Ashi Anand, CIO – IME Strategies, Valcreate Investment Managers, says “PSU banks space is relatively attractive. We are a little more comfortable with the higher quality PSU bank names, so SBI is amongst the top weights. Apart from PSU banks, there are other interesting pockets as well. Defence is probably a decadal story with a very strong make-in-India push. The big problem in defence is that some of these orders tend to be extremely lumpy. So, one needs to be careful about the specific defence names one is going after. We prefer Bharat Electronics which has a much more diversified portfolio. Power, infra and certain other segments are also interesting”

Let us talk about two things. One is in terms of PSUs, which have seen a rally. Do you think that rally in the PSU basket is going to continue and is there anything you are finding, whether banks or in the power pack, attractive there?
Ashi Anand: PSUs have had a remarkable run over the last year. But it has been driven by a combination of different things. Firstly, you have seen a turnaround in operations. Overall operational efficiency has improved and more importantly, across different segments that PSUs are operating in, the business environment has improved quite dramatically. Banks are very good examples of the same. Between 2010 and 2020 and especially 2016 to 2020, a lot of PSU banks were struggling with very large NPA issues. They were struggling with growth. They were struggling with capital. Now, effectively, post 2021-22 with all of these asset quality problems being addressed, we are seeing a very strong turnaround and we are seeing this turnaround across multiple different ratios. So, you are seeing growth coming back, credit quality coming down. We are seeing operating leverage start to play through and you are seeing an ROE improvement.

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Now, valuations which were very cheap have basically rebounded. But there is potentially still space for that to grow. So, PSU banks space is relatively attractive. At Valcreate, we are a little more comfortable with the higher quality PSU bank names, so SBI clearly is something that is amongst the top weights.

Now, apart from PSU banks, there are other interesting pockets as well. Defence is probably a decadal story with a very strong make-in-India push and a very strong strategic rationale. The big problem, however, in defence is that some of these orders tend to be extremely lumpy. So, one needs to be careful about the specific defence names. We prefer Bharat Electronics which has a much more diversified portfolio.

If you are looking at companies like HAL, Mazagon Dock, Bharat Dynamics, they tend to be very dependent on specific projects. And if those projects come through, things could be fine. Otherwise, not. These are the two spaces within PSUs that we are relatively more comfortable with. I think power, infra, there are certain other segments which are also interesting. But this is at least a space that we are focusing on.

One more point I want to talk about is in terms of OMCs, the oil and gas space, anything attractive that you find there as well because we have seen that run-up coming in, whether you look at an HPCL, BPCL, IOCL, especially in the last few months, there is a sharp run-up there. So, anything that you find in terms of value over there?
Ashi Anand: This is a space that we historically did not really like too much. What you tend to see is performance, and stock prices can be very volatile. One of the key problems in the OMC space is that if oil prices move up a lot, suddenly windfall taxes can come in. We have had at least historically not so much under the current government, but there have been caps in terms of marketing margins, etc.

We really see OMCs as a space one can trade in and out of and currently there is momentum, but this is not really a space where we see as a longer-term value creation space, especially if you are looking at longer-term trends in terms of a shift towards renewables, shift towards EV, etc. It is not really a space we are very positive on over the longer term. In the near term, some momentum could potentially continue.

What are your thoughts on the hotels and the hospitality space? On the one hand, leaders like Indian Hotels have got re-rated and become multibaggers. But even now, when we speak to some of the latest companies hitting the markets, say, SAMHI Hotels or Apeejay Surrendra Group, The Park, one gets a sense that the cycle has not exhausted itself. Have you looked at any of the broader market hotels?
Ashi Anand: Hotels is a space which does look quite interesting, especially from a slightly longer-term perspective. Historically, the moment an economy crosses a certain amount of per capita income and I think $2,000 is the global benchmark, we see a very sharp rise in discretionary expenses and travel and leisure is a very important component of that. So, if you are looking at the kind of youth and at the younger populations and their propensity to travel, that is a lot higher. Effectively, as India continues to grow, and as the consumer class gets more willing to spend, we are seeing clear momentum in the kind of travel and leisure spends. The two-three years that people were stuck in the house during Covid has just accelerated the need or the desire to actually go out and travel. We expect to see a sustained rise in leisure travel demands over the coming decade. Even commercial travel is doing fairly well and as the economy continues to do well, that part should also do very well.

We are probably not seeing the same level of hotel room additions as the potential increase in demand and if you just look at hotel room penetration rates against any other emerging or developed markets, hotel rooms are clearly underpenetrated in India. This should potentially lead to a fairly strong period of improved occupancies, higher prices, etc, and hotels being a fixed cost business, any incremental kind of revenue flows down very sharply down to profits. So, you could see margin improve. So, it looks like a fairly strong outlook for hotels overall.

Have you looked at Jana Small Finance Bank which had an IPO recently. The valuation, even after the IPO at Rs 450, comes down to a one-time forward price to book. Have you looked at it?
Ashi Anand: We have not specifically looked at Jana SFB and we have had a cursory look, but not something very in-depth. But at a broad level, the ability of small finance banks to really generate value, longer-term value, longer term ROEs, I do not think is yet very clearly proven. What you have seen is that small finance banks that have been around for a certain amount of time given the fact that sometimes they are lending to fairly concentrated segments, there can be quite high volatility in terms of their business operations. We have not really seen, according to us at least, a small finance bank really prove the ability to compound over the longer term.

You were making a point on Jana Small Finance Bank as well, talk to us about that, as well in terms of anything interesting where everyone is talking about consumer staples. No one is interested that much in it, but is there anything that you are finding interesting in that pack?
Ashi Anand: In terms of Jana Financial Bank, the core point we were trying to make is that the whole small finance banking space and the ability for small finance banks to create long-term value for investors is not necessarily something that we have really seen until now. We have not yet seen a small finance bank really scale without the kind of a certain amount of volatility that you are seeing in business operations. It is not a space that we are very optimistic about. We would like to see this whole banking license around SFBs, their business models evolve a bit more before taking more aggressive exposures out there.

There is not much interest in consumer staples right now. Do you see anything attractive in that space?
Ashi Anand: Consumer staples is a space we are watching quite closely. What clearly is the problem is that both rural consumption and in recent times, even urban consumption has kind of slow down. So, across the board, we have seen this in consumer staples as well as other consumer segments. Demand growth is actually quite weak. You probably want this to come back before you see some momentum.

A key element around the market focus shifting away from consumer staples is pretty much over the last decade you had a lot of these consumer companies as consumer staples especially re-rate quite significantly because of a lack of other investment options that were there.

With a number of new emerging themes coming out, which are quite attractive from an investing perspective, real estate, capital goods, the whole PSU space, etc, a lot of market focus has shifted towards place where there is growth and the problem at some level with consumer staples is when growth is not there, valuations are still no longer cheap. You probably need growth to come back for these stocks to start to perform. Now, within consumer staples, there are certain relatively interesting pockets.

HUL has underperformed quite significantly and probably for the first time in many years, we are seeing a company like Godrej Consumer trading at a premium to HUL. Britannia has recently crossed them. Clearly this space is interesting from a long-term value creation, but you need growth to come back with this space to move.

Private banks have not done much in terms of performance versus PSU banks. What is it that you are looking at in terms of private versus PSU banks?
Ashi Anand: It is quite interesting, because leading private sector banks are still growing, valuations are not very expensive, but they have just been struggling to perform. The way we look at it is, historically, there has been two bellwethers of the market – HDFC Bank and Kotak Bank. These were the private banks that would trade at larger premium valuations to the entire pack. However, both of these banks have had specific issues that have impacted performance and stock performance over the past year.

HDFC Bank is struggling with the merger at the current time and Kotak is seeing a transition away from Uday Kotak, a much beloved leader. These banks, according to us, have led to some kind of a ceiling in terms of valuations of other banks. So, ICICI Bank has caught up with HDFC Bank valuation and really struggled to move beyond that.

We have subsequently seen Axis Bank and IndusInd Bank also starting to move. But if you have an HDFC Bank at about 2.2-2.3 times, ICICI Bank is also now at similar valuations. In fact, it recently just crossed HDFC Bank. It really does not give too much room for other private banks to move up.

This kind of value premium compression that we are seeing is at some level, is causing some kind of a ceiling in terms of stock performance for some of the other private sector banks and at some level, that is where market momentum is focusing or shifting a bit to other smaller regional banks or PSUs, etc, where the valuation gap is still there.

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