Bullish on 4 stocks in banking and insurance: Santosh Singh, Haitong Securities

As far as corporate banking goes, SBI and ICICI Bank are good bets, Santosh Singh, BFSI & Head of Research, Haitong Securities, tells ET Now.

Edited excerpts:

We are seeing a lot of headwind when it comes to currency markets. I understand currency would have positive impact on IT sector bottom line and people are getting gung ho and stocks are doing well. But do you think even top line would be growing in the same manner the way people are anticipating bottom line to improve?

First and foremost, IT is a sector where people tend to have their opinion based on where the stock price is going. What we are telling our clients is that there is definitely some visible recovery within the IT space from three-four years ago. This was one space where we saw a lot of consolidation in top line growth. Now we are seeing some sort of recovery. But we are sceptical about how far the improvement would be. Barring rupee-dollar movement because of whatever is happening globally, the top line expectation may not be met because there is a recovery but it is not going to be as significant as what people are expecting.


Future Retail is looking at selling 10% stake to either Paytm, Google or Amazon. We understand that the deal could value Future Retail at about Rs 30,000 crore. The current market cap is Rs 25,000 crore. Is there money to be made in any of the Indian retailers? Do you think the adjustment fear which everyone had about the e-commerce business is coming to an end?

Globally, e-commerce players also want to have some sort of physical assets. Physical and digital are the two things which are going to work together rather than eating into each other and that is our view as such. That is why we think there is money to be made in the entire retail space, rather than just the e-commerce space.

Definitely, Amazon or Flipkart would need physical spaces because of customers’ behaviour pattern. Not everyone goes to e-commerce websites. We would incrementally see the e-commerce guys have more muscle power than the physical infrastructure guys and that is why they have more money and that is why they could be more acquisitive compared to physical retailers.

How are you approaching the metals basket? We have seen strong move in Hindalco, Tata Steel post Q1 numbers. Is there still merit to buy metals at these levels or book profits because a lot of people were caught in the metals rally about two years back. Is it time to book out?

The metals pack totally pegged to the commodity price. Based on the data from China or elsewhere, our expectation is some strength in metal prices. India is not a big metal producer. It is more of a converter rather than producer and if there is a surge in commodity prices across the globe, even Indian metal stocks are going to do much better. At this juncture, there is merit in buying metal companies but one should watch out for companies which are highly levered or which are getting into the leverage game. Other than that, if leverage is not a concern, then metal is an area where we do not see any problem as of today.

The buzz word now is not retail banks, but corporate banks. Between SBI and ICICI Bank. which is a better bet?

For us, SBI, ICICI and Axis are fundamentally almost similar. Then it comes down to the valuation because you can have one quarter of gap between the recovery in ICICI or Axis or an SBI and we are not going to see more than one quarter of difference in the recovery.

SBI valuations is significantly lower than Axis and somewhat lower than ICICI, adjusting for the return on equity profile. If I look at the corporate banking space, my picking order is definitely SBI, followed by an ICICI in the corporate bank space.

Which is one consumer name which still offers value where you think there is potential of a 15% return in next 12 to 18 months?

We are looking at the corporate banking space for returns because we are seeing some sort of the peaking of the stress building out and we would see growth in this space. The EPS expansion could be really sharp because a lot of them have upfronted the losses that we saw in the current quarter. A lot of these corporate banks showed losses in this particular quarter.

They have upfronted their losses. EPS growth is going to be sharp. You are going to see some sort of increase in growth in the loan book and even we are expecting that by 2020, a lot of these corporate banks might again start making pre-2012-13 ROEs. So, an ICICI maybe around 15% and SBI maybe around 13-14%. This is an area where we see significant value being added.

Give me two insurance stocks which you think should be part of everyone’s portfolio for next two--five years.

This is one space which is least understood also. People look at short-term trends in banking and insurance. But that is never going to work with insurance. ICICI Lombard from general insurance (GI) space should be in one’s portfolio. It is a very much misunderstood space where people think that investment returns is not the way to make money but this is the way to make money within GI space and general insurance as such is a great area.

If I look at it from a growth perspective also, what has been somewhat positive for me is that Ayushman Bharat has not been a big drag because I thought these companies were getting into the space without understanding the intricacy because this was a huge premium area. We could have seen some big losses coming from there. That is one concern which have been avoided. Clearly ICICI Lombard is one company which we like from the GI space.

From the life insurance space, despite HDFC Life being one of the most expensive ones, the margin expansion story is going to play out there. We are going to keep seeing more growth in profitability than in the top line. Top line may be 13-14% but the new business profit growth will keep delivering more than 20% for next five to six years. HDFC Life and ICICI Lombard are my picks within insurance.