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Market share of public sector banks will continue to come down: UR Bhat, Dalton Capital Advisors

Talking to ET Now, UR Bhat, MD, Dalton Capital Advisors , says the recapitalisation process is taking time and therefore if someone has to finance the growth of the Indian economy, it has got to be private sector banks and NBFCs.

Edited excerpts:

Let’s start with the cement space. The Supreme Court has lifted its ban on petcoke. What is your view on this particular space to start with and do you think any impact would have happened in this last month or so since the ban had been imposed? What is your view about this update?

The cement dealers will probably have some amount of stock and therefore there might be very marginal impact. But what one needs to worry about is since the ban has been lifted, that can have a long-lasting impact because of the level of pollution and stuff like could be a recurring theme. It is not as if this has been lifted forever. Sometime later, there will probably be one more revisiting of this space next year, when again pollution levels are high. There is something that needs to be done for the long term. I think cement companies will address this issue but this space needs to be watched because the last word has not been said on this issue.

You do not seem to be too optimistic on market from medium term perspective. When you say that earnings or market might remain range-bound with a slight negative bias, you are talking about the geopolitical tensions related to North Korea which seem to have subsided at this point of time. Even the Gujarat election issue. Looking beyond six months-one year, how are you seeing earning catch up with valuations and do you think this market is a buy at this point of time?

I do not think there is anybody who argues that valuations are very attractive because valuations have gone out of kilter and are stretched, But, it is basically flows that are determining market valuations today and given the level of flows, the market is finding itself at these rather stretched valuations. Going forward, after the immediate global political tensions and the Gujarat election etc, what one needs to really be concerned about is what has not been said on the interest rate hike in the US or elsewhere.

There was a coordinated quantitative easing globally and this is going to be withdrawn over the next few months. It has already started in US and probably it will start elsewhere also. Basically the liquidity and leverage binge which was the result of QE is withdrawn, it is never painless. The market seems to be very sanguine that interest rate hikes will happen very slowly, very gradually and so there would not be any impact on markets.

History has never been very kind to liquidity being withdrawn and so there will be further pain as we go along and these valuations may be difficult to sustain unless there is continuing flow of liquidity. But that party also will have to end sometime. Therefore, in the immediate future, I do think there will be big risk.

But over six months to one year, when there will be probably a coordinated withdrawal of quantitative easing, that is when there will be some impact on equity markets globally.

In the last one or two odd years, we have seen significant outperformance by the auto space. Month after month, their numbers have been very good. Do you think that as this comes into the base, the growth may just moderate and taper off in the coming year?
I do not know how one could come to that conclusion because even when the economy was not doing well post demonetisation, post GST, when the wisdom was that the economy is actually not in great shape, even then auto was probably one of the sectors which really showed resilience. It is growing month over month. So, when the economy is probably going to do better, I do not see why this sector should not do well. This sector will continue to do well but only long-term implications are on account of GST and the number of vehicles that need to be on the road, in the number of trucks, basically because of no problems on octroi and check nakas and stuff like that.

There would probably be some long-term impact on the heavy commercial vehicles because the number of vehicles required every year might actually come down very, very gradually but this will probably be more than compensated by increase in economic activity.

But there is a structural change on account of the ease in which trips can be completed and the speed in which trips can be completed. That is something that one needs to watch but otherwise other than commercial vehicles, growth continues to be quite robust and I expect that it will probably be as robust if not better.

If we recall our memories, then two or three quarters back, most of the market participants were ultra bullish on the NBFC space. What has gone wrong in last one quarter for this space to correct so substantially? What do you think is happening with NBFCs? What is your opinion in this space from long-term perspective?
If you see the asset liability mismatch that there are, basically they have quite a lot of bank finance and they lend and quite a lot of them have public deposits, at least the top two or three, almost a third of the liabilities are public deposits. The public deposits are now very sensitive to interest rate movements because the existing one or two year deposits will continue to be reprised only after sometime. Whenever there is an interest rate increase, their asset repricing happens reasonably fast, whereas liability repricing happens with a slight gap even though the bank interest rates probably would get immediately adjusted in terms of their borrowing from the banking system.

They should be able to manage interest rate hikes reasonably well. For the last several quarters the market has been expecting that the pain on account of NPAs is probably over but quarter over quarter you are seeing that this is not something that is going to get over in a great hurry. Therefore, the larger and especially in terms of the real estate market has been not doing very well. These are the issues that have been affecting the NBFCs for sometime.

But in a structural way, for a couple of years hence, public sector banks have been showing stress on the balance sheet,. They are under capitalised; the recapitalisation process is taking time and therefore if someone has to finance the growth of the Indian economy, it has got to be private sector banks and NBFCs . That is the reason why you have seen lot of interest in these two sectors and sub sectors. It is something structural and that will continue because I think the market share of public sector banks will continue to come down.

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