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what to buy: PSU banks may outperform private peers in next few quarters

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You could see a very powerful trading rally. Already one is underway, but this has got more wings and can fly even higher, says Dipan Mehta, Founder & Director, Elixir Equities.


Would you recommend buying afresh into any of the banking names at these levels?
Banks have been in the leadership zone right from Budget day and perhaps even before that. As the economy is starting to rev up, we are seeing that banks which are economically sensitive when it comes to their performance, have been doing exceedingly well and some of the uncertainties surrounding their NPAs and credit cost have been largely resolved.

Yesterday’s announcement was just a bit of a trigger which has let the banking stocks come back into limelight again. It does not make that much of a material difference to the profitability of the banks. Sure it opens up a new avenue for gaining more business, especially lucrative business from the government, but it is going to be incremental.

End of the day, the story about banks is lower NPAs and therefore lower credit cost and higher net interest income as the economy and credit growth start to pick up. Those are the two foundations on which bank stocks have been rallying.

In light of the commentary coming in from the Finance Minister as well as the Prime Minister himself yesterday stating that they are very serious about the disinvestment process and that the government has no business to be in business, should PSUs now be looked as an investment prospect?
Although those are great words and music to the ears of many, we need to take it with a pinch of salt. I do not think that the government is looking at privatising the PSU banks per se, although a couple of smaller ones may be privatised. They are not looking at privatising the big four or five banks and those banks will remain under the public sector.

Having said that, we are very positive about PSU banks. You could see a very powerful trading rally. Already one is underway, but this has got more wings and can fly even higher. The reason for that is the entire NPA problem has been resolved at the PSU bank and the economy is in fine fettle and they have improved their lending standards.

It is unlikely that the next one or two years would see heightened credit costs. Just because of significantly lower credit costs, the profit for the next financial year will look very impressive. These stocks will look cheap as compared to what they are just now. They are trading at 0.6 times price to book value and mid to slightly higher single digit price to earnings ratio. With their profitability moving up even further, these valuations will compress. Keeping that in mind, one can expect very good returns from PSU banks for the next six to 12 months or so.

No doubt two, three years later, they may get into some other problem, but for the next few quarters, PSU banks look very good and investors should consider investing a certain portion of their portfolio in PSU banks, maybe even at the expense of some of the private sector banks. I feel that over the next few months and quarters, PSU banks could outperform private sector banks in price movement.

As far as other public sector enterprises are concerned, let us see one or two serious disinvestments or privatisation and then perhaps make a call.

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