Gautam Sinha Roy of Motilal Oswal Securities recommends investors to build a portfolio of quality NBFCs which have a fair shot of winning the new banking license.
With just 10 days left for applying for new banking licence, eager applicants are making a beeline for the Reserve Bank of India. IDFC, an infrastructure company on Tuesday announced its decision to apply for new banking license.
Gautam Sinha Roy of Motilal Oswal Securities recommends investors to build a portfolio of quality NBFCs which have a fair shot of winning the new banking license. Roy suggests to focus on larger conglomerates backed non-bank financial companies (NBFC) that have had good operational and track record including Mahindra and Mahindra Financial Services, Bajaj Finance. L&T Financial Services, IDFC, LIC Housing Finance are also some other good contenders.
Apart from NBFCs, Roy advised investors to remain cautious in current volatile market and focus on safe bets like pharmaceutical and information technology. He is also bullish on telecom sector and identified Idea Cellular as his top pick in the sector.
"The competitive intensity in the sector is declining meaningfully and the pricing power which was at its bottom somewhere last year is improving, so as the number of voice minutes available to the incumbents, combined with this increased penetration of data. These three factors together will drive huge operating leverage for the sector which should improve profitability very strongly," Roy said.
Below is the verbatim transcript of his interview
Q: What are you making or what are you recommending to your clients at this point in time in terms of a strategy ahead of the FOMC policy on the equity markets and even post based on any sort of permutations and combinations that you are working with right now?
A: Right now times are quite uncertain not only because of the FOMC meeting. While we don’t expect some major move from the US Fed as yet, but the statement and what inferences investors globally will draw from the statements that the Fed or Bernanke makes will be quite important. We believe it is best to be cautious at these times although we are finding select pockets where we see some value emerging, but overall the market outlook continues to be cautious. Stay with good quality stocks in the pharma, IT, private banks as well as consumer facing names which is where we continue to see traction. So, we don’t see any change in the broader market direction or sectoral preferences as of now. So, we will continue to remain invested in our preferred sectors and that would include telecom too where Idea Cellular is our top pick.
Q: You said Idea Cellular is your top pick in telecom space. What is the target price that you have on Idea and because there has been so much news flow on the telecom sector what are the key positive triggers that could lead to some earnings improvement as well?
A: Telecom as a space we have liked for quite a few months now. It is not a new addition in that sense. It is just a continuation of our preference for that sector. As of now our target price should be closer to Rs 160 based on fundamental valuation. But what we note here is that the competitive intensity in the sector is declining meaningfully and the pricing power which was at its bottom somewhere last year is improving, so as the number of voice minutes available to the incumbents, combined with this increased penetration of data; these three factors together will drive huge operating leverage for the sector which should improve profitability very strongly. The profit number is hugely leveraged to all these factors including Revenue Per Minute (RPM) and voice traffic given their costs are more or less fixed. This is one sector where there could be a secular earnings growth across the board over the next few years. So from that perspective we do like the sector and we believe that even at these valuations there is potential upside based on upward revisions in earnings going forward. So that is one theme that we continue to play.
Q: So many stocks in the broader markets have been completely smashed out of shape in the last couple of weeks and Apollo Tyres is one of them, even today that stock is down about 2.5 percent post that deal. At what price do you think that stock could stabilise at and what would your recommendation be now?
A: We don’t really cover the stock so there would be no price recommendation. However, one thing clearly that comes out of the deal is that it is a huge leveraged buy-out deal, the kinds of which the market doesn’t really like in these risk averse environments. The company will have to work really hard over the coming few years to pay back that debt and after that equity holders will probably start getting returns. So, from a longer term perspective if the integration happens successfully there could be big story there but from the coming few years, from a cash flow to equity perspective should be a challenge which is what I think will be the case with Apollo.
Q: Would you have a view with regards to couple of these banking hopefuls and which ones would you bet on in terms of possibly getting the license on a more as opposed to others?
A: There are quite a few contenders which look good. You will have to really build a basket around that. Some of the obvious names that come to your mind would be the larger conglomerates backed non-bank financial companies (NBFC) that have had good operational and track record including Mahindra and Mahindra Financial Services, Bajaj Finance, L&T Financial Services and IDFC. These are good contenders for getting a banking license. Now the power finance companies like PFC and REC, for them, getting a bank license would really help them from a longer term perspective but it remains to be seen whether they would be considered. LIC Housing Finance will be another name. So it is best to identify good quality stocks around this theme and build a basket. Not only look at this from possibility of getting a banking license but also look at the business fundamentals and growth and valuations whether they are in the right place and then take a call. So that would be our perspective on playing this theme.
Q: Earlier we had a guest in the morning from Motilal itself who pointed out that the emerging market (EM) flows have picked up on the downside. So there has been quite a bit of redemption pressure that we have seen in EMs both in debt as well as in equities. Considering the mood is so subdued in markets like India do you advise putting in fresh money at this point in time at all? You have been talking about your recommendations, but do you think it is prudent to put in money right now or would you want to be up on cash and not make any fresh purchases into the market?
A: On an absolute basis it is not that one should not put money at all. One should keep some portion of your cash aside for possible opportunities in the future that is definitely the case here. If one is getting good opportunities and good themes one can still pursue those kinds of opportunities. On a net-net basis it is best to be cautious and not be fully invested in markets. While you have to be invested to some extent you cannot just sit out, but at this point you have to have some degree of cash reserve and that would be completely a function of your risk averseness. Given the overall situation, the mood of the global markets wherein reverse flows from EM equities seemed to be happening and that could keep on happening till this hangover of QE rollback continues. So we should keep on getting opportunities for deploying cash at better valuations than what we are seeing currently. So that should be the overall outlook for investing in Indian equities over the next year or so.
Q: Would you have changed your strategy with the volatility that we have seen in the rupee, would you have changed your equity strategy because of that?
A: Not substantially but we would have recommended more IT stocks, HCL Technologies and Infosys being the prime favourites within that. We are already recommending pharma names so that is another sector which should benefit from the fallen rupee. So, these two sectors are very obvious names where the stock prices should over a period of time benefit from the depreciation of the rupee.
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