Indian recovery broad-based; upbeat on banks, NBFCs: Nomura

Market is not anticipating the UK leaving the European Union. However, if Brexit happens, then Indian market will correct 4-5 percent, says Prabhat Awasthi of Nomura Financial Advisory. India, he says, is aptly insulated.This dip, in case of a Brexit happen, is a certain buying opportunity. Recovery in India is getting more broad-based. “There will be a market impact and less of an economy impact,” he says.Awasthi expects the monsoon to aid to this growth and return of balance between urban and rural themes. Sensex is likely to touch 28,000-30,000 levels by December-end and 15-20 percent returns are expected, he says.Nomura is positive on the financial space over the long-term. Emphasis continues to be more on retail banks than corporate banks. On PSU banks, Awasthi says that the non-performing loans situation will not worsen from now.Recovery in PSUs is expected to start in a year or two on the return-on-equity side. A clear upside is expected in public sector lenders, he adds.Nomura is overweight on private banks in the long-term.Non-banking finance companies (NBFCs) too are the in the positive with recovery in volumes and stable funding cost.Below is the verbatim transcript of Prabhat Awasthi's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Reema: It looks like it is going to be a cliff-hanger vote. Take us through what the impact will be in the Indian markets in the two events, one if it is a Brexit or second if it is a Bremain? How do you expect the Indian markets to perform tomorrow as well as in the near-term?A: I think that is a very self-evident answer if the vote is Remain, it is positive and vice versa. The question essentially is whether the market comes back from a negative vote and I would think it eventually probably will. Obviously there will be impacts in the global economy but I think compared to what happens globally, India probably will be comparatively insulated. Your answers couldn’t be more self-evident because if the Brexit happens then obviously it is a negative and if it doesn’t happen then I think markets -- essentially people have been staying out, volumes have been largely in anticipation of just watching this event.Latha: I think Reema Tendulkar's question was more as to how much of the interpretation appears to be that already you have seen dollar index go down from closer to 95 to 93.4-93.5, so a little bit of the risk aversion has already gone, we have already seen the pound jump and European equities gain significantly. So is there more upside left if it is a Remain and how much for India?A: In the short-term you could see couple of percentage points. I think the fact of the matter is that market has rallied very well in the last few months. So you are right in that sense that market has not reacted or has become cautious ahead of the event. Therefore, if the event is positive, should be comparatively limited. While on the downside, you could see more. So clearly markets are more on the positive side looking at the reaction of the market. So if it turns out to be negative then I could see 4-5 percent sort of move in the markets as well.Reema: Public sector undertaking (PSU) banks were unloved at the start of the year. Off late we have seen increased interest in them. You have recently upgraded Punjab National Bank (PNB) to a buy, you have raised a target price on Yes Bank as well. Take us through what the stance of Nomura is on the financial space, both PSU banks, is it time to buy now as well as what your preference is in the private banking space?A: Long-term we have essentially been positive on the financials with the emphasis more on retail banks and less on corporate banks and obviously that is where most of the private banks fit. Now that essentially was because of the fact that we had significant reservations about these stress that will come from the PSU banks, our belief now is looking at the amount of disclosures in terms of NPAs in last two quarters is that, we have seen a lot of stress that was underlying the books that has come through already.Our view is that things will probably not worsen from here and that next year and a year after you will start seeing a recovery in their return on equities (ROEs). So, we think that we have seen the worst of NPA problem and we also think that therefore where the valuations are compared to the ROEs that we see in two years time, we think that there are upsides in PSU banks going forward. So the reason why I have done that is that we think that there is not that much stress left to come out open and even for other corporate banks on private side, you know the extent of stress that could come through, they have not become NPAs.Then it becomes stock specific, I am not going to talk about stocks here but the overall stance is that, we are positive on financials, we have been positive on retail banks that doesn’t change but at the margin, we are getting more bullish on PSU banks as well.Latha: You have upgraded only PNB, the favoured buys until now used to be State Bank of India (SBI) and Bank of Baroda (BoB) for most of the brokerages and I wanted you to go even down the line, how would you look at a stock like Bank of India (BoI)? I haven’t read your report but that is shaded dark in your bankwise analysis. So among the midcap space also will you pick up any PSU banks?A: We are comfortable sticking with the larger ones that is what I can say because the fact is that the stresses for the smaller banks are larger and as I said, this is a very stock specific analysis because end of the day, the stress levels in various banks with respect to their books are very different and why we have become more positive simply is because we think that some of these banks will now start on a path to recovery in terms of their ROEs. That is why we have written a buy there. So I would say that incrementally more positive simply because of the fact that a lot of large PSU banks we think are now nearing the end of that cycle of NPA formation or at least in terms of information that is coming to the market.Latha: What would your otherwise hierarchy of preferences be in the financial sector space?A: The overweight still will be largely on -- if you look at for example the bankex or any representation in the index then you can see that still the largest rate essentially is with the private banks and you cannot get away from the fact that their the long-term dynamics is better. So from a long-term perspective, we will continue to like the private banks but at the margin we have started adding in our portfolio some public sector banks and that for example, the published top picks of Nomura for example -- we have put SBI instead of Axis so we have added to HDFC Bank, which is already there. So I am reiterating them for your benefit. So essentially we have moved a bit more weight to PSU banks. But the overall stance still is that because your index is weighted towards private banks, you have to have more on there.Latha: When I say financials, I meant where do non-banking financial companies (NBFCs) figure in your priority, in your like list?A: We don’t have a particular NBFC generic sort of view. We like particular NBFCs in spaces like vehicle finance or housing finance and again it is stock specific. We like NBFC as a concept because there is a recovery happening in terms of their volumes and the funding costs are still very well under control. We have a couple of NBFCs, which we like.Reema: Coming back to the Brexit issue, you said that if indeed there is a Brexit then we could see a 4-5 percent correction. Would you use that dip as a buying opportunity?A: Definitely. I think the fact is that our view on India has essentially been that we are in a sort of recovery phase as far as the economy is concerned. That is getting more broad-based and that essentially is underpinning earnings recovery.The financial market starts to have an impact on the real economy. I don’t think it will be that bad. So there will be a market impact. I think there will be less of economy impact. So long as that holds true and the global national markets find a new equilibrium then that 5 percent correction will be a buying opportunity for sure.Latha: What is the view on earnings in general? Have you all upped or downed your earnings in FY17?A: From strategy perspective, I look at consensus earnings and what is the trend it is taking and whether we are likely to see disappointments or not. For a very long time in fact, last two-three years our view has always started with even if we might have been bullish in the markets or whatever but our view essentially has been that there will be some downside to consensus.We are now coming to a place where consensus earnings will not likely to be on the downside, we started saying that about a quarter ago and if you look at this quarter earnings, the beats versus misses ratio is now starting to tilt in favour of beats and the current estimate for consensus are closer to about 17 percent growth for index in FY17 and I think that is something that we believe can be met. There could be some marginal upside to that.So, now we think that this base means essentially that you should be able to see about 15-16 percent compounded growth in next two-three years and the 17 percent growth number that exist today for 17 should not see downsides. It could be see in marginal upsides.Reema: Many of the monsoon related stocks have done quite well. So has that theme completely played out or do you think that it still makes sense for someone who has a six months time horizon to go ahead and buy couple of these stocks?A: There has been some rally in these stocks in the anticipation that monsoons will be good. I don’t know what you mean by monsoon related stocks, but our analysis suggests that not all that sort of moves on basis of monsoon is monsoon related. When you see the real behaviour of the sectors, for example you found the tractors do have a correlation with monsoon, two-wheelers don’t tend to have a correlation with monsoons but the stocks do well usually in anticipation of monsoon so there are other factors which saw impact on two-wheelers.Having said that, we had two bad monsoons, in aggregate demand basis if the monsoons are good, there will be overall economic boost and that will aid to the recovery. I think the rural theme which has taken a back seat compared to the urban themes if you see for example stocks like four-wheelers, within four-wheelers if you look at rural versus urban, urban stocks have done comparatively better over two-year period. I think that balance may come back. So the rural might start to pick up somewhat because it is a large population, it is a sort of feel-good factor, discretionary consumption might increase, FMCG volumes might pick up somewhat. So I won't think that we are done and some of these stocks are still not expensive. So I think rural themes will probably, if the monsoons are good, continue to play.Latha: What is your 12-months target of the Nifty and which stocks will get us there?A: When we started, we had December target. Our Sensex target was about 28,000-30,000 for December and you can roll it forward by the amount of earnings that come through. If you are looking at one year then you are talking of about another 5-7 percent but we had a range because the range was dependent on the global variables, how the global environment and macro environment is, how volatile it is. We think that therefore if you look at from here, maybe talking about 15-20 percent sort of return, so 15 percent is because 15 percent will be delivered to you through earnings. So that essentially means that your multiples will not contract. We basically don’t see reason for multiple to contract because economy is getting better, growth is getting better so you should be able to get that 15 percent. The upside to multiples is not huge simply because the fact that you are sitting at 16.5 times, maybe go to 16-17.5 times, beyond that on a sustainable basis, the market will start to look expensive. So that is why we are saying about 15-20 percent but 15 percent more likely because that is the return that earnings will generate for you.