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stock ideas: Index funds best way to play full weightage of Reliance: Sandip Sabharwal


A resurgence of huge direct buying in the Indian market combined with the F&O trading which has picked up, have been driving up stocks in the near term, says founder, asksandipsabharwal.com

What are your takeaways from HDFC Bank numbers?
A lot of brokerages notes are sounding excessively bullish but if you look at it, HDFC Bank numbers give a mixed picture. The advances growth was held up but that was largely due to their sudden focus on wholesale loans which have now gone up to 53 per cent versus 47 per cent. One of the reasons why HDFC Bank was valued much higher was because it was considered a retail bank. Now that wholesale loans have become greater than retail, then how do you value it? That is one factor that needs to be considered.

Other income fell substantially as loan originations were low and that could see a pickup going forward. Still 9 per cent of loans are under moratorium and to that extent, how will those play out going forward is something we need to see. HDFC Bank has a huge presence in the unsecured loan book vis-à-vis its credit cards, HDFC Credit cards and there, the industry news is that a lot of customers have been paying the minimum amount.

After a few months whether that creates a higher NPA or not is something that needs to be seen. It was a decent number in the context of where we are right now and where the economies are, but it is not an out and out positive, I would think that the recent outperformance of HDFC Bank should more or less have taken into account whatever has happened and for the stock to show any substantial upside from here, we need more positive triggers.

What the market would read more into is not the earnings of the quarter gone by, but the indication coming in from Aditya Puri that the next successor is going to be someone from within the bank, an internal candidate who has already worked for the last 25 years.
That is something which already people knew was more or less because we have seen in the past that external candidates can be a disruption. I do not really see that can be taken as a new positive but it is good for continuity.

Reliance or Infosys have done very well both in terms of outperforming the Nifty and also outperforming the market. But most of the mutual funds right now cannot increase their exposure to a single fund more than 10 per cent. Reliance weightage is around 14 per cent. It must be trying times for mutual funds.
The only way you can participate with the full weightage of Reliance is obviously via the index funds. In the index fund, it is as per the weightage which is there in the index. I think it is reasonably owned now and if you look at the data of the last 10-15 days, you will see that both domestic and foreign institutional investors have been very limited in the market. On a net basis there has been hardly any flow.

A resurgence of huge direct buying in the Indian market combined with the F&O trading which has picked up, have been driving up stocks in the near term.

Specifically on the weightage of Reliance, most funds would not like to go much above 8 per cent-9 per cent in a particular stock in an actively managed portfolio. If Reliance keeps on outperforming, than the possibility of most funds underperforming is greater.

HDFC Bank has started lending to the infra sector. Is this an indirect indication that if HDFC Bank feels that the risk is getting diluted there and now more and more banks are likely to start funding the infrastructure sector and a fresh cycle could start?
It is more to do with the way they have been and the way they are now, such a big part of the overall banking sector, they just cannot keep on growing if they are lending to retail. So, they are taking a considered risk in lending wholesale, to corporates betting that their risk management practices can help them if cyclicality comes in and they will be able to handle any NPA spike which happens. If that assumption plays out well, then it could be good for HDFC Bank, but it has not played out till now for any of the banks in the Indian context.

The risk on the balance sheet of HDFC Bank is obviously increasing now because in small ticket retail loans, the NPAs are managed in a manner where even if you go bust or do not repay, a vast majority actually repays and you can manage your growth at 15-20 per cent. When you start going wholesale, when you start lending to relatively more cyclical sectors, then obviously the risk increases. That risk might not be recognised today because people just look at numbers but it is building in the balance sheet. We have to see how that plays out over the next one or two years but it should impact the premium at which HDFC Bank trades over the rest of the banking stocks.

Voda-IDEA has already paid about Rs 1000 crore over the weekend in AGR dues. They had already paid about Rs 6,854 odd crore in the last three tranches, taking the total amount to Rs 7854 crore. Their intent is clear. They will be paying the dues and they are building their coffers to do so.
They want to build positivity prior to the hearing so that they get some relief from the Supreme Court. It is essential for them because there is no way that they can pay up front whatever the government has demanded from them. What they have paid is around 13-14 per cent of what has been asked from them, which is something which they do not agree on. They believe that the dues they need to pay are much lower. It is a tussle which will happen separately but we need to see whether the Supreme Court gives relief. If it gives relief, that will be a positive sentiment driver for both Vodafone Idea as well as Bharti Airtel.

If one works with an assumption that before this year-end, we will see a conclusive movement in BCPL’s divestment, could that re-rate other PSUs? Let us keep banks away but other PSUs where a stake sale is on the cards?
I agree that one successful strategic disinvestment of a large company should rerate many of the other PSUs where there is some possibility of a disinvestment. For companies like Bharat Electronics or some other core companies, there would not be any disinvestment but if BPCL disinvestment goes through and that too at a decent valuation, that also becomes important in terms of valuations because oil and gas assets globally are under deep stress at this stage. The only thing which could put a spanner in the works for BPCL disinvestment is the way the price has moved up because for oil and gas assets, people want to buy only at a particular price. This is not a business which is just starting or a business of the future. If this disinvestment goes through then it should rerate some of the other larger PSUs.

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