Rupee fall to strain banks; buy HDFC, HDFC Bank: Religare

With rupee almost touching new lows in consecutive sessions, banking stocks have been battered. Siddharth Teli of Religare Capital Markets feels that the sector may see some more downside due to the stress on its asset quality.

"With rupee/dollar depreciating, our bond yields are also surging. We will have to see the exposures that Indian banks have on corporates that have unhedged currency exposures. There would be some incremental asset quality stress from there as well," he explained. The Bank Nifty fell more than five percent on Tuesday, reacting to the currency’s freefall.

He told CNBC-TV18 that among the financial stocks, HDFC and HDFC Bank were the preferred ones as they held on better than others. He also recommends holding IDFC.

Also read: Bloodbath on D-Street, rupee butchered; what next?

Below is the edited transcript of his interview to CNBC-TV18.

Q: With the way the rupee is moving, would you have to relook all your banking numbers? Does it gel that as the rupee depreciates, there are more adversities on the banking space?

A: With rupee/dollar depreciating, our bond yields are also surging. Most (banking) names we are talking with, are paring down their growth estimates. While the non-performing loan (NPL) cycle has been on, the incremental issue would be given the sharp up move we have seen in dollar.

We will have to see the exposures that Indian banks have on corporates that have unhedged currency exposures. While banks are finding it difficult to quantify at this point in time, our sense is there would be some incremental asset quality stress from there as well.

The numbers have been meaningfully pared down through the earnings season by us. But, there could be some more downside that we currently factor in.

Q: Would the best falling knife to catch be HDFC and HDFC Bank?

A: Those stocks were holding on relatively better. In that context, we still remain more constructive on retail lenders. Both HDFC Bank and HDFC are the names that we like. Valuations were expensive there, so those stocks have also corrected a bit.

I am not sure if it is worthwhile catching a falling knife over here. From a portfolio stand point these were the two stocks that we would be overweight on at this point in time from a long only perspective.

Q: IDFC has fallen 12.5 percent in a single session? For the week, it is down 20 percent, and for the year down about 52 percent. What is happening to the stock?

A: Yesterday, they put a cap on their FII limit. It triggered the initial falls. It seems there could be an exclusion for IDFC in some of the major indices; it is MSCI. From a valuation standpoint, IDFC actually trades below FY14 book even if I were to adjust for the goodwill.

So our sense is that from a valuation standpoint it is fairly okay. However, it is in infrastructure space with a lot of exposure to the power sector where things have not improved meaningfully. That is weighing on the stock as well. This is an area where at current levels, we will not be sellers in the stock.

In the near term we are not seeing any catalyst either. We would have a hold on this name and that is in synchronisation with the ratings that we have with ICICI Bank and Axis Bank as well.