Serious over-ownership in banks at a time when the growth numbers are lower than expected and asset quality not quite up to the mark, make a case for a serious amount of de-rating, says Hemang Jani, Senior Vice President, Sharekhan. Excerpts from an interview with ETNOW.
Yesterday, the selling in Kotak Mahindra Bank was overdone. Would you be a buyer there?
I would like to say a few things about the entire banking space before we move to Kotak Bank. In terms of the NPL cycle and loan growth, there is a huge disconnect between what is being reported and what is generally being expected and that is a major worry.
Secondly, there is over-ownership across private banks as the weightage is very high and most of the investors are hiding in very few banks. When there is this kind of over ownership and the actual growth numbers are lower than expected and asset quality not quite up to the mark, a serious amount of de-rating is likely.
We have to look at it from that context. There are no clear answers as to how long this situation will pan out in terms of lower growth, etc. The major concern is that the government has very little room for a boost for revival. We are in for some pain as far as banking is concerned.
The steel companies took a price hike in October, another in November, another one in December and then one in January! If the economy is slowing down, how come steel companies have taken four price hikes in four months on the trot?
This has to be seen in the context of what has happened in the entire sector over the last two to three years. A lot of banks have either been merged into the bigger ones or have shut shop. Typically in a cycle, when you go through that sort of pain and there are initial indications of revival, there is a case for some kind of price hike. This is what has happened. At the same time, globally we are seeing much better news flow and environment because of the US-China deal and also the kind of restrictions that China has put in place for the metal companies.
The pricing environment in China and other parts of the world has improved. Metal, after going through a painful period, is showing initial indications of revival and that bodes well for stronger companies where the balance sheets have to some extent got restructured. We have been liking JSW Steel for a while and maybe some of the other companies like NMDCNSE -3.31 %, which are ancillary plays and some of the midcap companies within that space are looking quite interesting for a good move of 15-20% from current price point.
In the insurance space, do you track ICICI Lombard? They came out with numbers over the weekend and the stock post numbers has really collapsed.
ICICI Lombard has been our preferred pick. It has done very well over the last about 6 to 12 months and maybe because of the slowdown that we are seeing in the auto space as well as general slowdown, the numbers were slightly on the weaker side. But overall, for companies with a very large market share and overall opportunity, things are looking good.
We continue to have a positive view on ICICI Lombard and some of the other life insurance companies like Prudential ICICI, etc. We think that part of the money which is getting out of the banking sector may move into such a non-fund based kind of play. Though that space is not that large, it definitely would get some of the money moving out of the banking sector.
The latest air traffic numbers are again indicating some amount of slowdown. What do you feel is the outlook on the aviation sector?
The passenger traffic is pretty strong for the aviation sector but there are certain structural issues that the industry is grappling with. It is something to do with pricing power or slot related issues. Despite having two or three major players — IndiGoNSE -2.28 %, SpiceJetNSE -1.12 % and GoAir, and of course Air India which is not that strong a player at this point of time, the companies are struggling to report good operating growth. That is worrying us and we have been staying away from the sector for a while.
What is your view on the telecom sector? TRAI is saying that the two-player market is something they would avoid at all costs. The GR dues matter is in the Supreme Court today with the telcos seeking more time to pay their AGR dues. How do you read into all of the developments that we have seen since last Thursday?
Telcos, particularly Bharti and Reliance, are in a sweet spot and they are performing extremely well despite the challenges and the news flow around AGR. These two large players would be able to show remarkable growth in 2020 and 2021 with reasonable price hikes and a good amount of volume growth on the data side.
Given the fact that Bharti in particular has been able to raise funds recently, paying AGR dues should not be too much of a challenge. With incremental earnings growth coming in, people will get more confident about it. We continue to be extremely positive on Bharti and now that Reliance too has started some sort of correction, it may present a great opportunity to buy for investors for 2020.