Siddhatha Khemka’s top 3 picks in overall banking space


For the last four weeks, we consistently saw positive FII inflows and that seems to suggest that there is some interest coming back into the broader market, said Siddhartha Khemka, VP – Head of Research (Retail), MOSL, in an interview with ET Now.

Edited excerpts:

How do you read into the buoyancy in the markets in the afternoon despite some indications of a soft start this morning from the global end of the market? Is this sort of move where we are ignoring what is going across the globe likely to continue especially with what is happening with the broader end of the market?

We had seen in the market that the global rally was taking place. We were not participating because of a host of domestic factors. Now the market is well past that event. The geopolitical issues look likely to have resolved. Other factors like the US-China trade talks seems to getting resolved. Also the pressure from the crude side seems to be stabilising.

Having said that, the boarder market was oversold. A lot of stocks were hammered and the positive factor that started supporting the market was the positive FII figures. For the last four weeks, we consistently saw positive FII inflows and that seems to suggest that there is some interest coming back into the broader market.

Recently Mark Mobius alluded to the fact that with developments on the geopolitical front, BJP’s chances of winning the 2019 polls have turned brighter. He believes that PM Modi’s popularity for the second term is only going to grow and that our prospects compared to other markets like China are very strong. What do you believe is the sentiment in the runup to the big event?

Yes, definitely there are positive sentiments across the board which is being reflected not only from the domestic side but from the global FII perspective as well. While I am not a political analysts to suggest what the outcome may be, the events that have unfolded has definitely led to positive sentiments towards the current government and especially the Modi-led government where the Street is now talking about a sharp increase in the number of seats that they could win from what they were talking about just before this event unfolded.

So that is a positive. If the current government continues for the next term, that will definitely be positive for the broader markets which is where we are seeing the interest coming back in the market.

Is Eicher at a good level to be bought into and are all the negatives and decline in the RE sales, priced in?

Yes. Eicher had a lot of issues apart from the volume decline. They had issues with regards to strike at their factories and that also impacted some of the volumes. Compared to the historical past, the valuations were comfortable and that gives some upside to the stock. However, in the near term, we do not see very high growth in the volumes.

If I were to explain that while the absolute volumes looks like bottoming out, on a YoY basis, we would not see much of a growth and generally we try and track the growth in the two-wheeler or the overall auto sector. It is valued for the high growth that the sector gives which is still some time away.

Right now, more of value buying is there, which helped investors from a long-term perspective and can definitely have a look given the good portfolio and the niche segment that Eicher caters to. However, in the short-term, I do not think we need to see whether this buying get sustained but in terms of volumes and numbers, I do not see much upside in the near term.

You say there is a decent asset quality improvement in corporate banks now. Which are these banks where you are seeing asset quality improvement and are you restricting yourself only to private sector or are there some PSU names?

Generally, the bulk of the corporate facing banks which includes some of the PSUs are seeing a good improvement in asset quality. Slippages have bottomed out, provisions are getting lowered, because of which even if you see the latest quarter Q3 numbers, most of them reported healthy improvement in earnings.

But if you see private companies, for an Axis BankNSE 4.22 %, so far NII grew almost 18% while the PAT growth was much higher because of lower slippages and lower provisioning. The entire corporate facing banks because of the NCLT resolution and because of new NPAs not coming in, are seeing good improvement in the overall asset quality.

However, in terms of growth potential, I will restrict myself to the top three corporate facing banks which is your ICICI, Axis and one PSU that is again doing well — SBI. All three are in the same league and are expected to do well going forward. These are the preferred picks in the overall banking space, specifically the corporate facing ones.

If I have to go a one notch below and compromise a bit on quality, then which are the two or three names which attract your attention?

Some of the banks where I would not want to get into are tier two or tier three PSBs. But you can get into the private space. For example, look at RBL Bank, which is a mix of SME, retail as well as corporate book and has done consistently well. That is a bank which we prefer among our top picks.

Apart from that, if you wanted to take some risk, Yes Bank is another corporate facing banks which should do well. The quarterly numbers have been pretty good. The new management now is in place. We have also got clearance from RBI saying that there has been no divergence in the latest annual numbers. That baggage is now behind us and that should continue to do well.