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Last Updated : Feb 20, 2017 05:02 PM IST | Source: CNBC-TV18

Tulsian tells: Why private banks could see consolidation soon

After the public sector banks, private banks could also see some consolidation, believes SP Tulsian of

After the public sector banks, private banks could also see some consolidation, believes SP Tulsian of 

Many of the private banks have been seeing improvement while the valuations are still low on a price-earnings ratio (P/E) multiple of in single digit price-to-book of less than 1.5-2, he said. 

Below is the transcript of SP Tulsian's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Anuj: First your thoughts on what is happening in this midcap private banks, DCB Bank and Karnataka Bank. DCB is up 10 percent as we speak, Karnataka Bank as well, up about 6 percent.

A: Practically, if you see, this DCB Bank, the talk has been going on that this is seen as a takeover candidate in the past maybe for a couple of years. We have been hearing that HDFC Bank is looking to acquire it. But what I feel in the private banking space, because a big consolidation is seen happening in PSU banks, we are seeing five banks getting merged with SBI. Then you will be having about 25-26 PSU banks remaining after these five banks getting merged into SBI.

Obviously, the next move by the government will be to consolidate or maybe to merge the mid-sized or the smaller ones with the larger ones like maybe Allahabad Bank, the five larger banks like Punjab National Bank (PNB), Bank of India, Bank of Baroda, Canara Bank and they all will be taking the banks like maybe Allahabad Bank, Andhra Bank, Syndicate Bank kind of things. Depends on the geographical locations and all sort of things.

So, probably market is also sensing that if the consolidation is happening in PSU banking space, this has to happen in the private banking space also to optimise the cost or to cut the duplications and all sort of things and there are many banks which are not having the identified promoters and there they are seen to be the better target for acquisition.

So, probably that is the theme which is now getting played on the private sector banking space. And if you see, many of these private sector banks like Karnataka Bank, South Indian Bank or maybe the south based banks, Federal Bank, they have all been showing good improvement while the valuations are seen still to be ruling quite low maybe on a price-earnings ratio (P/E) multiple of in single digit price-to-book of less than 1.5-2. So, probably this is the reason you are seeing the interest getting revived in the private sector banks on the hopes of the consolidation likely to happen in that space as well.

Sonia: Any thoughts on the GMR Infrastructure story our colleague just broke a while back and is this is a stock that you would back at any point?

A: This news also is being contemplated by the market because the way things have been moving on GMR front. But maybe in this last one year, if I say the power assets have not got monetised. In fact if you see the capital employed of the company, the major portion, maybe 60-65 percent of the capital employed got stuck into the power generation projects, largely the thermal power. Gas based projects are not seen to be too much and that monetisation of power projects have come to a halt maybe because of the price which management is asking.

So to keep the process on of reduction of the debt which is seen closer to about Rs 40,000 crore, I do not think that management has any other option but to continue with the corporate actions and take the hiving off of the airport assets into a separate company. They have two airports, one at Delhi and one at Hyderabad. In fact, in Hyderabad, they have tried their level best to monetise the land parcels also by making use of MRO facility or maybe like hotels and the other airport related spaces. And even that has not worked.

And on the Delhi front also the monetisation of the land to the extent of about Rs 150 acres has also seen remain pending maybe because of the want of the right price by the management. So, because no progress is happening on the power generation front, on the debt reduction, probably this is the step being contemplated by the management. But if I need to allocate the valuations of the company, whatever valuations you are seeing now of the market cap and all those things, market is giving the entire valuations to the airport business only. I do not think that market is giving any kind of valuations.

If you take the enterprise value (EV), that EV of power business gets offset by the debt to be assumed by the prospective buyer, I do not think that there will be any value left in the airport business. On the special economic zone (SEZ) front and all that, those things have never seen having taken off. So, probably management is contemplating to take up this airport demerger move into a separate company.

Anuj: We spoke about it in the morning, but at Rs 416 on Havells India. Is the risk reward positive or favourable?

A: If you need to understand the price behaviour of both the stocks, Havells and Lloyd Electric and Engineering. Now if the market is saying that this is negative for Lloyd Electrical, the stock is down by about 15 percent, then obviously it should be that it is seen a positive for Havells.

But market is again taking that even for Havells, this is negative. You cannot say that if Lloyd has divested the stake at a very low price and that is why the stock is having corrected by 15 percent should give the better reflection into the share price of Havells. But it is not happening like that.

And in fact, in the morning I have said that maybe for Havells, market will be little uncomfortable because the blended margins, the overall margin of this air conditioning business or maybe the consumer durable business along with their existing product line will definitely fall. But eventually, on the net basis, for FY18, this will improve. So, maybe the correction is seen lower in Havells maybe because of the positive bias seen building up but honestly, I do not understand the reason for a correction in the Lloyd Electrical.

In fact, as I said in the morning, I will be keeping a positive stance on both the stocks, not from a day or from the near-term point of view because once the deal gets concluded by March 31 as indicated by Havells management, Rs 1,600 crore or Rs 1,550 crore coming into the company of Lloyd Electrical and the entire business wasting into the Havells will all be seen positive. So, maybe this near-term aberrations will be seen. But I am keeping a positive stance on both the stocks from a medium-term point of view.

Anuj: Any thoughts on Sandesh?

A: I have been keeping a positive view on this stock for the last 10 years because the kind of financial solvency and the strength you see in the company, Nigel referred of that one real estate company though the clarity is not available on that space, but any of the move, you do not doubt on the corporate actions of that. So, that will also be accruing to the good profitability.

And maybe one off because if you see nine-month performance, I am not disappointed with the nine-month financial performance because overall the stock is looking very good for the long-term investor because firstly it is thinly traded so maybe the impact costs are sometimes seen very high, but otherwise, those who want to have a stable stock like this, they can definitely go as a long-term investor.

Anuj: One thought from you on the space that is buzzing now, the likes of Rural Electrification Corporation (REC), Power Finance Corporation (PFC), PTC, all these stocks surging. What would be your top pick among all of these?

A: Actually, if you see, amongst the finance space, this REC and PFC, both were not moving up. In fact I gave a buy call on PTC India maybe a couple of weeks back on the channel saying that if you take the power exchange business, the kind of growth which we are going to see, in fact the power consumption is going to get improved. So, obviously, this kind of rerating reflection has to be seen into the PFC-REC as well. That is what is seen coming in today.

So, I am keeping a positive view because from here on if you have the improvement, if you have the transmission and distribution (T&D) infrastructure in place and the Discom health seen having improved because of the Ujwal DISCOM Assurance Yojana (UDAY) bonds and all that, maybe from the next financial year, the power offtake will be seen quite high. We are seeing the summer season now approaching and that will be seen a very big trigger for all these power generator companies and because of that we have a positive reflection seen on PTC India, PFC and REC.

Q: Any quick thoughts on Tata Consultancy Services (TCS)? These are the key numbers that have come in, the price has been set at Rs 2,850 a share.

A: Two things, firstly it is a tender offer and I am presuming that promoters will also be indicating that they will tender the shares in the open offer. But what it is not compulsory on the part of the promoters, so maybe eventually, they will look to increase their stake from 73.33 percent to 75 percent if this offer goes through and they do not participate in this offer, number one.

Number two, maybe near-term, I am not taking a near-term call, but these kind of tiny buybacks of maybe 3 percent has never worked in any of the companies, whether you take the case of Bharti Infratel, Wipro, there have been umpteen number of examples which we have seen in this case, because nowadays, I am not very sure about the rules, maybe an investment banker can throw light, this open offer is not allowed by SEBI, it has to be all tender route.

And these things does not work because even if you take maybe about one third of the money having used for this buyback, market will not be very cheerful. I am not going for the intraday moves, but ultimately, this will not be seen as a value creation. But as I said that maybe this could see promoters increasing their stake in the company to 75 percent.

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First Published on Feb 20, 2017 04:57 pm
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