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multibaggers: Where to look for multibaggers in banks?


If you want multibagger opportunities, then go for the bottom two-three private sector banks which have had stellar growth rate in the past but since have lost their way as corporate lending have turned sour for them, says Dipan Mehta, Founder & Director, Elixir Equities.

Are we missing something about SBI? They have 27% market share and the stock is available almost at one time book one year forward! Why is there lack of faith in such a formidable franchise? If India has to grow, SBI has to grow and vice-versa?
Nobody has really made money in SBI and for some reason or the other, it has been an underperformer and all the reasons that you were enumerated for buying are known to the Street. There is no real trigger as far as SBI is concerned and yes there is value in subsidiaries but there is a holding company discount in SBI. They know how to completely divest of their subsidies and raise a large amount of capital and distribute it to the shareholders. They still continue to lose market share and prominence as compared to say an HDFC or a UTI or Axis Bank. Occasionally, it does gain market share but at end of the day, because of its size and talent management and because of it being a PSU bank, which has its advantages and disadvantages, SBI never has really fired or created wealth for investors. That is something to ponder that in the last 10, 15, 20 years, when great values and great returns have been generated by a whole host of private sector ,banks the PSU banks led by SBI have not offered anything.

So you may buy SBI and hope that in one year you may get 30-40% type of returns but at the end of the day, you will end up being many years of underperformance and at a time like this, you would be better off buying into the market leaders within the private sector banks. If you want to play risky, then there are better bets amongst the smaller banks which have been hit by higher credit cost but eventually will get normalised. The likes of IDFC First or RBL Bank or maybe even IndusInd Bank and IDBI Bank could merit a mention over here. But these are smaller banks, they are nimble, they can grow higher than the industry growth rates.

Of course, they have a legacy problem as far as NPAs are concerned but they are very strong pre-provisioning operating profits to take care of any credit cost which may emerge over the next two-three quarters or so. Once those credit costs have been absorbed, you could have them growing again at 25%-30% which would mean an ideal situation where earnings also move up. These stocks have traded at historically very high PE price to book multiples and there is scope for rerating of these businesses, once we have clarity as far as their credit costs are concerned.

In the banking sector, the strategy of the investor has to be to go for the top two or three banks which will provide stability to the portfolio. If you want multibagger opportunities, then go for the bottom two-three private sector banks which have had stellar growth rate in the past but have lost their way because of corporate lending which they may have done which have turned sour but eventually when they absorb those credit costs, they may go back to their old ways and again start to generate 15% to 25% bottom line growth in a secular manner and that will immediately lead to rerating of those stocks. So, that is the broad strategy as far as banks are concerned.

The PSU banks do not really come into that picture but you could certainly trade in them depending on the charts, price volume action, news flow etc. but they now will be great wealth creators and there is always the risk of you getting caught on the wrong side as far as PSU bank rally is concerned.

Auto is expecting a whole slew of sales numbers and month-on-month uptick particularly on the back of the rural recovery. What is your view?
We are also watching the numbers keenly. More importantly, management commentary on early indications for the festival season. There is action in auto shares leading up to the festive season and a lot of auto companies are pretty well placed. Auto has got very high operating leverages as well.

Once the volumes start to pick up, you may see actual profitability move up at a rate higher than the top line growth rates and the safety is there with low-cost entry level for a personal vehicle manufacturers like Hero MotoCorp or Maruti and of course there is safety in the tractor companies like Escorts considering the fabulous demand for tractors. The underlying drivers driving tractors still remain very much in place given that we have had one of the best monsoons in decades. At the same time the Covid impact has been restricted in the rural areas.

With all the kind of farm reforms taking place and increase in MSP, agriculture is definitely becoming more profitable, encouraging farmers to go in for upgrades or considering buying tractors if they did not have it earlier. A good amount of replacement demand is coming at a time when interest rates are low and a lot of financing options are there for the farming community.

I would say that after many quarters of subdued demand, you can see good demand coming in for the personal vehicle manufacturers as well. Within the auto sector, if there is one segment to avoid, it is the commercial vehicle manufacturers because of structural changes taking place in the transportation segment which really are becoming more and more pervasive and offering great deal of convenience and GST having improved the turnaround time for a lot of trucks. I would be a bit sceptical as far as commercial vehicle manufacturers are concerned but generally positive on personal vehicles and tractors.

What about cement? Do you see opportunity in some of the frontline names?
Cement will be a consistent performer. There are no specific triggers to have a fabulous rally in cement. It is a mature business with a great deal of pricing discipline. Companies have reduced their cost significantly over the past few months because of lower commodity prices or because of internal efficiencies and those have kept the profits going despite rather challenging times for the cement industry.

Now that the season is coming back and construction is gradually picking up, I feel that infrastructure spend will be undertaken by all the governments to boost the economy and that is generally positive for cement. So there are many positive factors for cement but a lot it has got priced in, given the kind of valuations that cement companies are trading at. You could find a special situations cement company like Birla Corp which has been under the cloud because of management related issues or a mid-sized player like Heidelberg Cement or even JK Lakshmi Cement, where a lot of growth may come into play in terms of expansion of capacity.

In cement, if you want to really get the outperformance you need to be a bit selective, go for mid-sized companies which have got large plans coming into play and therefore adequate capacity to offer as and when demand moves up. But by and large, I would not go gung-ho on cement. I would like to be equal weight but not necessarily overweight. It is a steady performer. There’s nothing exciting about it like pharma or IT for that matter or some of the digital businesses where investors will pay even higher PE multiples and growth rates could surprise on the upside.

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