What are you making of the entire IPO and newly listed space right now? Do you foresee any of the valuation froth coming off over there? After the listing debacle, is on its way to recover almost all of its lost ground?
We have seen a huge string of IPOs over the last month or so. When we look at IPOs and companies that are coming up for listing, clearly there are a set of companies which have been so far present mainly in the private markets and are coming into the public space now. These are companies and businesses which so far have not been present in the public markets and hence we are also learning how to evaluate some of these companies and new age businesses.
Also, when we are evaluating IPOs, clearly we are not painting them with the same brush. Each company has its own unique positioning and also the business model differs from company to company. There are a few key aspects that we are looking at when we are looking at these IPOs; first is the business model, the scalability of the model as well as the ability of the company to continue to grow its current business given the market conditions.
The second aspect that we are looking at is the competitive positioning of the company within the space in which it operates in and also the chances of higher competition coming through.
The third aspect of course is the valuation and the adjacencies and optionalities that the business models bring over a period of time.
On the valuation front it is a difficult call. These are new age companies and evaluating them is a whole new game for even analysts and fund managers such as me. We are learning along the way but clearly each IPO would need to be looked at on a stock specific basis and that is how we are approaching this entire trend.
We have seen banks underperform at large as opposed to what the rest of the market has done. What are the concerns within the banking space right now?
Banks and financials as a pack have underperformed the markets. There are two key things; one, banks are a barometer of the economy and what is happening on the ground. Post the second Covid wave, there was a fear that there would be a significant rise in delinquencies. The second fear of course has been that a lot of new age fintechs are coming into the market and as a result of which the addressable market is shrinking and there could be competition for that.
The way we look at the financial services space, specifically banks, is that a set of banks, especially the large private sector banks, have been gaining market share. Now while at the headline level, credit growth appears to be muted at about 6.5-7% these banks are clearly growing faster and we are seeing pockets of disbursement growth exceeding pre Covid levels. So growth is coming back in a big way and loan growth will be a key differentiator for the banking sector.
The second fear is on the asset quality credit costs again. We have seen that delinquency levels have started to moderate even in the retail pack which was the most impacted because of the Covid second wave. Data show bounce rates have gone back to pre Covid levels and in fact are lower. That means over the second half of the year, we would likely see credit costs normalising.
The third aspect per se is that banks are very well capitalised today and many of them carry excess provisioning on their balance sheets, which means that over the next year or so, we would expect that the banks to return to profitability in terms of their ROE expansion trajectory getting back on track.
In the banking space, we find that the valuations are fairly attractive, earnings growth trajectory is improving and so are return ratios. Hence we are fairly positive on the banking pack, specifically the larger private sector banks.
In terms of larger private sector banks there has been an underperformance but there are a lot of positives which you spoke about; the reach, the business model they have. How would you classify the financial sector?
Let us talk about it in specific segments. Within the private sector, we clearly believe that the larger banks which have invested in technology, raised capital over the last year or so and shored up their capital buffer and created provisioning buffer to mitigate unforeseen risks, are well placed.
Over the last decade, some of these large private sector banks, given their technology and reach are gaining market share, not just in loans but in deposits as well. They have built up a liability franchise which is extremely low cost and as a result of which, their ability to lend and to maintain margins and in fact improve margins has gone up, We are seeing this as a segment of opportunity.
Also in the case of some of the corporate private sector banks which had gone through a lot of pain in the last cycle because of chunky corporate lending, the balance sheet stress has completely reduced and as a result, we expect that credit costs on account of corporate stress also would be under control.
Within the public sector pack we are selective. We believe that some of the larger public sector banks are better placed. Overall, the pack is somewhat of a trading play but of course the larger banks which have been able to maintain market share and which are also beneficiaries of lower credit costs are better placed.
NBFCs have seen more volatility and maybe a little bit more stress than some of these large banks and therefore we are a little selective on the NBFC space. We are looking at companies which are the larger companies with stronger parentage and also those companies which are seeing growth come back in a big way. So we are selective in the NBFC pocket as such.
