L&T Fin, ShriramTrans to benefit most from Bill: Kotak

Nischint Chawathe of Kotak Institutional Equities explains on CNBC-TV18 that L&T Finance and Shriram Transport are to benefit the most from enactment of the Banking Amendment Bill due to their reach and flexibility of operations.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Do you agree with the kind of price increases that are being accorded to L&T Finance itself assuming it receives a banking licence in the next nine months? Would it be beneficial in terms of valuation?
A: It is very difficult to really create a model on a banking licence to derive the value. First of all, we need to wait, watch and see how the whole process plays out, the dispensation accorded by the RBI with regards to cash reserve ratio (CRR) and statutory liquidity ratio (SLR) and the proposed business plan. It is only then will we be able to assign some value to the business. So, at this point of time, we are not assigning any option value for the banking licence for any of our non-banking finance companies (NBFCs). Q: If the Banking Licence Amendment Bill is passed in this Winter Session and thereafter the banking licences come through, which stocks you benefit the most?
A: I would say that L&T Finance and Shriram Transport would possibly be the most beneficial companies. I guess RBI has two criteria- one, the fact that it wants to improve financial inclusion will turn the RBI’s focus on companies which are lending to segments not penetrated by banks and Shriram Transport scores high in this aspect followed by the retail arm of L&T Finance.
The other criteria is the promoters and the management should have decent financial flexibility. I think in this aspect L&T scores high. Q: Do you have a 'buy' on L&T Finance?
A: Looking at the valuations L&T Finance, we clearly have a 'sell' on the stock. As I mentioned earlier, we have not included the option value of the bank at this point of time. Very honestly, it is very difficult and too early to estimate the company’s plans on receipt of a a banking licence. But purely looking at the business and where the valuations trade, we have a ‘sell’ on the stock. Q: Do you expect the Banking Amendment Bill to be passed at all in this Winter Session?
A: To be very frank, it's anybody's guess. The RBI is very keen on the Bill being passed as that would kick-start the entire process of allotting new bank licences. Q: What about IDFC? What is your view on the stock per se and do you think it is a likely candidate for a bank licence?
A: Yes, it is a likely candidate for a banking licence. From a stock point of view, this stock trades almost close to where the fair value estimate would be. So it is a good business and this company is clearly better placed as compared to its peers in terms of asset quality issues.
To some extent, this company will always trade at some premium to its fair value and there will always be some kind of a premium assigned to the fact that management has been very dynamic and conservative in its style of operations. Q: Do you track Bajaj FinServ?
A: Yes, we do track Bajaj FinServ. Bajaj Finance has done well and we continue to believe that it is a great business model. What fails our understanding as far as Bajaj FinServ is concerned, is the contribution of the life insurance arm. It is possible the market is assigning a far too high value to the life insurance business which is not really in line with the actual value. So, on this stock we have a 'sell' rating. Q: What about PFC and REC? Are their asset quality worries over? In general for NBFCs, do you think asset quality worries are still very much on the table?
A: Asset quality worries were never a concern for NBFCs with retail focus as compared to infrastructure finance companies. I guess that is one of the reasons why all the retail finance companies are doing so well.
Many of the issues in the infrastructure and power finance sector remain unresolved and the overhang will still continue. PFC's and REC's exposure to the private sector would be close to around 12 percent and that is where most of the investor-concern lies.