Bullish on these 4 PSU banks: Mahantesh Sabarad, SBI Cap

Huge growth ahead in consumer space and within that in FMCG space, Mahantesh Sabarad, Head, Retail Research, SBI Cap Securities, tells ET Now.Edited excerpts: Can Dabur continue to beat itself or is this quarter’s results a one- off? If they are reporting volume growth of 21% in Q1, which has surpassed their 65213681 65210291 65212306 own expectations, what does one pencil in for the remaining three quarters? Basically, in consumer space and within that in the FMCG space, there is huge growth ahead. That can be partly seen because rural incomes are getting better. We have a normal monsoon although the spatial distribution is not so great. There is a situation where a lot of GST rates have been moderated. Some of this is applicable for consumer durables but that is translating into a consumption boost which will continue to have momentum for two-three quarters more. While the growth rate in terms of volumes that we have seen from the likes of Levers, Daburs and Asian Paints have been in double digits, those double digit growth numbers will moderate because the base effect will catch up. The numbers, nevertheless will be strong. In an FMCG company, one has volume growth plus the pricing advantage and then comes the premiumisation effect. All three combined would drive growth on the top line and that growth will be in double digits.Harley is now eyeing Royale Enfield’s turf. Although CLSA believes that they may not quite harm Royal Enfield’s market share and may not really target a very large market size, I guess pricing is the key. Could this escalate into a deeper problem for Eicher? No not really. There is a separate niche that Eicher enjoys in the bike space in the light-weight categories. Harley while it is graduating from the heavy weights to middle weights and then the light-weights now, is not really going to affect Eicher in a big way because distribution is the key for such bikes. While the product is great, if you do not have great distribution network, your ability to generate sales is limited which is what Eicher has been targeting over the years. Now they have been expanding their distribution reach and they are becoming quite strong now. They were earlier the south-based distribution reach company. Now they have a well established distribution base. Overall, Eicher should not be worried about Harley coming into India in the light-weight category.What do you make of Bajaj Auto? Are they doing the right thing by coming out in the open and saying that we will do whatever it takes to regain market share? They have become number four. I can sense the desperation in the management. But will the bid to regain market share come at a price? Is the stock pricing in a margin erosion and a price war?Let me split your question into three parts. One is the strategy that is being employed by Bajaj Auto. It is in the right direction because you have to necessarily react to market pressures. The two-wheeler space is competitive and you cannot just stand by the way side. The second part of your question was will this really affect the company in terms of its margins and thereof? While the company has guided that they will not have 20% kind of margins for the next two or three years, I tend to believe that there are enough margins levers available with Bajaj Auto because of its diversified nature of business that can eventually take it to 20% margin.The third part of your question is whether the stock price is reflecting all this. I would say no. The stock price is not reflecting the potential that Bajaj Auto has in terms of growth ahead. It is fairly cheap at this juncture relative to the peers and relative to the broader market as well for the kind of return ratios, balance sheet strength and the kind of management quality they possess.Can Bank, Bank of Baroda have come out with excellent set of numbers. The PSU banks doing pretty well for themselves. But with Bank of India numbers, again all the factors which were looking positive for the space have turned bit negative. Should one be stock specific in PSU space? We continue to like the PSU space as a whole but then you have to be very stock specific even within that space because RBI is intervening and there are lots of banks under prompt corrective action. That means there will be a period of virtually no growth for those companies and for investors those are not the companies to look at. That leaves the other set of PSU banks which appear quite promising because now the NPA worries are going to be over. Also, it is not about NPA issue alone, it is about growth as well. Unless and until you have strong capital, you really cannot grow and therefore you cannot arrest the slide. For us, there are three or four PSU banks that we like -- Bank of Baroda, Vijaya Bank, Indian Bank and Can Bank seems to be coming into our radar right now. That space is generally good. The moment any bank comes out of the prompt corrective action, that would be something one should be watching out for.

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