Axis, ICICI must-have stocks; mkt uptrend intact: HDFC Sec

There is no reason why one should not grab Axis Bank at the current levels, quips Dipen Sheth of HDFC Securities. He urges investors to look at all parameters like NIM, loan growth etc and not agonise over NPAs alone. Sheth calls the private lender responsible for admitting its September quarter asset quality concerns.He is also bullish on ICICI Bank, which also has stressed assets, and advises to own the two stocks with a 2-year time horizon. "We remain buyers," he told CNBC-TV18.On the broader picture of the corporates which are reporting mixed numbers in the second quarter, Sheth said earnings are not a barometer for markets any longer. Despite the ho-hum results, the market's long-term uptrend is intact. If the World Bank report says India's ranks on Ease of Doing Business has improved, it goes on to show the governance is improving, he said adding "the direction has evidently changed".Below is the verbatim transcript of Dipen Sheth’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: Earnings season has not gotten off to the best start but how have you read into it? A: The numbers are all over the place so the good, the bad, the ugly, you can see them all. However, the bigger thing that I would want to say is that you are not going to look at this earnings season as kind of barometer to tell you where to drive and how to drive in this market. It has been that way for the last one or two earnings seasons and it will be that way for maybe another one at least if not more. The broader thesis of climate change should not get overshadowed by the weather; let us look at it that way. Sonia: You are saying the long-term upside is still intact for the market?A: Absolutely intact. There is news flow all over the place and if you look at the news headlines, media headlines are worried about the Bihar election outcome. We are slicing and dicing the result season right now as it were and with some justification I can say that we are agonising over the non-performing assets (NPA) problems. For example, yesterday with Axis Bank and now more with some of the PSU guys and so on and I don’t think that is unfair. However, the larger thing is going to sound like a stuck record and I have been saying it for a year and even maybe a bit more than that, that we are in the throes of remarkable healing, something that happens once in maybe two, three or five decades. All this is old stuff, I am just repeating what I have said earlier, you have got a right off center government, you have got improving governance, you have jumped 12 places. Now let us look at that part of the news, you have jumped 12 places on the ease of doing business in the World Bank’s database and even that is based on assessments made out of two large metros in the country and not the rest of country. So, there are clearly things that are changing here. The two big weaknesses you have had and again this is old hat, is your excessive reliance on imported and costly fuel and poor governance mix. So, the fuel bit is happened, the governance bit is happening now. I am not looking at company numbers so closely anymore. I am meeting governments, I am meeting bureaucrats, I am trying to understand how goods ad service tax (GST) will work out, I am trying to figure out how sate electricity boards (SEB) or discom dues will get cleared up. The person to research is Piyush Goyal for example. Latha: Not to throw cold water on your enthusiasm but the previous year’s global ranking has gotten revised so we have been moved up to 130 so we have actually moved 4 points but the point is direction is up.A: Direction is up after four or five years or I don’t know how many, it is 22 years or something. Latha: We have to talk stocks and there the point is the reality on the ground is not changing, it is not changing with ferocity, it is not changing at all in some cases like in the case of Axis Bank. One had got the impression that some people have been smarter in dealing with lousy assets. We didn’t get confirmation of that when the results came in so what would you do with Axis Bank right now?A: As analysts we were very clear that Axis does have exposure stressed sectors; a whole lot of banks do. It is a question of which bank is mature to accept, admit, recognise, classify and then provide for. If you are going to award marks for these virtues then Axis comes out top. Is there pain? Yes there is. Is there lots of pain? They took it on the chest or chin or whatever you want to call it yesterday or the day before. However, look at this bank, when they had extraordinary or non-recurring profits coming from overseas or treasury activities and so on, they created a contingency reserve. They are using that headroom to absorb three fourths of a large asset, lumpy delinquency that happened in the quarter. I think they are behaving like extremely responsible bankers.Latha: Are you buying it right away or would you wait to buy it? A:  Can you time these things, you tell me? It was down 7 percent. We haven’t changed our stance. We are buyers here. It sounds completely counter-intuitive but like I said the weather is bad, the climate is going to improve from here. Look at the virtues of the bank, in their peer set, they are at 78 percent provision coverage ratio (PCR) which is the highest. Their domestic net interest margins (NIMs) are string at 4 percent plus, loan growth is over 2x industry and valuations have now fallen to less than 2x FY17 adjusted book value and I am giving you consensus numbers. I am not even giving you mine. So, what is wrong here? All that is wrong is known and is baked into the numbers which have been reported and all that can go right is what we will play for now. Sonia: Would you worry about the fact that Axis has reported higher stressed assets addition so that could perhaps translate or could be reflective of what other private banks are going through?A: Of course. Sonia: Would you worry that there could be further downsides in names like ICICI Bank, etc and would you use that as an opportunity to buy? A: With an ICICI Bank let me tell you that the relative intensity of exposure to these sectors is probably higher at ICICI Bank. Our slicing and dicing tells us that net-net maybe there are more virtues to back at Axis at this point of time but it doesn’t take away anything from the fact that ICICI Bank has also got a great retail franchise. It has got very strong NIMs, very strong return ratios, very well capitalised, no risk of dilution. There is a context in which you have to love or hate these banks. Latha: The intensity of exposure to stressed assets is discounted by the market to the extent that year-to-date (YTD) ICICI Bank is down 24 percent; Axis is down 4-5 percent. A: Headline valuations are also 15-20 percent lower.Latha: Are you a buyer on both? A: We have got big overweight positions on both of them in our model portfolio which is underperforming and we are not rattled, which is underperforming relative to where it was say 9-12 months ago. Latha: Axis has about 8 percent of its total book exposed to the stressed groups, overleveraged groups, companies and all those are still standard in the books of Axis. Axis said that they will do 5,700 in terms of stressed assets incremental; in the first half they have already done 5,000. So the chances are they will increase therefore I am asking you should you buy right away or will the market still discount that there could be further NPL recognition or stressed recognition in some fashion, 5:25 or some other fashion and therefore would there be a more attractive space to buy? A: I do not have access to Axis’s loan books and I can’t look at every single let us say SMA2 account that they are sitting on right now. I don’t have it for ICICI Bank, I don’t have it for Yes Bank, you can name them all and I will say I don’t have access to this information. However, the fact is that if you are going to bet on the longer term trajectory of corporate health in this country improving over two years, then you should be doing an Systematic Investment Plan (SIP) in these guys; they are great banks. _PAGEBREAK_Latha: What about cement, Ambuja Cement disappointed and the stock is down about 2 percentage points today. Would that be an opportunity to buy Ambuja?A: No, we have a sell on them. We don’t think that core profitability, asset allocation and location mix is as much in favour or even product mix for that matter and their well-known clinker cement mismatch so to say which will not just vanish in a quarter and most of all capital allocation. So, we don’t think they are worth buying at this point of time on that ground. On the other hand, does it mean we are bearish on cement? No, but we do find the USD 180-200 kind of valuation across largecap cement to be a little discomforting. So, we love the midcap guys and I have been harking about Sanghi, I have been talking about Sanghi since Rs 30-35 on your channel. It has doubled from that level. Orient Cement we are still convinced on. Mangalam Cement, small little company where valuations are very low, if only they would get their profits right in a few quarters. So many cement companies are right now operating at 70-75 percent capacity utilisation. In a capital intensive industry, if you are not going to do capex for two years, somewhere the cycle is going to come back and help you make money. Sonia: Another stock that you have picked out for us is Cholamandalam Finance. That one had a great set of numbers this time. 22 percent topline, 27 percent bottomline but what is the story here on? A: You have to look at it like this, non banking financial companies (NBFCs) are facing a little bit of tightening of screws on the regulatory front from the Reserve Bank of India (RBI). If you ask me for a personal opinion, I don’t think that the move to 90 days past due (DPD) delinquency recognition is entirely fair and should apply to all NBFCs straightaway and so on. So, they have been given a window to this. These guys are six quarters ahead of schedule. They are at 120 days already. Look at the prudence, what I love in lenders is the way they will be prudent and here is a lender who is at how they define and love this definition of theirs that they are at the top of the bottom of the pyramid. It sounds like a smart catchy ad-line but the fact is very true, they are lending to the small road transport operators who are between the semi-urban and the completely rural geographies. That is about two thirds of their business. So whether it is light commercial vehicles (LCVs), medium commercial vehicles (MCVs) and so on and they have roughly one third of their loan book is the lap book or what they call home equity. So, that has kind of kept them in good state while this part went through a cyclical downturn. Now, both businesses are steady. If you look at the last quarter’s disbursements and that for me is the on the ground indicator for how the business is going and that is how the 12 quarter high, the disbursements growth. So, that tells me these guys are revving up. That cyclical tailwind which is going to help them on the commercial vehicle book, their steady home equity book so valuations are high and they will continue to be high. We love this company if you ask me. Latha: And they got a payment bank licence as well.A: And they have got a payment bank licence. Valuations are 2.5, we will give them three times or whatever, and again, in six months time, I will roll them forward or something and then again, you will find them attractive for another 20-30 percent trade. So, again, with these guys you just stick it out for the long-term.Latha: In the large midcap space, any other stock that caught your eye because of its earnings performance, anything that you have added to your portfolio or likely to?A: We actually added ICICI Bank. So, I do not know, are specifically talking about largecaps?Latha: No, I asked you about midcaps, but really if ICICI is what you have added, fine, anything else in the midcap space?A: I think that all that could have gone wrong in terms of asset quality and again, this is an asset quality story with a lot of embedded operating leverage, a lot of intrinsic capability which unfortunately we have not seen so far, so we have a right to crib a little bit, but if you maintain the faith, I think Federal Bank is available at a very good valuation. Again, not a new idea. Again, they have gone through a little bit of a stutter or a stumble this quarter and our interactions with the top management there indicate that, they clearly recognise it is time to buck up and deliver. If you cannot buy Federal Bank at this price, you probably may not get it at this price again. So that is again, a call of faith, a leap of faith that you will have to take. The recent pain on asset quality notwithstanding, valuations are again extremely in favour.Sonia: Wanted to ask you about Lupin and your view on that because there has been a considerable fall post the numbers, but it is similar to what we saw last quarter and then the stock rebounded quite a bit.A: We dropped them from our model a few days ago. There are two reasons for that. One, the tilt towards domestic cyclicals necessitated the need for generating cash out of some of our pharmaceutical and fast-moving consumer goods (FMCG) holdings and so on. The second thing is that we really do not have active coverage on them anymore so I think it is a little unfair to comment.