It is better to stick to retail lending till bad loans recognition in the corporate banking space is completed, says Prateek Agrawal, Business Head and Chief Investment Officer at Ask Investment Managers.
Even as global financial markets worry over the the fallout of Brexit, some analysts are downplaying the potential impact on India. Indian markets are not as risky as they were a few years ago, said Prateek Agrawal, Business Head and Chief Investment Officer at Ask Investment Managers.
The impact of Brexit boils down to increasing trade friction which may pull down Eurozone growth rates which is likely to weaken commodity prices a bit, Agrawal said. This in turn may mean a similar situation like last year when oil prices were falling, he said.
Agrawal expects that companies in FMCG, automotive and paints and adhesive sectors to continue to do well. He, however, cautioned against plays in corporate banking. He believes that it is better to stick to retail lending till bad loans recognition in corporate banking space is done completely. His is bullish on stocks like HDFC Bank, Kotak and IndusInd Bank.
Below is the verbatim transcript of Prateek Agrawal’s interview with CNBC-TV18's Nigel D'Souza and Reema Tendulkar.
Nigel: As the markets are telling us it appears that Brexit has really been brushed aside. What is your take on that front, do you believe that India has those fundamentals that really will help us outperform and really the street has been talking about the monsoons being the most important factor. If that is the case how would you play this market?
A: My thoughts are as follows. One, over the last one or two years India is really standing out versus earlier where our markets were completely seen as high beta market and would react very violently to any global events over the last two years we are almost seen as an island of tranquillity. So, if you look at even our currency, currency has held up much better versus most developed world currencies. So, that is a sharp change which has happened in our favour. So, probably as a market we are not seen to be as risky as we were some time back.
Coming down to Brexit, there are various things which are been talked about. In the end it boils down to maybe increasing trade frictions which reduces the pace of economic growth by a tad. So, if somebody was expecting between one and two percent kind of growth in the region maybe it will be pulled down by maybe 0.5 percent. So, that would be the kind of impact to our mind that happens because of this event. The Eurozone growth rates may get pulled down a bit. When that happens clearly versus interest payables you would have commodity prices weakening a bit.
So, we have a situation which is then very similar to what we encountered last year when we saw oil tumbled by 50 percent and so did steel etc and there was a part of the market which held up very well. The same part of the market will tend to do well this year also going forward. So, in terms of example if you want for example autos with all the cut in the input prices they still manage to hold prices, businesses in the FMCG sector, paints, adhesives, with all the cuts in the crude prices never cut product prices at all and the margins expanded quite a bit. So, these businesses would again be in the sweet spot and coming down to your last one monsoons these businesses also benefit because of monsoons.
Reema: Any names you can give us on individual socks that you would recommend a buy?
A: I gave you examples that businesses which were doing well last year would probably continue to do well. So, examples that I gave were stuff in the FMCG space. Autos in general and also paint, adhesives kind of business. So, Asian Paints, Berger, Pidilite etc. These were businesses which continued to do well, will do well going forward also.
Banks on the other hand have something to again tackle. So, if commodities drop a bit it stresses the outlook on corporate banks more going forward. These are entities which do get impacted by contingence. So, that is a part of the market to be a bit worried about.
Nigel: Could you give us a few ideas then? You are talking about banking stocks, would you play private sector banks or do you think valuations are cheap enough to go ahead and dip into public sector undertaking (PSU) banking stocks? Give us some names.
A: My sense is that it is better to stick with retail lenders till the recognition of stress on the corporate side may not be fully recognised. The trouble is most of the larger retail franchises like the private sector. So, we like three names. HDFC Bank, Kotak Mahindra Bank and IndusInd Bank where retail non-corporate part of the business would be close to 50 percent. That is probably the space to be in rather than corporate banks.
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