Shibani Sircar Kurian on how to approach the new bunch of IPOs that are hitting market

The banking sector is well poised to see improvement in terms of return ratios, specifically the larger private sector banks which are gaining market share both in loans and deposits and have capital ratios which are supportive of the incremental growth opportunity, says Shibani Sircar Kurian, Senior EVP, Fund Manager & Head -Equity research at Kotak Mahindra Asset Management.

In the middle of the earning season, the big theme that is playing out in the last couple of days has to do with the comeback of the banking stocks that began earlier this month, outperforming the Nifty. Your view
You are absolutely right. While the system credit growth number may still look muted, growth is coming back in various pockets. If one looks at segments such as retail, business banking and the SME space, the growth numbers seem to be improving and disbursements have been improving over the last quarter or so.

From the numbers that have come out so far, one thing is clearly evident that the larger private banks are gaining market share in loans and their liability franchise continues to become stronger and healthier with focus on retail deposits.


Also a lot of the concerns that were there in the banking sector with respect to asset quality credit cost being high, seem to be abating at the margin. If one looks at incremental slippages, numbers have been coming down.

Many of the private sector banks have also built in a huge provisioning buffer which will hold them in good stead in case there is a third Covid wave and therefore credit cost should start to normalise from the second half from here on.

Overall from the banking sector perspective, we believe that the sector is well poised to see improvement in terms of return ratios, specifically the larger private sector banks which are gaining market share both in loans and deposits and have capital ratios which are supportive of the incremental growth opportunity.

You have been quite clear that you are seeing the private sector banks eat into the public sector market share. We are seeing a rise in credit growth. But if somebody wants to play with this theme on the stock markets, the banking stories come back. How should one play it?
Actually the financial services space is a wide arena. So let us divide it into three parts – one is the banks, the non-banks or the NBFCs and then there are the insurance plays. Within the banking pack, the larger banks, specifically the private banks and a few large select public sector banks are well placed in this current environment.

Credit costs are normalising, growth is coming back and margins have been holding up because of the superior liability franchise and the fall in the cost of funds that we have seen. So clearly in the banking sector, our positioning is towards private banks and a select few public sector banks. Now within the NBFC space also, the larger NBFCs are clearly well positioned. While this sector has possibly taken a bit of a knock because of the second Covid wave and the lockdown impact specifically in segments such as auto financing CVs, at the margin, things seem to be improving in terms of collection efficiencies and disbursals.

Therefore one can be selective in the NBFC space as well. Life insurance is a more structural play both life and general. We believe that there is a long runway for growth. However, near term there are a few challenges specifically with growth on the protection side with increase in pricing on re-insurance and some of the supply side issues. Therefore one would look at life and general insurance place as a slightly longer term structural opportunity given the under penetration in India.

Nykaa has got a valuation of Rs 53,000 crore in terms of market cap. The profits for last year for Nykaa was Rs 61 crore. Do you think at such exorbitant valuations, the Nykaa IPO would find takers irrespective of how great and monopolistic the businesses may be?
It is pretty interesting times where IPOs are concerned. A lot of these businesses which were part of the private market, are now coming to the public market, giving the opportunity to invest in some of these businesses. However, as you rightly said, valuations are a key consideration when we evaluate these IPOs.

What we are looking at from across the board in some of these new-age IPOs is companies which have a positioning of competitive strength in their respective segments that they operate in. The longevity and stability of growth and the ability to gain the target market that they are operating in and how the under penetration could provide a runway for growth over the next few years. Now, these are new age businesses and when we look at valuation metrics, clearly some of these may appear to be expensive and therefore one needs to evaluate them with respect to how some of the global competitors are trading at. Also depending upon Indian conditions, what is the opportunity for growth and penetration in terms of their geographic and market segments. However, each of these IPOs would have to be evaluated on their own merit and on a case by case basis.

Zomato sought a very similar valuation to Nykaa and has never posted a profit. We saw what happen on Dalal Street.
Yes so as I was saying, these are businesses which obviously cannot be evaluated using very traditional valuation metrics as we know it. What we also need to see is the kind of addressable market opportunity that they bring to the table, what are the adjacencies and optionalities. Also, every business has to be evaluated on a case to case basis. So it is very difficult to paint everything with the same broad brush and say that everything applies to all the IPOs that are coming.

We are selective in the way we are evaluating these IPOs. However, it does give an opportunity to invest in some of these businesses which were so far away from the public markets. There are many global comparisons that we can look at to help us form some sort of opinion in terms of where valuations can be and the direction in which the companies are headed. However, it is very important to also understand the competitive presence of the company and also the threat from other competition and what it can do to their business models and how these business models will evolve over a period of time. It is pretty much case by case, very difficult to comment on specific instances but clearly we are evaluating all of these IPOs in this current time.