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    Looking for winners? Consider these 4 bank stocks: N Jayakumar, Prime Securities

    Story outline

    • I see interest rates coming down from 7.25-7.50% to well below 7%.
    • Only value buyers are looking at pharma now.
    • NBFCs are important. Para banking exists in every country in the world.


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    Banks which have gone through problems and are now coming out, in next few quarters will come up with earnings that will blow your mind, N Jayakumar, MD, Prime Securities, tells ET Now. Jayakumar says he is bullish on SBI, BOB, ICICI, Axis Bank.

    Edited excerpts:

    The concerns which were haunting US markets on the eve of Christmas included fears of a trade war, extreme volatility in FAANG stocks and nervousness from Fed moves. All the concerns have got addressed. The lay of the land has changed for global markets but can one say the same for India?

    I am not sure all of these concerns have got addressed. In the short run, some kind of palliatives have come through. Calming words have ensured that things have not got escalated. However, FAANG stocks are still off about 35% of their peaks. About 30% of the big ones had hit almost 1.1 billion in market cap. Apple is down to about $720 million. Amazon had crossed a billion and is down to about $800 million now, etc.

    There have been sharp corrections and even in India, stocks like TCS and Reliance, are off 15% to 18% of their highs. The index is down hardly 8-9%. From that perspective, three-four months is a decent period, it is not short term. From investors’ perspective, it may be short term but a lot of headwinds and to some extent tailwinds in terms of oil cooling off, etc, have all come together. In that context, many midcaps and smallcaps are 15-2-30% off their lows and in some cases, even more. They have outperformed some of the big stocks.

    When I was here last, we talked about how stock picking is truly in.While macro factors have changed quite dramatically, the reality from an India perspective is that dollar-rupee has gone back to a stabler 69-72 range and I am talking about next three-four months.

    I see interest rates coming down from 7.25-7.50% which they are currently at, to well below 7%. Of course, liquidity is going to be required as the elections come closer. Then there is the issue of oil. You have seen oil at $85. You have seen oil at $50. My own sense is we are headed a lot lower. This could be a bounce in a bear market. Oil is definitely in a bear market. Given all this, the headwinds for India have disappeared. Clearly the tailwinds are there but until this election and this growth around the credit that the NBFC sector was providing is addressed, you are going to have 11,200 as a roof on the markets and the floor will be at 10,000. It may have risen to 10,400, 10,500 but it has also become a lot more solid.

    I am going to turn the clock back. In 2018, the setup was extreme optimism in small and midcap stocks. The general view was that 2018 will be a great year for economic recovery and earnings will come very strongly. In 2019, the positioning is very different. There is scare in mid and smallcap stocks but there is a strong positioning in IT to a large extent corporate banks and some consumer names.

    In a sense, you answered the question. Where there is fear, please look more closely. I think the important thing is that the market is telling you that while it may have made a very robust bottom at 10,000, 10,200 and has gone up thereafter, the winners are going to be very different. So I believe in SBI, BOB, ICICI, Axis. I am still talking as a sector but actually taking these four specific stocks.

    They are the obvious names.

    In terms of being positioned for this because the NPA cycle has pretty much run its course. Recoveries are on and non-performing funds have now become performing assets as the recoveries come through. The biggest thing is buyout of portfolios of NBFCs. The space that NBFCs have vacated in recent times is now being taken up back by some of these banks. I am not talking about HDFC or a Kotak or those who never had the issues in the first place. I am talking about banks which have gone through the problems and are now coming out. The earnings that these banks will show you in the next few quarters will blow you mind.

    Will you apply that on Yes Bank also because it is a bank which has gone through a lot of problem?

    I would rather not talk about Yes Bank.

    Let us talk about the positioning of corporate banks. There seems to be a consensus which is growing in favour of corporate banks.

    But if consensus results in ownership being created if SBI moves to 250 or 240 to 300, then there is no question of a bull market. I do not believe there is anything remotely close to over-ownership.

    How do you define that?

    I will tell you. Over the last two to three years, FIIs were consistently selling quarter on quarter, month on month. For the first time in the last few months, there were bits of buying. Net buying has just about come in. All the stocks that I have talked about were the ones where they got their liquidity from. You need to have a substantial transfer of ownership back to those folks and a lot more buying in these stocks to come in.

    For the first time, ICICI has touched its lifetime high of around 380. If you ask me, just because four people have articulated this over one month period does not make it over-owned in that one month period. We should distinguish between four similar views and a consensus in terms of ownership.

    Sometimes I personally feel that I have started living in an echo chamber because I interact with these 10-15 people who are the smart guys and I think that is a consensus view.

    Well I do not know if that puts me also as one of the smart guys. But the reality is that this cannot be a sign of over ownership and I certainly would not believe that if they move on the index 10% off its lows or 8% of its recent lows and in one month some stocks have gone up 15%, that necessarily indicates consensus ownership. Number two, pharma is now a space which only the value people were looking at it in some form or the other.

    Is pharma cheap? It is at 15-18 times?

    But there is a difference which is that it has come off. Some of the leaders have corrected 70% from their peaks. I am not necessarily saying you go for those but in pharma, the important thing that has happened is the Teva announcement in the JPMorgan conference in San Francisco where they talked about price stability for the next few quarters. That is mega news because the moment you say price stability and you say that the rupee is now not in the Rs 64-65 range, but it is in the 70-71 range and you talk about most of these balance sheets being unlevered and somewhere there is some small leverage actually acting as a positive ROE kicker.

    You are talking about a scenario where pharma could be a surprise packet and certainly the under ownership in the last two-three years coincided with three or four sort of factors. One was of course the pricing scenario. Two was the FDA approvals and these inspections which were creating these disruptive risks, event risks in the business. Now, a lot of that is behind. So if you hand pick two or three and I do not want to name specific but I think there could be surprise 30-40% upside from here in the next 12-18 months.

    The pharma sector can be divided into two or three large pockets. US generic based companies, companies which have a non-US focussed market and pharma companies which have a debt and pharma companies which currently are in a very advanced research pipeline. So which end of the pharma space do you like?

    I would look at generics moving to complex generics. There are companies that are moving into complex generics, biosimilars, peptides (the higher end) and exploit in the US markets. Coincidentally, one or two companies like to have leverage but the leverage is easily addressable through earnings and they have been making smart acquisitions recently.

    Those companies with a little amount of leverage actually gives ROE because cash on the books is not always put to the best use and therefore surplus cash companies have made mistakes. Some of these companies have been making good moves into Europe as well. But, I am not too sure if there are too many plays in the India story or the pharma story around India. So, I would still focus on US generics but moving to complex generics, higher end peptides, biosimilars and have presence in other markets like Europe. The rupee is going to be a positive tailwind, there is no question.

    The general view is that you are optimistic on economic recovery which is a function of corporate recovery as well as consumer recovery. Just when we thought that consumer recovery is going to be increasingly better, auto despatch numbers have been poor. How should we read into the auto despatch numbers which were bad for November-December and October also?

    I would say just go back to our conversation with you in October end when we talked about how... has become crowded.

    Well more than autos we talked about the fact that the entire consumer spending would face a lot of issues because NBFC funding is a problem. Today, let us not run away from the fact that the NBFCs may have avoided a canon ball in this last set of episodes but what they have ended up doing is cruelly expose the fact that credit is required on a continuous basis for consumption to continue.

    The moment that drops off and their own growth plans become a little unsure, what do you end up with? We will have further slowdown evident in terms of credit not going where it ought to. Individual companies may do well but as a whole. the sector was trailblazing on the growth front. Now, that is going to be a big problem. Even in housing, we are going to see a definite deceleration of the pace at which the growth has taken place.

    If the consumer slows down, it will have an indirect or direct impact on the industrial and capex demand. Can they both parallely exist?

    The way I would look at it is that new capex is difficult to come by. A lot of consolidation is happening in NBFC space, in power and other things where a lot of assets that have been put up. Whether it is the SBI Samadhan Scheme or a scheme for resolution of stressed assets, Tata Steels and Arcelors are acquiring capacities that have been shut down or operating at lower utilisations.

    There is going to be capacity increase from that perspective. I do not see fresh capacities coming up in most places. The consumer side of it -- be it durables, white goods, auto -- is definitely going to meet with a lot of challenges for reasons that I mentioned.

    I am not that optimistic on growth going unchallenged and we will continue growing, I do not see that happening, especially in the run-up to the elections. The need to spend will be high but at the same time, this may be a pre-election issue.

    There are some structural issues on whether we want NBFCs in the system. RBI and others need to come out and go back to those models which have to be tweaked. Mismanagement has to be addressed but the NBFCs are here to stay and we need to recognise that they are existing because they have been providing credit and collecting what other banks have not been able to do.

    They have not been here because somebody one day wished that NBFCs should be there. Most importantly, they have got the risk management collections, they are more lightfooted, they are more able to respond to markets. stimuli and that kind of presence is important. Ppara banking exists in every country in the world.

    This governor has engaged very readily with people. Kudos to him and notwithstanding what the naysayers say about on the change of governor, the reality is he has addressed issues of liquidity and is taking issues head on as we speak.

    One fine example is that we have always called RBI as a great institute but it is only the two previous governors who were economists. Before that, bureaucrats had been running it and RBI did a great job of managing the 1999 or the 2008 crisis?

    We only understood that in the context of when somebody left and therefore you have to check out some of this stuff but I do not think education qualifications matter. People sort of hit the road running. It is great to have economists talk about it but we have also had problems when economists have been seen to be too theoretical and not accepting realities on the ground. It works both ways.

    For markets to do well, businesses have to do well. Let us talk about your own business. How has 2019 been so far?

    I was not ready to talk about Prime but one of the things that has happened is that we are now purely in investment banking. We are 100% in the debt markets, equity markets, in wealth and investment advisory.

    We have never seen in my 30 years plus of working where people are willing to pay as readily for advice. In the past, it used to be that people would call you, you would sit and chat and then say fine and then you would realise later that they implemented what you were saying but they did not really pay you for it.

    Today, investment advisory or restructuring advisory is being sought after big time and in the financial services sector, advisory business is actually booming. From that perspective, knock on wood but we have no complaints.
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    1 Comment on this Story

    Suresh Kamath747 days ago
    Wow what a thought process from the Market person with an EAR to the very Ground near the Dalal Street BSE Building and all such facts coming to fore from such Institutions News NOISE
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