PSU banks poised for rerating to 1.5x book as real estate monetization unlocks growth: Deepak Shenoy

PSU Banks - PSU banks are trading at attractive valuations of 1-1.5x book value, with earnings growth projected at 12-20% annually, creating reasonable valuations for investors [1][19] - The potential for rerating from 1x to 1.5x book value depends on maintaining growth quality and the ability to monetize real estate through REITs, which can unlock tier I capital without government recapitalization [3][7][19] - Government ownership in PSU banks has decreased below 75%, alleviating concerns about future dilution from government stake sales, which supports the rerating thesis [8][19] Private Sector Banks - Mid-level and larger private sector banks are also seen as having potential for good returns as credit growth returns to healthy levels of around 15%, despite their unimpressive historical performance [2][22] - Investors are encouraged to evaluate both public and private banks based on growth quality, asset quality maintenance, and valuation rather than making reflexive choices [23] Real Estate Monetization - The budget provision allowing CPSEs to monetize owned properties through REITs represents a significant opportunity for PSU banks to convert undervalued assets into tier I capital [4][6][7] - Many PSU banks hold real estate purchased decades ago at historical book prices, and divesting these assets can fund growth without requiring government support [6][7] Structural Growth Themes - The semiconductor and electronics manufacturing services (EMS) sectors are identified as having strong long-term growth prospects, with current capital expenditures expected to translate into revenues by 2027 [20][24] - High-tech manufacturing is anticipated to benefit from budget changes and trade deals, creating opportunities in capital expenditure-oriented plays initially, followed by manufacturing companies [20][24] - The electrical transmission ecosystem is poised for substantial gains due to increased government focus on energy production, necessitating investments in transmission and management infrastructure [14][15][25] Rare Earth Investments - The rare earth sector is highlighted as a strategic area for investment, with tax incentives creating potential for high-yield investments over a five to six-year horizon [17][21][25] - Investors are advised to monitor developments in this sector closely, as it holds strategic importance given global supply chain concerns [25]