Indian banks far more resilient, well-insulated than global peers: Deven Choksey

The collapse of Silicon Valley Bank (SVB), a US-based commercial bank, sparked some concerns about the overall Indian banking system, but Choksey believes Indian banks are far more resilient and well-insulated.

While there may be some impact on private equity firms and their lending practices, he said they will be given sufficient time to recover money. As for Indian startups, he said companies like Paytm are turning profitable and have clarified that they are not impacted by the SVB collapse. He believes these new-age companies need to generate sufficient cash on a sustainable basis.

Overall, he holds a bullish view on Indian equities and finds it an attractive proposition. Indian markets are strong, with companies having a visibility of 24- 36 months in terms of revenue, he said in a conversation with Moneycontrol.

Edited excerpts:

Do you think the SVB collapse has any bearing on Indian equity markets? There were a couple of clarifications from SVC Co-operative Bank, Paytm and Nazara. What do you make out of all these?

The SVB collapse is largely due to an asset-liability mismatch. As a result, the regulators out there immediately stepped in and made sure that depositors are allowed to take their money back.

Once this situation is under control, the run on the bank would probably get minimised. That is my first point. So, depositors are now pretty assured. On the other side, the impact will be felt on the lending book of SVB.

The lending book is largely driven by private equity investments this bank has lent money to. They are now going to be questioned about returning their money in due course of time. I don't think they're going to put an aggressive foot on the pedal as far as recovery is concerned.

They will be given sufficient time to recover that money. But that does mean the flow of new money is likely to be a little bit more circumspect than ever before. Given such a situation, there is going to be some pressure on the money that has been lent to the private equity firms.

Within that, the India horizon is included. For some of these companies will be required to recapitalise themselves as they've equities/fresh money from other corners. This is what my sense is. As of now, I don't see any big impact on Indian equities coming, including the sell-off in the names you mentioned.

How do you look at the overall state of Indian banks? Are they well insulated? Are there any interconnected links?

No. Overall, the Indian banking system is far more resilient. I guess the Reserve Bank of India (RBI) has been doing a splendid job. Due credit should go to our regulator for the kind of work they have been executing.

More or less, there is a good amount of transparency and disclosure of non-performing assets (NPAs). Even if there is a slightly less amount of irregularities, I think the matter has to get reported to the regulator. Our regulator, probably, has a very systematic rule.

By design, we have kept the banks insulated. Over-exposure is not allowed in any one particular area.

At the same time, I think there will be a resolution process when an investee company has borrowed money from the bank. Some IBC processes are already in place. All in all, my viewpoint is that the RBI has been playing a very proactive role. I don't see too much of an impact on Indian banks. They are far more vigilant at this point of time.

How about startups in India? Do you think they may feel a bit of the SVB jitters? We saw Paytm actually coming up with a clarification that SVB has fully exited by marking handsome returns. What do you make out of counters like Paytm? They've just turned profitable overall on the operating level?

I think they better make profit on a sustainable basis. That is what we are all looking at. The company says it will be EBITDA-positive by September. Should that be the situation, definitely I think one would like to see how it sustains. Various properties of Paytm – be it transaction properties or fintech properties or malls or distribution platforms, all in all, I think they need to generate sufficient amounts of cash on a sustainable basis.

Should that be happening, in my viewpoint, the kind of apprehensions we have would probably get addressed in a systematic manner. As of now, it is still early. I would keep an eye on it.

Taking a very aerial view, how do you look at markets, overall? How are you approaching it? We're seeing a high amount of geopolitical uncertainty, higher interest rates and anaemic growth. FII trends aren't that encouraging at this point of time.

Our markets are absolutely very, very strongly positioned, from a fundamental point of view. Most of the companies you talk to have a visibility of around 24–36 months in the form of revenue, which means when you have got 8–12 quarters worth of visibility on revenue and profit. I think this definitely makes life much easier in predicting the market and the market movement from the point of view of investments.

Now comes the other angle -- the trading angle. Today, a majority of the global funds that are operating in various parts of the world, including in India, are traders. They come through the ETF routes. From that particular route, I think the only thing that matters is the amount of inflows and outflows.

If they raise the inflows, they will pump in more money into the markets by increasing the weight in some of the index stocks and some of the large-cap stocks.

If they are smaller, the reverse of that definitely happens. This is what is being seen currently. Interest rate in the West, in the US, has increased from virtually zero to, I think, 5 percent.

And, today, I think these countries are providing a 5 percent kind of return on a fixed-sum basis. They are probably going to shift big time into some of the debt-oriented products. How exactly will it sustain? Will it create an excess? How exactly will they recover that money when they are lending to their borrowers?

These are some questions which time will tell. But coming to the Indian market, in my viewpoint, I think it remains an extremely strong proposition.

So, the FPIs are selling for reasons I explained to you. I think the inflow of money from domestic sources, through mutual funds, and SIPs remain pretty strong. This is probably the time for many funds to accumulate stocks at the lower levels when foreigners are selling.

Let’s talk about the Adani group of companies. A significant recovery was witnessed in these companies due to the prepayment of debt, check in by marquee names like GQG, and reports of selling the cement business. How do you approach these counters right now, and, overall, even the cement space?

A very important question. This year, the Adani group would be making an operating profit of about Rs 54,000 crore, and you have a net debt of around Rs 2,75,000 crore.

So, in my viewpoint, if you are basically generating a profit growth at 20 percent rate, if Rs 54,000 crore becomes Rs 80,000 crore to Rs 1,00,000 crore, for example, in four years' time, you are repaying that particular money for retiring the debt.

Frankly, for this kind of infrastructure business, the amount of cash flow you're generating will command an extraordinarily high amount of premium. No business, I think, would give the visibility of cash-flow generation like the infrastructure businesses. That is where most of the sovereign funds, endowment funds, insurance funds, pension funds, kind of long-term funds, which are investing for 25 and 50 years, will jump in.

They will probably buy these stocks. Fortunately for the Adani group, most of the infrastructure assets they've built are profitable. They're cash-generating and are promising to go even bigger.

The second point is that if India has to attract long-term investors in the form of funds which I mentioned, I think the Adani group probably offers the best India infrastructure story. I believe if the assets are available at a cheaper price, buying will emerge.

So, I remain fully convinced about the infrastructure potential and the story that the Adani group is unfolding. As far as cement businesses are concerned, both ACC and Ambuja look absolutely convincing.

They're strong businesses. They are cash-generating businesses. India is spending Rs 10 lakh crore this year. Last year, they spent Rs 7.5 lakh crore.

Overall, in the next 10 years, if we are spending Rs 110 lakh crore in infrastructure, cement would be one sector which would probably make the best out of this particular spending. In my viewpoint, ACC and Ambuja remain absolutely convincing stories. Adani Group is a strategic fit in this story. On the one side, they've got the limestone mine. On the other side, they have got the distribution reach to ports, railways, and roads.

I think this is where probably they are better-placed, comparatively.

What do you make out of the overall IT space? The former president of Infosys is now the managing director and CEO of Tech Mahindra. Do you see more risk-reward ratio coming in the IT space, overall?

I'm fully convinced about IT. I think, for every Re 1 of product development, services for Rs 2 are required. So, Indian companies are definitely well-positioned. Experience shows whenever managers are hired from outside, they have built the companies very, very strong. So I will remain relatively optimistic about the possibility of Tech Mahindra.