Bajaj Finance, M&M Finance top NBFC bets: IIFL

Banking analyst, Sampath Kumar, Institutional Equities, IIFL feels though HDFC Bank's fourth quarter earnings were good and its peer ICICI Bank is also expected to meet estimates, one is still not sure if these private lenders will be able to sustain this growth in FY14.

The broking firm is positive on Axis Bank and has upgraded earnings estimates for the year by about 4.5 percent. On the other one, for public sector undertaking (PSU) banks one needs to see more clarity on macro-economic environment and asset quality issues. IIFL is not bullish on PSU lenders. IIFL prefers private sector banks over state owned banks. It is betting on non-banking financial companies (NBFCs) as a rate cyclical play. Bajaj Finance, M&M Finance, Shriram City Union Finance are its top picks. Also read: Private banks, auto look strong, says Vineet Bhatnagar Below is the verbatim transcript of his interview on CNBC-TV18 Q: A word on HDFC Bank and whether all the nervousness around that stock on Tuesday has been reconciled and what your call is on that? A: HDFC Bank’s Q4 results saw a very strong performance. The management has high credibility and they have high degree of consistency. However, 2014 there will still be a question mark on whether they will be able to continue that 30 percent growth particularly in the face of slower loan growth that the industry itself is facing and so as a consequence HDFC Bank will face. If they are able to improve their efficiency substantially then you can say 30 percent growth in profits again is possible. However, in absence of improvement in efficiencies they will probably end up with 23-24 or 25 percent. Also considering where the valuations are trading at and growth coming off a little bit from where it historically was, there is still a question on whether that valuations will be sustainable. Q: Axis Bank has responded quite well to its numbers with the 2.5 percent move. Did you like the numbers, would you have upgraded your expectations for the year? A: Yes we upgraded our expectations. On the revenues side particularly they have done exceptionally well. Margins have improved sequentially and we saw a very strong fee income growth. In this environment to deliver very strong revenue growth is pretty difficult. There are very few banks who have delivered revenue growth and Axis Bank is one of them. They are going strong into FY14 because they have capital, the growth expectations are generally low and they do have sequential uptick on the revenue side which should help them. We have upgraded estimates for the year by about 4.5 percent. Q: ICICI Bank announces results tomorrow. Do you think this quarter will see continuation on the path to recovery for the bank? A: Looking at the results that we have seen so far, certainly ICICI should not be any different. They have delivered over 30 percent growth in profits in the first three quarters. Q4 also should be closer to that. The question mark is on whether going into 2014, we can continue to see high growth but Q4 results would not be as much an issue. _PAGEBREAK_ Q: It is interesting that you have buys on many of the private banks but while even the PSU banks have also pulled back in the last 15 days, you are not very bullish on them? A: We need better clarity on the macro economic environment, we need to see the asset quality overhang go away. On the asset quality front, we have so far seen cyclical pressures. Basically, companies for whom the profitability margins have come down and as a result their debt servicing capacity is getting impacted. So that overhang has to go before we can change our view on PSUs. There are many things that have to go right for the PSUs; macro conditions have to continue to improve, you have to see corporates continue to deleverage. Although, we have seen initial signs of that, we have to make substantial progress on corporate sector deleveraging. Only then we can change our view on the public sector banks at the moment. Q: Do you track any of the NBFC stocks like Mahindra & Mahindra (M&M) Financial Services has seen a strong response to their numbers today? A: We do track most of the large NBFCs. M&M Financial Services results have been exceptionally strong. There has been certain degree of disbelief on whether they can continue to deliver the kind of growth that they have been doing so far that is why the stock has reacted the way it has. It is interesting to note that the urban part of the economy is growing slow but the rural part of the economy continues to do extremely well. So across NBFCs who are positioned in this sector continue to do very well and there are still no signs of a significant slowdown coming through. To that extent M&M Financial is very well positioned. Q: What are your top picks in the NBFC space at IIFL? A: Bajaj Finance, M&M Finance, Shriram City Union and we have a buy on Shriram Transport as well. If one looks at our investment hypothesis, we prefer private sector over state owned banks and we prefer NBFCs as a rate cyclical play. They seem to be a better proxy to the interest rate cycle coming down than anybody else.