Banking licence: Shriram, L&T Finance likely candidates

The Banking Amendment Bill, major reform legislation, got approval of the Lok Sabha on Tuesday. The government dropped the controversial provisions relating to allowing banks to trade in futures.

Also read: Banking Bill already priced in, be cautious, says Udayan In an interview to CNBC-TV18, Nischint Chawathe, analyst, Kotak Institutional Equities says Shriram Transport Finance Corporation and L&T Finance Holdings are likely candidates for the banking licence. According to him, L&T Finance Holdings is trading at significant premium to fair value estimate. "Its current valuation looks to be expensive," he adds. Below is the verbatim transcript of Chawathe's interview to CNBC-TV18 Q: L&T Finance has had the spectacular rally over the last couple of months. Do you think it’s over done? A: The stock is trading at a significant premium to our fair value estimates. If we assume that the entire premium is assigned for the banking licence then one can broadly say that somewhere close to a billion dollars of valuation has been assigned to that. One can’t pin point and say - which is the way market is looking at it. But, clearly the way the stock is trading, it clearly looks very expensive. Q: What are your top picks from the non-bank financial companies (NBFC) that could likely go on to get a banking licence? A: There are two parts to this. Which are the NBFCs which are best placed to get a banking licence? Which are the best NBFC stocks to play today? If you ask me the first question - which are the best NBFCs to get a banking licence, we believe that Shriram Transport and L&T Finance are two entities which are extremely well placed to get a banking licence. Reserve Bank of India’s (RBI) agenda essentially is to focus on entities which can improve financial inclusion and the fact that RBI will want to look at entities which have a strong financial backing and which is exactly the reason why we believe that these two entities are fairly well placed. From a stock point of view, look at the rally in the sector, we find it very difficult to go ahead and say or put a thumbing buy on any of the stocks in the sector. In the past, we have had a preference to asset finance companies, essentially Mahindra Finance and Shriram Transport but looking at the kind of a rally that you have seen in Shriram Transport recently, we believe that the stock is already trading close to its FY14 fair value estimate. Q: While this one is a much more tricky call – have you correlated any list in terms of potential merger and acquisitions (M&A) candidates as well because a lot of the smaller banks that maybe up for grabs? A: Firstly, this entire news on banking licences, all that has happened, you now expect RBI to come up with the final guidelines for bank licences. There is going to be a detail process after which banking licences will be assigned based on the business models of each of these players. After that is somewhere, where you will have the licences being issued and that is where you will come to know about what business model these entities would follow. Clearly, the business model of an entity will not be to go ahead and acquire another bank because then it makes the entire exercise futile. Consolidation in the sector or acquisition of banks comes in at a much later stage. This is too early to talk about it as of now.