Nifty Bank has outperformed all the other benchmark indices at least, up almost 1%. On the other hand, you have PSU banks also that are not doing so bad for themselves. In fact, they are doing pretty well for themselves. So, help us understand if one has to play this entire banking theme, where are you seeing comfort? It could be in terms of valuations. It could be in terms of just the momentum that you are pencilling ahead. Would it be large private sector banks? Are you playing this theme via public sector banks, PSU banks? What is your view?
See, there is good growth that we are seeing on the top line for most banks. When I say top line, I mean credit growth, deposit growth is quite good for most of the banks now after having seen sluggish deposit growth towards the start of the last fiscal year.
But then there is one worry that is cropping up now that the banks have reached a bottom in terms of their asset quality, bottom as in the asset quality has become in terms of pure NPAs very low.
There is an oncoming fear that the provision aspects of most of the banks will become now a little more accelerated. In fact, many of the banks will target higher provisioning and more provision coverage ratio ahead.
Having said that, the other worry that we will see is that when the interest rate cycle starts turning, what typically will start happening is that the banks will be landed up with higher costs in terms of their deposit costs and lower lending rates and therefore, there could be a margin squeeze which we will see towards the later part of the fiscal year.
From a valuation perspective, I am not too comfortable with the banking sector right now because we are having reached the fag end of the fiscal year. Now is the time that the banks will start tightening up and therefore, the valuations will start showing up in terms of lower numbers. They will perhaps reach a situation where we will find the banking sector performance will lag expectations and therefore, there could be a valuation dip. Now, within the banking space, what to look for is potentially a hunt for the smaller private banks or perhaps the smaller PSUs as well because many of the smaller PSUs and smaller private banks have yet to see their asset quality go down. They are in a cycle which follows a little later and they are quite late in terms of their asset quality improvement process, so that is where we can get comfort, that is smaller private banks and smaller public sector banks ahead.
Oil has been really on the boil. We have seen quite the moves coming in for oil this week. So, given all of that, how are you putting that into perspective for oil explorers, the likes of ONGC, Oil India or even crude sensitive companies on account of input costs going higher?
I think what is more important to recognise here is that the oil sensitive companies, those who are exposed to either crude oil directly or crude oil derivatives, you would find it a little difficult going ahead to really pass on the differences that they will see on the input side.
But fortunately, many of these companies would have been sitting on a good amount of inventory which is at low cost for the immediate quarter or so, probably two quarters they would perhaps see margins expanding a little bit because of the low cost inventories that they would have.
But as soon as we turn into the monsoon period, we should be finding it difficult for them to really raise their margins or even their output because what typically then follows is your demand is seasonally very weak and you are now straddled with higher cost inventory.
So, I would rather be a little cautious of them. And as far as oil producing companies in India are concerned, they are a non-entity now.
ONGC is not a stock which is on the radar of many of the investors in India and quite frankly the other oil producing companies are clearly off the radar.
If we take the oil marketing companies, then perhaps, like I said, they would stand to gain temporarily because of this phenomenon related to the lower cost inventory and fortunately with the elections ongoing, they will not see forced reduction in prices or the volatility on the price front will at least temporarily be halted and that should spell good news for many of these oil marketing companies.
The other, particularly on the chemicals, fertilisers to even some pharmaceutical companies this uptick in oil could potentially damage margins ahead.
