Banks & NBFCs are expected to be one of the key beneficiaries of lower interest rates, but experts suggest to remain invested with sector leaders.
Indian market rallied on October 9 after the Monetary Policy Committee (MPC) kept rates on hold on expected lines, but at the same time, it announced a significantly dovish monetary policy with a slew of measures to boost the economy.
The MPC kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent. Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 percent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 percent.
The MPC also decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward, said the RBI note.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.
Experts are of the view that the policy is dovish in nature and was the need on the hour, and feels the central bank could well cut rates by 25-50 bps in near future.
“RBI’s status quo on rates was along expected lines, given the elevated inflation. But the MPC clearly delivered accommodative moves through non-interest rate tools. As an endeavor to lower the yields in bond markets, the central bank announced to expand weekly OMO purchases, include State Development Loans as part of its purchases and TLTRO of Rs1 trillion,” Amar Ambani, Senior President & Institutional Research Head at YES Securities told Moneycontrol.
“We believe, over time, Gsec 10-year yield will drop closer to 5%. Rationalization of risk weights on Individual housing loans, now linked only to LTVs, for all new HL sanctioned till March 2022, is a positive for banks. But HFC not mentioned may be a near-term dampener for housing finance stocks. We see possibility of further scope of 25-50 basis points cut in Repo policy rates,” he said.
A further rate cut could still be a few quarters away, but quality rate-sensitive stocks could well remain in focus. Banks & NBFCs are expected to be one of the key beneficiaries of lower interest rates, but experts suggest to remain invested with sector leaders.
“We will continue to maintain a positive stance on Banking and NBFC sector and prefer HDFC Bank (best placed on growth as well as the overhang of management change will be behind us), ICICI Bank & Indusind Bank (valuation pick along with better-operating income growth), SBI (management change overhang will be behind us), DCB Bank ( almost all clients will get benefits of Govt relaxation), IDFC First Bank (positive earning movement due to restructuring of the balance sheet), and Equitas (growth is returning back and all clients will get benefits of Govt relaxation),” Asutosh Mishra, Head of Research, Ashika Institutional Equity told Moneycontrol.
Here is a list of 14 rate-sensitive stocks that are likely to benefit the most from a rate cut:
Expert: D K Agarwal Chairman & MD, SMC Investments and Advisors Ltd.
The Company remains focused on maintaining sufficient liquidity, tight cash management, and gearing up for the future. The Company did not avail of any moratorium on its debt facilities and continues to honor all its financial obligations on time.
The Company expects that as REITs grow in number and scale, the rental business will have higher access to liquidity and more transparent valuation benchmarks. Post unlocking, the Company is witnessing a pickup in enquiries and some early green shoots of demand.
It expects that demand to improve gradually and believe that its strong brand image, healthy balance sheet, and commitment to quality will act as a catalyst for future growth. It retains its positive outlook on the rental business given the robust office collections and positive feedback from tenants.
The company is doing well and Q1FY20 has been a good quarter for the company due to the adoption of innovative technological tools, self-reliant model, strong brand, on-time delivery, robust balance sheet, presence in major cities, availability of sufficient liquidity, and huge land bank for future growth.
The management of the company strongly feels that the company is well equipped to face the recent challenges. Moreover, the Real estate sector is expected to perform better due to all-time low housing loan interest rates, inherent demand for housing, various tax exemptions under income tax, CLSS (Credit linked subsidy scheme) scheme & other government benefits.
The bank is now working on a plan regarding the shape of business, future requirements, impact on the cost-to-income ratios, digital and technology against the branch networks, strategy on branch expansion from existing 1600 branches, levers needed to press to significantly transform Kotak as an institution in the time ahead in the post-COVID world.
Going ahead, focus on strengthening the balance sheet, and building a strong deposit franchise, maintaining risk-adjusted returns will benefit the return ratios of the bank.
The Bank has been one of the most consistent performers over the years, driven by best in class return ratios & margin profile.
Given government support, MSME advances would occupy significant space for incremental lending in the near term. Based on all these factors, it is expected that the bank would see good growth going forward.
The company has a main strategy to exit the T&D developmental asset portfolio and other non-core businesses. The focus has shifted on growing EPC businesses with an aim to be amongst the top players in the global EPC market.
The company is targeting becoming debt-free in FY21, mainly from proceeds from selling transmission assets. The company is expected to deliver 5-10% growth for FY21and thus there is no change in revenue guidance for current fiscal.
The company even after losing 2 months of sales still looks to target an EBITDA margin of 10.5-11% for FY21.
During Q1FY21, the Consolidated total income was Rs.1,562 crore which was lower than the previous year by 8.8%. However, consolidated profit before tax was Rs.134 crore, representing a healthy year-on-year growth of 18.7%.
In crop protection, consolidated revenue and segment results, grew by 11.9% and 10.0%, due to the robust performance of subsidiary- Astec LifeSciences. Sequential recovery in prices and demand of poultry products, coupled with favorable raw material prices led to a sharp recovery in the subsidiary Godrej Tyson Foods Ltd.According to the management of the company, the macroeconomic indicators for the agriculture sector are positive with timely and above normal south-west monsoon, high water reservoir levels, and favorable commodity prices.
Expert: Ajit Mishra, VP Research, Religare Broking
It has seen a healthy revival in demand post easing of restrictions and the growth trajectory is likely to continue on the back of festive season demand, ease in the financing, higher rural income and increasing preference of private mobility.
The COVID-19 pandemic has impacted the real estate however the structural growth story remains intact. At this point, Godrej properties is one of our preferred picks given its strong brand name, past execution track record, and access to liquidity. The low-interest rates would also aid growth for the company.
Expert: Vinit Bolinjkar, Head of Research, Ventura Securities
It has a huge debt burden on its balance sheet with a debt to equity of 1.9x and interest coverage of 0.6x. The rate could ease the burden on income statements and improve cash flow. Valuation: FY22 EV/EBITDA 7.0x
Bank has witnessed a pickup in the rural demand as the rural economy has shown good resilience due to the lower impact of the pandemic, good Rabi crop, and normal monsoon. Kharif season is also expected to do well. Management is expecting a strong revival in rural credit in H2FY21 and the rate would work as a catalyst. Valuation: FY22 P/BV 1.6x
Bajaj FInance is a market leader in mid ticket size discretionary goods financing market. A rate cut is expected to improve consumer durables sales, through credit. Valuation: FY22 P/BV 4.6x
Similar to Hero Motocorp, Maruti has the largest sales network in India with a dominant presence in entry to mid-range cars.
People are shifting from shared mobility to personal vehicles due to health issues, which is expected to improve sales volume. A lower rate could trigger car financing. Valuation: FY22 P/E 28.6x.
Expert: Gaurav Garg, Head of Research at CapitalVia Global Research Limited
Emerging Home and Vehicle load providers placed at attractive valuation might give good returns in a few months. Technically, the stock is forming a flag pattern on the daily chats, indicating upside.
Beaten down mid-cap stock in the financial sector, might give good returns.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.