On Axis Bank numbers
In terms of profitability, the numbers were lower than what we anticipated but in banks, the key number to look at is pro forma, GNPA numbers and restructuring. Those numbers have largely been in line and restructuring has been lower than what we had anticipated. What we have seen for most of the tier I banks is that the pro forma, GNPA numbers have been in line with expectation. We have seen a good amount of rally in most of the tier I banking stocks, and that is why some cool-off is happening now. But structurally, all tier I banks look quite attractive to us.
On two-wheeler majors
We are slightly circumspect on auto as a sector largely because of the disruption which we anticipate could happen in the next few years. But from a shorter term perspective, we are more bullish on Bajaj Auto because rural recovery has largely played out and we would expect the urban recovery to pan out. From that perspective, Bajaj Auto looks better to us compared to Hero. But overall, we have not been chasing auto as a pack heavily. You will not find these stocks in our portfolio. We continue to like them only from a shorter term or a medium term perspective but structurally we are still not very sure on a lot of names.
Ancillaries are looking a lot brighter as the threat of disruption is relatively less and especially in tyres as a segment.
On whether to buy auto & ancillary stocks on dips
Among OEMs, from a shorter or medium term perspective, we are slightly positive on urban recovery. So, Bajaj Auto looks better to us in the two-wheeler space. Commercial vehicles (CVs) look a lot more attractive within the overall auto segment as a scrappage policy is expected to benefit the CV industry the most. On top of it, the CV sector follows a two-year cycle and our sense is that the cycle has bottomed out and as and when the schools open, the buses will also pick up. Ashok Leyland from that perspective looks attractive but better value lies in the auto ancillary space, especially the tyre space.
The tyre segment is showing a good set of numbers and margin expansion as well as sustainability. JK Tyre has been one of the biggest gainers of late and we are quite positive on the stock given the fact that it is still looking attractive at about 6 PE kind of multiples. They have reduced their debt by Rs 1,000 crore odd. Apollo Tyres also is walking the right path in terms of improving the ROCEs and not really chasing capex.
In the ancillary space, the tyre segment looks far more attractive. As for battery players like Exide and Amara Raja, till we get comfort in terms of how they manage the transition or if they are taking baby steps towards managing the transition from IC to EV, we would not be of chasing some of these names.
On sustainability of cement and steel prices
Last year steel prices rallied sharply due to a combination of factors. China which contributes nearly 55-56% of the overall production, did not get impacted by Covid this year and grew about 13-14 odd percent. Overall, that led to industry growth of 6-7 odd percent. On top of it, the inventory base was lower and that led to a rally in prices along with raw material prices. My sense is all these conditions would not prevail this year and I would expect steel prices to moderate a bit. That is why I am not that much worried about the entire value chain which uses these products as inputs.
After the rally that we have seen, I am slightly cautious on steel because those conditions are unlikely to prevail this year and accordingly I am not that much worried about their value chain. A decent amount of price hikes have been taken by respective players but I do not see that impacting the end users.
Should one stay with HDFC Bank?
The typical mindset is to look for banks which are cheaper and hoping that things will get better and they will get rerated. Ironically, the most expensive banks have done the best largely because people forget that these banks need to raise money at regular intervals for funding growth. If a bank is managing its risk well or containing the asset quality and is able to raise money at regular intervals, that is the ideal combination to look at. This is where HDFC Bank, Kotak Bank and all tier-1 banks have done a very phenomenal job even in this pandemic.
Most of the proforma GNPA numbers that have come out for most of them have not sprung negative surprises. It has been largely in line with expectation and PSU banks like SBI have now come to about one time book but most of them are still below book value. So, even if the government funds them or injects money, it is still going to dilute their ROEs which is a big challenge.
Structurally, tier-1 private banks are looking far better from a growth perspective. It will be interesting if some of these corporate houses enter the banking frame because we would get new players and they might be able to raise money more efficiently. Otherwise, a few private sector banks are looking a lot better and those stocks should be in the portfolio.
