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5 small and midcaps that may give 50% upside in next 2 yrs, BFSI News, ET BFSI

Banking & Finance

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Stocks like JK Cement, Dalmia and Nuvoco Vistas may fall 10% in the near term but could give 50% upside over the next 2 year. Within the financial vertical, AU Bank and Federal Bank are the two names that we would be going with, says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.

What is your take on financials? Do you think that asset quality fears may come to haunt them a little later?
This space has gone through a lot of pain in the last one year. Initially, when we had the lockdown fears, the entire sector went down and within that sector, the smaller banks and NBFCs went through the maximum pain and after that we have seen a good amount of revival and by and large things are looking much better. What is important to note is that within the universe, there are a few pockets where the outperformance has been huge. Typically, HDFC, Kotak have underperformed and ICICI, Axis and SBI have done better.

My view is that some of the smaller banks like AU and a few other NBFCs seem to be doing well even in the most challenging environment where top notch banks are struggling to grow in terms of the NII and the overall franchise part. In a bull market, one typically tends to look out for some of the more exciting opportunities and within that, AU Bank or Federal Bank would definitely fit in. But a larger allocation of stocks should be in the likes of ICICI Bank, Axis Bank and State Bank of India.

Have you looked at Zomato’s numbers? There’s strong growth, strong revenue momentum and stronger contribution margins and all of this at the peak of the second Covid wave. Is that reason enough for the stock to push up even further?
The reason the Zomato IPO met with so much of success and excitement is definitely because there is a belief in the fact that there is a long runway of growth. The kind of app that they have created and the kind of business model that they are following would really deliver good performance over a period of time. When we look at the numbers, the fact remains that on the topline front, the average order value or the number of orders definitely has an element of momentum and traction and which also indicates that there is a good demand revival.

On the other hand, what really came as a big surprise was that the contribution margin has dropped by 170 bps and that is something that needs to be really checked as to what really is leading to this kind of a compression when there is a very strong growth on orders etc. What remains to be seen is that once offices open up and people go out more, are we going to see this momentum continuing or there is some sort of a cool off? That is something that we will have to watch. I do not think that we should form a view on Zomato by looking at the operating loss or the net loss. As long as the company is delivering on their top revenue and delivery transactions parameters with an eye on margin, the market may find this pretty exciting to get into it.

Give me the name of a small cap or two where you think a 10% downside for technical factors is possible but a 50% upside is also possible in the next two years?
I would be happy to share the midcap names or some of the smallcap names, but we have to be mindful of the fact that given the kind of runup that we have seen and the kind of valuation at which the broader market or midcap stocks are trading, they are almost at par with large caps. With this kind of runup, the volatility or the correction sometimes can surprise us. It may be 10%, it could be little more also and that is something that we will have to bear in mind when we are trying to dabble into the midcap and the small cap names.

So within the broader universe, we are comfortable in the cement sector. Given the kind of visibility that we have on the volume front, the companies on the north and east side of India are extremely well placed. One can look at names like JK Cement and to some extent Dalmia. Somewhere there is going to be a listing of Nuvoco Vistas and we will find that these existing companies are far better placed compared to the newly listed ones and that may create some sort of excitement.

Apart from that there are some of the smaller banks. Banks as a sector remained a bit muted for a long time and we are seeing an uptick and so AU Bank and Federal Bank are the two names within the financial vertical that we would be going with.

What about sugar stocks? After the runup in stock prices, do you believe they can be added afresh or added to the already existing holdings?
We have seen a very strong momentum in the global sugar prices maybe because of some crop failures in major continents like Brazil and some of the south-eastern regions. What remains to be seen when it comes to India is what are the inventory levels and the pricing that one can really expect from where we are right now.

Also we have to bear in mind that an important state like Uttar Pradesh is heading towards elections and the sugar policy and the stance that the government takes also plays an important role from election campaign perspective. It remains to be seen what happens in terms of fresh developments. Some of these commodities are in a strong up move and people may have some allocation for names like Balrampur Chini and some of the major north-based sugar companies. From a tactical point of view, it may make sense to participate in those names.



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Nischal Maheshwari, BFSI News, ET BFSI

Banking & Finance

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As we are going back to normalcy, the easy money has already been made in pharma and it is going to be very stock specific, says Nischal Maheshwari, CEO-Institutional Equities, Centrum Broking.

What will be the impact on Vodafone after Mr Birla’s resignation? Also, how exactly would Bharti and Reliance Jio gain and how should one approach the telecom sector now?
I continue to maintain my view that there is trouble for this sector. Even after the number of players came down from 7-8 to 3, we were still not able to increase ARPU. Now, one of the companies is just throwing up its hands saying that they are not able to manage. In the short term, there is more pain. Maybe the government will come out with a package or something delaying the payments. But long term, it could be good. But in the short term, it would be pain.

Why would you say that? As Vodafone is losing market share, the subscribers are not going to stop using mobile phones. They will switch to Bharti or Jio and both will gain market share as a three-player market becomes a two-player market.
That was true earlier also. Vodafone has been hanging by a thread. In the last 12 months, every month Vodafone has lost customers. There has been a question of its survival. But still ARPUs have not increased. Both the top players continue to come with very aggressive numbers though their bottom packs have been raised from Rs 49 to Rs 79. But there are enough discounts out there. At the end of the day, I would look only at the ARPUs and ARPUs do not seem to be increasing and none of the two players are actually going out and saying that they are going to be giving away or taking a backseat as far as competition is concerned.

The world over, it has been a two- three player market. There has never been seven or eight players anywhere else. In India, they were surviving. Now, they have been cut down too and the existing players will continue to compete with each other.

SBI seems to be recovering faster than anticipated and the hit on account of Covid second wave is not as much as the Street was pencilling in or even the industry average. What’s next for SBI?
The results have been good but I would be a little bit worried given that most of the other banks have shown higher slippages as far as the second wave is concerned, especially, on the retail side. I would wait for another quarter because my issue remains that the coverage ratio is very low for SBI. It is only 40 bps which they have provided for unlike most other banks especially on the private side, who have provided for anything between 1% and 1.5%. Otherwise, the bank is doing pretty well. The recoveries have been good and it seems to be on a very solid wicket. So wait for another quarter but definitely it is a buy on dips.

Everyone is bullish on real estate and housing demand but somehow the HFC stocks have done nothing. Why is that?
After the first wave, most of the HFC stocks doubled from the bottom like Can Fin, LIC. HDFC has been a bit of an underperformer but that has also done well. During the second wave, basically everybody seems to have suffered — and the slippages are much higher in companies like LIC Housing Finance. HDFC Limited came up with very good numbers, Can Fin also faced some amount of pressure. So during the second wave, market was worried as far as retail is concerned/

The market is worried what is really going to happen if another wave comes in because the retail seems to be getting much more hit than the corporate book in the banks because the corporates are able to get their people vaccinated and and it so they continue to work but the collections suffer as far as the retail is concerned. That is why the market is a bit worried and wants to wait out for another quarter to see what really happens on the health side.

If everything goes fine, then we will start seeing some action in housing finance companies. But having said that, I believe it is a good time because these stocks have not performed and if real estate rightly is doing well, it is only a matter of time that the housing finance stocks will also start doing well. So we have a buy across the whole sector.

Where within banks are you finding comfort to buy afresh?
The top two banks SBI and ICICI are the ones I would put my money on. As the recovery in the economy happens, most of these banks are showing stronger recovery in their old NPAs. ICICI, Axis and SBI historically have had much higher NPAs in their portfolio. So when the recovery happens, they would be the beneficiaries and that is why one is seeing a strong recovery there. HDFC and Kotak are the better ones of the lot. They never had much problem and that is why they have quoting at 3.5-4 times. During this phase, they may underperform the market.

The Covid bump off for pharma companies is over. Today Cipla will come out with numbers for the quarter gone by. Is market pricing in the normalisation of pharma earnings?
I think so. Last year when Covid hit, the pharma sector came out of five years of underperformance with most of the stocks doubling in a very short period of time. But if you look at a longer time horizon, I think they would have just returned whatever 30-40% kind of a return on a five year time basis. So yes, for a short term, outperformance happened. The API companies started showing 20% plus kind of margins and as the Covid receded or things became normal, most of them have hit below 20% margin and are not even able to hold 17-18% margin.

So as we are going back to normalcy, the easy money has already been made in pharma and it is going to be very stock specific. We may see something like Divi’s outperforming. A new stock which got listed, Gland Pharma, is outperforming. Now it is going to depend on earnings growth and valuations.

Sun has been an underperformer for a long period of time and for two quarters, they have started showing good performance on the specialty portfolio which the market was waiting for. The stock is outperforming now. It is very, very stock specific now. The big move is over in pharma



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Chakri Lokapriya, BFSI News, ET BFSI

Banking & Finance

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SBI’s credit costs have come down and it looks like SBI has executed well, given the tough macro environment. The Covid related provisioning are largely within expectation and gives comfort that numbers for other banks will also hopefully be in line or better, says Chakri Lokapriya, CIO & MD, TCG AMC.

Just looking at SBI’s performance, the big takeaway from the numbers is the asset quality outcome, the fact that they have managed to brave the Covid-19 second wave impact. Slippages have come in at 2.47%, of which, a significant amount has already been pulled back in July. Do you think that is something that is going down well with the street?
It is absolutely right because going into the quarter, the economic backdrop had the services economy still in a contraction while the manufacturing sector was moving by stops and starts. There was a fear that slippages would increase from industries that take loans from SBI.

Now those slippages are under control. The 15,600 odd crore mark is a good number. Secondly, we know that credit growth is unlikely to pick up any time soon. The number reflects that 5% to 6% range whereas the deposit growth continues to remain strong. SBI’s credit costs have come down and it looks like SBI has executed well, given the tough macro environment. The Covid related provisionings are largely within expectation and gives comfort that numbers for other banks will also hopefully be in line or better.

Would a long-term investor be willing to buy the stock at the current levels?
Absolutely. The stock at the current levels still trades only at about close to its book value around one time for the medium to longer term investor. For a franchise as strong and big as SBI, one in four or five loans in this country is made by SBI.

Today whether it is corporate banking, retail banking or the government borrowings from banks, SBI has executed well. So even without multiple re-rating, the stock can go much higher. At this current rate it will probably hit north of Rs 600 in less than about a year’s time from now.

What are your views on HDFC Ltd?
After long underperformance due to slowing loan growth etc, hopefully things will improve for HDFC if there is no third wave. Also coming out of the current lockdowns, home loan growth rates are picking up while other forms of borrowing or lending has still not picked up. That is reflected both in the volumes of real estate companies as well as by the housing finance companies. I think given its underperformance, HDFC being the market leader along with LIC Housing and Repco, could do well in the next couple of quarters



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CS Ghosh, BFSI News, ET BFSI

Banking & Finance

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We are provisioning for net NPA in this quarter also. It has come down and so a very small amount has come. This is a conscious call because we have not written off NPAs in this quarter, says CS Ghosh, MD & CEO, Bandhan Bank.

It has been a kind of mixed performance for Bandhan Bank. While the bank has reported the highest ever quarterly operating profits, NPA stress has also risen. Can you tell us about the quarter?
This quarter was more severe than any other quarter in the pandemic situation. The second wave affected lots of lives and people were more scared about it. That prevented a good number of business owners from properly running their business. It started in the first month of the quarter from central India, Delhi and Madhya Pradesh and Chhattisgarh and it has gradually gone to the north east. Till now, it is happening in the north east.

Secondly, micro credit is nearly 60% of Bandhan Bank’s advanced book. The staff go to customers’ doorsteps to collect instalments. It was not easy to do because of the lockdowns and also because of risk to staff health. The number of cases affected came down in July and lockdowns were also lifted and a couple of rating organisations and the government also declared their GDP growth rate will come to 9-10%. I hope the future turns very good.

The total collection efficiency stood at 86% in Q1. Talk to us about collection efficiency for the overall book and collection efficiency in states like West Bengal and Assam. Are you seeing any improvement versus the last quarter?
There has been improvement in collection efficiency. In March, micro credit collection efficiency was 95%. In April, May, June it was hit in a big way by the Second Covid Wave. For that region, it has come down a little bit.

In case of the micro credit portfolio, in the first quarter our demand was Rs 13,000 crore and we collected nearly Rs 13,000 crore including arrears. That means our customers are paying the instalment. The total collection efficiency including arrear is 98% in micro credit and in case of total bank, it is 101% which shows that after the bad situation in the first quarter, it recovered a lot in this month. I hope next quarter onwards it will improve further.

Has micro finance loan book slowed versus last quarter? Is that a conscious call to slow down the growth as collections and demand may be impacted?
No. There are three factors here; one factor is that in the first quarter of any financial year, demand for credit always comes down. Secondly, there was the impact of Covid 2.0 in first quarter and that also impacted demand. Thirdly, we are disbursing credit conservatively and on a very selected basis.

Credit cost has come down versus the last quarter but it is still pretty high at 4.9. Will operating profits be enough to take care of the provisioning or the credit cost needs?
The provisioning is in two parts. One, it has helped me to increase PCR. The other side, it has helped us to strengthen our balance sheet. We can continue this provision continuously and accordingly the business growth will absorb it.

Gross NPAs stood at 8.2% and the net at 3.3%. At a net-net level, will gross and net NPA for FY22 be higher?
No. We have not written off this quarter. We have a Rs 700 crore account for NPA. If we write off this NPA, it will not be in place. Again, when one calculates the gross NPA percentage, because my advance book size has come down, percentage wise also, it has come down. Otherwise, percentage wise gross NPA has increased by 0.5% from last quarter to this quarter. We are tracking that. We are provisioning for net NPA in this quarter also. It has come down and so a very small amount has come. This is a conscious call because we have not written off NPAs in this quarter.

Overall the loan book has declined by about 8% quarter-on-quarter. What kind of loan growth do you expect this year?
In this type of a situation, the bank will be cautious and very selective. The credit growth will come from the last month of the second quarter before the Puja and Dussehra to the fourth quarter. That has been the case in normal times and even last year. So it depends on whether the Third Covid Wave comes in the Puja season or not.

Over the next one-two years, which segments do you think will lead to growth — microfinance, mortgage or commercial banking?
Microfinance is a very standard model and India is a big country. There is no growth driver needed for that. But we are likely to drive the growth of the housing loan vertical. It accounts for 24% now and in future we would like this segment to account for 30% of the total book.
The second vertical we are focussing on is MSME which caters to less than Rs 5 crore type of MSME. There is a huge market which is secure and we would like to grow it in future. Gold loan is another we would like to grow because like housing loans, it is also secured. These are the three sectors we would like to focus on in future and which we expect to account for 30:30:30 by 2025.

What led to margin improvement during the quarter, at what level do you see margins stabilising going ahead?
I have always predicted that around 8 or 8 plus will be NIM but this quarter, it is a little bit higher compared to the last quarter. That is because of last quarter we have reversed the interest of Rs 500 crore. Otherwise, 8 to 8.4 is what we would like to maintain.

You seem to have sufficient capital, how long will the current capital last considering your growth?
The growth of the bank was a little bit on conservative side last year and this year we expect normal growth. Upto 2025, we do not need the extra capital.

Is the structure of the financial industry changing with competition from fintech players?
The banks are focussing on digital transaction mode for the customers. At Bandhan Bank, in the last quarter, 87% of the transactions happened digitally. 11% of the bank accounts were opened digitally. We are also invested in digital transformation of the bank. We are also focussing on how we can give digital service to the customer.

Won’t you need additional capital to expand in digital space?
We have enough funds and we are already working on that from last year. Whatever is needed, will be invested from our own funds.



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Rashesh Shah, BFSI News, ET BFSI

Personal Finance

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“We expect to have about Rs 500-600 crore of excess capital available that we can invest for future growth to acquire companies. Our board decided that we need to be very focussed and reallocate capital in a very smart way,” says Rashesh Shah, Chairman, Edelweiss Group.

Edelweiss Group is going to exit insurance broking business. US insurance broking firm Arthur J Gallagher & Co is likely to acquire JV partner Edelweiss Financial Services‘ 70% stake in Edelweiss Insurance Brokers at a valuation of $100 million (around Rs 750 crore). Insurance is a great place to be right now and you are exiting and divesting the stake here. What is the strategy?
Edelweiss is a diversified group with almost 10 different businesses and this insurance broking business is very similar to investment banking and very similar to broking business. It was earlier part of the wealth management business which we have spun off and we are getting it listed as a standalone business. Here we had a partnership with Gallagher. They were keen to keep it as a standalone and increasingly this is becoming a global business. They wanted to increase their stake and we got a good price. So, we are reallocating capital.

I must remind you we have two other insurance businesses. We have a life insurance business and a general insurance business where collectively we have invested more than Rs 2,500 crore up till now and we continue to invest in that. We are reallocating capital from insurance broking which was a small, very high quality, very niche business. Since it was part of wealth management after we spun off wealth management, this became a standalone business and so our board decided that if there was a good partner and the business future is very bright, we can re-plough this capital into other growth areas.

After this sale, we still have eight businesses; we have a housing finance business, NBFC, asset management, mutual fund, ARC, life insurance, general insurance and wealth management. All are very good businesses. Our customer assets had grown by 35% in the last one year. We have restructured and from one company with many divisions, we have now become many standalone separate companies and each one has a very bright future and can take off on its own.

You have also done a transaction in the wealth business a couple of months back. PAG, one of the most reputed companies, has come in. How much capital have you raised together and how would you be utilising that?
The total capital we have raised in these two transactions will be close to Rs 2,500 crore. About half of that — Rs 1,400 crore — goes into repaying debt. We had some holding company level debt and which we have now decided to reduce. So about Rs 1,400 crore goes into reducing debt and the balance goes as investments in our asset management business. We have an alternative business and a mutual fund business, the collective assets are now close to Rs 85,000 crore. As they are growing fast, we need to make some very tactical investments in that. We are making small investments in our NBFC and housing finance business and the retail part of the credit business which are growing very well plus, our insurance business.

Even after this, we expect to have about Rs 500-600 crore of excess capital available that we can invest for future growth to acquire companies. Our board decided that we need to be very focussed and reallocate capital in a very smart way.

Did you say acquire companies? Which direction would you take?
There are a couple of areas where we are seeing a lot of opportunities to make very smart tactical acquisitions; one is in the fintech space. We think the entire credit space is getting disrupted in a very fast way given the NBFC crisis, credit issues in SME and housing finance. There are some good analytics firms. There are some good firms which underwrite risk management on retail credit portfolios. That is a good place for some tactical investments. One can spend Rs 100-200 crore to buy some smart capability.

We want to grow the retail credit business which is SME and home loans as well as our asset management business. We also want to grow the insurance businesses. Even in general insurance, we are seeing some very good tactical opportunities coming up. It is a very fintech driven business. One of the biggest things would be to buy stakes which either gives us distribution or stakes which gives us technological capabilities.

Edelweiss wants to focus on getting distribution. We can get that by buying a small stake in a small finance bank and that will allow distribution of insurance and asset management products by the small finance bank. We also want to invest in technology. As we have become more retail in the last two years, our retail customers have gone from half a million to 2.5 million. Now we are adding between 1.2 and 1.5 million retail customers every year. So distribution and technology are very important for us.

Have you identified any of those banks where you may be keen to pick up small stakes or some of the credit organisations or SME related fintech kind of companies?
There is no development to announce anything. We are evaluating and the year FY22 is a very important year because we have restructured our businesses and simplified our organisation structure. We have capitalised all our businesses adequately. All businesses have enough capital for growth plus we have some excess capital at the holding company level. We will make sure there is enough capital. Now we have to think about growth. The last two years have been about managing liquidity, simplifying the structure and strong balance sheet.

Let us come back to value unlocking. There would soon be another listed company from your house. How far is Edelweiss Wealth from being a listed company and how is business growing over there?
Edelweiss Wealth had a very good year last year. Retail broking and individual investors coming back to the market has been a big thing as interest rates have come down and investors are looking for advice on how to get some extra yield and how to manage risk very well, given all the disruption in the mutual fund industry.

Our customer assets in Edel Wealth Management last year grew by 25%. The business made a profit of approximately Rs 240 crore last year. With a PAG deal, Rs 400 crore of fresh capital has been infused in the business and we we are going through a demerger process because that will allow us to give Edelweiss shareholders direct equity in the wealth management business and we think that demerger process is about 12 to 18 months away depending on NCLT process.

We should have Edelweiss Wealth Management listed. The business is growing well. It is very well capitalised. By the end of this year, it should have an equity base of close to Rs 1,800 crore plus. Having that level of equity base and growth, it seems to be in a very good place and listing will be good for that business.

You have seen cycles from the market point of view, from credit point of view and economy as a whole as well. What stage of the market cycle are we looking at? In terms of rebound, are we euphoric or are we fairly priced?
It is always a challenge to make any predictions on the market. Market even after 30 years keeps us surprised, especially in the short term. In the short term, anything can happen, some global announcement by US Fed, some Indian government announcement, some accident happening anywhere in the world could derail the market. In the short run, it is very hard to say where the market is headed.

On a long term basis, India has seen degrowth in corporate profit for the last eight years from 2013 till 2021. The long term trend has turned around and I think corporate profit will be on an uptick for the next four-five years at least. So on a five-year basis, one feels very optimistic about corporate profit growth.



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SBI MF likely to be listed in Q1 of FY23, says SBI MD, BFSI News, ET BFSI

Banking & Finance

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A blip or a pause of three months should not affect the long-term story of our economy, says Ashwani Bhatia, MD, State Bank of India.
What is your understanding of the economy and the business impact of the second Covid wave? The first wave was brutal on banks and the economy. How big has been the collateral damage so far?
It is kind of a repeat of what we had last year except for the fact that the spike in the infection curve has been parabolic. That was not expected. Last year, the lockdown came in the last week of March. This time it has come in the third week of April in different locations. We saw an increase in deposits initially and then in the second half the credit pick up happened, housing loans took off, governments gave discounts and reduced the stamp duty. Interest rates are already at a record low, demand was there and people have saved a lot and spent a lot also.

Till the first week of April, we have seen the instalments coming in. So, to that extent, we have not seen any deterioration in the numbers. Last year, we also gave options to customers, especially on the retail side, to postpone their instalments. But all the instalments came and we did not see any stress in particular over there.

Going forward, I would only hope and pray that the same thing repeats in this financial year also. So far, it is holding up. We hope that this does not last more than a quarter and the flattening of the curve starts happening soon. The fact that the government announced vaccination for all above 18 from May 1 is welcome. Money has gone into Bharat and it has gone into Serum Institute. So, some kind of supplier credit has happened. From our side, we can only be hopeful. It is too early to take any call very frankly.

The problem is at the bottom of the pyramid, the lower strata and the MFI space where job losses have happened and migrant labour issues are going to be challenging. Will the second wave impact this end of the society and would the borrowing cycle be even harder because the numbers are so big that the impact is going to be felt very hard?
Quite possible but again, it is very difficult to give a definite direction. If more lockdowns are announced, there could be loss of life and livelihood just like last time. This may be repeated this year also but it is too early to take a call on the numbers or on the delinquencies. The initial estimates are that the lockdown is not as severe as it was last year where there was no traffic on the roads, no toll collection, the aircraft were not running, the trains were not permitted to run and so on. This time, it has been more measured, more calibrated. So the collapse of demand may not be as strong this time around.

Digital may continue to see an uptick, deliveries are happening and to that extent, the services sector that was really impacted may not be that bad. Very frankly, it is just a wait and watch kind of a situation and I do hope that within the next one month, things improve.

Last time, RBI came out with a moratorium to help the borrowers. The government came out with credit guarantee schemes which gave a lot of help to the entire SME and MSME sector. Do you think a similar scheme should be considered again?
I think the jugalbandi that you saw last year will continue into this year also. So let us just go back to what the governor said in his last policy statement. He actually used the word whatever it takes and there are plenty of measures that RBI can always take and the fact that he has announced things like the government securities acquisition programme, the fact that he said OMOs would be in addition to this. He will be accommodative to all those things. RBI will be in readiness to provide all support to the financial sector, to the industry and to the economy.

There was some optimism in the last couple of months. Could the second wave challenge that optimism?
Three months in the life of an economy does not really make a difference. At the most, it can be postponed by three months to six months. The commodities cycle still looks pretty strong, pretty robust. A blip or a pause of three months should not affect the long-term story of our economy.

Birla AMC has already filed for an IPO. There is HDFC Life. There is Nippon. There is Birla. When will SBI AMC see the light of the day?
I would think that within a year we should be done with the process. So SBI Mutual Fund will definitely be the next subsidiary of the State Bank Group that will be listed. So maybe around the first quarter of the next financial year.

The digital business which is the YONO business, has reached a critical mass both in terms of size and the fact that it is now nearing its break even while a lot of other fintech firms in the payment business are still losing money. When are you planning to monetise it?
The question of monetising may be some time away or we are not even thinking about it. It still needs to gain critical mass. We think that it will grow very fast this year also. We have been having a CAGR growth of about 35% there. We are in excess of 5 lakh crores plus the PMS that we do is another Rs 7 or 8 lakh crore or so. The total business that is managed is about Rs 13 lakh crore. It has scaled up very well. The profitability numbers are also likely to be decent for the previous financial year and the digital bit. So many changes are happening every other month. A lot of scope exists over there.

State Bank of India is the only large bank which did not raise capital even at the peak of the pandemic news. Do you have sufficient capital buffer to participate in the growth cycle?
We are very comfortable at the moment. You will see our numbers within the next one month. We think that our capital requirements are met by our own internal reserve and profits that we have. As time goes, we will have a look at equity raising but in the next six to seven months, I do not think we’ll be coming to the market. We are quite well and adequately capitalised at the moment.

Citi India has gone on record saying that they want to monetise their consumer businesses, credit business and wealth management businesses. Is there any business there which excites you?
Certainly. So maybe not the whole piece, but if it is available in segments, we may look at some part of it.

Can you be slightly more specific about which end of the business excites you?
There are plenty of things. Number one is their retail franchise itself. The kind of clientele they have is interesting as is credit cards business and even their housing portfolio. We will examine it once the opportunity is shown to us.

ET Now: A lot of other banks are facing breakdown issues including some of the best private sector banks but SBI has done a great deal of technology advancement. How did you adopt that?
Ashwani Bhatia: When SBI Mutual Fund became number one in the market, somebody asked me how could you beat the private sector players and I said why not? Where do we lack in human resources, capability and reach? I would give the same answer here also.

SBI has reinvented itself again and again. We have shown direction everywhere. In the ‘60s and ‘70s, it would have been the small scale industry (SSI) or agriculture, MSME sector wherever. I would think that we would continue to be thought leaders and provide support in whatever form and we will use the best in-house talent to improve our capabilities, our products and our technology.



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Average deal sizes have been going up for last 3-4 years, says Kotak Investment Banking CEO, BFSI News, ET BFSI

Banking & Finance

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FY21 saw 120 deals on the ECM side, raising more than Rs 2,20,000 crore compared with FY20 that had 65 deals raising about Rs 1,40,000 crore, says S Ramesh, MD & CEO, Kotak Investment Banking.

How special was FY21 in your view and how are things geared for the next couple of months in FY22?
I would say FY20 and FY21 were exemplary years for the investment banking industry. FY21 was a notch higher and was a great year for the industry. Just to put some statistics around this, FY21 saw 120 deals on the ECM side, raising more than Rs 2,20,000 crore compared with FY20 that had 65 deals raising about Rs 1,40,000 crore. Similarly, the advisory and M&M side deals announced in FY21 were close to $120 billion compared with about $90 billion in FY20.

The components of the ECM business were IPOs and QIPs and we also saw during the last two years, the largest right issue came in from RIL and on the M&M and advisory side, the financial sponsors, private equity and the tech dominated in terms of doing deals. Overall, for the investment banking industry and for us, it has been a very busy time.

How do you expect FY22 to be?
We expect FY22 to continue on similar lines. There is a little bit of pause and fatigue in the equity capital market (ECM) given the volumes of deals and the bad news around Covid, but the pipeline is quite strong.

The composition of money is changing. Historically, US-based North American funds have been dominant in India but this time capital flow is coming from newer geographies. Give us some flavour of the kind of money which is coming in.
If I were to look at money flow in the context of the ECM deals, for some time now Asia and India have been dominant but let me give some new perspectives. There are a bunch of investors, particularly the sovereign wealth funds, who have been present in the secondary markets but who were not so active in IPOs. We are now seeing a change in that trend. In some of the recent IPOs, we saw sovereign wealth funds come in and invest a reasonable amount of money. We expect this pattern to continue. Similarly, emerging funds out of Europe have preferred participating in large caps and in the secondary markets. They have moved the bar a little bit to participate in midcap IPOs. We are seeing the trends continue.

We are also seeing very active involvement from hedge funds which are opening their long only books to remain invested in some of the IPOs. In our conversations with clients — both private equity investors and corporates — we find that there is reasonable optimism about deal making. There is also optimism that Indian markets have a great architecture to allow them listing or do M&A deals.

There is also an optimism that the flow of money will continue. Except for these odd windows when we may have abatement both on advisory and payment & cash management (PCM) — we continue to see a fair bit of optimism among both investors and clients.

What kind of enquires are in the pipeline? We understand that Nykaa, Zomato and policybazaar IPOs are in the offing. Some of the big new tech companies are showing interest about coming to D-Street.
I will not give you the names but I will give you an idea what kind of pipeline we are seeing. I think 2022 and 2023 are likely to be dominated on the equity capital market side by new listings on the tax base. The new age companies’ pipeline is quite active. There is also good interest from investors to invest in these companies. We have already seen some announcements of pre-IPOs and we expect the new age tech company IPOs to be very active.

The second space is specialty chemicals and allied space. Some very interesting and large names which have remained unlisted over the last many decades are now finding it worthwhile to consider listing. The healthcare sector continues to see inquiries and so we will see listings of healthcare and occasionally large auto ancillary companies. Last but not the least, the financial services space will see IPOs.

Quite a few names are likely to get listed over the next 12 to 18 months and this will give us an idea of the flavour of the sector. In the last one to two years, we saw real estate or financial services dominating the IPO space. We are now seeing more diversification. Newer sectors like specialty chemicals, agri chemicals and some very interesting companies in the consumer space are making it quite interesting for investors to engage. Our conversations with clients and investors show that there will be reasonable interest to partake in some of these offerings. On the QIP front, there was a lot of fundraising that happened front ended in FY20 and a little bit in FY21.While there will be some action in FY22, a lot more may happen in FY23.

Are the average deal sizes also going up? Is there more risk appetite among the investor community for some of these newer assets?
When we talk to investors and clients, we find there is a profound recognition that the sustainable way to build wealth is through a proper listing on the stock market and continuing to nurture it. There is one trend line that we have seen every year over the last three-four years. The average deal sizes have kept moving up and investors generally like large companies where they have the ability to participate. The impact cost is less and if these companies do well, they will have the ability to get into various indices over time.

We are noticing conversations. Companies are now looking at much larger floors than they were before. The average deal size has moved to Rs 1,000 crore but I will not be surprised if over the next one to two years, this needle will move a notch up to maybe Rs 1,500 crore. There are other deal sizes which are larger.

In the last two years, SBI Cards IPO was the largest in the private sector at close to Rs 10,000 crore. This year, Rs 6,479.55-crore Gland Pharma IPO took place. We were involved in both these deals. Larger deal sizes are preferred by investors. In some of these new age tech companies, we are seeing similar conversations where the deal sizes and the floors are likely to be large.

A quick word on where are we on the cycle as far as the stock market is concerned? Do you see any upside in 12-24 months as far as the earnings are concerned?
I will break it up into two parts. I think we are currently all in this second wave that has hit India in particular and other parts of the world. So, the move is a little muted but there is more optimism because there was a turnaround and a lot of companies were doing well. Some of the industries and sectors found their way through this muddle.

Currently, you will have to give a little time for companies to spend off the temporary lockdowns and come back. In general, I will make two points. Both on the corporate and the economy side there is more optimism that India in particular, over the next few years will do well. The second thing is that given this backdrop and given that governments all over the world are loosening their purse strings, we expect the flow to be quite good for India.

The emerging markets in particular are likely to benefit but India will get a reasonably good proportion of these funds. We think that liquidity will not be a challenge but there will be pockets where you have to be careful. Otherwise, the trend line is quite positive when we look at the next two or three years.



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Bitcoin: Keep 10-15% of assets in physical gold, avoid Bitcoin: Mark Mobius, BFSI News, ET BFSI

Personal Finance

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I do not think Bitcoin is a good asset class for the average investor and the simple reason is that converting Bitcoin into cash that can be used is an extremely difficult and even dangerous proposition, says Mark Mobius, Founder, Mobius Capital Partners.

While the good is definitely getting better in metals, is the best yet to come?
All the metal prices are up and even in areas like palladium, platinum, etc, they are all moving up very quickly. That will be reflected downstream.

Is it imperative now to have some portfolio allocation to Bitcoin and continue with investments in gold as an asset class along with equities?
I do not think Bitcoin is a good asset class for the average investor and the simple reason is that to convert Bitcoin into cash that can be used is an extremely difficult and even dangerous proposition. The US government is after many of these Bitcoin exchanges. So, this is something I would not recommend.

However, gold at this level sounds like a good investment. In fact, I have added some gold to my own portfolio because I think it has reached a sort of turning point where we are going to see a recovery in gold prices. But even if you are not following gold on a day-to-day basis, from a long-term point of view, you are better off with 10% or 15% of assets in physical gold.

Would it be the same case for silver as well?
Yes silver, platinum and palladium as well. It is a good idea to diversify in these precious metals. The four key ones would be gold, silver, platinum and palladium.

Where do you stand as an investor in the entire home decor segment including paints?
We have not been able to find a company meeting our requirements in terms of the fundamentals in this area. Most of them are rather small. There are some exceptions but we have not found the right investment in that area. But I would not discourage anybody from looking at that and investigate more carefully because companies like paint companies and companies that are doing furniture might be an interesting entry into that sector.

What happens to the real estate revival in India? While the second wave could put a bit of a dampener, is this a sector one should stay invested in?
 The real estate sector is very interesting, particularly in India, because the demand for housing is almost endless. We are not going to see a let up in demand for many years to come. Many Indians are living in substandard housing and they want to do better and as incomes rise, there will be a greater demand for housing.

The issue in the housing market is of course having reliable systems of registration and financing these houses and apartments. This is a big challenge for not only the federal government but also the individual states. In fact there has been the idea of using blockchain to track ownership of houses and apartments. I am familiar with the US system of title insurance which might be an answer for India going forward.



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Uday Kotak, BFSI News, ET BFSI

Banking & Finance

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Uday Kotak, MD & CEO, Kotak Mahindra Bank, in conversation with Nikunj Dalmia of ET NOW at the Times Network India Economic Conclave 2021.
During the last India Economic Conclave (IEC), you had said that India needs banks but it needs few PSU banks, it needs adaptation of fintech and it needs consolidation in the sector. I guess you knew what was happening because that indeed is happening one year after our interaction?
I do believe that India has made very serious progress in this pandemic era and actually grasped the opportunity of what we need to do. Therefore the financial sector is in for a significant change. The government’s move of testing out with two public sector banks is first of its kind and this combined with the fact that over time you will have four or five large state owned banks and private sector banks and at the same time opening up competition in the sector is the right way to go. At the same time, we need to be clear that in the last one year, Covid has changed our lives in the field of technology and financial services by a multiplier of five. What would have otherwise taken us five years is happening in one year. That is what we are going to be ready for.During the course of 2020 every time we interacted with you on various forums your words were: “India Inc has been hit. It is like a ship which is now trapped in muddy waters.” Is the challenging time behind us? Has the ship reached the shore?
Covid has created a new category of what I call as haves and have nots. The people who have had access to capital are in the category of haves and that is primarily the organised sector or companies which have access to public markets as also private equity and the have nots are the ones who did not have access to capital. There is a very stark difference between the haves and the have nots, based on access to capital. Therefore, even if you are from a stressed sector, if you have access to capital you are in good shape. If you do not have access to capital, you are in a tougher position and that is the difference which we have seen happen in front of us. That is as a result of dramatic pouring of money and liquidity globally and in India as well. That has enabled equity capital to rescue most of the organised sector.

The broad commentary from India Inc is one of highest-ever margins, strongest demand visibility and high optimism. A year ago, there was fear, gloom and doom on the Street. How does one differentiate the kind of indications which we are getting from India Inc.? Are these permanent or are there spurts of demand like sugar rush?
One year ago we did not know what hit us, we had no idea of the contours of the Covid impact. Today one year later, we seem to understand the virus a little better though it continues to mutate. At the same time, there is greater optimism on the possibility of vaccination of a lot of our people though I think it is going to take a few months more for us to get to a more comfortable place.

At the same time, we have started being able to deal with this virus in terms of our lives, what we can do, what we cannot do. We have adapted our life to the new reality. All these are the pluses and that is one of the reasons why business and industry feels they are in a better place than what it was one year ago.

Having said that, things will need to be better handled on the virus and vaccination moving forward but we have to be careful of a mindset of complacency. The virus has not gone one year later. It is still around and we feel more comfortable with it. But the virus is mutating and therefore I will certainly be looking with optimism because we are seeing a changed world. But I keep my guard up. I would not lower my guard too soon and make this more a marathon rather than a sprint.



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Saswata Guha, Fitch Ratings, BFSI News, ET BFSI

Personal Finance

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We are pretty mindful of the fact that a fair degree of underwriting has been done by banks over the last three to four years in certain cases quite aggressively and some of that underwriting is probably yet to see the right kind of seasoning yet, says Saswata Guha, Director & Team Head, Fitch Ratings.

The gist of your report is that the impact of pandemic going forward is likely to pose challenges for the banking sector. You have said that not only credit cost will rise but even the NPA situation would get challenging. Most of the large banks say they have adequately provided for the challenges which lie ahead. What is your hypothesis for this space right now?
The hypothesis is primarily based on the premise that not everything that is arguably stressed is getting recognised at the moment as NPL, simply because there continues to be several forbearances in place as well as the judicial stay on some of the moratorium loans.

The number is roughly about 4% odd over and above the system’s NPL ratio which is roughly around 7%. But having said that, the 4% still does not account for the incipient stress including anything that is 30-60 days overdue and that is a number that has been on the rise quarter on quarter across the banks.

But more importantly, what it does not include are the several SME loans which have been refinanced under the various easy refinance schemes under the government’s relief measures and that cumulatively means that whatever the government is guaranteeing is just about 20% of the total exposure. The total exposure of those loans is roughly about 8.5% of the total system loans and when you start adjusting all of these into the number that we have at the moment, it is quite clear that at some point, whether it is easy liquidity condition or waning of some of the forbearances, it is likely to have an impact on asset quality. Whether that will manifest in the next financial year and whether some of it will get pushed further out because of forbearance measures being extended, we do not know, but it is quite clear that whatever banks are reporting while not being outside of our expectations, also does not present the full picture.

There is a race to bottom as far as home loans are concerned. Other consumer loans are also getting quite competitive. Meanwhile, fixed deposits rates etc also are in a race to the bottom. From here on, do you see rates hardening? How much do you see the additional borrowing cost for the NBFC universe? Will the banks face the same pinch?
Funding costs will be impacted. The declining funding cost trajectory has been a huge contributor to the fact that banks have continued to do well through a time of very limited growth. At some point, we do expect the funding cost to bottom out but if you were to consider the current liquidity situation, of which funding costs are a significant function, we expect that to continue at least for some more time, at least for a large part of this particular calendar year.

Any upward movement on the rate side will put pressure on the banks but what is important here is to also understand the inclination of the banks to lend now that it is being driven by two factors. One is credit demand itself which continues to remain reasonably subdued, at least as of now. The other of course is the bank’s ability to lend and in this situation, I have to call out the state owned banks which are constrained by virtue of the capitalisation.

Both of these factors are contributing to very limited credit supply. So without the inclination of banks to go out and lend in a meaningful way, it will not put pressure on the loan to deposit ratio which would therefore mean that banks might still have some headroom even after the rates start inching up for them, to be able to maintain their funding costs at low rates.

But quite clearly, what we have seen as of now is not sustainable because at some point we expect rates starting to inch up. You have raised a fairly valid point on retail credit and we have seen a fair bit of that and continue to see banks almost getting lock, stock, barrel into that space and trying to give out retail credit as much as possible.

It is quite possible that certain parts of retail credit, especially home loans, may prove to be a little more resilient than what we had expected initially and that was back in 2020 when things were very very uncertain. But there is also a large segment of unsecured credit cards within retail which are the usual suspects which we deem as vulnerable. You could also see vulnerabilities emanating on account of loan against property, loan against shares and some spaces which NBFIs dabble in a lot more than banks.

That is one space where we would see potential pressure in future. What is challenging with retail and to an extent even SMEs is that unlike large corporates which were pretty much the epicentre of the last asset quality cycle, it is very difficult to try and square in on an individual SME or an individual retail given how granular this portfolio is.

Banks would have to look at it on a portfolio basis but we are pretty mindful of the fact that a fair degree of underwriting has been done by banks over the last three to four years in certain cases quite aggressively and some of that underwriting is probably yet to see the right kind of seasoning yet. In times to come, clearly we will see some pressure and the litmus test of that portfolio.



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