Prefer larger names like HDFC Bank & ICICI Bank in the financials space: MOSL

There are concerns that a lot of the credit that the government has promised may flow through PSU banks, says Siddhartha Khemka, Head of Retail Research.

What according to you broke the back of the market yesterday? Was it only and only disappointment from the package?
When the prime minister announced the Rs 20 lakh crore package, our markets went up. That was the direction opposite to what was the global direction and the market was waiting patiently over the last few days to hear out the entire package. There is definitely some disappointment on the markets side and in the investor sentiments after hearing the entire Rs 20 lakh crore package. The government says it is Rs 20.9 lakh crore while our estimates are just that the actual spending from the government would be much lower compared to what the government announced.

So the government is essentially taking care of the supply side by various measures that they are doing rather than improving demand. Now the demand is something that will drive the supply over a longer period of time and that is clearly not visible in the immediate future. Hence, the market reacted negatively. People who were patiently waiting started withdrawing including the FIIs, which have been seeing sharp outflows. So yes, it is definitely one of the biggest factors.

What is your take on Bajaj Finance? What is it that you are pencilling in when it comes to the overall asset quality in terms of the change in the product mix that you would like to hear because this stock has taken a beating of late and been quite a laggard?
It has been an interesting stock. Results will be keenly monitored. On the operational front, the March quarter was not that impacted; only the last ten days of the quarter was impacted. So to that extent, the AUM growth of about 27% was healthy. On back of that, we are expecting net interest income of about 35% and operating profit growth of about 37-38%. What will impact is the higher provisions and credit cost slippages in the quarter and that could lead to a much lower profit growth of about just 10% to 11%.

Going forward for the current quarter, things look even worse where the business has come a halt and they will be reporting much weaker numbers. So we’ll have to look at the management commentary around how things fare. The slower growth compared to what the Street was expecting for Bajaj Finance over a longer period of time that has come down and the sharp increase in credit cost is something that we will have to see. We are expecting credit cost to be around 3.6% for the March quarter which could even rise going forward for the first quarter of the current financial year.

Financials will continue to be in focus. The RBI may also extend the loan moratorium facility by another three months and that could also be something that some of the financials keep an eye on or react to. How are you viewing that particular basket? What would be your strategy right now?
If you look at the financials, they are the worst impacted in the current environment. Back to back events on the macro side have led to much higher slippages and credit costs across the larger financial spectrum. Earlier it was the corporate NPAs and now MSMEs are the ones which are the most impacted because of the current lockdown. A lot of these mid-tier banks and NBFCs are a lot more exposed to MSMEs and that is where the pain could be much higher.

Compared to that, some of the larger names like HDFC Bank or ICICI which were much focussed on the corporate side will continue to do well although in the near term, there will be pressure and the stocks will be under pressure for maybe one or two more quarters. But from a longer term perspective, these pockets do offer hope that as and when the economy revives, they will not only gain market share but will be much stronger compared to some of the mid-sized banks or some of the NBFCs which are facing issues of not only asset quality and higher slippages but also in raising additional capital to survive in the current environment. We are clearly focussing on some of the larger names and some of the diversified players in the financials.

Let’s talk about SBI. Markets are not at 52-week lows, but SBI has plunged to Rs 155-156. They have got valuable subsidiaries, credit card business, AMC, insurance and they have a banking business where they have scale and size. Why are markets disproportionately punishing SBI?
Yes, you rightly highlighted that. Compared to some of the larger peers in the banking space, for example ICICI Bank where about 25% valuation is coming from subsidiaries, the valuation of subsidiaries in SBI has gone up to about 40-45% largely because the market is not giving value to the core banking business. The concerns are that a lot of the credit that the government has promised in the packages may flow through some of these PSU companies where the asset quality may not be that good and it could be much higher given that there would be a lot of people who are in distress and may not be able to pay. So that is the concern that is impacting SBI right now.

Give us a sense as to what exactly you are pencilling in when it comes to the capital goods sector because this has borne the brunt of the economic contraction and given that order flows have completely dried up, there has been a major challenge to execution. Do you foresee that earnings for quite a few quarters are likely to see pain?
We have already seen the numbers for some of the heavyweights like ABB and Siemens coming out and they have disappointed even in the March quarter. Going forward, it does not look like the capex cycle is going to revive anywhere in the near future. Even before the pre-Covid era, we were seeing the private capex cycle not pick up for the last few years and now with capacity utilisation at much lower levels, we are witnessing a slower ramp up. With the lockdown being gradually lifted, we do not expect a pickup in the capex cycle in the near term.

So looking at the numbers, we think it would definitely be under pressure. So there are two parts of the capital goods; one is the order book inflows which has already taken a beating. We had seen some improvement in execution over the last few quarters but that has now also taken a beating and that will lead to lower or subdued numbers from some of these capital goods companies at least for the next two or three quarters. So overall, we expect subdued performance from capital goods at least for the next two or three quarters.