state bank of india: Be cautious on IT in short term, positive on PSU banks

Investors looking to invest in IT companies could wait for a correction of maybe 10% or so before making fresh investments, says Dipan Mehta, Founder & Director, Elixir Equities.

We have seen an across-the-board move on some of the PSU names. Has anything changed?
My view on PSU banks has changed. I have been very negative on PSUs and PSU banks per se but I think they are a good value play at this point of time. The success of Canara Bank’s QIP and the numbers which have come through over the last quarter from a lot of PSU banks does suggest that maybe the worst is over for PSU banks. They were pinned down because of NPAs which were unknown as far as the pandemic was concerned when the moratorium was on. Gradually, confidence is building up and the NPAs will not be as bad as were suspected earlier.

Once normalcy comes back into the economy, credit growth will also come back into the PSU banks. Post Covid-19 and IL&FS crisis, the entire banking and NBFC industry is slightly transformed. Given that a lot of weak players have exited, competition from NBFCs at the smaller and mid sized ones has come down and post consolidation, most of the PSU banks are in a reasonably strong financial position. Some of them have got capital adequacy ratio issues which will easily get addressed in times like this.

I think the likes of Canara Bank or SBI or some of the larger PSU banks will be able to at least maintain their market share, grow their credit book and earn a decent amount of fee income as well which has been lagging for the PSU banks per se. The most interesting part about PSU banks is that their valuations are extremely attractive at or below book value and at least the next six to 12 months looks very positive for PSU banks.

The PSU banks may even be outperforming the private sector banks on a relative basis. So one can get into PSU banks with a one-year outlook, but one should keep in mind that these can never be part of the core holding and one needs to monitor them quite closely. Six to 12 months down the line, they may suddenly lose steam and one has to be a bit careful about that. But for the time being, there is scope for earnings to move up and the PEs and price to book to expand as well as in PSU banks. So I am positive on that sector as a whole. Normally, we are quite negative, but it is an interesting situation at this point of time.

What is your take on IT? What have you been tracking in this basket?
Generally we have been very positive on IT. Large cap IT companies like Infosys and Wipro are quite interesting and more so, after the recent interview by the new Wipro CEO where he has pledged to grow the company at higher than peer growth rates two years from now. If he does achieve that then you could see Wipro outperforming all its peer group companies and the other larger IT companies and that is quite interesting.

In terms of valuation and superior growth rates, HCL Tech also makes a compelling investment case. Within the midcap we are very positive on companies like Tata Elxsi and Intellect Design and Ramco Systems where we feel they have a slightly differentiated business model. But I would like to be a bit cautious on the sector because I feel the market has moved up significantly in the last almost six weeks or so and maybe we are at the top end as far as this particular bull run or this cycle of the bull run is concerned. There could be a correction impacting all stocks, IT included.

From that point of view, I would like to be slightly cautious even in the IT sector. The large IT companies have a very high quantum of FII investments and if selling pressure comes from there, then these will be the counters that would be targeted first. On a medium to longer term basis, we are very positive on IT and the entire equity segment.

In the short term, we would like to be a bit cautious and investors looking to invest in IT companies could wait for a correction of maybe 10% or so before looking at making fresh investments.

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