Let us start with the specifics of the mega PSU bank recap plan which was announced — 15.3% of the PSB net worth in total and 12.1% of their total gross net NPAs. Who do you think is going to be the biggest beneficiary and where are we likely to see a bigger market reaction come by today?
Looking at the fine print that has come in yesterday, it clearly earmarks the regulatory capital that was mandated and required by a lot of PSU banks because the asset quality stress on their books was very evident. The shoring up of capital adequacy tier-1 capital is going to help them provide for all the provisions that are actually required — whether in NCLT or otherwise. In that respect, again the dilution that might actually come through can be quite substantial because a lot of these banks are trading substantially below book, specifically the mid and small cap PSU banks.
Now for the larger ones like State Bank of India, Punjab National Bank where the infusion probably has been decent and there has been a marginal uptick specifically in the case of SBI when it comes to capital adequacy. The larger banks will not face the issue of equity dilution like the small and mid-cap banks and that probably helps them in propping up both the regulatory requirements as far as the NCLT cases are concerned or otherwise.
Also, the balance sheet expansion in terms of credit growth is picking up. From all the criterias that the finance secretary discussed, a lot will depend upon the financial performance of the small and mid PSU banks. The larger PSU banks is something that I will veer towards. So, State Bank of India, Punjab National Bank which needed capital and both needs as well as provisioning requirements have been met. But within the mid and small PSU banks, Indian Bank is the only bank which has not probably received any capital funds and it has got a very strong balance sheet with improving dynamics both on asset quality and improving credits.
In that sense, Indian Bank probably stands out. And Vijaya Bank yesterday came out with a very good set of numbers and through accelerated provisioning, did increase on a quarter on quarter basis. It is a step in the right direction. With the funds that it has got — almost Rs 1200 crore odd — it does shore up its capital adequacy but the bank is very confident that it was already on a path of consolidation in terms of asset quality improving significantly and credit growth picking as well. This is one bank that we will probably look out for.
Give us your two stock ideas on the back of earnings that we have seen thus far?
What I have really liked is IndiGo. The yields of the company is reflected on a low base effect. On y-o-y comparison, it is looking extremely strong and the cost of available seat kilometer ex fuel has grown just marginally. Even if you account for the efficiencies that the A320 can drive in the quarters to come because the passenger volume growth was a tad bit disappointing, as more utilisations start coming through with these aircraft, the yield aspect will also show signs of improvement and the spreads will probably stabilise.
Yes, crude prices have moved up but a large element in terms of earnings growth looks very strong. IndiGo has posted a very strong set of numbers in my opinion.
The other stock from the large diversified companies is DCM Shriram. And again, their operational performance, when it comes to the Chlor-Venyl segment, has been exceptionally good. They are expanding capacities both in terms of their facilities in Kota, Bharuch and the captive power plant that they are probably expected to get through along with the distillery unit on their sugar operations.
But even the bioseed operations have done pretty well in the quarter gone, the fertiliser segment has done relatively better both on a year on year and a quarter-on-quarter basis.
If you are a trader and interested in price performance, go for IDBI Bank, go for Vijaya Bank, go for Dena Bank because these banks were on the verge of almost a lockdown. Not only will they now survive, they have also the potential to revive the credit growth?
The capital infusion was mandated because of regulatory requirements, both in terms of the Basel-3 requirements as well as shoring up their provisionings. The second aspect which is far more crucial about the financial service sector are the six important criteria, that he has laid down. Post these infusions, they have to perform on these six criteria and based on that and performance, the judgement on the street will probably take place on the basis of whether they are working on quarter-on-quarter numbers by reducing stress, by improving their credit score and by lending to MSMES in a graded manner on a credit score basis.
I will remain extremely selective and within this pocket, trading moves are absolutely evident. But Vijaya Bank looks very promising from a long-term perspective.