How should you approach and what kind of frictional effect it has on other PSU banks? Want to look beyond SBI?
A decades-long underperformance of the SBI and other PSU banks is now gradually being corrected. HDFC Bank, Axis Bank, ICICI Bank created much more wealth than what PSUs provided. Now a kind of reversal is taking place.
This will be the absolute “blue sky” for PSU banks over the next two or three years. All the old NPAs have been planned and with the economy picking up they are really well positioned for credit growth. There will be a situation where the net interest income will increase for the PSU banks and the costs of credit will be considerably lower. We could see an increase in profits, as we have seen in the last two quarters, and that should last at least two or three years until they run into problems with the increase in NPAs.
Given this, growth looks attractive. The SBI led by all PSU banks is expected to generate exceptional returns. As to whether to invest in other PSU banks, it all depends on your risk appetite. If your risk appetite is low then SBI will do, but if you want to have a slightly higher risk / return profile then banks like Bank of Baroda, Canara Bank, PNB can be considered. The underlying investment theme and logic remains the same. It’s just that second-line PSU banks are significantly cheaper and offer a possibility of PE reservation and prices to be revalued upwards. It all depends on the risk appetite. It is therefore undeniable that this year and possibly next year, we will see significant outperformance of PSU banks vis-à-vis other private sector banks – the constituents of Bank Nifty.
The real action will happen in the IPO market. How to align the public portfolio to benefit from this wave of IPOs of companies in the new economy?
The value game is transitory, but the growth game is permanent. If you want to make money in the stock market, you can’t do it by buying valuable stocks. It must go through the purchase of growth companies. Globally, there is a tendency to buy more value stocks because economies are opening up and commodity prices have risen and global cycles are better for these companies. But at some point in time, the industries in which these valuable companies operate are mature industries and they are growing at or below the growth rate of GDP.
If you want multibagger stocks – the creators of wealth – they’re going to be in the growing companies, the one or two new age digital companies that have been listed, and many more that are in the process of being listed. The valuation of these companies is becoming more and more common, they have been around for a long time. A lot of investors understand them and once we get a list and they are available at a fair price then they will have a lot of appetite for these stocks and eventually find their way into many investor portfolios.
Also, it should be kept in mind that many foreign investors are completely free to invest in India and have a preference for new age digital businesses. We have seen foreign investors flock to Chinese markets and Chinese digital stocks have also risen significantly. I expect something similar to happen in Indian capital markets once we have the opportunity to invest in large new age digital companies. So while IPOs will be very successful and you might see a pop on the list, it won’t be the last high for these companies. Slowly, they will find their place in the portfolios of investors.
The real dilemma for the average Indian retail investor or fund manager is how to strategize for these holdings, as you cannot price them on traditional metrics like price versus earnings, price at the reservation, the EV to the EBITDA are ridiculously high and in some cases nonexistent losses. Nonetheless, if you see the examples in China and the examples on the Nasdaq, even after suffering losses, these companies continue to soar and build wealth. This conundrum has to be solved at some point, but I welcome these announcements and look forward to investing in them significantly over the remainder of this decade.