Is there going to be any respite for the markets any time soon or would you say that there is further pain in store for us?
The markets had rallied since March in the expectation of a V-shaped recovery driven by fiscal and monetary policy. Now what is happening globally is that monetary policy remains intact in terms of being supportive for growth. But once rates are already down to zero, incrementally it does not help so much. So the big driver for many of the economies was fiscal support and the incremental impact of fiscal support is now reducing. That could keep on playing out for the next few months. Huge euphoria got built up and both on the trading and investment side, the markets got overextended. The markets are in the process of adjusting to the fact that although the recovery is always V-shaped because when it falls so much, it has to go up similarly, there is also going to be a phase where things will stagnate. So the extreme optimism is now giving way to realism and that is what markets are adjusting to.
The markets would adjust lower in my view before they come into the value zone and that is something which we could see over the next two weeks. Given the drastic fall over the last 8-10 days, maybe there could be a few days of upside but then directionally, the market needs to adjust lower for it to come to a range where we can consider putting in any serious money.
Do you begin to buy the fall just yet or do you wait for some more dips to come in?
It could be a stock to stock approach, but if the overall market falls, then most of the stocks could fall. At this stage, I would not touch the very heavily overbought sectors like IT and pharma and to some extent autos also where a lot of money has flowed in and we could still see some lower adjustments where we could see the opportunity.
One is obviously Bharti. It is something which I like. At Rs 430, it has value that is something which we would like to nibble at. On the FMCG side, one of the biggest underperformers which I do not own as of now has been United Spirits but it has got a huge market presence and a huge opportunity going forward. The stocks, unlike most of the other FMCG stocks, are trading at 30% below what it was in January, February. That is something which is starting to look interesting at Rs 490-495. That is something which I will be looking at.
Markets right now have two fears if you are a Bharti shareholder, that instead of two, there would be three players and tariff hike may not be coming. So let us look at two scenarios – if a tariff hike is not going to come, then Vodafone-Idea will not survive and if a tariff hike comes, then it will be better for everybody. Bharti is very interestingly positioned.
The reason for the recent fall could be more about some short-term cash flow in the sense that some investors were exiting or at a time when there is relative liquidity in the market when the overall market is also falling. I agree with your logic that if there is no tariff hike, then Vodafone-Idea does not survive and then two companies survive and then you get a tariff hike. The other scenario is that there is a tariff hike, all three companies survive and all three do well. Both scenarios are in favour of Bharti. I would think that people look at price movements and when stocks are moving up in euphoria, they want to buy that stock and when stocks are falling, no one wants to touch them. So then, you have to buy them in the value zone. So at Rs 600 or near Rs 600, Bharti saw many buy recommendations. Now we see relative silence from the analysts but it could be a better time to buy.
Finally Bajaj Finance is outperforming and it is outperforming quite handsomely. While IndusInd Bank, RBL, ICICI Bank, SBI have fallen, Bajaj Finance and HDFC Bank have held on in this carnage?
Bajaj Finance held up very well but then it gave up 20% very fast over the last few days. Bajaj Finance has a great management but the problem is that it had one of the highest moratorium books outstanding among the larger institutions if we are comparing Bajaj Finance with banks and leave aside the other NBFCs like some of the microfinance ones which may be 30-40% moratorium as well.
Last time we heard from Bajaj Finance, they had around 17% of loans under moratorium which is huge. They are a pure retail lender and on the retail lending side, there is great pain today. Unlike in the past where it was more a corporate led pain, this time it is a retail pain. That retail pain will definitely impact Bajaj Finance. As a management, given that they are relatively conservative, they will cut back on growth and conserve capital and to that extent whatever most of the analysts are expecting in terms of deliverance of numbers, might not come through at least for the near term.
I would be slightly contrarian to many of the people who are always positive on Bajaj Finance. At Rs 1,800-1,900, it is a blind buy but at Rs 3,000, there are risks. At this price, near term downside risks are greater than upside potential so the stock needs to adjust lower.
The other one is ICICI Bank with the analysts coverage standing at 100% to the buy side return potential of 39% but still there is a stark underperformance in the stock price, do you think this continues to be an overhang on the entire larger financial system as well that of moratoriums and the following NPAs?
There are many financial stocks today where people are underestimating the impact of moratoriums and the decline in economic activity and the subsequent ability of investors to repay even if they want to. I am not saying that a lot of people will default just for the heck of it but the reality is that there is significant unemployment, there is significant impact on SME activity in the country and to that extent, there will be an NPA build up. Those fears are now coming to the fore.
The first indication of where the fear level versus reality lies will come out once the companies start reporting results in the next two, three weeks. I would think that there is still risk for financials, they could still trend down over the next few months. As you were saying, initially it is all a question of time horizon. So if someone has two, three years, if they buy many of the financials at this price and do not look at it for the near term and they just want to hold it for two three years, they will make decent money. But in the near term, I still see the financial sector as the weakest sector.
The counter argument is even if NPAs go higher, banks already have raised capital and are fully capitalised. Also a lot of NPAs were recognised between 2015 and 2019. If it is 5-10-15% higher than what we are anticipating, banks have capital to provide for it.
Yes, but then stocks do not perform on the ability of banks to provide for bad loans. They perform if bad loans are under control and earnings are growing. So that is the disconnect right now and like you said many of the private sector banks like ICICI, Axis, HDFC Ltd and some of the smaller ones like IndusInd have raised a decent amount of capital in the near term, but if you look at the financial system as a whole, it needed to raise maybe Rs 200,000 to 250,000 crore in equity.
As per my estimate, the current equity raising by all the banks combined right now is Rs 70,000-75,000 crore and that leaves some of the large PSU lenders where the market cap has come down so much and that puts the entire national system at risk because they will now need government support for capitalisation and I am not sure how much the government wants to actually put in.