3 banks where ROE will improve going forward: Sanjeev Zarbade

Apart from ICICI Bank on which we are positive, we are quite bullish on Karur Vysya Bank and Federal Bank. These are the other two names where we see that the return on equity would definitely improve going forward, says Sanjeev Zarbade, analyst, Kotak Securities. Excerpts from an interview with ETNOW.

What exactly is the mood of the market that you are deciphering?
If you look at the markets from where we really started at the beginning of the earning season, the expectations were really low because the slowdown was still there; consumption growth was slowing down and there were concerns about volume growth. But what we have seen during the earning season is that the volume growth has been quite decent and especially the gross margins have improved for a lot of companies.

In banking, we saw a significant improvement at the PBT level. Of course post the deferred tax, the profit after tax was definitely impacted but overall, the earning season that has panned out was broadly better than expected at the PBT level. From here on, as we go into November, December, we do not have many triggers from the earnings side.

There could be a phase of consolidation and the market is now looking at some more reforms from the government side. Government’s revenue collection has been quite weak. The GST revenues that have been announced, the IIP data that is coming, the core sector data, all are in the negative zone. If there is some action on the reforms front from the government, that is something the market will really cheer up. But the other things that we are looking at is that the domestic buying and mutual fund buying have been negative and that some extent is offset by the positive buying by FIIs. If there is negative from both sides and maybe the market can go to lower levels.

What has been your analysis on the earnings? What is the preferred lot amongst the private banking names?
In the private sector banks, the loan loss provisions have definitely come down. Slippages have also been coming down and if the loan growth, which is currently quite tepid, improves going ahead, then definitely over the two years’ timeframe, the return ratios of private sector banks will definitely look quite good.

So, apart from ICICI Bank on which we are positive, we are quite bullish on Karur Vysya Bank and Federal Bank. These are the other two names where we see that the return on equity would definitely improve going forward.

Do you have any internal estimates from ONGC or Bharti Airtel?
Yes, we do have our internal estimates but right now it is very difficult to take a call on Airtel because of the regulatory issues and the overhang about the payments that has to be made to the government. So really not following the earnings number at this point of time. But in case of Vedanta, the non-ferrous metal price realisations have been trending down in the second quarter. Therefore, I am not expecting a good set of numbers in the second quarter. But we do believe that the prices of non-ferrous metals have started to bottom out and if that trend continues, then we might have a better third quarter performance from Vedanta.

What is the view on some of those media stocks? Today, Sun TV was under pressure because of earnings but by and large given that the ad environment is looking weak, a lot of these companies have buckled. Do you see slowing growth?
Yes. In the media sector, the print media has really underperformed over the last several years. In between, whenever there are elections, the ad rates go up and for one or two quarters, the numbers are better for the print media. But otherwise, the sector has been an underperformer.

Even in the broadcasting sector, we see a lot of change in dynamics. New technologies and new preferences are coming and broadcasters have to be future ready for these kind of disruptions. Even in the past, the media sector has been a very difficult call to take. In some companies, there have been accounting issues, some have corporate governance issues.

By and large, of the four to five stocks that we have under our coverage, we like Zee Enterprises because the asset in itself is quite good. They have been able to maintain their ratings and in terms of cash flow also, the business has been quite good in terms of generating cash.

Now with the stock price having corrected, the valuations also look quite attractive vis-à-vis historical levels. Within the media space, we remain negative on the print media but in the broadcasting side, we remain positive on Zee Enterprises.