Santosh Singh is ready to take money out of Axis Bank & put it in ICICI, here’s why
- Axis Bank stock is now trading at almost double the valuation of ICICI Bank.
- Housing finance NBFCs more in trouble compared to auto finance or second-hand vehicle finance.
- Stocks have a problem, not companies.
What is your view on the finance space? One of the key factors to watch out for this morning is rising rates making a dent in the margins of a lot of NBFCs sooner rather than later. Would that lead to timely correction that these stocks have been bracing themselves for given valuations?
I would not say that NBFC is a sector. It is a combination of stocks and that is where the valuation differential is also very high. If I look at the 10-year treasury, clearly the financing cost is moving up for all of the NBFCs because they will have to raise money from the capital markets and the cost of that is rising quite sharply. It is moving up more than the rate of bank funding. Definitely, it places them at a disadvantage wherever they compete with banks. If the bank rates are not going up and if NBFCs cost of funding is going up, then the banks can price them out on those particular products.
It is problematic but it is more so in housing finance then say in auto finance or second-hand vehicle finance. It is more so in areas where they compete with the banks and less so in areas where they have the ability to price their products.
There is fear in the market that wholesale borrowing rates are moving higher and that could impact wholesale banks and NBFCs. Is that fear valid? Is there a serious case for an underperformance or price-wise correction in Yes Bank followed by a Cholamandal or Shriram Transport, entities which borrow from the wholesale market and have a low CASA?
That is what I was pointing to. I would not be that much worried about Shriram Transport Finance, but I would be worried about LIC Housing Finance. I am talking about wholesale business because Shriram is not directly competing with the banks. Even if the rates are going up by say 25-30 bps or even 50 bps, they are giving loans at 17%, 16%, the 30-40 bps passing on is not that difficult.
But if you are giving loan at a very thin margin, at 8.55-8.6%, it is very difficult if your housing financier takes a hike of 40 bps while the CASA funded bank rates are not going up. That is where it places them at a clear advantage. If we talk about something like Yes Bank or some of the wholesale funded banks, it is the same thing.
If we look at some of the wholesale funded banks, they have not gone into these finer priced segments. Yes Bank has not gone into finer price segment in home finance which is very important for a CASA financed bank. That is why I am saying that the impact will be very different across the board. It is not going to impact each and every bank in the same way or each and every wholesale funded NBFCs in the same way. Housing finance will definitely have a big impact. If you are a second-hand vehicle financier, it is not that much. If you are Cholamandalam and you are doing new vehicles, you will be impacted. It depends on what segments you are in.
How would you look at the oil and gas space in the wake of rising oil prices? The most common thought process is it is bad news for OMCs, good news for ONGC and oil explorers or some of the upstream companies. Even for Reliance, refiners essentially get benefit. Is that how it will play out even now?
It broadly plays out that way but I would agree that efficiency also plays a very important part and stock prices are more than pricing in the movement in the oil market. If we look at Reliance and the oil marketing companies’ stock prices, these have moved in the opposite directions. The market is already pricing in that. So how much trade is left there? I do not know because the way movements in all these stocks have happened, it is more than pricing in the impact of what would be the final outcome.
Suddenly the view on Titan is that you do not have too many Hindu wedding in this calendar year and as a result gold sale may not be that strong. But is that a very naïve argument to not to buy Titan because weddings will not stop and even if they do not happen this season, they will happen in next season?
I would agree with you. The best part with Titan is whenever the stock falls, we talk about wedding season and the gold prices, whenever the stock moves up, we talk about different businesses and retail franchise. If you are buying the stock for two months, you might talk about wedding season and number of days but how does it matter if we are talking about buying Titan which is one of the best retailers in India for a multiple number of years. How does it matter that wedding is going to happen in this year and it is not going to happen in next two days? To me, that is not an argument. To me, the argument is the valuation versus the opportunity which Titan offers and definitely in our view, the sort of opportunity Titan offers on a multi-year basis, is quite exciting. We are not really worried about the wedding season.
Any other spaces that you would be monitoring closely with regards to currency weakness? I am not talking about the usual suspects the Jain Irrigation, etc, of the world but some of the other large names like Hindalco, Bharat Forge or even Tata Power. How bad is it for them?
Definitely, it is a problem for some of the importers. The currency definitely is a problem for a lot of those guys but I would not be really worried about the fundamentals of a lot of companies because of the currency movements as they can also pass through a part of it and hedgings are available. Definitely, the movement has been pretty sharp and whatever hedging you will be doing, is not going to save you that much.
I am not that much worried about the larger companies getting impacted or getting into trouble because of the currency movement. I am more worried about the leverage part and the cost of money which is moving up on a global level. The worry comes more from that area. If you are a highly leveraged company with a weaker promoter, there is a case to worry.
In case of Hindalco, we do not have a case to worry in the near term. I am more worried about Tata Power because of the way their assets are and the way they have not been able to utilise those assets and not from a currency point of view. Currency is definitely important but I am not fundamentally negative on companies. Stocks are different from companies and I am not fundamentally negative on companies just because of the currency movement.
But a large part of the story for the market is premised on growth. It is not that this has a direct impact but if export growth does not come through on the back of a falling currency, then there is a bit of lag effect given that our import bill gets swollen and that will have a trickledown effect on sentiment and flows.
I said that the stocks have a problem, not companies. Why should FII investors invest in India? Even if the market moves up by 10%, their return is zero. Whereas if the money is put in US bonds, they are going to make some money out of it. So yes, rising currency is definitely a real problem from the stock point of view. From the company specific point of view, are they going to get into trouble just because of the currency movement? No, they might not but investing in those stocks may not be the brightest idea if there is going to be an earning lag as well. So, definitely that is a real concern.
Give me a stock idea where you think it is time to take some gains and a stock idea where it is time to invest.
I would say that there is time to take some gains out of Axis Bank. We definitely like corporate banks with good quality liability franchise. That is why we are positive on SBI or ICICI Bank. The way the Axis Bank story has played out in last two months, not only have they got a really good CEO, the stock is now trading at almost double the valuation of its peer -- ICICI Bank. I do not think currently there is any difference between an ICICI or an Axis. Maybe in two to three years’ time, Axis CEO Amitabh Chaudhry can make it a much better bank compared to ICICI Bank. As such, we are seeing better value in corporate banks and the way Axis has moved up, I would rather take some money out of Axis Bank and put it into ICICI Bank.