What is the sense that you get in terms of the market set ups that happening and the kind of stocks that are moving and do you believe that investors are looking for value in companies which had pain points earlier?
Yes, we are definitely seeing interest coming back in midcaps and smallcaps. Performance wise, it is still the top end which is outperforming. Banks are leading this part of the rally and we expect that to continue. We saw substantial treasury gains for most of the banks. The NPAs are getting more or less plateaued out.
There are some surprises still coming by, but the Essar resolution is a huge positive for most banks that had a big exposure except for a couple of foreign banks which had not participated.
Overall, macro is weak but micro is picking up in company specific manner and we are seeing the market front ending the eventual turn of the macro. Whether that happens in December or March or later is anybody’s guess, but we are fairly close to the bottom as far as the macro goes. That seems to be what the market is surmising. FII flows are also strong. There is liquidity in the domestic market which RBI has pumped in and that is helping the overall scenario. It is a matter of time before the economy catches up, but markets are front ending.
What do you make of the overall earning season? One can say that tax cuts did impact the earning season in a big way in terms of EPS numbers, but what about the earning season?
This time, we had to do a lot of adjustments because a few companies were moving to the new tax regime, a few were not and the deferred tax asset treatments have really clouded the picture. You have to look at the adjusted books and then take off the one-time huge losses, like in telecom, which is a one-time catch up for 18 years of conflict with the government.
On balance, it was a pretty good season. It was on par with expectations and the expectations for next year are quite enhanced and that is helping the markets. Markets are driven by earnings and the multiples you are willing to give to those earnings determines the price. We are seeing earnings pick up in the market after four-five years of flat lining. Also, we are expecting some kind of a multiple expansion. As the interest rate goes down further, the discounting factor kicks in. That and the higher growth expectations for next year will together lead to some bit of a PE expansion for our markets. That will help the markets to continue to go up.
What do you make of the PSU banking space? With some of the private banks again going to new highs or in an and around the new highs, is there a lot of value in largecap PSU banking names as well?
Definitely, I would say the pecking order would be go for private sector corporate banks which are turning around. Those names are very clear. The second would be the top four-five PSU banks that is a brewing story and it will be handsomely rewarded. It is just starting. Still the valuations are quite compelling and the good thing is now you look at the credit. I was with the company director the other day. Even for a loan for the company, the bank sent people home, took down passport numbers, filmed the house. For a car loan, somebody came to a very senior CEOs house and took a video of the house. So, credit is getting constrained but credit is getting stronger and down the line, as the interest rate cuts start seeping into the economy and the economy kicks in, public sector banks still have a 70% market share and you will see those outperforming.
It was a pretty good season. It was on par with expectations and the expectations for next year are also quite enhanced. That in turn is helping the markets.
I would say stick to the top end; do not try mergers and special situations. Leave that to the fund managers. If you want to do that, then buy your financial services mutual fund because the professional money can manage that. For the rest of us, I would say just buy and forget top four-five public sector banks for the next two years. You will be very pleasantly surprised.
Would you be a buyer into telecom names?
A lot of foreign brokerages have over the last three-four years been taking out rosy projections and said this is the bottom. We have seen that in aviation, we have seen that in telecom — very high capex, very highly regulated businesses good for the customer, bad for the investor. I would say stay away from telecom. Voda Idea and Bharti Airtel might have done well yesterday but remember the day before, Idea was down 20%. If you had bought Idea one year back at Rs 24, today it would be sitting at Rs 3. That is the kind of value destruction that has happened in telecom.
The very high capex requirements of the 5G spectrum auction is totally dependent on the regulator. Just like the sugar industry, very high politics is involved. A lot of lobbying is involved. Why do you want to invest in a sector like that? Let it come out of its pangs of slowdown. The good news is with a 5% ARPU increase, revenues shoot up to the extent of Rs 35,000 crore. So, that is the kind of leverage available with 700-800 million customers. If they are able to increase ARPU by Rs 5-6, all the problems will get sorted out.
There is news that the government might create an artificial floor price. If something like that comes, then it merits a rerating. Otherwise, I would say, stay away. You have so many growth sectors in India, focus on those.