You have got quite a few lenders in your portfolios — be it the country’s biggest mortgage financiers, some gold loan companies. There are vehicle financiers like M&M Finance, Piramal, NBFCs with wholesale books which got rerated. Where do you stand as far as the lenders are concerned?
In any lending business, there are two big levers; one is the cost of funds and other is the cost of lending or cost of credit. For the last one year, we have seen the cost of funds coming down very drastically and this was reflected in the NIMs at most of the lenders. But then the perceived cost of credit was very high all through the pandemic and now the market is realising that the perception or the hypothesis which they were working on for the NPA levels somehow is not holding correct. As a result, the market is now looking at lenders more positively and the benefit which they were getting because of low cost of liabilities are getting translated into higher multiples.
Some of them were trading as 0.5 times book, some of them at one-time book and they are now inching closer to their highs which we last saw in 2017-18. If this cost of credit continues to behave the way we have seen in last two quarters, the market will like to see them rerated even further, especially when the growth is coming back. We believe that the cost of liabilities may not fall from here but may remain low for some time.
Hence the liabilities which were taken two- three years back, will get refinanced at a lower rate. Overall, that is where the market comfort is coming and the financials are catching up to the underperformance which we saw during the first half of the pandemic. Those are broadly in line with the broader market.
What about the specialty chemical play SRF? Do you see a lot of steam in this sector in terms of earnings for the next three to five years?
Specialty Chemicals is a highly commoditised micro sector. This sector has emerged as a decent sized sector today. It still remains small but if you look at all these companies which remained, overall generally we had seen a couple of things happening in the sector; a) they all have moved up the value chain and are progressing in a value-added sort of way which means better products than the commoditised products.
Second, they have all been able to deleverage their balance sheets now. Many of them have hardly any debt or manageable debt and many of them are cash rich. Most of these new investments are coming from their internal accruals. Many of them are doing substantial capex and the existing capacities are running at decently high capacity utilisations at many places close to 100%. That gives a decent runway to growth. This is a small sector, China being the big brother here. China plus one policy will lead to a decent amount of business coming to them. Now decent in Chinese terms may be 10% of their revenue but for India, it could be substantial and give them a decent runway to growth.
Some of the companies have moved from smallcap to being large caps. That trend should continue and and in our portfolio, a decent alpha has been generated. We should continue to see this sector getting rerated going forward.
What is your view on the pharma space? Do you see highest earnings growth coming in the next three to five years?
Most of Indian pharma is recognised as generic pharma trying to sell in the US and that has been the trend in the last cycle and that is how the companies were being rewarded. Now that space has expanded right from the generic to contract research, contract manufacturing and some are specialised companies doing specific businesses. So, pharma includes many businesses and each are different from the other. This sector has underperformed for the last three months but the way the work is happening, contract research, contract manufacturing and the way the people are being able to scale up the businesses, there is a decent runway for growth in this sector.
Also, suddenly we are the largest player in the vaccine market. We were not perceived to be as good but that perception is changing and that will help the companies in getting new businesses. Maybe the regulatory lookout may also get changed a bit. With the overall spend towards the health sector increasing, these companies will have enough runway for growth. One has to be a bit selective as historically price pressures will continue.
