Why is Bowen Capital bullish on NBFC stocks?

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Why is Bowen Capital bullish on NBFC stocks?

Aadil Ebrahim, Investment Manager, Bowen Capital Management is very bullish on non-banking financial space. “We are overweight on non-banking financial space—HDFC, Rural Electrification Corporation (REC) and LIC Housing.”

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Some of the foreign instituional investors (FIIs) are just waiting to park money in India until the grind in the market is over. As a alternative they are shifting out to China as valuation looks cheap there.

In an interview to CNBC-TV18, Aadil Ebrahim, Investment Manager, Bowen Capital Management said, "We have been shifting out of India more to China where the valuation looks more attractive. But we haven't been reducing in India; it's just a more in terms of balancing the portfolio.

On the home ground, Ebrahim, is bullish on non-banking finance companies (NBFC) like HDFC , Rural Electrification Corporation (REC) and LIC Housing .

He reasons that NBFCs do not have stringent capital structure that the traditional banking companies need to employ.

Ebrahim isnt too worried on IT stocks from a long-term perspective but on short-term he thinks there may be some noise. "If Infosys does fall another 5-10% then we may look to pick some up," he adds.

Here is the verbatim transcript of his interview with CNBC-TV18's Anuj Singhal and Latha Venkatesh. Also watch the accompanying video.

Q: Starting with Tata Steel because that's one stock, which has done well, in fact steel as a sector has been doing well for last couple of days. Where do you stand on this front?

A: We do not follow cyclical industries like steel, for example. So, I wouldn't be able to comment on Tata Steel's specific performance. But I think we will have to look at it from a global commodity perspective. With global growth slowing down, muted growth the next couple of years, are you going to see commodities run? Probably not is my guess. So, I wouldn't want to advice investors to take a long-term call on commodities when you are going to see slower global growth for the next year or two and with China also restructuring, re-balancing its economy to cut down from export intensive commodities, focus more into services domestic and consumption growth.

Q: For sometime now the top holdings in your couple of funds have been Infosys , HDFC and Dabur . Let's take one by one, how you would look at the IT pack itself? Now that you are talking about the global slowdown, would you say this is a time to shed some weight on these stocks?

A: The IT sector has obviously not done so well in the last couple of weeks. With visa restrictions in US, with US Senator calling Infosys 'chop shop', obviously sentiment is not the greatest. Leading up to the mid-term elections in the US, I do not think these stocks may outperform. Saying that if they deliver fantastic results in the quarter then you would see lot of short covering and these counters will do quite well.

I think the thesis going forward is the Indian IT companies will have to start to hire globally, in the US, not reduced, but the growth will come from hiring in US than from India, for example, to comply with all these new regulations going forward. The larger IT companies can weather the increase in marginal costs and the mid to lower tier cannot. So, you may see some consolidation going forward, the larger tier guy should do okay.

Saying that, if billing rates do not improve in the next 12 months and rupee continues to be well bit then these guys will face margin pressure going forward. But if billing rates do pick up slowly and gradually then they should be able to weather the higher wages and maintain margins and deliver pretty solid earning per share (EPS) growth. So, we aren't too worried from a long-term perspective, but short-term you will see noise. If Infosys does fall another 5-10% then we may look to pick some up.

Q: Are you buying in India now? I remember you saying last time that you think it is a very richly valued market, but it seems to defy people who believe in those valuations and just keeps to grind higher and higher. What would your thoughts be? Is it time to perhaps cast the doubts on valuation aside and just go with the flow, with the liquidity?

A: In terms of our trading in Indian markets, in the last two months, the only trade we have done is we have sold out of Dabur and bought Bajaj Auto. That was purely a valuation go with Dabur trading at 30 times and Bajaj Auto at 15 times, both would have mid-teens sort of earnings growth in the next two-three years. So, the fact is we have swapped out of higher PE for a lower PE stock with similar growth characteristics.

Aside from that, we haven't been doing a lot here in India, we are just waiting and the market is grinding over, we already have decent exposure, so it doesn't make any sense to keep adding. We have been shifting out of India more to China where the valuation looks more attractive and the market hasn't run as much. But we haven't been reducing in India; it's just a more in terms of balancing the portfolio.