Indian market will see recovery through private banks: Deepak Shenoy

How are you reading into the pharma rally that we are witnessing in trade today? Of course there is the news of the government easing the export of 24 pharma ingredients; most of these stocks are very upbeat in today’s trading session. Are you encouraged by this move?
In general, pharma is probably one of the few things that are still operational from a drug perspective all over the world. So yes, of course, it is a good thing but to a large extent, it is difficult to get goods out; the supply chain is a little broken down but these stocks have also been beaten up for like months and years now. So hopefully, we will see a little bit of ease up in foreign regulators clamping down on silly unnecessary FDA issues; so hopefully that attitude will change and this might mean something longer term.

But right now, the rally is all about liquidity. We are seeing money come into everything. We are seeing stocks up 20% for no reason at all. So in that context, I do not know whether to attribute this move to a general change in fundamentals or whether it is just the fact that we have gotten so badly down that just getting things back to normal will take all stocks up by a tremendous amount. So I cannot comment on today’s move but hopefully the fundamentals are improving.

What is your take on banks because we are seeing quite a bit of encouraging commentary from a lot of these private sector banks. There has been healthy deposit growth in the quarter gone by and you are seeing a lot of these private sector banks regaining some lost ground. Do you believe that the picture in Q4 could look fairly encouraging for most of these banks or you are not buying into this commentary?
We have been buying the last few weeks. In fact, we intensified buying in private banks in the last two months and last month or so. I believe that the fact that the world is coming to an end is probably a little bit too much. India will recover whether from the economic or the medical crisis that seems to be upon us and we will do it very fast. India and the whole world is working towards the problem and economically, there will be stimulus. All of this will affect our banking sector positively; it will initially be negative but eventually it will be positive because the way a country like ours recovers is through its banks itself. So I do not see necessarily there being a huge amount of challenge.

There may be some temporary issues in some banks but I feel overall, the banking system is safe. I have been saying that about YES Bank also; deposits were safe. So if the banking system does not collapse, the private banking sector will come back in a big way in the next few years. Remember, these banks were highly valued; so they are just coming back to normal valuation metrics. So that makes them a lot easier to buy now versus say two months ago.

What kind of an outlook do you have when it comes to these real estate stocks that have been quite badly beaten out of shape?
So my view is, there is and there always has been demand for low cost housing. So anything that is Rs 20 lakh, Rs 25 lakhs forever has seen demand. It will continue to see demand. There is a huge amount of demand for these kinds of houses; in Bombay just multiply everything by 2 because people there seem to be richer but everywhere else, the 20-25 lakh price point is actually quite attractive.

Deflation in commodity price which may happen will actually encourage the building of such houses. The problem is, all our real estate developers have gone and built expensive housing, which is beyond Rs 1 crore, Rs 75 lakhs, and Rs 1.5 crore and that is where the maximum inventory is. That inventory for the next five years is going to have trouble selling.

We are going to have a lot more builders construct houses in the lower end; so there will be a dichotomy that lower-end builders will make money and the lower-end housing loan lenders will benefit. The guys who lend to the rich people or richer housing are going to hurt a lot for a long time. So I am not very positive on expensive real estate although I have made my mistakes in that sector as well.

How are you viewing the prospects for the telecom sector because recent brokerages seem to suggest that Bharti is among the top picks and while they are fairly bullish in terms of the company gaining market share vis-à-vis Vodafone Idea, they have cut the revenue as well as the EBITDA quite significantly. So where do you stand when it comes to telecom? Is it a basket that you would approach selectively? Is it something that you would avoid completely?
We are quite long in both the big players here; Reliance and Bharti Airtel. I think the reason is very simple. They are a gateway to pretty much everything happening on the tech side of things in terms of internet access, in terms of work from home and they are the biggest players in the industry. Both of them have some layer of content integration into their networks.

They also have reach; so if you consider the fact that Bharti is now available at what prices of 2008, 2007 and the debt cost that it has are likely to come down because of lowering of interest rates, there is also likely to be more revenue because of Idea not performing quite as well and because all those customers will migrate to either Airtel or to Jio. I think in the longer term this has a tremendous amount of scope.

They need to reduce their data rate and over time that will come down. But if you look at it, they have increased their prices recently and not seen too much damage in terms of subscriber counts. You can also see the quality of their networks even though people are working from home and there must be a lot more pressure on the networks; it does not seem to have given way completely in any meaningful way across the country.

We have a lot of scope here and hopefully whenever 5G comes, auctions will be less expensive for them in comparison to what other 4G auctions have been. So I am positive that this is a sector that will do well.

What about Bajaj Finance and Bajaj Finserv in particular. Bajaj Finance was once heralded as darlings of the stock market and now of course, it is a grim and cautious outlook that is unwarranted at a time like this. They have clocked in the slowest AUM growth in the last 12 quarters and they have spoken about protecting the balance sheet, which is the top priority as demand has been hit quite severely. What is the sense that you are getting on both of these names? Do you think that right now would be a good time to even nibble in further into these names?
Bajaj Finance is the main thing; Bajaj Finserv is just like the holding company of it. So the concall yesterday was quite informative. The company is aware that there are a lot of unknowns right now. We do not know how long the lockdown is going to last. The optimistic projection is that if the lockdown lasts just till April 14, then perhaps by October, they will get back to normalcy. Now if you can forgive two quarters and in the best case three or maybe a little more than that in the worst case, then the company should come out ahead in the longer term.

It is valued at a much better rate now; not that it is cheap, it is still expensive. But I believe in the longer term if growth visibility continues and when India comes out of this, they are still going to need credit. If it appears at least that the debt markets continue to price Bajaj Finance debt at a very low price; their short-term debt is trading less than 6%; so there is no credit issue that the debt markets are seeing and debt markets are usually better informed than equity markets in general. So I feel there is no problem if you can wait for a year or two for the stock to recover. If you cannot, then of course, this is not the best time to speculate on the short term for the stock.

If you are patient, this is a good time to buy that stock but you should spread your investment across the financial sector; the banks will probably recover earlier, Bajaj Finance will probably recover next and the smaller NBFCs will probably recover last. So I still like it and as a disclosure, we are holding it in the PMS. But I do not think it is for the faint hearted; so I would not do it as a speculation thing. I really like the company and the way they communicate and their operations from a long term perspective.