Investors can find winning stocks in pharma & insurance: Abhimanyu Sofat

HDFC and Kotak would stand out in BFSI space, says VP-Research, IIFL.

ETMarkets.com
Let us not try to bottom fish the smaller players just because stocks have come down.
Let’s take off from the kind of data that the CII survey is indicating that we are going to see job losses coming in, revenues could see a double digit cut and profit too in the fourth quarter could decline by nearly 5%. Do you think that these estimates are a bit conservative in nature and that the actual picture could even be worse?
Definitely, I think so. The picture is going to be pretty bad. Clearly, the kind of commentary we saw yesterday from Bajaj Finance in their conference call clearly suggests that we are in for pretty bad times in terms of economic recovery over the next couple of quarters.

So the way this thing is panning out, we have to look at the depth of recession. Assuming that there is a recession, we have to see how widespread it is going to be and the duration of the recession that we are going to have. So looking at all these perspectives, clearly the depth is going to be high. All walks of life are going to get impacted. The key monitorable is going to be the duration of this. So what we believe is, clearly looking at what is happening right now in Spain and now in New York also for the last two-three days, this thing can be taken care of.

The main issue which everyone was feeling was that the entire emergency system in these cities will be able to control things. So now we have seen that has happened. So what is now very critical is that we maintain social distancing over a significant part of time. Maybe in cities like Mumbai, you may not have everyone go back to office by 15 April. But for other cities, you slowly need to open up the rural economy. If that does happen slowly, surely we are going to see some amount of recovery happening. But clearly, until we see a dispensation and some kind of further package from the RBI in terms of mitigating the losses which right now lot of the NBFCs and banks are currently facing with people simply not being able to pay, it is going to be a hard thing for most of the corporate India over the next couple of quarters.


What about Godrej Consumer Products Ltd (GCPL)? That is another company that has come out and talked about the impact going forward and has clearly said that the supply bottlenecks and logistics are all hitting them hard. We all know that, of course, discretionary is going to take a hit this quarter. What would you be doing with some of these companies in light of the current situation?
So some of these companies also have international operations; so it is going to be harder for them to take care of things since they have diversified into Africa as well. The logistics are going to be a big challenge for such companies. So overall, look at this particular crisis and how it has panned out. Initially, this crisis was more of a supply chain kind of a disruption. Now we are going to see a destruction of demand, which we are clearly witnessing over the last 15 days. So now both the supply chain as well as demand are getting impacted. It is going to be a tough fall for most of the companies.

So right now from our perspective, our checks with some of the pharma companies suggest that business is still down by 50% for some of them at least at the current run rate because of logistics. But first is pharmaceutical and secondly insurance because a large part of insurance business is digital. So these are clearly two winning sectors which one needs to focus on.

In the rest of the market, there will always be some pockets which you can buy looking at the valuations. But overall, it is going to be pretty challenging going forward for most of the corporate across sector. In fact companies even in the IT sector are going to face a significant brunt of reduction in budgets of a lot of their customers in Europe as well as Americas.
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Do you think that the overall credit cost, loan growth and the asset quality all stand to be impacted or do you think that some of the private bank names, the marquee bluechip names could perhaps weather the storm a lot better than the midcaps?
Definitely. If you look at what commentary has come up, we have seen that Kotak Mahindra Bank has talked about an improvement in current and savings account (CASA) ratio quarter on quarter probably because some of the deposits from YES Bank shifted there. We have seen a reduction in CASA happening in the case of IndusInd Bank as well. So clearly the matter right now is the quality of the franchise, how much capital adequacy the businesses have. So from that perspective, clearly HDFC Bank and Kotak would stand out in terms of the BFSI sector.

The overall weightage of the sector had gone up to around 43-44%. So if we look at historically how things have happened in 2000, it was the IT sector; in 2007-2008, it was the infra-related sectors where the weightage had increased significantly. So going forward, I would not be that sanguine about the prospect of the sector because the collection is always hard relative to lending money to people; so clearly it is better to stick to the larger private sector banks because their ability is significantly better relative to the smaller ones.

Let us not try to bottom fish the smaller players just because stocks have come down because collections won’t shape up until we see significant help from the RBI going forward. So it is going to be pretty difficult for most of the smaller players.

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