3 reasons why megacaps are driving market: Girish Pai

Falling crude price and improvement in macro front, return of FIIs among reasons driving investors to megacaps, Girish Pai, Head of Research, Nirmal Bang 65334700 65324239 65322871 Institutional Equities, tells ET Now.Edited excerpts: It has been all about mega caps, mega caps and mega caps. The pace in Reliance, the comeback in ICICI Bank, the flourish in Axis Bank. Why has the market template changed so much suddenly? What has changed for the better is the flow situation and the fact that the rate of deterioration of the domestic macro has kind of slowed. One of the key factors concerning market sentiment has been crude price. Crude has pulled back from about $80 to the barrel to about $72-73 to the barrel. It used to negatively impact sentiment vis-à-vis current account deficit, INR depreciation and stuff like that. So, the Indian rupee has also pulled back from levels of 69 to 68 plus something. We are probably looking at the negatives on the domestic macro front which have been impacting the markets for the last six to nine months. The rate of deterioration has slowed down, plus we have a situation now where after a fair bit of time, we are actually seeing FII flows coming back to the market. The domestic flows have slowed but we still have SIP flows to the tune of about a billion dollar or so per month. Coming to valuations, one of the things that is leading to the sharp movement on the upside of certain companies on the largecap or megacap side, is the rise of the corporate banks like ICICI Bank, Axis Bank and SBI. The market is taking cognisance of the view that the asset quality problems are largely behind us. The June quarter numbers indicate a quarter on quarter slowing down of accretion to the gross NPA number. This fact is giving heart to the market and specifically for ICICI Bank. People are beginning to realise that the book is turning more retail, more consumer oriented. If you look at the split in the book between corporate and retail, it is almost like 60-40 in favour of retail. I would say half of that probably has to do with housing finance which is not so good from a margin perspective. But, if you look at the book itself, it is pretty good and also the subsidiaries are delivering value to the company. All those are probably leading to the stocks moving up and these are stocks which have not done well in the last few quarters. Also, this is a market which is hunting for value right now. That is broadly the reason as to why some of these megacaps have been delivering upside to the market and driving it up.Is momentum coming back for some of the PSU names? Are you evaluating the opportunity there? We like PSU banks selectively but that is more a trade rather than a structural bet. On a structural basis, we still like the private sector financials which are focussed more on the retail side of the market, the consumers and not so much the corporate banks. Structurally we are positive on HDFC, IndusInd and on the corporate bank side in the private sector, we like Yes Bank, RBL. That has also got a fairly large corporate book as we speak though it has been turning more retail. Between ICICI Bank and Axis, we think the upside in ICICI Bank is much larger because it has suffered because of issues connected with the top management. The stock has kind of been suppressed for a while despite the market knowing that the worst on the asset quality side is behind us. We have had a very strong listing of HDFC AMC which shows that the underlying subsidiaries of ICICI Bank have got very large value in them. Some of these are leaders in the businesses that they are in. If you look at private insurance, life insurance, ICICI Prudential is one of the largest players there. ICICI Pru AMC is the largest player on the AMC market.People are beginning to realise that there is value there and one of the points that I talked about is that the company is turning more retail than what the market thinks, 60% of the loan book is actually retail. It is no longer a corporate. That will potentially lead to a situation where the multiples will expand and the cloud surrounding the top management will probably go away over a period of time. Committees are being set up to look at issues with the bank itself. As these reports come out, cloud over the bank will lift and we will probably see the stock price expanding from where it is right now. Between AU, Bandhan or Bajaj Finance which is the better one to buy, all or none or one? We do not track any of these. But we like something else in the small finance bank side which is Ujjivan. We think the valuation of Ujjivan are at a fraction of what AU Finance kind of stock is trading at currently. We think the delta from ROA standpoint could potentially come about and Ujjivan is going to be pretty substantial between FY18 and FY20 and that can lead to a situation where the price to adjusted multiples can expand a fair bit. It would lead to a very large upside in Ujjivan Small Finance Bank. If I am not mistaken, the AU Finance valuations are close to five or six times FY20 adjusted book. This is a multiple of what Ujjivan is currently trading at. So, between AU Finance and Ujjivan, the latter seems is an easier trade to play right now.

from The Economic Times https://ift.tt/2vzrOSp