Is it right time to pick smaller PSU stocks?

“I think it is more rather than the IPO boom, it is more, I can guess, the more the vehicle market or the passenger vehicle segment which has now started to expand, the premiumisation, the inspirational Indian coming to the fore which is now driving these markets more,” says .

I am sure you remember the IPO of Maruti. At that time, people have made massive money since then who stuck around as far as Maruti IPO is concerned. But now, there will be another passenger vehicle stock to track. Do you think Hyundai IPO will also attract a lot of good quality investors, retail investors also likely make money?

Yes, I actually precisely remember the times when Maruti got listed. If my memory serves me right, it was somewhere around 2003 when the IPO came at Rs 125 and it got listed at Rs 175 and today we all know the story, the compounding that the stock has offered, the business has offered, it is trading around Rs 10,000.

I think it is more rather than the IPO boom, it is more, I can guess, the more the vehicle market or the passenger vehicle segment which has now started to expand, the premiumisation, the inspirational Indian coming to the fore which is now driving these markets more. The per capita consumption of vehicle, if we talk about, if we talk about the discretionary consumption in India or luxury trends now rising, Maruti itself is on record saying that they are selling more SUVs now than the hatchbacks or even the sedans.

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So, yes, you made a point absolutely right that Hyundai has a mark-to-market market share sort of along with Maruti a lot of discounts where they sell SUVs like Creta and these urban SUVs which sell very well.

Ideally, yes, it is a good time for this type of a company to come into the market. The market size is expanding. The size of the opportunity is huge. Probably, yes, market can digest a bit of more passenger vehicle companies. Maruti has been sort of losing market share to the Hyundais and the Kias and the Hondas of the world a bit, but still it is a large company.

So, Mahindra & Mahindra also entered into the SUV segment with a lot of bang and was successful. I think, yes, there is still a market which is to be penetrated, so there are these IPOs which are welcome and I think retail investors along with the HNIs there will be good appetite if it comes during a good market scenario.

These slips or this volatility that we are seeing in the market right now could give a lot of buying opportunities in select names as well, especially the stocks which are reacting very negatively to earnings. Has any such name cropped up on your radar?

Yes, it is a very good question. See, ideally at these levels of the market where we have seen such a fast and furious rally, a bit of correction, a bit of consolidation here and there would be great for the health of the markets. So, there has to be certain gravity to the proceedings and stocks cannot just go up, so that is where I think we are finding a lot of heart that this volatility has sort of come in.

It would be unnerving for people, but ideally you made a point that whether it is sort of a buying opportunity, it is, it is not everywhere and anywhere because we have seen the market breath expanding to crazy levels.

Ideally, there are a lot of businesses which probably would not deliver this quarter, but the management commentary has been good. So, just an example being IT sector seems to have sort of come out of the woods. There is also a lot of pharma companies, niche pharma companies, naming a certain like Abbott India came up with good set of numbers, after a long while the company saw a bit of traction, margin expansion. I think the stock also reacted very well. So, there are both ways. Some of the banks have not come up with good set of numbers. Some private banks did not deliver, but that does not mean that this will keep on going for the next two-three quarters.

So, yes, there are buying opportunities across BFSI, across IT, across certain pharma companies, even in capital goods, just an example being in case L&T came up with great set of numbers but there was a margin drag because of certain earlier commitments. So, there again is an opportunity with a huge order book, with a good execution capability, with capex again going to happen thick and fast. I think there are opportunities in great companies and good companies where there are sort of these corrections entering and one can probably look forward to enter for another one-and-a-half, two years.

OMCs, ONGC, any of these names you think are a material buy?

Probably the Red Sea crisis saw a lot of these companies doing well, so India used to get its normal share of crude imports from Russia as well and I think the sort of GRMs had expanded and most of these companies, it immediately gets into the net profit of these companies.

Most of these companies started to do very well, like Reliance started it off and then ONGC and oil in this company sort of started following it up. I guess it is more a move that is medium term in nature but having said that, this side of the market, for example, Reliance had underperformed for the last six months, one year time frame I think it has just come out of that hibernation mode and most of its businesses, look at the numbers, most of these numbers were excellent be it Jio, be it the retail numbers, be it the O2C business, plus I think also the GRMs.

I think most of these businesses are doing well. So, my sense is that if the market has legs to go forward from here, these are some of the market leaders which will take the responsibility of taking it to the new level.

You do not track Paytm you said, but what about Jio Financial Services?

I think yes, it is into the right kind of the business and probably financial is one theme that is riding high on, it might have phases of sort of small hibernations in between but the model that Jio Financial is trying to get into, probably even the EMC that will come into picture and the other line of businesses, all these businesses together probably India is still underpenetrated and I think it is going to take the advantage of economies of scale, the reach that this company has.

It is extremely a right moment at the right time for this company to be into this type of business. So, ideally, yes, I have not looked at the model in detail, but it seems like it is sort of making the right noises as such and will be in favour for some time to come.

But since we are on the subject of bank, what is your view on the public sector banks at this point of time? I mean a UCO Bank is up 15%. They are talking about how their asset quality is likely to improve, at least that is what the takeaway from the earnings call was. Punjab & Sind Bank is higher, Central Bank, Bank of Maharashtra, a lot of these regional small PSU banks are perking up. Should one get tempted by this rally in these smaller PSU names or stay away?

See, ideally, I think banks are going through the best times, PSU banks particularly, the question is on PSU banks and I think this is a confluence of factors. Very clearly, most of these companies have now improved balance sheet. There were robust balance sheet to not only lend, but I think there is nothing in the pipeline that can immediately come and disturb, add to it the fiscal deficit number that the government talked about and the lower borrowing figure that they talked about in the interim budget, that also has spooked this side of the PSU banks where I think most of their gains on the bond side can come on the treasury side because we saw the bond yields collapsing on that day and probably that is a sign towards lower inflation and lower rates over a period which these banks would be big beneficiary of not only in the treasury portfolios, but overall as well.

So, I think, yes, it is a good time. One needs to be just cautious that they cannot get into everything that is doing well, but yes if you are holding these businesses, I think these are the best times you have seen in the last 10-15 years for PSU banks.

Just keep on holding and probably at the first point of a collapse or rather whenever the numbers or the fundamental quality deteriorates and if you see NPAs coming in the near future, for example, a failed monsoon or something like that, that is the first sign one should probably be deterred with. Right now, I think things are good for these PSU banks and they have come out of a multi-year bear run. So, I think, yes, for the next six months, one year, it looks good for this sector.

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Harry Byrne

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