what to buy: I’d wait for 30-40% dip before buying HDFC Bank, ICICI Bank or Kotak: Rajat Sharma

How are you viewing FMCG? While growth is not a concern, it is always a toss-up between growth visibility and the valuations that these stocks are trading at?
You are right. If we look at the FMCG companies results that they have posted, there has not been any significant damage to the revenue that they have reported or to net profits. In the case of HUL, the net profit has grown 17-18%. On valuations, yes, a lot of these companies are extremely overvalued and that is not just about these companies. It is true about the markets as a whole because last year for about six to eight months, we were in a complete lockdown and FMCG was one sector which was not really affected by that lockdown because the goods that these companies make were still in demand.

What is your outlook when it comes to financial stocks? A lot of these PSU banks are active on the back of the privatisation news. Should we wait for a bit of a cool off within the private names to dip into some of the marquee large caps?
Personally if you ask me, I would like to wait for a dip of at least 30% to 40% in some of these private sector banks whether it is HDFC or ICICI or Kotak because that is really where my fear is stemming from in these markets. You may call me old school but a), markets are extremely overvalued and b), there are a lot of unknowns in the market and most of these unknowns are coming from financials whether it is NBFCs or banks.

Before Covid, we had a lot of problems with NPAs and stressed debt. Come Covid and all this liquidity and relaxation for a lot of these banks in terms of the results that they have to maintain, the bad bank being set up — all these are feel-good things but nothing has really addressed the problem that we were facing before Covid. Talk to any private banker and everybody would tell you that there are a lot of skeletons in the cupboard and nothing is really coming out. Corporates were getting loans at 8%. Today, they are getting loans at 4-5%. At some point, all of this will be over. How long can this low rate regime continue? Even if this is the new normal, you will see a lot of debt going bad.

I was looking at the results. Bajaj Finance has reported a 17% decline in net profit when everything else is about 50-60% up, the overall Nifty results are 56% up on the net profit and both on operating level and net profit level, this stock has reported negative earnings by 17-18% and yet the stock has more than doubled and that is the same with a lot of private sector banks and the time to privatise even the PSUs was probably two years back.

Today you are going to privatise the four PSUs that the government is talking about. They are already at a price point where the government is not going to make anything. You may call me cynical but I do think it could take a long while before these banks would become healthy again. Do not go by stock prices. So would I like to buy into these banks? I do not hold any of the large cap private sector banks. I am still holding Federal Bank. I am still holding IDFC First. The latter has its own problems in terms of NPAs and stuff but that is that. Those are the only two stocks I am holding.

The major problem is in the large cap private sector banks and even the public sector banks.

Would you take a relook at PSUs or would you wait for the first disinvestment to go and then perhaps take a call?
I think the latter, not just the first disinvestment I would like to see some of these disinvestments. If you look at the PSU stocks, nothing has really performed well, whether it is

or Coal India or NTPC or BHEL. The reason is that the government has been talking about disinvestment for a very long time. Even the four PSU banks whose names have come up in privatisation shortlist, have not moved at all despite the disinvestment buzz. The reason is everyone knows that the government will have to disinvest them at whatever price they can get and that is why even in such an overvalued market, these stocks have not moved up.

Personally, I really like ONGC at Rs 100 a share. As the world starts opening up again and crude consumption increases, we have already seen crude prices come up higher. As business starts picking up, crude oil will do well and this stock will move much higher from where it is. Oil and gas is one space, where once this BPCL investment happens, there will be some sort of rerating because oil and gas is still very regulatory driven whether it is Mahanagar Gas or IGL or ONGC or even Adani Total Gas. All these stocks are at a very good price point but then the PSU pack of these stocks has not moved up because of this talk of disinvestment has been going on for a long time.

The whole market is worried about the price at which the government will sell the stocks. They may be forced to do it at whatever prevailing price and that many more shares will come into the market. Nobody knows what route they take to disinvest and that is the reason.

In these overvalued markets, if you had to pick up something and hold for the next two, three years, oil exploration companies like ONGC or oil marketing companies should be a good place to be. Other than that, in the PSU space, I do not see any stocks moving up from here.

How do you think the overall crude price trajectory is likely to impact the OMCs?
It is old school wisdom that when crude prices rise, oil marketing companies do not really perform that well but oil exploration companies stand to benefit a lot. Now we are in a market where none of the old school wisdom really seems to be working because what we have seen is exactly the opposite of how things should be working.

Having said that, I personally believe that ONGC as a stock is available at a very good price point. It has got a very healthy dividend yield as the world opens up and crude consumption increases. One keeps hearing about electric vehicles and a permanent shift to that but I do not think that is going to happenin my lifetime. We are going to remain with crude as the primary source of fuel for the next 20-30 years.

So if somebody wanted to add a stock to their portfolio and hold it for a long time, ONGC would definitely be one stock. As for OMCs like BPCL and HPCL, if markets fall, which certainly will at some point, those stocks could correct quite sharply from where they are. So, I favour oil exploration a lot more than oil marketing companies and that is what I have recommended. In this space, a lot more value could come out irrespective of when the stock prices correct.