Buy SKS Micro; L&T Finance a slow mover: Antique Broking

Digant Haria of Antique Stock Broking in an interview to CNBC-TV18 spoke about the L&T Finance Holdings deal with Bain Capital and its impact on the stock. He also spoke about the impact on SKS Microfinance after not getting the small bank licence.According to Haria SKS Microfinance not getting a banking licence is not the end of the story for the company. In fact, he thinks it is a attractive buy at the current levels for a target price of Rs 528.With regards to L&T Finance he says the key thing to watch out for would be if they get a banking licence in the future. The deal with Bain Capital would not boost its earnings because basically it is not a high growth, high profitability story.L&T Finance Holdings , the subsidiary of engineering & construction major Larsen & Toubro, will get Rs 708 crore from Bain Capital by issuing preferential shares and warrants.Below is the transcript of Digant Haria's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Sonia: Tell us what did the management say and what is your view on the stock now? A: The reasons why SKS could not get a small bank licence, RBI knows the best. However the best guess that we have is that - if you look at the 8 microfinance guys who got the banking licence, there were two trends which run common in them, one is all the 8 have an identifiable promoter. Second is that none of them were involved in the Andhra Pradesh microfinance crisis of 2010 either by luck of just because they were not operating in those regions. So, these two were common trends, while SKS had both these things going against it. One more thing is that though SKS is very strong, very profitable right now we have to understand that it is in 2014 that it started reporting profits after showing huge losses in the Andhra Pradesh crisis. May be the RBI would have thought that let us give SKS some more time to build a profitable track record and probably then they would apply and then they would rethink. So, we think that it is more to do with these technical reasons rather than anything to do with the company's fundamentals or their processes or their operations. Latha: What are your own price levels for SKS therefore? A: The market is just believing today that getting a small bank licence is the road to utopia and probably not getting a small bank licence is the end of game for you. However in a very heterogeneous country like India things are never so obvious, they are never so black and white, they are always grey. So, it is not that all these small bank licences would definitely be winners. They will take their own sweet time to build up a deposit franchise to get their credit rating upgrade, launch new products, launch the operations. So, these 8 guys who have got the new licenses and Bandhan who is already a bank now, they will not cause so much disruption as the market is thinking today. On the other hand we think that companies like SKS which are so well entrenched, they have a lot of capital, they can see next 18-20 months as opportunity to capture market share from these guys who are busy in aligning themselves to comply with the small banking regulations. So, on the price levels we think that company like SKS which is completely rural, it is the only large microfinance player who follows a weekly process which requires a lot of manpower, lot of effort and lot of diligence. So, such a player will always trade at premium to the general markets or the general NBFC sector. So, we are not cutting our price by any way because they did not get a small banking licence as we had never built-in a small banking licence in the first place. We always used to say it is an option value, if it gets it we will revisit the investment premise but if it doesn't get it life will go on as an NBFC MFI. Sonia: Now that this small banking licence issue is out of the way, moving forward at Rs 390 how attractive does this stock look from a medium term perspective? A: We think it is quite attractive largely because the expectation of small banking licence would have subsided. People would rationally think and understand that it is not the end of the game. Probably Ujjivan and Janalakshmi's of the world they operate in the urban area and may not impact SKS Microfinance. So, as this reality sinks in, I think the price is quite attractive and we definitely have a buy rating on the stock with a price target of around Rs 528. So, that is 30-40 percent upside from the current price. So, we think it is giving a good chance for those who missed the initial rally or the initial upmove in microfinance. Latha: L&T Finance the deal is done with Bain, what is your view of the stock itself? A: L&T Finance has not been an NBFC. If you look at the internal structures, they have structured themselves like a bank. They lend to 25 different sectors and no single sector is very huge to contribute to the bulk of the profitability. So, I think that in the NBFC avatar - L&T Finance has limited headroom to increase its profitability. The company has been doing ROAs of around 1.5-1.6, I think that can go a little higher but for L&T Finance the key thing that we would watch out for is if they get a banking licence in future. Otherwise the story is not that of a high growth and high profitability because most of its sectors like infrastructure, even renewable energy if you see they have grown at 100 percent but the competition from banks that has got so severe that margins have come under pressure even in that segment. We think that earnings wise this deal doesn't impact the stock and I think the stock should be a slow mover.