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Deep cyclicals are still some time away from a recovery: Chakri Lokapriya

While India is slowing down, there is a cushion of global support for Indian companies.

ET Now|
Dec 10, 2019, 05.12 PM IST
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ETMarkets.com
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The transmission of interest rates has been lower and slower than the fall in GDP, which simply translates into tighter credit availability for the companies which are down the curve, says Chakri Lokapriya, CIO & MD, TCG AMC. Excerpts from an interview with ETNOW.

Listed insurance space
Life insurance used to be a push product. Now, with the huge amount of media campaigning, it is increasingly turning the other way round. Against that backdrop SBI with its reach and brand names are spread right from tier-1 down to villages. SBI Life Insurance has a very long growth curve ahead of it.

On Yes Bank fundraising
The Street also believes that clearly capital raise is very crucial for the bank. Let us assume that the $1.2 billion fundraise does not happen; even if half the amount happens, that should be sufficient for the company. Yes there would not be growth for the bank to do lending but it will be enough for it to last may be a year or so. This capital, if it comes in, gives them confidence in their ability to write off or clean up some of the books.

Net-net, whether it is $1.2 billion or an amount less than that, if it comes in then there is clearly loss of upside but whether that capital is coming or not and the colour of money has become more important today.

Since the stock has already beaten down to about Rs 50 odd and it has a roughly Rs 36,000 crore odd stress book, even if you take a 50% haircut on that, it knocks off about 40-50% of the book value, which then brings the stock price of about Rs 50 where it is today. From there on, any capital infusion into the bank will help to shore up and clean its book. It will give the company time to breathe and then maybe do a capital raise at a later stage.

On deep cyclicals
In the deep cyclicals, the recovery is still fairly far away simply because credit flow is very tight. The transmission of interest rates has been lower and slower than the fall in GDP, which simply translates into tighter credit availability for the companies which are down the curve.

Second, when GDP has hit one of the lowest points, the repo rates also are facing the risk of turning negative, which makes credit very tight. The very deep cyclicals are still some time away from a recovery.

Telecom Companies & AGR Dues
The stocks reflect that 20-30% tariff hike has already happened. AGR is going to be a huge dampener for the system because it expands into the non-telecom companies as well. As far as the telecom companies are concerned, there have been warnings and counter warnings from both the industry as well as Kumar Mangalam Birla saying that Voda Idea will shut shop. Now from that perspective, the stock prices pause until there is clarity on this.

On Banks and Insurance Stocks
While the valuations have run up in insurance, they are trading at fairly steep valuations. In spite of the slowdown, they have fairly decent growth ahead of them as a space -- be it life insurance or any other form of insurance. The space is underpenetrated. There is a huge amount of interest in a number of companies that are going public. Also, you will have various kinds of business models further refining themselves as you have seen in other countries. These stocks tend to do well.

Global Cues
In case of the US, just about every single number is looking very strong -- be it farm roll, pay rolls, earnings have been revised upwards, Michigan Consumer Confidence is very high so against this backdrop, whether they have a deal with China or not, US is in a strong shape. In the UK, Brexit is now more likely to happen and that gives you a some kind of a backstop saying that yes while India is slowing down, there is a cushion of global support for Indian companies.

On FMCG Sector
So far, the valuations have been justified given the clarity or visibility in earnings. We have seen the high ROEs which allow you to command a higher valuations but now growth is slowing down and input cost is going up. Some of the palm oil prices have started moving up for instance, for the Hindustan Levers of the world. Yes they do have the flexibility which they demonstrated in passing on the prices, but I would suspect that against this backdrop, they will rein in trade, rather than making meaningful returns until demand comes back. When demand comes back, then valuation is less of a concern. But right now, both rural and urban demand are slow.
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