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Worried over stressed assets in Axis Bank balance sheet: Yogesh Mehta

On the NII front, I am projecting 14-15% growth for Axis Bank. The PAT number would be between Rs 1,700 crore to Rs 1,800 crore, which on a year-on-year basis would be almost flattish or at best show a mere 2-3% growth. The only thing is what would be the writedown of assets for controlling their NPA numbers.

ET Now|
Last Updated: Jan 22, 2020, 09.13 AM IST
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Yogesh Mehta-MOFSL-1200
OMCs are an avoid for investors as margin variations are too high due to crude price volatility. Refining margin are difficult to predict and that in turn will hit PAT significantly, says Yogesh Mehta, Founder, Yield Maximiser. Excerpts from an interview with ETNOW.

On preferred picks among HFCs
We have seen some positivity in housing financing companies (HFCs) in terms of residential properties getting sold in in most parts of India barring one or two states. Can Fin Homes has delivered the numbers and the loan book has grown in private sector banks. The numbers are showing 10-12% growth in the third quarter of this financial year in the home finance business.

Among HFCs, LIC Housing is a much better placed company in terms of pan India presence. The preferred lowest loan rates and 60-65% of the book consists of loans to white collar jobs. The default risk is less for them. However, this being a government company, the valuations are not what private housing finance companies are getting, But at reasonable valuations or 1.9 or 1.7 times current price to book valuations, there is room to do better, Today the prices were at Rs 480-485 range but at least Rs 580-600 would be the price target for LIC Housing Finance over the next one, one and a half year.

On Pharma
Domestic sales and business will have a better prospect. USFDA has been a little bit more stringent of late. I think the margin on the overseas front -- be it the Europe side or the US -- the biggest market for pharmaceutical exports has been shrinking day by day.

It has come down to almost historical lows. There is premiumisation in a few of the names. The domestic play would offer much better scope for pharmaceutical companies. As a defensive play, all these pharmaceutical companies are available at very reasonable and fair valuation except one or two, where one can still go for investment hunting, rather than chasing growth stocks which are now expensive.

Pharma has seen better days and is available at better reasonable valuations.

On Uber Eats-Zomato Deal
E-commerce till has been a disruption. Now the process of consolidation has started. However, Uber Eats is delivering what just 10-15% of what Zomato is delivering. However, the consolidation will have a better advantage and now the competition in this segment will be only with Swiggy. Overall on the e-commerce side, it provides a greater opportunity for private equity investors.

On OMCs
OMCs would be a tough call because it has been trading as commodities nowadays due to crude prices volatility. Crude prices had gone up to $75 per barrel and now are back to $65-66. Due to this, the margin variations would be too high, It is too difficult to predict what the refining margin would be and that will hit their PAT number significantly.

Secondly the government is considering a stake sale in BPCL, IOC and HPCL, which are at one end of the valuation chart. BPCL is at the other end of the chart. I would say the profitability remains very subdued in OMC companies and the growth would be hardly 7- 8% depending on the inventory. I would say that though IOC has gone down to Rs 113-114 level and HPCL near Rs 250 and BPCL near Rs 460, an investor can avoid the OMC basket as a whole.

On L&T
L&T is in the capital goods segment which is facing a lack of order flows. The execution capability is there but the slowdown in order flow is a concern. As per the projection, the numbers will be declared tomorrow. There would be 15-16% growth in revenue terms on a year-on-year basis, but the EBITDA margin would be in the 11-11.5% range. Profit will be again in the 25-27% range on the lower base. Private capex needs to be seen over the next two, three quarters, unless and until government orders have already flowed in.

Overall the stock and the company price will remain in the 1,250-1,400 range. The company needs a major trajectory and the booster for showing some strength in the balance sheet as well as the profitability. So we see 25-27% growth with a limited order visibility. The order book is very much full but the execution capability and the lack of private capex into the businesses is showing some kind of tapering headwinds for the company. Overall, it is a reasonable valuation and could be a portfolio stock as well as a defensive one.

On Axis Bank
We will have Axis Bank numbers on Wednesday. The only concern with RBL Bank and Axis Bank is that their stressed accounts need to be watched and one has to see how much provision is there. On the NII front, I am projecting 14-15% growth for Axis Bank. The PAT number would be between Rs 1,700 crore to Rs 1,800 crore, which on a year-on-year basis would be almost flattish or at best show 2-3% growth. The only thing is what would be the writedown of assets for controlling their NPA numbers.

I would be cautious on any further deterioration in asset quality. Prima facie, I am not so gung-ho about Axis Bank at this point in time due to these stressed assets in the balance sheet right now.

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