3 PSU bank stocks can see significant upside over 6-12 months: Chakri Lokapriya

“Indian Bank, Canara Bank, Bank of India all these banks are trading at under book and even adjusted book. One of the problems with Bank of India and the other PSU banks was pre pandemic NPAs. They have repaired their balance sheets and NPAs have come down, their provision coverage has improved and balance sheets have strengthened,” says Chakri Lokapriya, CIO & MD, TCG AMC

Relaxo came out with a disappointing set of numbers. We saw a complete washout when it comes to the gross margins and if I understand it right, the lock-in period for Campus’ anchor investors opens today. So there will be that additional supply in that stock. This entire space has seen quite a bit of rerating in the last few months. Do you sense that it has already peaked out?
Campus was priced at a higher multiple versus where Bata, Relaxo etc are trading today. There will be some amount of additional pressure on the stock purely on a fundamental basis. Bata and Relaxo have had some amount of inventory losses because of raw material pressures due to higher raw material prices that have since come down quite significantly.

I think demand is on the uptrend both for Relaxo as well as for Bata and the other footwear companies. In fact, Relaxo and Bata stocks have fundamentally improved but the stock performance does not reflect that. I would hold on or buy at these levels.

Delhivery is now down by about 34-35% for the month. There was a little bit of recovery. Nykaa was the other one that saw that massive selloff. Did you buy any of these stocks?
No, we did not buy any of these stocks. Delhivery is a logistics company which is tech enabled and will allow it a certain amount of margin premium and therefore multiple premium. That margin premium is not really evident because of their expansionary phase. If you are going to buy it on a wing and prayer for the future, this is not the market for that.
The second is Nykaa. It is clearly priced at a higher multiple and even at the time of the IPO, still trades at about a 150-160 odd times PE. We would still wait for these stocks and not enter at these points.

There’s almost a clamour out there for the smaller banks like Indian Bank, Karnataka Bank and the Street is rewarding the stock thereafter. Within the entire small bank space, where does your preferences lie if at all you are invested?
Indian Bank, Canara Bank, Bank of India all these banks are trading at under book and even adjusted book. One of the problems with Bank of India and the other PSU banks was pre pandemic NPAs. They have repaired their balance sheets and NPAs have come down, their provision coverage has improved and balance sheets have strengthened.

All the good things have happened but loan growth has not happened yet for well known reasons of pandemic and then economic recovery. Against this backdrop, whenever loan recovery comes back, these guys will have the biggest NII margin expansion. Also with the higher interest rates, they will have the benefit of lending at a higher rate and the deposits repricing happening with a lag.

As a result, their margins will benefit and their treasury book will benefit from that. From this perspective, even if they go slightly above book or even 2 adjusted book value, these stocks have significant upside over the next six months to one year.

We have been talking about this space since the start of the year. We all have been talking about how this is a sunrise sector but at what level would you want a relook at this space in terms of booking profits because it has run up considerably?
They have run up considerably. Putting in new money is tougher but these companies are facing the same issue which is actually a good place to be in as the economy is still not yet strong. So as and when that picks up over next year, they will see additional volumes which will have the operating leverage, higher income and therefore lower multiples. But that is something which is for the future because these stocks have run up a fair bit for them.

The entire consumer durable space this quarter has been fairly disappointing. Can air purifiers become a big segment for some of these companies or is it still very nascent?
Yes, indeed. This is the far bigger segment outside India and with pollution and all taking centrestage, it is not just Diwali which causes pollution but other things also I think the focus on trying to improve the quality of life will create demand for air purifiers and ionizers etc. and Havells and Voltas and all these companies are well placed because they also have the technology backups.

What are your top three large holdings and where are you looking at taking some chips off the table?
Large holdings are still in consumer discretionary as well as in specialty chemicals like SRF. If you look at a specialty chemical company like SRF, the avenues for growth are immense, export is still very strong and they will benefit from China plus one. Outside of that, this as a sector was not really for FIIs. If you rewind back about five years, Today the company’s capabilities have increased across the industry levels.

Second, on a consumer discretionary basis, whether it is a Voltas or Chalet Hotels or Indian Hotels, their consumption levels or volumes are still below pre-pandemic levels and pre-pandemic it was still not exactly a super hot economy either.

Today interest rates are on the rise and short-term consumer loans are very expensive. During peak interest rates, consumers do not take those consumer ticket loans.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)