ICICI Pru, SBI Life personal favourites in insurance space: Anand Tandon

Tell us what exactly you have made of the news flow that we have seen so far with respect to Franklin Templeton and the kind of move from the Reserve Bank for the mutual fund industry? What do you think would be the reaction of the markets if we were to perhaps see an extension yet again of the lockdown post May 3?
So there are three questions there. First of all, Franklin Templeton obviously was a case of a badly managed fund. They clearly went away from their mandate in some cases of having reasonably risk-free money and put it into structured products, which were not necessarily part of the mandate. Therefore, I am not surprised. Also, the performance has been rather pathetic. They have participated in every credit event of any nature, at least over the last one year. So to that extent, the fact that they have decided to shut it down is certainly good for the investors who are left behind because otherwise those who went out early would have benefited at the expense of those who came out late.

Sebi’s move again in the same context has to be seen in the form of RBI’s move; that you are actually providing a line of credit and hopefully stopping the panic from spreading to other funds. That does not mean that there should not be greater scrutiny on the credit risk funds that are there and some of the others which have taken inordinately high structured product risks. But that aside, I think pretty much I would imagine that the damage may likely be contained provided of course the underlying economy does not deteriorate further and some of these companies do not actually end up defaulting, which could be a problem overall.


This brings me to your third question which was what happens if the shutdown were to extend. Frankly, the shutdown has done what it was supposed to do, which is to make sure that there is adequate time for the health services to be prepared for any sharp spike in the Covid cases and to also isolate areas where some of the cases still continue. I think now the marginal utility of extension is somewhat low and it would make lot of sense for the economy to get back on its feet and at least in those areas where the Covid cases have been kind of contained because all said and done, we cannot assume that we will continue to remain under lockdown forever and it is not likely that the vaccine will come anytime soon. So you have to work on the basis that for the most part, it is not a very deadly kind of disease and it largely affects people who have comorbidities or who are a certain age who can somewhat be isolated whereas the rest of the world can pretty much go on. If we continue to go where we are, I fear that the economy will go into a tailspin where given the current government policies, the ability to pull it out and put it back on track will take a lot more effort than it already will.

What is the stance when it comes to earnings from these financials because the expectations are that slippages could remain elevated for both IndusInd as well as Axis that are slated to come out with their earnings today and tomorrow? What are you penciling in for the financials when it comes to their Q4 numbers?
IndusInd definitely has a portfolio which is a lot more exposed especially because it has, for example, a lot of exposure to the auto sector, especially the truck financing sector because of Ashok Leyland and that is certainly an area where one is hearing anecdotally that a lot of stress has come through and in many cases, we hear that trucks have been abandoned on the highways. So I would be very surprised to see a somewhat sharper portfolio cut operated cost in the case of IndusInd.

Axis may be a little better largely because of the fact that it had already gone through much of the pain on the corporate side and perhaps the risk on the retail side is not as high presumably as IndusInd. Overall, I would argue that we are going to go for a slightly tough time. Most of the corporate exposure was supposed to have been behind us.

In my view, now we have two other new areas that will come up for concern. One is the MSME sector on the corporate side, which will certainly take a big hit and therefore, the credit cost there are likely to be higher and most definitely on the unsecured exposure that most banks now have especially the private banks on the retail side including credit card loans or for that matter consumer credit that they have extended, which to my mind will take a big hit. That said, I think the banks are still probably the better place to be if you are looking at the financials and on the lending side rather than the NBFCs and the MFIs, where I think the credit risks are even higher and the hits can be far greater.

Also, they have no great liability franchise; so their ability to manage costs in terms of the deposit side is not particularly high. So if you have to be on the lending side of the financials, I think banks that too probably some of the larger private sector banks are still probably the better place to hide. Otherwise, I would argue that despite the slowdown that we have seen in, for example, life insurance, that is probably a better place to be.

I do not know how closely you have been tracking ICICI Pru but this is looking like a very steady guidance and a solid move on the stock today.
That is right. Though there has been a bit of a surprise on the margin front, especially in the last quarter, positive surprise, but nonetheless it is a good set of numbers and the guidance was also fairly steady. As I said, this is for me a preferred space because you are gathering assets rather than distributing them and the ability to get it over a long period is fairly high. Certainly, a long runway ahead in terms of the space in which they operate. So almost all the insurance companies especially the life insurance are to my mind doing reasonably well. Obviously the valuations differ. I think ICICI among the top three is probably the cheapest but my own personal favorite is actually SBI Life. But you could choose any of them. I think all of them will do reasonably well over a period of time.

Would you say that the concern is valid around NBFCs and it is kind of a déjà vu of the IL&FS time when you had the liquidity in the system but again banks and NBFCs were not willing to shell out and that is pretty much what we are seeing as an example with the failed TLTRO 2.0 as well? There is liquidity in the system but there is complete lack of confidence and unwillingness to really lend out?
I would not compare it with IL&FS where there was an issue in terms of the quality of the assets or the gap that was there in the balance sheet in IL&FS which was kind of hidden. Here, you are really seeing that the assets that the NBFCs are holding now are perhaps not worth financing or the fear is that if this extension continues, some of the loans that they have given out may come back as bad loans largely because while they may have been given out at a time when the borrower was in good shape, the borrower’s financial conditions probably have now deteriorated to the extent that despite a moratorium, they may not be able to actually come back in time to pay.

I think that is a wholly justified fear because what we are seeing now is that the smaller companies have had no revenues for a while now; for almost five, six weeks. If the extension happens for a few more weeks going forward, the costs pretty much have had to remain the same largely because they have not been able to cut manpower costs, there has been no support from the government and you have not had any way of actually making up for the expenses. So therefore, how are you going to go back and pay? More importantly, even if you do have some reserves, how are you going to be able to get back into the working capital cycle and take care going forward? These are all genuine and legitimate issues.

So for a bank to go out and lend in such a situation irrespective of the fact that it can borrow cheaply; will leave it open to the allegations later on. They do not have an understanding of how to go out and lend. So I think it is perfectly fair for them not to be lending and I do not know whether it is fair to be forcing them to lend in a situation like this unless the government steps in and offers a backstop that in case of poor lending decisions being made, there will be no blow back on this.

What is your outlook on the OMCs because the expectation when it comes to numbers is that there is going to be that inventory loss? What exactly are you expecting for the likes of HPCL, BP and IOC?
I think the inventory loss is inevitable. It, of course, depends on how much of the inventory they were carrying and at what price but the kind of sharp fall that we have seen in oil price will mean that there will be an inventory loss. That said, it is still pretty much a regulated market and you have a price which is already fixed for the consumer. So I would imagine that the marketing margins would have been fairly strong and would probably sustain. Refining margins not so much; there is certainly going to be an erosion there. So it is not likely to be a great quarter for the OMCs for sure.

Going forward also, the chances that until somebody comes out and does a strategic buy, any of these companies will have a significant value from an investment perspective remains somewhat remote. That said, at some stage, once the market stabilises, one does hope that the government will do the strategic sale that it was planning for BPCL for example and that will certainly get some interest back into the sector. I think that is a little distance away.

What is your outlook on the auto companies? We have seen the overall slowdown which has plagued the companies but the likes of Maruti are talking about a partial resumption in some of their select plants; what is the road ahead looking like for autos? Where do you stand?
So first of all, for companies like Maruti, it is not simply their own ability to stand up and start manufacturing again but also the ability of their suppliers and the supply chain ancillaries and so on who also provide them the parts that they need and on time. So it is a fairly complex situation where we are going to have to kind of slowly ramp up production.

The interesting bit is, having ramped up production, who do you sell it to? If people are not allowed to come to the showrooms and do a test drive and decide which car they want to buy, you are not going to be selling any cars anyway. So to my mind, till we do not see a greater stability in terms of where we are in terms of the opening up, the sales at the retail level are likely to remain somewhat bleak. Frankly, that is also the situation for the rest of the auto sector. In my view, the MCHVs are not going to do anything great; tractor sales may probably pick up because agriculture is the one place where you have not seen a shutdown in any meaningful way. More importantly the production which is likely to have been quite good except for perishables like vegetables, farmers who have grown grain and so on have had a fairly good crop and I understand that the sowing for the next season is proceeding quite smoothly. So you may find the tractors provided you can get the financing for them. It is still probably doing reasonably well.

If you have to look at the passenger side, I would argue that the best place to look for is scooters because cars are likely to take a bit of a back seat in terms of their decision making process. Many people would have lost their jobs or would be somewhat apprehensive about pay cuts and so on. Therefore, people will likely defer their decision for cars. However, if you are going to be looking at a personal vehicle because you do not want to travel in a crowd or you do not want to travel with other people, the most likely vehicle you would end up buying is a two wheeler. So a two wheeler is probably a good place to be looking at and if you have to be looking at autos what is wrong with Hero or a Bajaj; Hero more so because it has more rural presence.