PSU banks are trading at an attractive book value of 1-1.5x despite strong growth prospects
After State Bank of India’s impressive performance, Shenoy wondered whether investors should expand their exposure to public sector banks beyond the largest player. He acknowledged that while the PSU banking pool contains some underperformers in terms of earnings, growth and quality, the consolidations over the past two years have strengthened the balance sheets of the top and mid-tier banks.
With the new normal likely to involve lower net interest margins across the banking sector, PSU banks are actually in a better position than their peers. Many trade at around 1x book value or even below, creating attractive entry points. Shenoy sees the range of 1 to 1.5x book value as the opportunity zone, especially for banks growing earnings at 12-20% per year, a combination that makes for very reasonable valuations.Interestingly, he also doesn’t write off mid-market and larger private banks, noting that with credit growth returning to 15% levels, there is room for good returns despite unimpressive historical performance.
Providing budgets enables breakthrough real estate monetization
The revaluation potential from the current 1x book to 1.5x book depends on two critical factors, according to Shenoy. First, banks must maintain growth without destroying quality, avoiding excessive provisioning levels or portfolio concentration in distressed areas. Secondly, and perhaps even more revolutionary, is the budgetary provision that allows CPSEs (Central Public Sector Enterprises) to monetize proprietary assets through REITs.
Shenoy expects PSU banks to be included in this CPSE category, which will provide huge opportunities. Many public sector banks bought real estate properties thirty, forty or even more years ago and held these assets on their balance sheets at historical book prices. The challenge is that revaluing these properties does not meaningfully help Tier I capital; only part contributes to the regulatory capital requirements.
By formally divesting real estate into REITs, banks can convert these undervalued assets into Tier I capital, which they can use to finance growth without the need for government recapitalization. This represents a paradigm shift in how PSU banks can finance expansion while unlocking hidden balance sheet value for shareholders.
The overhang of government interests has been reduced to below the 75% threshold
Another positive development that supports the revaluation thesis is the reduction of the surplus of government property. Shenoy noted that government stakes in most PSU banks have declined significantly and are now below 75% based on recent data. This reduced overhang addresses a historic concern for investors worried about future dilution from the sale of government stakes.
The combination of lower government ownership, potential real estate income, strong earnings growth and attractive valuations creates what Shenoy characterizes as a compelling basis for a revaluation of the PSU banks in the period ahead.
EMS and capital equipment: five-year perspective required
Shenoy focused on the corrections in the capital goods and electronics manufacturing services sectors over the past year, highlighting that semiconductors within the EMS space offer strong longer-term prospects. He expects potential trade deals with the U.S. could lower tariffs on goods and machinery, making raw materials cheaper and allowing greater domestic manufacturing capacity.
However, investors need an appropriate time horizon. Much of the investment currently being made will not translate into income until 2027, making this fundamentally a longer-term investment thesis. Near-term revenues and order flows will determine near-term performance, but Shenoy emphasized that the sector should only be evaluated from a more than five-year perspective.In five years, he expects these companies to achieve multiples of their current sales and profits, with margins improving thanks to better input cost management and scale-based leverage. While generally positive about the sector, he warned that not all EMS players will succeed in addressing selectivity issues, even within this structural growth story.
High-tech manufacturing: budget changes and trade deals to boost domestic production
In addition to semiconductors, Shenoy cited high-tech manufacturing in India as another compelling structural story. Budget changes and emerging trade deals will accelerate domestic manufacturing across multiple categories, creating opportunities for capital investment first, followed by the manufacturing companies themselves.
Areas such as high-precision manufacturing tools and automotive accessories should perform extremely well over the next four to five years. Investors should look for companies trading at relatively low price-to-earnings growth ratios while carefully evaluating their potential growth trajectories. The investment approach requires us to look beyond current valuations to assess the long-term positioning in India’s manufacturing transformation.
The electrical transmission ecosystem benefits from energy focus
The electric transmission ecosystem represents another area poised for substantial gains, according to Shenoy. This includes DC transmission, related components, product manufacturing for the ecosystem, and service providers that support the transmission infrastructure.
Greater government focus on energy production will inevitably require corresponding investments in energy transmission and management infrastructure. Companies in this value chain, whether manufacturing products or providing services, will benefit enormously from this structural shift in energy policy and infrastructure development.
Nuclear energy and rare earth metals: new opportunities with tax benefits
While acknowledging that there is currently limited listed exposure available in the nuclear sector, Shenoy flagged this as an important area to monitor for future investment opportunities given India’s energy strategy.
More immediately actionable is the rare earth strategy unveiled in the budget. While Shenoy would like to see more concrete announcements before capital is committed, the tax exemption offered to this sector creates the potential for high-yield investments over a five- to six-year horizon. The tax incentives should encourage meaningful investment in rare earth production and processing, an area of strategic importance given global supply chain concerns.
Investment philosophy: Patient capital for five-year structural themes
A common thread throughout Shenoy’s analysis is the emphasis on the right time horizon for different investment themes. Short-term traders who focus on quarterly earnings and immediate revenue recognition will miss the fundamental transformation occurring in India’s manufacturing, infrastructure and banking sectors.
The opportunities he identifies, be it revaluation of the PSU banks through real estate monetization, building semiconductor capacity, expanding high-tech manufacturing or electric transmission infrastructure, require a five-year perspective before they can fully materialize. Current valuations may not necessarily appear cheap in the short term, but patient capital deployed in quality companies within these structural themes can generate significant returns as these multi-year trends unfold.
Summary of the most important investment themes
PSU banks: Trading at 1-1.5x book value with 12-20% earnings growth; Real estate monetization through REITs can unlock Tier I capital without government recapitalization; potential revaluation to 1.5x book; Overhang of government interests reduced to below 75%.
Semiconductors/EMS: Five-year story about structural growth; current capex translates to 2027 revenues; potential input cost benefits from U.S. trade agreements; margin expansion through increases in scale; requires patient capital, not a short-term trading approach.
High-tech production: Budget changes and trade deals that accelerate domestic production; capex plays first, manufacturers second; includes precision manufacturing tools and automotive accessories; aim for low PEG ratios with strong growth potential.
Electric transmission: DC transmission, components, product manufacturers and service providers benefit from the increased focus on energy production; transmission and management infrastructure essential for the energy strategy.
Rare Earth: Tax holiday creates investment potential with high returns over a period of 5-6 years; strategic importance given supply chain concerns; pending more concrete implementation announcements.
Private banks also offer selective options
While much of the discussion focused on PSU banks, Shenoy made it clear that he is not firing private sector banks. Mid-market private banks and some larger private banks offer scope for good returns as credit growth returns to a healthy 15% level.
The key distinction is that historical performance may not look attractive, but the forward-looking dynamics with recovering credit growth are creating opportunities across the banking spectrum. Investors should judge both public and private banks on the quality of growth, asset quality maintenance and valuation, rather than reflexively choosing one category over another.
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