Finance Update

Deepak Shenoy: In NBFCs, look for a mix of value and growth: Deepak Shenoy, Capital Mind

Talking to ETNOW, Deepak Shenoy, Founder, Capital Mind, says he is bullish on Gruh Finance, Bajaj Finance

and Mannapuram among growth NBFCs.

Edited excerpts:

Are you surprised by the move in the financials? FII overweight sectors like IT and banks — either one of the sectors have to do well?

One of the reasons is the rupee swap introduced by RBI. Liquidity is being flushed into the banking system which is good for March-end timeframe and also for most of the banks and financial institutions, input interest rates have started to come down. So, it is looking good. I do not want to read on the one-day move though a lot of them have moved substantially to better values from even about a month ago, when a lot of them were 15% to 20% lower than current level. We are heavily invested in financials and biased in that way.

Would some of the PSU banks play a catch-up as far as valuations are concerned?

There are two things. The way you look at valuations will decide whether that they are playing catch up or catch down. If you look at the price to book ratio, the book can’t be trusted because a lot of the NPAs are not recognised yet. Even now, the book value is arguably inflated two or three times.

If you look at adjusted book, many of these public sector banks themselves are trading at two or three times adjusted book which is not very different from a lot of the private sectors banks which may be trading at three, three and a half times.

If you look at price to earnings ratios, effectively public sector banks are heavily overvalued because they have no earnings. Most of them are loss-making and so their PEs are infinite versus a 30 PE or 35 PE for private sector banks. It is going to be more of a catch down in a way or showing up of earnings on their profit and loss statements that should change the game from this quarter onwards.

This quarter should be very good for banks — be it public sector or private sector. Noth interest rates are coming down. Bond prices, bond yields are going up slightly and higher liquidity, mark to market gains, recoveries from a number of NCLT resolutions should result in a much better quarter for them.

Hopefully, their earnings start coming back and their PE ratios will come down from infinite to at least something more sane. Prices have already shot up in anticipation. I do not know where prices will go. I will look forward to results to make a call on longer term timeframe.

What is your outlook in the auto space?

Compared to where we are versus where we will be, a year or a couple of years down the line, the current market is trading as if there will be very little growth for the next two years. That is wrong because we have had a lull in growth in the last six months for multiple reasons. The two-wheeler costs have gone up substantially and insurance cost has increased bike price by 10% to 15%. That overhang will last six to seven months. We have seen inventory going sky high. We have also seen production values coming down.

Probably the March data will reveal something and sales will improve sales going forward. It will increase all through this year at least until BS-VI comes in. We are waiting to see the impact of BS-VI and there might be slight lull next year as well.

We believe that in the longer term, India is going to see a lot more sales of two-wheelers and four-wheelers including personal and passenger vehicles. Commercial vehicles have been beaten down quite substantially but part manufacturers of commercial vehicle are looking at a number of stocks where even the promoters have started to buy back stocks because valuations have fallen quite substantially.

From value prospective, this is a good point but I do not think it is the end of the sad story for the stocks. Stocks might be under pressure for the rest of the year or at least for three-four months at least. But economics will start improving from March onwards.

Anything on telecom, aviation or anything else that is contra?

I am not fond of aviation. As Jet struggles, the other two players will benefit though in the longer term, there will be some more consolidation. I am not buying anything there.

In telecom, we are interested in Bharti Airtel. After Jio, this will be the player that will really survive. If you are an investor or have a current holding, you should plan to invest more in the rights issue that is coming along. During the longer term, they will be able to use the cash effectively. They are one of the few better integrated players out there.

Airtel should get rid of some of its African operations and get a little linear so that they can service their debt better. In the next five years, number one and number two are going to be Reliance Jio and Bharti Airtel. If Jio were to list separately, I would be buying it but as a proxy, right now, Bharti Airtel is our interest.

If you have to pick a few names would it be the NBFCs or private banks versus PSBs or vice versa? What would be the ideal basket?

In NBFCs, look for a mix of growth and value. If you are looking at growth, Gruh Finance, which is likely to merge with

Bandhan Bank

, is growing at a scorching pace and therefore you would want to play that as a proxy through Gruh Finance or look at a Bajaj Finance which is growing really well. You can also look at Mannapuram. A disclosure, we are invested in all three and we are looking forward to their growth prospects.

If you look at value, there is PFC. PFC and REC are going to merge but even with the merger, it is going to be a pretty good NBFC backed by the Government of India in a lot of ways. But relative valuations are low and they will succeed in the years going forward primarily because there seems to be a lot of interest from players abroad.

We have seen this happening in the recent past with DHFL bonds being bought by OakTree and with a number of other power projects getting interest in terms of financial bids from non-India companies which are now seeing those 15-16% IRRs and salivating because their cost of funds has reduced substantially and the Indian cost of hedging dollars has fallen to 3.2%.

Microfinance area itself is looking quite interesting to us as it is relatively lower valued and are blessed with faster growth as well. I am excited about the space but we are staying away from public sector banks right now.

Source

Prakash Poojary
Business Analyst

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