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Last Updated : Oct 28, 2014 02:44 PM IST | Source: CNBC-TV18

HDFC can give 10-12% returns in 1 year: Kotak Institutional

Onto the auto space, Nischint Chawathe of Kotak Institutional Equities feels commercial vehicle operators may witness some pick up in business backed by plunge in diesel prices.


In an interview to CNBC-TV18, Nischint Chawathe, Senior Analyst at Kotak Institutional Equities shares his outlook on various stocks and industry specifics.


Chawathe is positive on SKS Microfinance, as the stock is a structural growth story while trading at around 3x P/BV. Onto the bigger financial players, he feels M&M Financial is trading a bit above 2x PBV.


Onto the auto space, he feels commercial vehicle operators may witness some pick up in business backed by plunge in diesel prices.

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Meanwhile, housing financing companies are an exciting space; he says adding that HDFC can give 10-12 percent returns in a year.


Below is the verbatim transcript of the interview:


Q: Your thoughts in Mahindra & Mahindra Financial (M&M) and what did you make of the stock reactions?


A: M&M Financials results were actually inline with expectations. The good part about the results was that the provisioning number was much lower than expectations. There was some fear that non-performing loan (NPLs) will increase very sharply this quarter given the fact that they had increased in the previous quarters as well and as compared to that the rise in NPLs was very measured.


This was more to do with the fact that the company was a lot more aggressive on recoveries and I guess it is because of the recovery efforts of the off-term at the company level because of which the performance was better. It does not indicate that things are changed for sure at the ground level it does not indicate that things are going to improve from hereon for the company.


All it will possibly mean is that recovery that you will not have very significant slippages from these levels. So in that sense it provides you some comfort but it does not give you any signs or any comfort in terms of saying that things are going to turn around and the business momentum is going to pick up again.


Given the fact that this is a short–term business in all possibilities even if things start improving from the next quarter it would take somewhere close to four to six quarters for the loan group to pick up meaningfully.


Q: You have an add-on Shriram Transport Finance and another perform or reduce on M&M Finance don’t they services more or less similar sectors?


A: The difference with Shriram is that it is largely focused on the commercial vehicle (CV) segment. The big thing that has happened for the segment over the last two-three weeks is essentially the reduction in diesel prices. Now four and a half percent reduction in diesel prices would essentially means that the economics for a CV operator improves by around two and a half or three percent which is a big thing given the fact that CV operator have been going through difficult times.


The expectation is that as and how the economic cycle improves CV sector is the first one to revise. Having said that for last several months there was just a hope and expectation around it. We could not see any signs or any reasons why that would happen. Now given the fact that diesel prices have come down this is the first sign that economics is getting more comfortable for CV operators and which is where things could pick up from hereon. What this essentially means is that NPL situation will not worsen for this company it will start improving. What is the space of improvement I guess that is something which is challenging to figure out.


Q: How are the valuations stacked up Mahindra & Mahindra Financial Services Limited (MMFSL) versus Shriram?


A: M&M is kind of trading at north of two times price to book as compared to that Shriram is around 1.7 so I guess there is an arbitrage on that one as well.


Q: What about SKS Microfinance, the stock has seen a huge run-up in 2014 itself, it is up closer to 65 percent but it is accompanied by good earnings. Do you think the stock can rise more? What would your view be?


A: SKS is more a structural growth story. SKS was facing its own challenges, struggling with capital. Now that they have got all the pieces back in place they are in for a fairly high growth momentum over the next two-three years. In this back drop the quarterly results frankly speaking don’t really matter. Having said that the quarterly performance was better than expectation, which is what has been the catalyst for a stock.


Can the stock trade at very significantly higher multiples from the current levels in all possibility? It may not; but can this be a good compounding story over the longer-term. Given the fact that it has a low base, it has a fairly good franchise, it has fairly good systems and now that it has access to capital as well. So we have a moderate up-side from the current market price. However, this is one of our preferred and one of the stories that we like in this space.


Q: How does the price to book look like forward?


A: SKS is approximately three times price to book.


Q: What about HDFC limited that stock came out as always with the steady set of earnings. Few brokerages also increased their target price on HDFC limited. What kind of a return do HDFC limited can give in the next one year?


A: We are looking at approximately 12 to13 percent return from the current levels. If you look at the performance of HDFC, just look at the bottom-line growth for HDFC this was in single digit for the second, third, fourth quarter of last year. Things have picked up for sure from the first quarter of this year itself. The good thing that has happened is that the margins have expanded, margins were slightly better than expectations because the borrowing cost is coming down.


As and how your bulk borrowing rates start coming down or the interest rates in the system starts coming down housing finance companies would be the biggest beneficiaries given the fact that the spreads in the mortgage business are the lowest amongst the Non-bank financial companies (NBFC) space. So very clearly this is going to be one exciting space to watch out for an obviously HDFC is a fairly large stock out here.


Q: Wouldn’t Indiabulls Housing be a dark horse?


A: Could be but frankly, we don’t have a coverage on this stock.



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First Published on Oct 28, 2014 01:20 pm
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