Rally in bank stocks purely a function of F&O expiry: Sana Securities

‘It seems to be some kind of herd mentality and that could be one reason for today’s move’

I do not think the Sun Pharma numbers are as bad as they appear to be, says CEO Rajat Sharma.

What is your view on corporate banks?
I think there is some in fact a lot more than some short covering. I do not usually look at markets day to day but I have been looking at it since 10:30 this morning. If you see, it has gone up very gradually and it consistently kept going higher. That means with expiry tomorrow, a lot of investors are cutting their losses. They have realised this may not fall today and this may not do anything different until tomorrow; so you may see this short covering happening. That is primarily why markets are going up. If you look at Bank Nifty where there has been a massive gain, nothing has changed for the banks that have reported numbers.

If you talk about Axis Bank, year-on-year, the net profit was down 20% despite the corporate tax cut and that is primarily on account of much higher provisioning. Same goes for Kotak Bank where provisioning has jumped 400%. HDFC Bank’s provisioning has gone higher and that is actually the only bank so far which has reported higher net profit over previous year. So nothing has really changed for corporate banks. The earnings look very weak, provisioning is increasing; so I do not know why there is excitement about corporate banks.

I think it is some kind of herd mentality and that could be one reason for today’s move. Let us see what happens in the next two weeks because some more short positions will be built in because markets are so disconnected with the reality. We are still trading at PE multiple of 21.4 after factoring in today’s move and investors would still want to short the market for the next series. We may still see this again at expiry next month but this to be honest looks purely a function of expiry tomorrow.

What is your view on the numbers that have come in on Dabur? Could this possibly be the impact of challenges in the supply side?
First of all, I was looking at Sun Pharma numbers and that is a stock that I recommended on your show and I keep holding that in many portfolios. The reason why the bottomline looks way below estimate is because there is a one-time settlement which they have disclosed in the notes and then it is higher employee cost benefits. These are the two things which are making the expenses look higher. Otherwise the topline is actually higher than estimates at the consolidated level. This was the last of the disputes that were standing and they have now settled it. So I do not think the numbers are as bad as optically they appear.

On Dabur, yes the numbers do look genuinely bad. Again, I am looking at them right now. This may well be a genuine case because from January to March, there was nothing lockdown-wise which would impact their supply chains or have any impact on their sales. You have to deep dive into these numbers because this may go beyond the financials. And again, all the products that they manufacture, the demand for any of those should not be impacted that much by a lockdown, which was anyway eight to 10 days. So yes, these numbers are genuinely bad numbers and we will have to see why.

What are you sensing in terms of the extent of the impact we may see on the fundamentals of these companies?
Most of the people that I have heard, what they are saying is that they do not know what the impact would be. They have just said in three months or six months or maybe eight months, if we do open up in a measured manner, the impact could be reduced. The other day I heard someone say by the end of this year, corporate earnings will start reviving and that is just the most stupid view. The companies and the promoters who are coming out do not know the impact of this on their earnings. The top analysts do not know and the government does not know. So it is very hard to predict what would be the damage to corporate earnings going forward. Things will be uncertain and I do believe markets are totally disconnected from that reality right now.

I can just guide investors to hold a large portion of their portfolios in instruments that even make 6-7% and use the balance to invest in stocks where you are trying to chase a higher return in case earnings revive. And even if earnings do not revive and if there is any positive development medically, you will see that stock prices are going to bounce back a lot before earnings do. So to that extent, maintain some portion of your money in stocks but keep a larger portion of your money in instruments where you are making a lesser rate of return but a fixed rate of return so that if markets fall, you still end up making that 6%. That is how you should go about portfolio allocation.

But how will the earnings look, how fast they will recover depends a lot on government action. I have seen some of the larger countries outside of India opening up their economies and unfortunately in India, the attitude is what can the government do about it. Of course, the government can do things. Start home delivery of basic things, open ice cream shops and let people go to parks. Charge them Rs 100 and put people in-charge to do it. Do not let them stay longer than one hour inside. No one is really doing anything to open things up.