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Choksey also says: “One would tend to buy the argument for buying into the ICICI Bank given the visibility of a cumulative growth rate of around 20% for at least the next three years or so.”
This morning a brokerage note has come through from Jefferies which has downgraded the stock, saying that there are a lot of moving parts to this company and perhaps the risk reward is a bit unfavourable given the leverage situation. Do you track Biocon?
Deven Choksey: No we do not keep active tracking on Biocon. But in general I believe that the observation is correct. That is another reason for which we are not tracking this company because there are multiple areas where probably, we do not have too much clarity in the business from this company and that is the reason for which we have stayed away from it.
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The potential of the business has always remained high as far as the Biocon therapeutical segments are concerned. But somehow or other, we have not seen the kind of traction which one would otherwise see from the business so far. That is the reason for which we have stayed away from covering this particular stuff in the portfolios.
The HDFC Bank management has been articulating their preference for earnings growth over loan growth or market share. Anything that stood out for you?
Deven Choksey: I believe that that is the right thing to do given the size of the bank. They need to be extra careful about expanding their book in a hurry and that is what this management has confirmed that they would not be expanding the book in a hurry. They would be managing their liability side in a systematic manner and probably focus more on having a low-cost deposit and on the other side the loan growth, which is more on the secured side than on the unsecured side. That is what we gather from the underlying tone of the commentary that is coming out.
We should have got more clarity about the kind of fintech use in coming period that clarity probably is not forthcoming, though there is assurance about creating a significantly large amount of digital interfaces for acquiring the customer as well as for disbursing the loan which is a cost-effective medium, that is what has been promised. But I do not see too many things coming up on the fintech side. So that is one area which one will have to look around for.
Talking about the banking sector, ICICI Bank has been outperforming. Will that continue? In Kotak Mahindra Bank and Federal Bank, management rejigs have happened. While it is positive for Kotak Mahindra Bank because clarity has emerged, can Federal Bank react negatively because KVS Manian was a frontrunner for leading that bank too?
Deven Choksey: I am not too sure about the Federal Bank aspect and the KVS Manian moving into that particular bank. Because all said and done, even if there is some high-level banker moving into this particular bank, ultimately for growth in the business, one requires a strong balance sheet. I believe it makes sense to stay with the likes of Kotak where the promises are far bigger than anything else as far as the balance sheet strength is concerned. From that perspective, I would still prefer to see the Kotak Bank as a preference from the investor’s point of view. This bank has been cautious like HDFC in expanding the loan book. They have been measuring their growth as far as the activity goes on the expansion side, be it on the corporate lending side, be it on the personal lending side. They have been measuring their growth so that is a good thing to do. As I put across the point, there is a similar situation out here. Whether the visibility on the fintech side for expanding the distribution bridge is coming forth, I do not see it immediately. So from that perspective, that is a list if one wants to call it as. But otherwise, from the business side, I buy the point that they are more prudent in lending and probably they are systematically expanding the book.
ICICI similarly, has not been showing aggression beyond a point. On the contrary, they have been managing the balance part of the business by acquiring the deposits at a cheaper cost. At the same time, expanding the book on the other side in a balanced portfolio, be it corporate, SME, MSME and retail book, all of them are being expanded systematically in a balanced portfolio. So one would tend to buy the argument for buying into the ICICI Bank given the visibility of a cumulative growth rate of around 20% for at least the next three years or so.
Within the chemical space, there was a rekindling of interest over the last few weeks. Are there any names that stand out to you within speciality chemicals or other arenas?
Deven Choksey: In the last two-three quarters, the challenge has been on the input cost side. Most of the companies carried the balance sheet inventory of a higher cost. Even though systematically one has seen the sliding down of the raw material cost for them, the benefit is now being seen in most of the specialty chemical companies – be it UPL, be it Deepak. They are all basically getting into that mode where probably the stability in the price along with the stability in the input price is now giving them the advantage of both the demand of tech as well as margin protection.
In my viewpoint, the commodity nature of business probably would demand a very careful look as far as I think the forward path is concerned. Some of the companies remain distinctly clear and positive in the business model and that could include the likes of UPL particularly, where I think they have seen the worst of its business. Probably, things are likely to be relatively better if not in the current year but maybe starting the next financial year.
So that is one area where we will probably look. Otherwise, there are other companies which are in a small pocket in niche areas which continue to operate like Anupam Rasayan, Ami Organics, Laxmi Organics. These are some of the companies in different pockets in which they are operating. They remain relatively stronger plays. Even PI Industries would remain a relatively stronger play going forward. One will have to be a little more selective in picking up these businesses in the portfolio.
In Whirlpool, a large trade is expected to happen. The stock always used to trade at very expensive valuations despite not getting supported by the fundamentals in earnings performance because the float was very low right, 75% was held by an MNC. Only 25% was in the market. But now that is expected to reverse and 24% will come into the markets. Will this lead to the real price discovery of Whirlpool, and would that mean a significant derating?
Deven Choksey: According to me, the business has to catch up for this company. On one hand, we have seen the domestic players playing a significantly large role in taking over the market shares. Havells, Voltas and others have been taking over the market share in the white goods.
I believe that this is one area where probably I think this company has missed out. I am not completely sure whether we have got a case here to expand the size of the market. Though the market remains extremely potential because a higher amount of risk is the spending in the hands of individuals for the white goods they are manufacturing. Some strategies probably will have to get corrected and that is where one would see the focus on management. I do not think that immediately infusing the liquidity by way of selling the stock and allowing the market to discover the price would make too much sense. In the short term, the market may remain slightly euphoric. But over a period of time, ultimately fundamentals would matter.
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