What is your outsized bet for 2021 – one large cap name and one midcap or a small cap name?
The big theme for 2021 is transformation, companies which will transform from a lower ROE to higher ROE, improving earnings fundamentals. So from a midcap stock, it would be Federal Bank. Federal Bank is a company which is still trading at under book value. The loan provisioning is improving, their tier I capital is good as well as the loan growth which will come back as the economy opens up. So one is Federal Bank.
Second is ICICI Bank. It has all things going for it. It is a company which can also move fast in various segments of the business and given it has a balance of both corporate and retail business. So, these are two banking names — one larger and one midcap.
On SBI Card underperformance
It is primarily two or three things. Timing was one issue after the company listed. All kinds of problems including the Covid lockdown hampered their new sales growth. Existing users used their credit cards and moratorium was also a factor and it continues to be a factor. Third, their bread and butter business growth was largely the PSU type credit card base of customers and they needed to expand out of that. It was not possible because marketing was limited during this whole phase.
So it was a confluence of factors. But all the underlying good things remain in terms of the overall economics. Credit cards as a business allows companies to price customers according to their risk profile. That way the net interest margins that one can make in this business is very good. If you look at the international experience, the subprime customers are charged higher APRs and from that perspective, SBI has a stable card base and valuations are okay at this point. The stock has not done well recently but as the economy opens up, it will allow them to do the other things which they were slated to do including marketing their product well.
