Positive on PSU banks, selective on IT: Pankaj Pandey, ICICIdirect.com

In a chat with ET Now, Pankaj Pandey, HoR, ICICIdirect.com, says in largecap space, betting on SBI and GAIL.

Edited excerpts:

Two mid-cap IT names -- KPIT and Sasken -- have come out with numbers and the revenue growth is disappointing for both of them. Do you cover either of them?

We cover KPIT and while the revenues are slightly above our estimates, the bottom line growth has been largely driven by other income. Overall, the results are not so good. Within the overall IT space also, we are not expecting much of a magic because the volume growth or the dollar revenue growth is expected to be in high single digits and most of the stocks are trading somewhere between 12 and 15 times forward basis which is why overall the sector is not expected to do much.

However, within this entire pack we like Persistent Systems with a target price of Rs 725 and largely we like this stock because of the linearity in growth what we expect to happen in the next two or three years. Again, I am selective in IT but overall I do not expect this sector to outperform.

From amongst the stocks that you are recommending, Indian Bank is amongst the stocks that you like, why this one?

Overall, we have turned positive on PSU banks and we like both Indian Bank and State Bank of India. So there are multiple triggers; a 30 bps kind of a decline what we have seen in the last quarter can get extended and that should lead to good amount of bump up in the profitability. The specific reason for liking Indian Bank was that it has got exposure towards SEBs which is not so risky compared to the other banks and also what we expect is that this company is quite comfortable on the capital front and which is why it will not need fund raising or funds from the government and which is why we like this stock for the next one year.

As a house what is your preferred largecap idea for 2017? Where are you telling your clients to take a little bit of risk? There is no harm in allocating 10-12% or your total portfolio to this largecap stock?

So we are positive on two largecaps; one is State Bank of India. Again, we expect this bank to benefit on multiple counts, one of them being treasury gains. There could be lower cost of funds because if the money gets retained in the system, that might bring down their cost. In addition to that, we expect that the government would do something on providing benefits to the rural consumers and I think this bank is sort of very well placed given the fact that they have got about one-fourth of the Jan Dhan accounts. So from all counts this stock looks good to us.

Another stock which we like is GAIL. We have seen that there is revision in tariffs for certain pipelines and we expect further revisions also to. Ideally that should lead to better ROCs for the gas transmission business from about 9.6 odd to about 13.6 odd, so about 400 bps kind of an improvement. All this should drive their profitability upwards of 20% and which is why we like the stock.

10% up for the small cap index in this year itself.What explains this rather strange phenomenon? No one saw that coming but the data tells you that there is a nice little rally which has already happened in the smallcap stocks?

If you look at, especially if you talk in terms of index, I think the earnings growth are still muted. Also there are certain deadwoods also in the index wherein you do not expect much of a directional move. Take the case for of IT or probably Reliance. It is not expected that a number of stocks in the index would outperform going forward.

The midcap and the smallcap space offer opportunity in terms of higher growth and higher returns though at this point of time they are not that risky given the fact that the macros are still quite stable. Which is why the midcaps and smallcaps have been doing well. People should look at stock specific stocks, for example, we like a stock like Phillips Carbon Black, the company came out with good sort of numbers.

Please give one top largecap name from your end and the rationale thereof?

State Bank of India is our top pick for 2017 and they have got multiple triggers in place; one of them could be that you will see a good amount of bump up in profits because of the decline in yields, plus any kind of government benefit if the government intends to pass on the monetary benefit to the weaker section of the society through Jan Dhan accounts, this bank is the right place to invest. Plus they have got growth capital so which is why we believe that compared to the rest of the pack they should do well and their asset quality is also relatively better compared to the other PSU banks.