On SBI
SBI has been subjected to all kinds of uncertainties. They had to bail out YES Bank. There was a fear that SBI would probably need to bail out other PSU banks too. Rajnish Kumar, the previous CMD did a fantastic job in guiding SBI through that whole process and now the new CEO is an old hand and knows the system very well, which is very important for a PSU bank and provides some amount of continuity.
We are now entering into a period of peak provisioning. We know the maximum losses that can happen and that helps in provisioning and in the tier I capital ratios and therefore loan growth. When all these things fall into place, then valuations begin to matter. Valuations anyway are on its side as it is an extremely cheap bank. It will do very well in the coming year.
On real estate as a contrarian play
2020 has been pretty much affected by Covid. No sales were possible before the last two months for obvious reasons and now sales have started again as the economy unlocks and people begin to go out. There is a sufficient amount of unsold inventory out there. Companies including DLF have restructured, reduced their debt and are now showing increasing willingness to sell at a lower price than they were holding back in the previous year. This is going to be a big theme and will apply to other sectors as well.
2021 will be a year of transformation and the companies that are transforming themselves such as DLF, will see increased traction.
On how much more can TCS NSE 0.04 % & Infosys NSE 0.81 % go
If you look at the PEs in the context of earnings, these companies are still trading pretty much in the 20s and for an earnings growth which is going to accelerate with good visibility going into the next couple of years, then PEs will look slightly more palatable.
Second, ROEs of these companies have been improving because lower expenses, greater productivity and higher ROE support greater profitability which supports a higher multiple. Against that backdrop, the multiples are clearly fine for the frontline players and companies as big as TCS, Infosys and HCL Technologies NSE 1.53 %. These companies are still growing earnings north of 15% earnings growth and with the potential for a further earnings upgrade.
As I believe that 2021 is the year of transformation, a transformation in the companies’ business model which improves their margins even in a limited sense, will support higher multiples and earnings will come back over the next couple of years. I think IT will make steady 15-20% returns per year going to the next couple of years at least.
On QSR/consumption space
QSR as a space will continue to do very well simply because coming out of the lockdowns, people are increasingly ordering in more or going out. All these factors will help consumption companies. For example, the Burger King stocks were running ahead of themselves in terms of fundamentals. These are great companies with good valuations at the time of listing but Bectors Food now trades at a very high multiple. Easy money has been made in those stocks but on the other hand, Jubilant Foodworks and Westlife still look good. There is still additional room for returns in the coming weeks and months.
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