Time to bet on Manappuram, Shriram Transport? Kotak guides

Nischint Chawathe of Kotak Institutional Equities is bullish on auto-finance company Shriram Transport and recommends buying the stock. 

"The credit cost, which ballooned in 2012 is now at stable levels. Also, some of the operating parameters are improving. So, the issues faced by the company have already been factored in and their asset quality performance will improve," he said in an interview to CNBC-TV18.  Meanwhile, he finds valuation of gold non-banking finance company (NBFC)Manappuram General Finance cheap at current levels. However, he cautions that the company is likely to get impacted by volatile gold price movements. Below is the edited transcript of Chawathe's interview to CNBC-TV18. Q: Give us a word on Manappuram General Finance? A: We do not have a coverage on the stock but we have been tracking the chain of events on this stock per se. Q: What is the sense you are getting, are we going to have a similar problem with Muthoot Finance as well? It has also got hammered in the run up to the conference call that Manappuram General Finance hosted, but are you expecting a similar kind of fall? A: Muthoot Finance management has not made any comment on how that portfolio would be. To some extent, Manappuram General Finance had already guided in Q3 and infact even before that that their margins were volatile. They had guided that there was a small portfolio of loans which was running at a high loan-to-value (LTV), they had already reversed income on this portfolio even in the earlier quarters. So, Manappuram General Finance had guided that there will be a similar reversal this quarter as well. In case of Muthoot Finance, there was no such trend visible nor has the management given any such guidance. Every single asset finance company has a linkage with the underlying asset. So, when you see volatility in gold prices, gold finance companies will tend to get affected. When you see volatility in commercial vehicle sales, you will see some kind of an impact on companies like Shriram Transport Finance Corporation. So, there is bound to be an impact of volatility in underlying prices. I guess the extent to which an organisation can cope up with the volatility is something which is very much individual to the organisation. It is function of the risk management systems of the organisation. We will we not be concerned or looking forward to or trying to understand what happens with other gold finance companies. Looking at the trends and atleast trying to get whatever sense we have about the risk management practices of other firms, I am not sure whether I should be get worried at this point of time or not. Q: You would not be starting a full-fledged coverage on the gold companies at these very low levels? Now Manappuram is at Rs 20-24, does not look like a buy to you? A: We do not know how much overhang we should expect. We don't know what are the chain of events, or what is still expected. So, I would want to wait for a while before taking a call on the stock. From a pure valuation point of view the valuation is looking very cheap. Q: Getting to the auto financers; have the auto financiers found their feet after the diesel price hike, are they able to see their borrowers raise freight rates. Are you seeing them impacted by the increase in diesel prices and the economic slowdown or do you think the financiers are able to kind of keep to their promise to rate of growth? A: There are two parts to this; one is growth and other is asset quality performance. As far as growth is concerned we have seen slowdown in commercial vehicles over the last couple of quarters. That has already got reflected in the growth for the sector per se. As far as the asset quality performance is concerned, we have seen some stress here for a while now. Yes, rise in diesel prices at this point of time makes it a little challenging for commercial vehicle operators to fully pass it on but that is one of the multiple factors. So, I do not know whether I can differentiate this factor and say that because of this, incremental impact would be moving in a particular direction per se. Things have been under stress in this particular segment and one will need to wait and watch. Maybe there will be a little bit more clarity next year post monsoon because that is when activity starts picking up. Q: You have add on Shriram Transport and reduce on Mahindra & Mahindra Financial Services. Why the difference? A: In case of Shriram Transport, they did face a lot of difficulties and lot of challenges in 2012 as well. So, a lot of it is already factored in, in our estimates. From hereon, given the fact that they did go through very difficult patch, we are seeing growth improving. In all possibilities, asset quality performance will improve. Although broadly the last couple of quarters’ credit cost, which ballooned in 2012 is now at stable levels. Incrementally,  hereon some of the operating parameters are improving and not actually declining. The second aspect is that securitisation, which has been a very large source of funding for the non-bank sector per se. There was a concern that this particular avenue could face a challenge post the regulations on securitisation but somehow as we get a sense from various players, bankers still seems to have significant appetite for securitised papers and that is a very important funding avenue for these guys. So that is something, which has turned more on the positive side. So, that is also something which will help them grow.