Sandip Sabharwal’s top 3 picks for next three years
Some financials are in a virtuous cycle and some Like YES Bank are in a vicious cycle.
Assuming the best case scenario, what will be the top five winners for the next three years?
It is very tough to say who will be the top five winners overall, but I expect some consumer names and financials will do well. ICICI is in a transformational phase. For example, when the entire Indiabulls crisis came up, the only large bank which had no exposure to Indiabulls was ICICI. Who would have believed that three-four years ago, they had exposure in every stressed asset? So there a transformation process is on there. Their CASA ratio is very high. They have not been raising capital because their capital adequacy has been very strong. So this bank should do well.
Among financials, HDFC and Bajaj Finance will gain market share. The NBFC business was always a suspect business because they used to take cheap money from banks and lend and make money out of it. Now when they are stressed, the banks can lend themselves and make money. That is why banks will become more prominent.
Is there no bearishness about financials?
There is no slowdown for some of the companies.
Those are large companies with large bases, not the small, low-base HFCs where 5% means uptick of only Rs 5 crore.
What we need to understand is that these are the financials which cater to the retail segment. Retail demand will actually pick up much more from October because the festival season has started right at the fag end of September. Go around the marketplace, you will see the kind of penetration that Bajaj Finserv, Bajaj Finance are gaining. Every retailer has a tie up with Bajaj Finance, Bajaj Finserv. They are taking away market share from a lot of other financial companies and my guess is that they will continue to grow at this pace with such a large base even for the subsequent two-three quarters. That is the reason why their valuations defy gravity. I guess they are also looking out to raise some capital. If they raise Rs 4,000 crore, that by itself is additive to the shareholders.
There are some financials which are in a virtuous cycle, there are some financial which are in a vicious cycle like Yes Bank, which is unable to raise capital. Since they are unable to raise capital, they have to degrow.
Would you take a relook at Yes Bank now that the uncertainty with regards to Rana Kapoor is over? He has totally exited in terms of pledged shares. Now, TPG, Carlyle etc are looking at a piece of Yes Bank?
We have to look at it practically. The data they revealed on the conference call was that their deposits went down this quarter, the advances have also come down. That was the first step. I believe they had to take to compress their balance sheet to revive.
I hope that they continue this phase so over the next two quarters. If they continue to compress their balance sheet to release some capital for growth in the future, that will be the best strategy. Now at Rs 10,000-crore market cap, it is very tough for them to raise equity. Even if they want to raise Rs 2,000 crore, they have to dilute by 20% and if they dilute by 20%, the EPS comes down and they are trading at 0.4 times reported book.
If you raise money below book, then it does not add to the existing shareholders. It actually is negative. I would think that on balance, may be fundamentals could start bottoming out now but as the advance book compresses, the profitability will also see pressures. People just look at the price and think it is attractive since the price has fallen so much. We do not know but this might not be the time to take a long- term view. The long-term view has to be taken one or two quarters down the line.
Do you think the pecking order in the next three years would remain the same?
It depends on how the economy behaves. If the economy actually bottoms out, which we have been expecting for the last two years, and there is a revival, then a different set of companies will outperform. But if the economy continues to languish and we see recovery now, then obviously these companies will benefit much more. Given the strength of their balance sheet, they do much better in adverse circumstances. When there is lesser strength of balance sheet, you gain better from the macro environment improving.
It depends purely on that. Ideally macros are such that things should improve but they have not improved till now.
I will continue to bat on the back foot which is stay with HDFC Bank, Bajaj Finance. I may lose 10-15%, but I am not guaranteed to lose a substantial chunk of my capital?
Yes, so HDFC, Bajaj Finance, Kotak are one basket, then there is another basket with ICICI Bank, Axis Bank, etc. If you want to take some risk, why do you want to take on Axis Bank? Take it via SBI. Though I don’t own this stock, I would think it is cheap. If someone wants to take risk, take it on those stocks, rather than Yes Bank.
What do you make of Zee and the commentary coming in from the management. They are not sounding confident on the non-media asset sale. However, that stake reduction is only going to increase supply. Does that help resurrect the stock or save any of the minority shareholders who still have money to put in Zee?
That has been an issue because it is a question of what expectations were built up and what was actually delivered. The expectations that the management continuously built was that a stake sale, potentially to a strategic investor, will happen before the earlier deadline. That was in July or something but then they ended up selling to a financial investor and no strategic investor came in and the money flow was lesser than was expected. Right now, it is more a technical thing.
The good part about Zee is that it is a debt-free company. There are no allegations of funds siphoning off or something like that from Zee and it is a very profitable company, even at this stage. It is a very large company, whose valuations have now come down to 10 times earnings. Purely on valuations front, it is extremely cheap but technical factors are dominating right now. So on a particular day, we do not know how much of promoter stake is going to be sold off in the market. If today 5% of that stock gets sold off for whatever reasons, there is no way the stock will not fall 10-15%. That is the uncertainty we have to fight with.
The other panic stock seems to be Piramal Enterprises. Though Mr Piramal himself has time and again reassured investors that they are not in a soup and they will recover money from the beleaguered real estate names, what signal should someone who has invested in Piramal Enterprises be taking and what should they be doing with their positions?
Piramal Enterprises is a very tough company to analyse because we do not really know which are the companies they have actually lent to. They do not take in public deposits. To that extent, the disclosure levels also are not as great although even with greater disclosure levels for NBFCs, we have gone nowhere. But at least in this company, we do not know that.
The only thing is you can possibly trust the management more, in this case. I never bought the stock because I thought that they were always doing slightly higher risk lending to get higher profits. So, it is a very tough to take a call on the stock because given the way the interest rates are moving, what the RBI policy has been and the liquidity in the system,. one would think that all the stressed companies should start stabilising sometime now.
Now with the earnings which will be trickling in, last quarter saw the impact of the wage hikes, the visa cost and the strong currency, all of which impacted the margins. Will we see some reprieve on the margin front in IT?
Yes, it could follow through because most of the IT companies have been increasing onshoring and given the employment situation in the US, the wage pressures have been high. So, we could see some impact of that. The rupee has also not been so supportive this quarter. The positive is that the US economy continues to do reasonably well. So, the demand side pressures might not be seen. It is a balanced picture. I do not think there is a case for any big upside in these stocks and they should remain more stable.