Clipped from: https://economictimes.indiatimes.com/markets/expert-view/be-cautious-on-financial-companies-going-into-q4/articleshow/80136904.cmsSECTIONSBe cautious on financial companies going into Q4Last Updated: Jan 06, 2021, 07:29 PM ISTSynopsis
Among financials, we will restrict ourselves to gold financiers and HFCs, says Mahantesh Sabarad
Inflation is perking up, commodity prices are moving up sharply and financial companies are going to see their NIMs or spreads getting narrower and narrower, says Mahantesh Sabarad, Head, Retail Research. SBICap Securities.
Where are you still finding opportunities in the telecom theme?
The basic business model for the telecom companies is still good. The ARPUs on a quarter on quarter basis are improving. While that is so, what is happening for some of the companies is that from the regulatory side, the AGR dispute is slowly getting unravelled probably in favour of the telecom companies. Also, the 5G auctions are coming up. So the going is getting better for telecom companies. In CY2020, they had seen a significant amount of capital raising to bolster their balance sheet. While that has happened, the future looks quite positive for most of them. Most of the headwinds for telecom companies have now dissipated and we will have to watch out for what the budget gives them in terms of leeway.
Energy is coming back into focus now with crude back on the uptick. Anything from that pocket of the market that would catch your eye?
Oil refining, particularly the downstream activities, is looking fairly attractive. Deal making is going to happen with BPCL getting divested. Gradually, demand is coming up for petroleum products and so there is the possibility of refining margins going up as the crude prices go up. There is also potential of refining margin expansion.
The overall economic recovery with the vaccination drive happening across the world is leading to better demand for petroleum products. All these outcomes are turning out to be quite positive. These companies have not done really well relative to the markets. So there is a catch up yet to be done. Some of these downstream refining companies will do well.
All the three oil companies are there plus there are the likes of RelianceNSE -2.64 % coming into play. The gas market is also looking quite robust. India is now bringing more and more cities under the piped gas network and demand for gas is growing. It appears to be quite positively poised for the energy companies on the oil side.
Quite a few Q3 updates have come in. From the FMCG arena, there was Marico, Godrej Consumer coming out with impressive numbers. In HDFC Bank, the commentary was very strong but I cannot say the same about Bajaj Finance which was a loser in trade. Anything out of these four that has really stood out for you?
In the earlier part of last calendar year, the volume growth in FMCG companies was quite tepid. Most of the FMCG companies were in that 2% to 6% underlying volume growth kind of band. Ever since the unlock phase began somewhere around August, September thereabout and the festival season started gathering momentum, most of these FMCG companies have been seeing sharper volume growth on a year-on-year basis.
It has moved 2 to 4 percentage points up in terms of volume growth closer to the double digit mark, not yet double digit. It would vary company to company but the underlying volume growth because of the festivities and the unlocking activities that were happening has been very strong for the FMCG companies.
Having said that, within the FMCG companies, two distinctions can be made. The rural growth has been far sharper than urban growth. So, rural-oriented FMCG companies are doing better and within that, the brand plays, the companies which have stronger penetration, large brands are the ones who are doing relatively better than the smaller brands and lesser penetrated kind of companies.
FMCG will see better volume growth reported in the December quarter when the results come out and therefore it will also drive better or sharper value growth but the outlook forward seems a little challenging because oil prices have gone up. Lots of commodity costs have moved up higher. While the December quarter results may be good, the guidance for the future may not necessarily be as strong. As far as consumer facing financial companies are concerned, the going has been not so good but relative to what it was, most of these financial companies are riding the consumer durable growth as well. So, you have better growth coming in from two-wheeler companies, consumer appliances companies and there has been a good or a fair degree of personal loan growth.
Most of these banks or financial companies would be reporting on a year- on-year basis closer to 20% kind of loan growth on the personal front. The industrial side and the other lending activities will be tepid. But for them the challenge ahead is that the NIMs are getting compressed and they need RBI to continue its softer monetary policies. Inflation is perking up, commodity prices are moving up sharply and financial companies are going to see their NIMs or spreads getting narrower and narrower. So I would be a little cautious about the financial companies going ahead into Q4 of the fiscal year.
Are you interested in any of the mid tier financials?
We will restrict ourselves to the gold finance companies right now, given that most of these NBFCs are either weak in terms of their ability to raise funds or have very weak demand to look forward to. We would rather look at the so-called safer financing companies like gold financiers and home financing companies.
The other set of financing businesses like automobile financing, consumer financing are a little risky. We know that the moratorium levels for these loans are much higher and therefore we would rather play and take a bite at the housing finance and gold finance kind of companies. But there also you have to be very choosy. We would rather look at those companies which have recently raised a substantial amount of money either by way of equity capital or on the debt side because even the cost of debt has substantially come down and it will help them to mop up funds for future growth.
What about Any ancillaries related to vaccination? Vials, syringes, the whole business of vaccine infrastructure providers?
The market went through this cycle of betting on cold chain companies saying that when the vaccine gets rolled out, we need to have proper cold chain infrastructure and that can only come through the logistics companies. Even airlines went up saying that vaccination demand would mean that we will have to airlift a lot of vaccines etc. All these value chains have very limited potential both in terms of time and effort and limited profitability swing that can bring to the shareholders.
I do not think there is any deep value in any of these ancillary chains related to vaccination efforts that we will go through. If at all, post vaccination, we will have to bet on a surge coming in for medical advice. During the pandemic, a lot of hospitals and a lot of healthcare activities were either postponed or deferred etc. Those deferred and postponed elective surgeries will come back on to the table and the hospital networks will start doing better.
Not only that, some of the pharma companies which are domestic oriented will start doing quite well. So rather than betting on the vaccination cycle which is quite temporary in nature and very low potential in terms of profitability, it is better to focus on the post vaccination situation arising out of let us say the healthcare demand going up. We would rather bet on those kinds of companies than these logistics, glass vials, syringes etc.
What about real estate? How bullish are you on realty?
Realty does not really excite us. There are problems galore. In the pandemic, we saw them getting hit either on the cost side or the demand side. We saw demand crashing down. Now the cost cycle is going up and the real estate companies will have to find an avenue to raise prices in an environment where demand is still not yet improving as it should.
They are sitting on a huge amount of inventory as well. So we would not really look at the realty space. If we touch that sector, we will look at companies which are debt free, The only name that comes to mind is Oberoi Realty and to some extent Godrej Properties is also doing better. But barring these two quality names within the sector, we really do not touch the real estate sector. But it is a sector that often provides us with a meaningful cue in terms of what can happen in the year ahead, in the months ahead for such sectors as cement, home building kind of companies or NBFCs which finance home loans. These cues are now looking a little better but from a stock market perspective, we would not even have a very low weightage assigned to real estate. Sometimes it is even zero.