ICICI Bank could be a better pick than Bajaj Finance now: Girish Pai, Nirmal Bang

Girish Pai, Head of Research, Nirmal Bang Institutional Equities, says ICICI Bank is a value financial pick right now. Since Bajaj Finance is trading at very high multiples, I would be far more comfortable investing in ICICI Bank. It could be one ...

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How does an investor approach a franchise like Bajaj Finance? It is a great business but it is trading at a high. If you do not buy it, you regret that but if you buy it, the danger of valuation coming down is going to be there.
Yes, that is one of the things that we have been grappling with. We cover about 30 financial stocks in our company. We still do not cover Bajaj Finance because we have always faced the issue of valuation. What has happened in the last 18 to 24 months is within the financial space, there has been a flight to quality, especially after the IL&FS crisis and the series of accidents that have happened in India in terms of various things that have fallen out of the cupboard.

Bajaj Finance will probably continue to trade at premium for some more time until the market believes that the NPA crisis is fully behind us. We keep saying that the worst is behind every single quarter but something or the other keeps turning up and now there is this lurking danger about Vodafone-Idea and possibly the YES Bank situation. Wedo not know what the ramifications of some of these incidents could be on the larger financial sector and the individual players. The reason why Bajaj Finance is trading at 6-7 times price to adjusted book is the fact that investors are focussed on quality. It has been delivering on growth and so people who have invested, just hold on to it. Obviously, some incremental buying is happening.

Yesterday’s numbers show there is a little bit of deterioration in asset quality, especially on the two-wheeler, three-wheeler side. Otherwise, it has been delivering growth, good asset quality as well as good ROA. There is nothing to complain about at this point in time. I would probably think that the valuations of Bajaj Finance will hold up until such time when things are fairly clear and then investors would look at some of the other financial stocks in the market. Right now, it is a very narrow, quality-oriented market.


Between ICICI Bank and Bajaj Finance, which stock would make better returns this year?

My bet would be on ICICI Bank. One of the reasons I am structurally positive on ICICI Bank is the statement they have made about two or three months back where they said that they are going to get out of project finance. That has been one of the biggest issues that ICICI Bank has faced ever since it moved away from becoming a development financial institution into a private bank.

It has always been hit by these NPA cycles and that has docked the bank for almost 20 plus years. If that is going to go out of the window, it is going to develop into a bank very similar to an HDFC Bank from asset mix perspective. I am structurally positive on ICICI Bank. I do not think the bank is getting the kind of valuation it should get.

What about price to book for ICICI?
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My own analyst has given multiple of close to 1.8 price to book on just the bank. There is also the valuation which comes from insurance, asset management piece and all that. Expansion towards 2-2.5 is quite possible over the next 12 to 24 months as people begin to realise that asset quality issues of ICICI Bank are largely behind it. It is slowly turning towards It is a value financial pick right now. You may have a little bit of trepidation investing into Bajaj Finance with the kind of multiples it is trading at. I would be far more comfortable investing in an ICICI Bank.becoming something like an HDFC Bank or Kotak Bank in some sense. There is a lot of room for multiple expansion for pure banks, though not so much for the subsidiaries. That could deliver a fairly decent growth. It could be one of the best performers in FY21.

You track the consumer space and have coverage on Jubilant. What are markets telling you? Okay, there is a slowdown but we will continue to buy pizzas and burgers?
QSRs (quick service restaurants) have been gaining market share within the food space. Within QSR, the shares of Jubilant Foodworks and even more Westlife Development ((its wholly owned subsidiary Hardcastle Restaurants holds the master franchise for McDonald's) have been going up. The SSG data of Westlife is almost 9% versus 6% of Jubilant. In my opinion, the market share gain is driven by menu innovations, there has been a lot of menu innovation that a player like Westlife has done. For instance, Westlife addresses a much larger segment of the consumer population by addressing the needs from breakfast to lunch and even dinner.

There are multiple things that some of these consumer companies have done to drive SSG growth, especially on the QSR side. We have been positive on it because we felt these are very strong franchises and a lot of the growth has been distribution driven and a bit of premiumisation has also been driving growth. These are strong franchises which will stand well in a slowing environment that we are seeing right now and that is why we continue to be positive on them despite the kind of multiples that some of them have traded at. Broadly that is the view we have on the consumer staples and some of the consumer discretionary names.

What would you recommend buying right now -- paints, QSR, liquor companies? All these sectors have shown resilience at the time of consumption slowdown ?
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Within consumer staples basket, we like HUL because while the rural economy slowdown has hit growth on the volume side, there could be some recovery on the anvil. There is already talk of rural recovery. The good reservoir levels that we have seen this year post very good monsoons, the higher agri prices are expected to push up farm income by 15% in FY20 versus 4% last year. A potential increase in rural income, say in UP and Bihar, because of elections coming up in the next couple of years is also going to drive demand, Plus the fact that the central government has to deliver a little bit increase in farm incomes. It has talked about doubling it. I do not think that can be achieved but at least some increase in farm incomes are due.

In staples, I would bet on HUL and Britannia. Within the QSR space, we like both stocks but would be more positive on Westlife because there is a greater scope for margin expansion -- 300-500 bps margin expansion story in Westlife over the next two- to three years. These are some of the stocks that we have been pushing. Even now, we would think that those are good stocks to buy.

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With coronavirus in the backdrop, what will happen to China/metal stocks?
Unlike the 2002-2003 SARS situation when China used to contribute about 4% of the global GDP, China contributes as much as 16% of the global GDP as we speak. So to that extent, any issue in China is going to lead to a lower growth globally, much more than it used to be like 16-17 years back. So, if there is a situation where this is going to be protracted or take three-four months to cool off, I would think that Chinese growth is going to get impacted.

I would also want to see how the US-China trade situation works out because China was supposed to import $100 billion plus extra from the US in 2020 to hold on to that phase I deal. I do not know how that will play out and whether there is going to be any kind of reaction from Trump in particular. I would think the global growth is going to get impacted. China being a fairly large consumer as well as a large producer of metals, if Chinese growth gets impacted that would probably have downstream effect on a lot of industrial commodities like metals. I would be a little nervous if I were a holder in some of these metal names.

The government may refrain from announcing any recap of the public sector banks in this year’s Budget. What would that mean for the banks? Would it encourage them to go out in the market and beef up their own capital?
It would be tough to raise capital for any bank, except for SBI and maybe BOB. Some of the other PSBs will have a tough time raising capital from the market. Asset quality issues have been lingering around them for a very long period of time. I do not think investors would take to them very kindly in the next few months or so. I would think in FY21 it is going to be a tough ask for them to raise capital from the market. Anyway for the last many years now, we have not seen any kind of growth capital being given by the government. The capital that has been put in the company has been to basically bridge the gap between what they have been providing for in terms of the credit cost. They have not been getting any kind of growth capital.

It is only maybe say an SBI which has been able to get growth capital from the market in some sense, maybe to some extent BOB. I do not think the others would be in a position to raise. I would not be positive on the PSBs as a basket. Within that, I would probably take a trading bet on SBI. But I would still have concerns around SBI over a potential merger. It is not on the anvil but it has been discussed in the media about a potential merger with YES Bank. This could be a very big negative for SBI and I do not see any other player in the market which could absorb a balance sheet of the size of YES Bank.
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