Sameer Narayan on Infosys, Axis Bank, Kotak Bank and more
Among PSUs, one should be ready to bet on OMCs, Coal India and BEL.
Will you buy Infosys?
What happened in the stock is quite unexpected because after what we saw two years back and the steps that were taken to restore confidence, these kind of allegations coming in a company known for stellar corporate governance perhaps numbed investors yesterday.
The first thing one would need to know is how proven or substantiated are these allegations in the report and then there is also an overhang of a class action suit because the stock is ADR listed. That is making people jittery. After Nandan Nilekani stepped back two years ago and corporate governance issues were put to rest, nerves were soothed. But what has come out recently is quite damaging. Even though the valuations are not that expensive after the fall yesterday, there are a lot of significant events for which investors would look for answers before taking a shot at the business.
Although the growth numbers were good, people were quite happy with the TCB wins in this quarter, but on balance, some clarity has to emerge for people to take a price call more than anything else because now it is not a question of just a business at a price. In case there is some merit in whistleblower’s allegations, that could mean very different outcomes.
It seems like Axis has delivered what the street wanted it to?
Axis Bank is maintaining the trajectory of what we have seen over the last three quarters. Yes, there has been some sort of arrest on the asset quality deterioration and the fact that now the management has taken a positive guidance. Today loan growth is at 14-15% but the fact that some spots of commercial vehicle portfolio are showing some stress and at the same time, slippages are also not coming down as much as expected. Those are the red flags but having said that, the valuations have now corrected to about 2-2.5 times book.That is not too bad a price for people to look at, assuming that this trend accelerates further and normalised earnings are much more closer than what they were once the entire corporate credit cycle hit the bank.
What about Kotak Mahindra Bank? Would you be a little worried that the asset quality has come off and has worsened?
One looks at Kotak as a torchbearer for what is happening on the borrowing trends etc. There also, the loan growth has fallen to 14% and there are the same stress points in CVs. There is some problem that is happening in the nuts and bolts economy because the CV portfolio is not picking up. That means there is less freight and people are not getting enough volumes. This means the payment cycles for most of the NBFCs who have given loans will sooner or later also start seeing a 30-day, 60-day kind deterioration in the asset mix. Those are factors that probably will concern investors going forward.
Would you dare to buy PSU stocks?
PSUs have been classical value trap. For them, the only problem is that they are great cash machines available at fantastic yields. The only challenge is that one does not know that there is a) CPSE ETF overhang, b) the management prone to regulatory interference.
That’s why these banks do not get valued as they should be, but having said that, there are a lot of names and large companies like Coal India, BEL. These are names where even today the outlook is bright, the valuations are very comforting and the government is making the right noises to make a change in these specific sectors. So be it the oil marketing companies, Coal India, BEL -- these are places where one would be more open to taking a bet.
These are the bets that one should definitely take from a 3-5-year horizon because the government has stated that they need to do the strategic investment and these are names where one will start seeing a lot of changes in perception.
Is there an opportunity in State Bank of India and other PSBs?
SBI has definitely given enough to investors to suggest that the worst of asset quality is behind us but having said that, starting this financial year, in the first quarter, we saw the banks taking back a lot of share from the NBFCs in the lending market and hopefully the trend should sustain even in the second quarter. But the problem is that today demand for credit is so low that despite this, even SBI is not looking at loan growth of more than 12-13%.
The challenge is that the moment credit cycle revives, it will probably lead to a lot of confidence coming back in terms of valuations being comfortable and subsidiary value getting discovered. Of course, that is also a very comforting point.
Of course, if IBC implementation had been speeded up, things would have been even better and the confidence would have been higher. But the valuation is giving a lot of comfort, more so because today you see the disparity of a private financial available at two and a half-three times book. We are noe seeing a lot of asset quality concerns coming up, whereas as a PSU available at book and with the worst of the asset quality pressure behind them, that is where the trade off seems to be coming around.
What about Asian Paints performance?
Today, in a slowdown kind of mindset, when a company comes out with and reports very strong decorative paints volume growth numbers, that is a very healthy sign which is also corroborating the fact that even Lever has reported very healthy underlying volume growth. but ne needs to get a sense whether and probably that is the reason why they are getting valued as well because most of them are 40 times plus in terms of forward earnings basis.
The value is already there and from here onwards, either the core economy starts picking up so you see there is a switch of flow rotation. Then you see that there are better returns to be made elsewhere but otherwise till that time the pickup on the ground is visible, I think these will continue to be high trade where more funds will continue to be allocated. Investors are more likely to stay put here because visibility of earnings is better, even though the earnings growth may not be 20-25%, that is being expected on a revival basis but at least 10-15% is good enough for people as long as there is visibility.
But the larger concern is that when the staples segment is quoting at 40-45 times forward from here onwards, there is no value argument. For a value investor, these stocks do not sort of make the grade.