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You are likely to see far cleaner, Version 2.0 of NBFCs: Hiren Ved, Alchemy Capital Management

ET Now|
Updated: Dec 24, 2018, 10.49 PM IST
The low point for Indian markets in 2018 was some time in August-September at the peak of the IL&FS crisis and when the rupee went to 74.


  • Well-run stronger, larger companies will be better able to handle economic disruptions.
  • Delta change in profits will be significantly different for corporate banks.
  • Axis, ICICI and SBI are where incremental money will be made over the next two years.
Indian market has digested a lot of bad news, says Hiren Ved, Director & CIO, Alchemy Capital Management. The dynamics in 2013 may look similar, but the underlying factors are different, he told Nikunj Dalmia of ETNow.

Edited excerpts:

It has been a challenging and disturbing and scary 2018. Are markets telling us something which we are missing out? As of now there are indications of slowdown, there is no threat to the economy or global growth, but markets are telling you that a big turnaround or a big turn for the worst is coming?

Yes, you started the year with the fear that interest rates will rise, US growth was fantastic and therefore, people thought that the Fed was behind the curve and that they needed to tighten interest rates. As we come closer to the year, there is fear that the US might enter a recession and people are already forecasting that instead of five rate hikes next year, you might have only two.

So, we have moved from optimism and tightening to pessimism about growth and probably slowing down the tightening or increase in interest rates. The narrative has completely changed. On top of that, we have the whole trade issue with China which created a lot of headwinds for emerging markets.

If Chinese growth were to slow down, it will pull down global growth as well. Then, the US cannot continue to grow at 4 per cent because employment is reaching levels where the economy could have overheated. Market and trade war volatility has created this uncertainty.

Having said that, I think all markets and financial assets had it too good until 2017. It was a record year of low volatility and that was too good to last. We have 2018 where we have very high volatility and uncertainty going into the end of the year.

So, you are right that it has not been an easy year at all and things have moved very quickly from the beginning of the year to towards the end of 2018. In the Indian context, we saw a couple of headwinds. To my mind, second half of 2018 was pretty much like the second half of 2013.

If you remember at that time, you had oil prices going up. You had the current account deficit, which was a challenge. As a result, the rupee depreciated by 20 plus per cent and then Chidambaram came in as the finance minister and he got in Rajan. Two of them turned around the situation and August-September were the lows of the markets in 2013. Even then, there was a big risk off and small and midcap stocks got smashed very badly in 2013.

Come to 2018 second half, you had a very similar set-up. Fear about interest rates going up. Oil prices went to $85. The rupee depreciated by 12-13 per cent though not as much as in 2013 and then on top of it, you had the IL&FS crisis and you had the small and midcap stocks that corrected very sharply. So you had a big risk-off environment.

But even back then, the low point of the market was when the crisis was at its high and I believe that the low point for Indian markets in 2018 was some time in August-September at the peak of the IL&FS crisis and when the rupee went to 74.

The good news is that from there, we have seen oil fall dramatically. We have seen the rupee come back to 70 levels. We have seen bond yields fall from 8 per cent to now 7.2-7.3 per cent and there is a dramatic change.

At least in the short to medium term, what the Indian market is telling you is that it has digested a lot of the bad news, probably we could have seen the worst point coinciding with the IL&FS crisis and then we have come back from there.

So that is the set-up we have seen in India and there are very much similar parallels with what happened in 2013. Even back in 2013, there were elections six months down the line. Now, you have elections in six months.

But post 2013, when the market adjusted, the rupee had settled at about 65-66, we saw surge in mid and smallcap stocks because they were cheap. Currently, the difference is that mid and small cap stocks are not cheap, the markets in general are not very cheap and then in 2013, you never had risk of Fed increasing interest rates. So the dynamics may look similar but the underlying factors are different.

I completely agree with you. One thing that was very different in the Indian context was that the small and midcap space was very cheap because they had been correcting since 2011 and well into 2013. So, you could get lot of good quality small and midcaps at single digit PEs. Thereafter, we saw a big rally in 2014 which culminated in some kind of top by January 2018 and we have seen a correction from there.

While they have corrected sharply, I agree with you that valuations are still not cheap enough as they were back in 2013. Therefore, my view is that the next upcycle if we may say in the Indian markets will largely be led by large caps and larger midcaps.

There will always be a few smallcaps and midcaps which will do well which is always the case, there are always exceptions on both sides. But by and large, the economic recovery post very gruelling 3-4 years where earnings have not increased have seen so much of disruption because of e-commerce, digital, demonetisation followed by GST and RERA.

Well-run stronger, larger companies will be better able to handle this kind of economic environment and take away market share from the small guys because this whole liquidity tightness compounded the issue because of IL&FS which is so bad for small and midcaps. Their ability to raise capital is hampered. The larger companies who have a good balance sheet can better manage this situation.

You mentioned corporate banks. So are you making a case that in the next three years, ICICI Bank and SBI will make more money than HDFC Bank and IndusInd Bank?

When I say more money, what we should understand is that the delta change in profits will be significantly different for corporate banks compared to well-run retail oriented banks. Their growth might continue. Having said that it is not that HDFC Bank is not going after the corporate customers, I mean they have the balance sheet, they have the relationships. So they will also benefit.

But the delta swing that you will see in profits which were dented because of high provisions will tail off next year and the year after. You will see a very big swing in Axis, ICICI, SBI and the likes of that. That is where incremental money will be made over the next two years.

We have seen a big shakeout in NBFC stocks, the so called crowded trades have reversed completely, the typical market phenomenon when the sector is in a boom, everything goes higher.

When the sector turns, the best and fittest and the large ones only survive. Has that shakeout already happened in NBFC and now would you say, it may be in Bajaj Finance or maybe in Chola, I can talk about Piramal, 4-5 names that will survive. That is where you should have bulk amount of concentration?

Yes, what you call the classic version 1.0 bull market in NBFCs is over. Like if you take any thematic move, if you take tech companies pre-2000, whether you bought an Infosys or a Satyam or DSQ or whatever, you made money because that was version 1.0. Everything goes up and investors are not able to differentiate the quality of business. They are only looking at growth.

They are only chasing growth and it was so easy in a lending business to get growth, all you have to do is to lend money. So nobody really focussed on ALM mismatch, credit capacity to manage credit cost, etc. It is only when a crisis hits you and the entire sector derates and the men and the boys get separated. That is what has happened as a result of the IL&FS crisis.

What you are likely to see now is a version 2.0, a cleaner version of NBFCs. I for one do not believe that people say oh! NBFC is dead. Nothing dies. It is just that the players get separated.

The Bajaj Finances of the world or the very well run NBFCs like HDFC Limited in housing finance are well run. They have seen so many cycles and they have proven themselves over and over again.

So after that brief correction, they will come back. They are the ones who will take away market share from the weaker guys and the weaker guys are going to find it very difficult to raise capital.

Will you buy HFCs right now?

Hiren Ved: Well, we have not bought HFCs purely because of the reason that the stock we own, Bajaj Finance, is also making a big dent in the housing finance market. We are happy to play it through a player that we are very comfortable with, but if it is a good high quality HFC like an HDFC, it is probably a good time to buy.

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