Consolidation does not mean telecom majors get back pricing power soon: Rajesh Kothari, AlfAccurate

In a chat with ET Now, Rajesh Kothari, CIO, AlfAccurate, says the telecm sector is in an evolving stage from return on capital employed perspective and it will take some more time before it comes back to healthy levels.

Edited excerpts:


What is your view on Idea Cellular, I do not know whether you can give stock specific views at all but on Idea Cellular because the stock has lost almost 22% in the last seven trading sessions. We could have been talking about how the deal was supposed to give the stock a facelift but it has done the complete opposite?


We have not been holding telecom companies almost for the last three to five years because we have seen that the incremental return on capital employed in the last three years at least in the telecom sector has been very significantly lower compared to our benchmark return on capital employed generally.

Having said that, post Idea-Vodafone merger, there is one less player from the industry and that results in lower competition. But that does not mean that telecom players are going to get back the pricing power which they used to enjoy five to eight years back. The industry is in an evolving stage from return on capital employed perspective and it will take some more time before it comes back to healthy levels.

What about the PSU banks and the frenzy there? Are you buying into the excitement and the rising tide?

We are holding some PSU banks, a very small component of our portfolio particularly few large PSU banks like State Bank of India and Bank of Baroda that we are holding from I would say from last six to nine months.

Having said that, the asset quality which remains the biggest issue in PSU banking while the government is trying its best to sort out this issue has to be worked out because straight waiver is not possible from corporate banking perspective because if you do that then you have to do even the farm loan waiver and considering that there are lot of negotiations which are happening for the top 10 accounts which are in NPA reservation has not yet happened. We all are waiting.

Last but not the least, the PSU banks, managements are very important. One of the very good PSU bank MD had been asked to move to the another large PSU cum private sector bank. I do not know whether it is the right strategy. There are a lot of what I would say uncertainty in terms of management tenure and that is very important to drive the overall quality of earnings growth and quality of assets which PSU banks are going to land over next two to three years.

For a couple of years now, we are debating that why ICICI Bank should be the first port of call for someone who believes in economic recovery. The valuations are very attractive but betting on ICICI Bank in the last two years has been a futile exercise, not only you have lost money you have also underperformed the markets massively?

What is important is that from the growth perspective if you look at HDFC Bank and Kotak Bank, they are probably well equipped to capture the growth whether it is a consumer driven growth or whether it is a corporate driven growth.

For example, if you look at the Kotak Bank’s number the corporate book is growing quite significantly compared to other two large corporate lenders. From the valuation perspective, while on optical basis, a few of these private sector banks look expensive but when you adjust it for the NPA, then the valuation difference comes down significantly. If you ask me, we continue to hold private sector banks, whether it is HDFC Bank or Kotak Bank. We believe this sector will continue to do well considering there is going to be 20-25% probably loan book growth which will get reflected in the earnings growth on compounded basis over the next few years.