Saurabh Mukherjea, chief investment officer (CIO), Marcellus Investment Managers, spoke on concerns emerging around the HDFC-HDFC Bank merger, about the sharp fall in the shares of HDFC twins, underperformers Nestle & Asian Paints, and on margins coming down in the Q4 for the consumption companies.
Dismissing concerns around the growth outlook for HDFC Bank going forward, Saurabh Mukherjea, speaking in an interview with CNBC-TV18, did not slash the earnings growth estimates going forward, and said the stock will continue to give high premiums for investors in the long term.
On being asked over some concerns regarding the weakness in HDFC twins after the merger announcement, Mukherjea said HDFC Bank was an outperformer in the private banking space in the last five years.
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The analyst believed the stock price movement is momentary and the superior asset quality will keep the returns intact for investors.
Outlining his reason for this outlook, he stated he was positive about HDFC Bank with a long-term view. Mukherjea further said HDFC Bank could deliver around 20 percent, from a long-term perspective.
Mukherjea, reacting to a question on HDFC Bank and HDFC stocks witnessing sell off recently in the run up to the merger, said, "Last five years have been spectacular. They have just blazed away. 20 percent loan book compounding and 20 percent deposits compounding.”
He also believed no other bank remotely matches up to HDFC Bank.
The analyst said, " No other bank in the private space has been able to compete with HDFC Bank on both sides of the balance sheet. On gross and net NPAs also, no other private sector bank is even close to HDFC Bank. If HDFC's 2 percent ROA is seen, it is difficult to see any other with 2 percent ROA. If we look at the performance of HDFC Bank in the last 15 years, it is in a completely different league. Even in the last 3 years, no other bank came close to such performance."
On being questioned again over pre-provisioning operating profits of HDFC Bank slightly looking weaker, Mukherjea said, "We have to back companies which have delivered through decades in a stellar fashion. So, we back such companies which give 20-25 percent returns on our clients' investments."
Coming out in defence of the merger, Mukherjea said, "The merger will bring two very profitable businesses together. We will see their ROEs exceed and growth reaching high."
The market expert added, "Currently, HDFC Bank's mortgage runs on HDFC, so HDFC Bank's growth is reduced. When HDFC Bank holds on to mortgages, it will accelerate."
Since their merger announcement on April 4, shares of HDFC Bank and HDFC tanked close to 15 percent each.
HDFC Bank, the largest private sector lender in India, on April 16 reported a 23 percent year-on-year (YoY) growth in standalone net profit at Rs 10,055.2 crore for the quarter ended March 2022 as bad loans provisions declined 29 percent, with further improvement in asset quality. But the lender’s operating performance showed spots of trouble. Operating profit growth was just 10.2 percent for the quarter and the net interest margin was at a record low.
The analyst stated the succession plan for HDFC Bank was taken care of, when asked whether the new leadership will continue to produce the kind of results it gave and if there is a reason to worry.
Dismissing such concerns, the market expert said, "We have closely monitored the succession planning. Shashi was mentored and trained by the erstwhile CEO. The operating metrics from the time Sahshi took charge are stellar. They are growing at a fast pace. Delivery impeccable on asset quality and growth. I give 10/10 to Sahshi."
Mukherjea is also extremely bullish on Nestle India and Asian Paints.
The expert termed both the stocks which are market-leading franchises have been compounding consistently, and added, slight margin pressures witnessed by Nestle India do not add any material value.
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He said, "Nestle's share price compounded around 25 percent in the last five years. Profits compounded to 22-23 percent. It is obviously a dominant player in its category. There is food cost pressure. It utterly dominates the category that is a compulsory purchase."
Mukherjea, reacting to the performance of Asian Paints in the stock market, said margin pressures of the company should not be a concern for long-term investors.
"Whenever crude doubles over a two-year period, Asian Paints' operating gross margins are solid. This results in the share rallying. Share price of Asian Paints in the last 12 months compounded. It has gained rapidly in the last 4-5 years," said Mukherjea.
The expert noted rising raw material costs and inflation have acted as a dampener for both the business companies.
Nestle India on April 21 reported a 1.3 percent decline in its net profit to Rs 594.7 crore for the quarter ended March, which came in below Street expectations of Rs 625 crore. It registered a 10.2 percent growth in revenues from operations to Rs 4,002.14 crore.
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