall realisation. I would say the banking sector has been pushing a lot of auto this thing.

All those things are there. What has not reflected in this particular quarterly results is the expansion in margin as much as I would have expected. I think that is the next trigger according to me so basically urban consumption items can actually do well which includes Escorts which is kind of a premium urban kind of a thing and if there is a fall in material cost as we believe that steel prices and other metal prices have corrected as that kicks in I think that should be one area to really look at.

We have been looking at TVS also, TVS has done very well so we have replaced that with Motherson Sumi Wirings as a stock though we are still positive on TVS. I would say that Hero Motors can be a value pick because it has actually not done much and there is a possibility of better agri scenario going forward, especially a sort of a positive outlook from the rabi season.

So Hero Motors can be considered from a value opportunity over a period of time. If you look at six months time, one can look at that. However, Hero Motors is not in my portfolio. But it is a stock we like.