On the impact of second Covid wave on banks and NBFCs
The bankers are not that pessimistic this time around because everybody anticipates the lockdowns to be quite short lived, unlike the multi-month lockdown we saw from April to September last year. So, even where lockdowns exist, industrial activity is pretty much intact. What has shut down is more of the entertainment and retail centres. As underlying industrial activity will be intact, the bankers remain pretty optimistic that they will be able to ride out this second wave. Only time will tell but there is no denying one very important fact that almost every bank has made huge provisions for Covid and these are sitting on the balance sheets of the banks. If an unusual spike were to take place, they can easily draw on these reserves and flatten off their credit curve.
Clearly the story for the next several quarters for banks is going to be lower and lower credit cost. Look at PSU banks results to realise that the credit cost for banks is coming down even more significantly. Credit growth is going to be great, keeping in mind the 11-12% type of expected GDP growth rate and credit growth being a multiplier of GDP growth rate.
On one hand, we are going to have a very huge and decent net interest income and on the other side, the credit costs are going to come off. These are great operating leverage businesses because they have fixed costs. The next two-three years or so are going to be the best period for the banks. It is going to be an absolute blue sky once we are over and done with this particular pandemic and lockdown.
Intelligent investors are seeing that and are tanking up on banking stocks. In my view, when the industries going to see such a great upcycle, probably more money will be made in the tier two, tier three banks like IDFC or RBL or
and may be some of the weaker PSU banks. These sort of banks would turn out to be multibaggers over the next three-four years. Meanwhile, HDFC, Kotak, ICICI and Axis will remain steady performers given the 15-17% type of a compound returns over the next years or so.
We have been waiting long for real delta to come in RBL, Federal Bank or smaller banks
Dipan Mehta: Let us just keep on waiting and seeing. Whatever numbers have come through at least from IDFC First for the quarter and some of the other banks indications are very positive. Maybe we are at about the end of inflection for a lot of these banks.
Have you taken a leap of faith in the so-called new age companies?
First of all, a disclosure. We have investments in most of these companies and we are very bullish on the digital space. In fact, the last two, three years we have been trying to steadily search out digital businesses and buy into them. One can add Affle to that list of Zomato, Nazara etc. Some of the other companies like Tanla and Route Mobile also benefit from increased digitisation and use of digital products.
Zomato is going to be really a test check for this market and its appetite for digital because for the first time you will have a digital business which is making massive losses being listed in an Indian exchange and how the Indian investors will react to it would be quite interesting. My sense is that Zomato is a must-apply IPO and no doubt I think we are awaiting more and more information but these are digital businesses. They are loss-making businesses that you keep in your portfolio for three to five years or so and you realise that they have given fabulous returns over that period of time. While the old economy companies will have their ups and downs, companies which are in the digital space, which are in the growth areas, have a secular growth momentum. Let us not get a bit disappointed with the loss because these are technically not losses, they are investments into the business. Try and build the brand, the distribution, the customer loyalty. As and when scale is reached you will find that these companies can churn out massive profits.
It is a winner takes all business so there is a high degree of monopolistic attribute as well. So we are very positive on digital businesses and investors should not try and value them on traditional parameters, at the same time at every correction they need to make sure that gradually their percentage of allocation to digital business is growing. Depending on how Zomato IPO shapes up, we will find many more Indian unicorns going for listing on BSE and NSE which is a very positive trend. It will add a whole new dimension and diversity and choice for investors to investing for the long term..
