Moneycontrol
May 09, 2017 02:31 PM IST | Source: CNBC-TV18

Remain sceptical on banks' bad asset turnaround; see upside in aviation: Dipen Sheth

HDFC Securities’ Dipen Sheth is a little skeptical of a turnaround in bad assets. He sees upside in aviation stocks and gave a positive outlook on InterGlobe Aviation.

With several developments happening in the banking space with respect to the bad loans problem, HDFC Securities sees it as a late, but welcome awakening.

“I remain a little sceptical on whether bad assets can be turned around,” Dipen Sheth, Head- Institutional Research, HDFC Securities told CNBC-TV18 in an interview. Having said that he added the move sent a message that reforms were taking place to address issues plaguing the sector.

On sector-based bets, Sheth doubts if there is great money to be made in evolved housing finance companies.

Meanwhile, he hailed InterGlobe Aviation, the operator of low-cost carrier IndiGo, on the back of its performance. “There is a firm which has steadily grown market share. It is one of the lowest cost airlines running anywhere in the world and enjoys a franchise which will persist when rail fares rationalize,” he told the channel. Overall, he expects significant upside on airline stocks in the next 2-3 year.

On Voltas, Sheth expects a good quarter and sees the stock as being one to own for the decade. He stated that their channel checks suggested stocks running out at dealers.

The real estate sector is a bit of a gamble on the market currently, he said. Issues hurting the sector were being addressed and it is natural the market is excited about it, he said. Further, he added, that with RERA being a reality, he expects more consolidation in the sector.

Below is the verbatim transcript of the interview.

Sonia: The space to be in and the space everyone has been talking about these days is banks. Give you great returns so far especially in beaten down names in the PSU space, how have you been positioned here?

A: The way to look at this space right now is that after three years of repeatedly falling behind promise in being able to solve the non-performing asset (NPA) problem, the government is going through a slightly late but welcome awakening on figuring out ways to cure this malice as it were. I remain a little sceptical on whether really bad assets can be turned around but certainly the message which has been coming from legislative and executive corridors off late, is that large scale healing should happen.

I think it is a good thing to do as we enter the last two years of this government’s tenure. It will also send out a signal to the electorate that the last remaining hurdle in terms of policy reforms is being addressed. I do not know what kind of success will be achieved. so even as banks are recognizing pain and much of the pain is showing up people, I think investors are taking the view here that this is perhaps close to the end game now and the big recognitions on pain on asset quality have already been factored in to bank books.

So, you just have to see the momentum in an ICICI Bank and in the last trading two-three months in the Bank of Baroda (BoB) also where I believe there is super hope playing out for the next one or two years, I think it is an excellent trade from here.

Latha: Housing finance is the one that has attracted a lot of investor attention and yesterday when State Bank of India (SBI) cuts rates, I am just worrying if now there will be a rate war over here, would you still back any or many of them?

A: Housing finance is an ocean and you have to slice and dice it into different segments. The low hanging fruit in housing finance which is where the big opportunity and penetration have already played out and will continue to play out for many more years is the salaried urban class where penetration is running high but like I said, house ownership is still not running high so there is many years of growth. There it is the interest rate leaders who will get increase in market share.

So SBI cutting rates to 8.35 makes a lot of sense although it is there for a particular segment of borrowers but 8.50 and 9 percent kind of headline rates doesn’t leave much room for wholesale borrowers without deposit franchise like LIC Housing Finance. I know the stock has been on a tear and we have a sell on it. So in that slice, the evolved slice of the market I doubt if there is great money to be made because people will find it easy to flip loans without fees as the law now demands. So I think LIC Housing Finance is in serious risk there with 2.5 times adjusted book on FY19 basis. I do not think there is too much money to be made in the stock, it has drifted up the sector. Smaller names look much more attractive.

Anuj: I am going through your last strategy note and some names stand out for me, Force Motors in particular, at current levels also you think the risk reward is reasonable?

A: Force Motors has two slices of the business. One is their commercial vehicle (CV) or buses slice as I call it, mini bus slice which is where they are in OEM but half their business today is assembling engines and gear boxes for luxury car makers like Mercedes and BMW and that to my mind is a high franchise ancillary business in which they are indispensable to these two marquee names in the luxury car market.

In India, we sell something like 35,000 luxury cars, which is like just about one percent or so of overall car volumes in the country in most countries, which are comparable to the Indian economy and especially the way we are going to drive forward in terms of aspirational consumption over the next few years, this number is anywhere between 3 percent and 5 percent.

I would not be surprised if in five years time, the luxury car market would cross 100,000 and Force Motors will be a direct beneficiary. We have been interacting with some of these luxury carmakers and the sense we get is that the luxury car market is at the verge of take-off. If that happens then the volumes which will accrue to Force Motors on that slice of the business can be stupendous. So you need to buy this with a 5 year view if you ask me. It is not a cheap stock right now but if you factor in the earnings growth that is coming in, it is still available for something like 18 times or so on FY19 numbers. If I was to buy it today, I would hold it for much beyond FY19 for sure.

Sonia: Another stock that is not cheap at all and that you like is Interglobe Aviation. This quarter’s numbers are expected to be weak because of the way aviation turbine fuel (ATF) prices have gone up, but what are you bullish about because the stock has run up a whole lot lately?

A: It was in that 800-900 band which was around the IPO price when the initial listing honeymoon got over and a whole lot of marquee investors exited the stock and all of that. It has gone through its bit of disillusionment with investors and it is fashionable to say that airlines is a bad business and it is always vulnerable to fuel prices, the competition is going to kill them, they do not have pricing power, there is no franchise. What have you got in IndiGo? You have got a company that has steadily grown market share every year for the last eight years running. It is one of the lowest cost airlines, running anywhere in the world if you look at comparable cost, if you strip out the taxes, it is probably the lowest cost airline running anywhere in the universe.

Secondly, it enjoys a franchise which is going to persist and which is going to grow as rail fares rationalise and as aspirational Indians move more and more towards air travel. We are a 100 million market today and I would not be surprised if we were a 300 million market in terms of airline passengers over the next decade. These companies do not need capital to grow, their planes are off balance sheets where you can call that disguised leverage but IndiGo is earning more than 100 percent RoE and distributing 75 percent of its profits. This 5 percent dividend yield. In an industry like telecom, about 12-13 years ago, which didn’t have pricing power and minute tariffs were falling from Rs 10 a minute to maybe Rs 2 a minute over the next five years.

Bharti Airtel delivered some 20-30 times returns and after that Bharti went into a funk for 10 years. So I think even these allegedly low quality businesses have a J curve and we are proudly on the edge of that J curve for airlines today.

Latha: Edge of the J curve, you won’t buy it you are saying or it is about to rise on the J?

A: Maybe it is Rs 1,100 today and it might go back to Rs 1,000 after the numbers come out soft this quarter but two-three years out, do I see a Rs 3,000 price or five years out, do I see a Rs 3,000 price? I absolutely do. Unless something disastrous happens or my thesis does not work out which is fine, we are humble. But if you ask me today, this is the guy who is best suited as an investment if you want to ride the curve.

Latha: What about Voltas? The price is actually 30 times isn’t it? Even then you would buy it?

A: It isn’t 30 times, if you look at FY19 earnings and that is what we are looking at for a one year out target price so it is at about 24 times and even 24 times looks high to you, which I respect. You also need to understand – just like airlines, air-conditioner ownership is something at 4-5 percent penetration in this country, just go and look at the stats on aspirational consumption and how it takes off when you cross USD 2000 per capita income level in many economies and I am not talking of Singapore, I am talking of countries like Turkey and Thailand and go back to their economic growth and their expansion of AC ownership, when they cross USD 2,000 per capita income. Voltas has got 20-21 percent sticky and well distributed market share.

Our channel checks -- we do these channel checks every quarters – suggesting stock outs at Voltas dealers as we get into peak summer season. That is the kind of demand that is playing out. I am expecting a very good quarter. Year-on-year, we might see a mild decline because of some one of items and exceptionally low commodity prices getting into their cost side and the profit and loss in the last year quarter. The fact is, is this a stock to own for a decade? I think it is.

Anuj: Real estate is again surging and this time yesterday was Indiabulls Real Estate having a trend day, today it is HDIL along with that DLF as well. Market is sensing something big in real estate, the stocks have doubled but nowhere near what they were at the peak of their own bull markets, anything that you would buy right now?

A: I do not want to spoil the party here but real estate looks like a little bit of a gamble on the stock markets right now. This structural drivers are all falling into place and all the reasons why we were hating real estate for all these years are being addressed in terms of the governance issues around the sector, in terms of the capital allocation issues around the sector and so on. All of that is being addressed.

So it is natural that the market is getting all excited about this space. With RERA coming in and becoming a reality across the country over the next 12 months, what is going to happen is that these few 1,000 real estate developers are probably going to boil down to maybe a few dozen. The kind of restrictive conditions that RERA puts on the real estate developer, these restrictive conditions are likely to make it a much more consolidated industry than it ever was. So that is one big takeaway.

The second thing is the information transparency that this industry will have to share with its buyers, its customers, with banks and in the way it reports its numbers and in the way they operate and they sell their real estate is also going to change dramatically.

Couple that even with today’s low home ownership stats that you have in India and you have 15-20 years of growth possible in the industry which is consolidating so people are going out and taking bets on maybe the likes of Sobha, the DLF, the Oberoi and so on and so forth.

I think a lot of these guys who were jumping in to buy these stocks will discover over the next year that the numbers are going to take a little longer to come. So I think I would be a little careful in terms of not getting carried away by the euphoria.

Sonia: What is your view on the cement space because you have been bullish on many midcap cement names for a while but anything in the largecap space because we are also hearing about that ACC-Ambuja impending merger?

A: On the ACC-Ambuja merger, we don’t have a view on the merger as such. We have had a neutral on ACC and a sell on Ambuja for some time now and we have been proved spectacularly wrong so far. So we are just looking at what the operating metrics are and what the growth opportunities are and the fact that ACC’s operating metrics are not particularly inspiring or that Ambuja’s limestone reserves or their cement clinker mismatch has not been addressed for a while but I guess the market has a different view and I don’t want to get into a tussle on that bit right now.

What is more important for us is that there is an emerging market for cement which is opening up, which goes beyond the traditional infrastructure argument and that is housing. If that indeed plays out over the next few years then the boost to cement consumption will be much more than what all the fans of infrastructure have been talking about.

The name to pick then would be an Ultratech but there as I think again, valuations are rich. So there is a little bit of a yes, no. I would look for compounders like Shree where again valuations are again running ahead of reality. So the thing to do here is not to look at the largecaps but to see where volume growth can happen over the next five years which is the midcaps.
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