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    Tough times ahead for banks & NBFCs with very large unsecured retail loans: Piper Serica PMS

    Synopsis

    ‘Smaller consumption companies are suffering as they are not able to support the distribution chain’

    Abhay Agarwal Piper Serica
    For a fund manager, this is a time to focus more on risk management rather than calling a bottom or being very aggressive.
    Going forward, there is going to be a lot of convergence and integration in the healthcare space, says Founder Abhay Agarwal.

    You have a reasonable exposure to the area of financials. Now the opinion in financials is quite divided. Where do you find a better margin of safety? How are you analysing financials? Talk to us about your thought process.
    When it comes to financials, our belief is that the balance sheet strength will be tested first; it is already getting tested. Second, the market is going to test very vehemently the risk management skills. The largecaps that you named like HDFC Bank, Kotak Bank and even Bajaj Finance who are focussed on collections would be okay but in the smaller banks and smaller NBFCs, you can already see the moratorium increasing. There are some small banks who have said that 90% of their book has gone in moratorium. I think that is where the scary signs are because with an extension of the moratorium to six months, all that has happened is that the defaults have gotten extended.

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    We track the collections very closely. We have some good linkages into the industry through which we know what is happening at the collection levels. The collection agents and collection companies are very worried that the ability of people to pay is at serious risk. Those banks and those NBFCs which have a very large unsecured retail lending portfolio I can say with a lot of confidence will have a very tough time in recapitalising. Whereas banks like Kotak and HDFC Bank will be able to raise capital. Even HDFC Ltd does not have any balance sheet pressure as they are the lowest cost borrowers even right now in the market.

    How are you looking at this entire healthcare space and what kind of exposure do you have? How do you recommend to play this particular area?
    This is a space that we have been tracking very closely. We own Apollo Hospitals which is the largest hospital company in the country. A lot of people do not realise that it is also probably one of the largest pharmacies in the country. We also have Sanofi, which is the largest diabetic formulations company in the country. So if you step back and look at how healthcare has organised itself in the country over the last 10-15 years, they were all separate moving parts. So you have hospitals on one side, you have general physicians on one side, pharmacies on one side, diagnostics on one side and the branded formulations and the drug on the other side. None of these five parts really ever came together. They were all moving separately. They had separate stakeholders and influencers; so doctors would run the hospitals, pharmacies were run by pharmacists, pharmaceutical companies would run the companies and decide which drugs to push out. MRs would go and tell the doctors what to do.

    Now what Covid-19 has done is, it has slowly and steadily ensured that there is a convergence that is taking place across these. So now diagnostics have to work well with the doctors and hospitals and the pharmacies have to integrate. So what we are looking at going forward is that there is going to be a lot of convergence and integration of these different moving parts. It will be difficult for a pure play path lab to stay independent as a path lab. For large hospitals like Apollo Hospital is also one of the largest pharmacies. Nothing stops it from becoming the largest path lab in the country. So what we are going to see going forward is that the larger companies that can integrate the whole supply chain and distribution chain will get stronger and bigger and the smaller speciality hospitals and companies will have a tough time.

    How are you playing the consumer space overall? Again, there is a lot of comfort towards this area but how are you differentiating between consumer staples and discretionary? What kind of themes are you finding comfort in this kind of an environment?
    People thought that the consumer staples are slowly becoming consumer discretionary. People are now really trading down and thinking twice before spending even one rupee on a premium product. Before Covid, the whole thesis was of premiumisation and now at least in consumer staples, we are seeing that premiumisation is not playing out. If two products are available at the same time and one is cheaper and does 80% of the work, they will go for it.

    So companies like Lever, Nestle are reducing the cost of purchase by reducing the sachet sizes and making sure that their product is widely available. The smaller companies are struggling. Again, we are seeing that they are not able to support the distribution chain. So if a retailer wants more credit genuinely, the larger companies are able to provide that credit and the smaller companies are not able to. So their products are slowly getting out of the store shelves and we think this will continue to play out where the larger companies with better distribution and better adaptability will continue to gain market share, and will also see some volume growth once the lockdown is over. The smaller companies will have a tough time.

    How are you looking at the investing landscape especially at a time like this? Crisil just yesterday said that the demand destruction would be huge; almost 10% of the economy demand will be destroyed permanently. So the entire narrative on how people are assessing the hit to the economy is getting changed in such an environment. What are the indicators the market would watch out for closely?
    As an investor, what I would like to see is that the lockdowns go away, the number of cases of Covid drop and the fear psychosis reduces. Most importantly, the number of job losses that have taken place is reduced and people start getting back to jobs because that will tell us that corporate earnings will pick up. Until then all that we know is that earnings are going to be under tremendous pressure for 90% of the listed space; the 10% will benefit because it is already prepared and strong enough to deal with this. It is like Covid-19 attacking a body; the one which has higher immunity will survive and the ones with weaker immunity or weaker balance sheets in this stage will have a very tough time.

    We have raised our cash allocation, we are at almost 35% cash right now and the remaining funds are invested in 10 or 12 companies where we can say with a lot of certainty that whatever happens, the earnings will still grow for the next three years. So if you are looking at a three-year CAGR of let us say about 15% revenue growth, we are not looking at the rest of the space because right now it is impossible for the management to be able to say what kind of earnings visibility they have in the next quarter or next six months. Everybody is just guessing.

    Crisil kind of reports are good reports because they put out real data and they talk about 10% of GDP and irrevocable destruction, which is $200 billion of loss and that $200 billion is Rs 1,50,000 crore gone from a large number of small and medium-size enterprises who will not be able to open up. There will be tremendous job losses. So in a situation like that, there is no point jumping the gun. We are playing it very safe. For a fund manager, this is a time to focus more on risk management rather than calling a bottom or being very aggressive. So that is our approach. We are waiting to see how the earnings play out and if confidence comes back in the consumer space before we start raising our allocation.




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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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