is 10% higher in just three trading sessions. Nothing has come on Jio, nothing has come on the retail business. What is driving the stock higher?
One good thing that really might be working for Reliance is the sharp surge in commodity prices and a sharp rise in margins across the entire polyester chain or the polychemicals. Reliance being a dominant player will see a significant margin expansion in their petchem business. That could be one trigger which will effectively mean that Reliance is likely to show very strong numbers on their petchem business and GRMs of late have been pretty strong in their traditional oil and gas business and the petchem business over the course of this year. So that could be one of the reasons.
You have historically owned a lot of private banks and the smaller ones as well. DCB has been one of your picks. What is the future now for smaller banks considering there are alot of smaller banks with SME and MSME level exposure?
My view is that we should not paint all the banks with the same brush. While there is pain in the MSME and the SME space and more so with the second lockdown which has become far more deeper in tier II and tier III towns, but at the same time, it is also a function of how prudent these banks have been while lending. Some of these banks have been very prudent in terms of lending. Despite these challenges, their asset quality has been reasonably stable. There is some spike in NPAs but that is within a reasonable limit and banks are more than confident that they will recover those and get their asset quality back to where they were at pre-Covid levels over the next four quarters. There is pain within the SME space and that will reflect on the balance sheet of some of the banks. As far as smaller banks are concerned, it is a function of each bank’s own risk management and prudence in terms of what they have done with their lending book.
An interesting move has come in PSBs, especially after SBI’s numbers and the management commentary. That strength has rubbed off on the likes of PNB, BOB and Can Bank. The entire sector was looking lively. Would you be backing PSU banks at this juncture or stick with the private lot?
We continue to remain positive on the sector as a whole. We own quite a lot of banks. As the economy opens up and grows over the next few years and longer, banks will do well but we are sticking with banks with strong balance sheets. That is very important and which is why we have a positive view on most of the larger banks, especially the top five banks.
Within the state-owned banks, we own SBI and I have always liked it. As a franchise, it is grossly undervalued. SBI over the last four or five years had significant asset quality issues on their pre-Covid balance sheets but a large part of that corporate stress is now out of their balance sheet. More importantly, last year, under Covid conditions, SBI’s delinquency was actually lower than some of the major leading private sector banks and that is partly because a large part of their lending on the retail side has been to salaried customers and within that, a significant part has been to government employees.
SBI had a big problem with some accumulated corporate stress on their balance sheet but that is behind them and as a franchise, it remains extremely valuable. It is still grossly undervalued. If you go back in history, it used to do something like a 15% ROE over a long period of time except for the last four or five years and we think it will revert to those kinds of numbers in a year’s time or so. If that is the case, then SBI valuation should be much higher than where it is today.
The market is seeing some value in state-owned banks and that is why at least four or five state- owned banks have managed to raise QIPs successfully. Now that the government has announced that they are going to divest stakes in two state-owned banks, IDBI to start with, that should also lead to some value unlocking in state-owned banks. Overall, there is a tailwind in support of state-owned banks and we remain positive on SBI.
Sugar has been one sector which has given very handsome returns and of course the related ethanol plays like Praj Industries. Would you have a call here or be an interested party?
We have stayed away from the sector for many years because of the volatility that we see in the sector in terms of sugar prices and there is always policy interference in this sector. Also, the listed space is a very small part of the sector because 80% of sugar mills in India are in the cooperative sector. So far we have always stayed away from the sector but I take the point that a significant part of sugar is now being used for ethanol making. As a result, sugar cycles in India which used to be very steep probably would be more moderate from here on. The sector does call for a relook or revisit in that context because from here on, probably sugar prices in India will be far more stable than the deep volatility that we have seen over the years.
How are you looking at the entire capex theme? What about some of the midcap names within this basket like or ABB or even Norton? Do you believe that some of these names merit a buy for a long-term play?
Absolutely. I am very positive on the capital goods names. I firmly believe that the recovery that we are seeing in the Indian economy from the latter half of this year would be driven more by the investment cycle, public expenditure.
The government investments are holding or have accelerated during the course of the pandemic. Government investments across roads, railways and critical infrastructure projects and across ports have been holding pretty strong. After a very long time, we have started seeing green shoots of private investments where companies across the commodities sector — be it steel, aluminium or coal for that matter — are announcing significantly large brownfield or green field expansion plans.
Our view is that probably in the later half of this year and early next year onwards, all these will show up in order books of these capital goods companies because for the last 10 years, corporate India has not invested in fresh capacities in a meaningful manner in the core sectors of the economy. The capital goods sector itself has gone through a very deep cyclical pain over the last seven, eight years. From here on, the outlook for the business is extremely robust and names like Schaeffler, Grindwell and even many more others look very positive from a slightly more medium to longer-term perspective.
