Girish Pai’s top 4 large, mid and smallcap picks for next 12 months

Girish Pai, Head of Research, Nirmal Bang is betting on ICICI Bank among largecaps, gold finance players Muthoot and Manappuram among midcaps and Inox Leisure among the smallcap stocks in next 12 months. Excerpts from an interview with ETNOW.

Excitement has returned to telecom stocks ever since markets realised that the tariffs have bottomed out. Is this excitement short lived or is it here to stay?
One needs to remember whether we are going to have a three-player market or a two-player market going forward. If this is going to be a three-player market, the value accretion for a player like Bharti Telecom may not be that dramatic from here on. But having said that, we need to understand that the payments due to the government have been only pushed back by a couple of years. Vodafone Idea is not exactly in a great place from a balance sheet standpoint. By hiking tariffs, Vodafone Idea has progressed from a bankruptcy kind of situation to a place where it is going to survive for a few more years.

But I would probably take a bet on Bharti right now. I would say that this is probably the kind of company to look at if you take a 3-5-year perspective. There is going to be lots of ups and downs. While we have only seen the euphoria connected with the tariff hike right now. One also needs to see how things are going to pan out over a period of time in terms of how the market shares are going to shift.

What would be your top buys in the next 12 to 18 months?
I would bet on ICICI Bank. In fact, it was my top trade even If you had asked me this question in December 2018, I would have said ICICI Bank, it still is. There is a long way to go for the stock. I would think that the market is not taking enough cognisance of the fact that this company has decided to get out of project finance permanently. That could lead to multiple expansion of valuation for the bank.

Also, valuation accretion might come through the subsidiaries of the bank. The insurance space has done fairly well both from the performance as well as stock perspective. There could be a potential situation of a listing of ICICI Pru AMC for sometime in the next 12 to 18 months. That could lead to value unlocking. I would think this is a bank which has kept its asset quality under control in the last few quarters. We have not seen any kind of negative surprises being thrown up and the move away from project finance is a big one. So ICICI Bank is one largecap stock I would bet on in the next 12 months.

In the midcap space as defined by AMFI, I would probably take a bet on the gold finance players Muthoot and Manappuram. These are companies which are delivering between 12% and 18% asset AUM CAGR. The ROA is very strong between 5% and 6% ROA. Stocks are trading close to 2, 2.1 times FY21 price to adjusted book. I would think there is a lot of upside there.

In the smallcap space, we would bet on Inox Leisure. We think that within the consumer discretionary space, this is a stock which has got fairly low EV/EBITDA multiples -- in the region of 7-8% on FY21 basis. This is a stock which can deliver good returns because it is an oligopoly in the film exhibition space which is in its infancy right now. India has got just about 3,000 odd multiplex screens. China has close to 55,000-60,000 multiplex screens. So, we have got a long way to go from that standpoint. Over the last 24 months, content is being delivered on a consistent basis.

If that continues, we are going to see very good numbers from Inox Leisure. These are the three stocks in the largecap, midcap and smallcap baskets I would bet on in the next 12 months.

Now that the promoter pledge issues are getting sorted, would you buy something like Zee or any other company where promoter pledge is a challenge?
Promoter pledge being a challenge would be an issue if you have a situation where the entity to whom you have pledged, start selling in the market. You could have a technical situation where the stock could be under pressure, but if the business is doing well, which I think is a case in Zee Entertainment, I would probably think that such sell downs from technical reasons, should be opportunities to buy the stock.

Now the question is who is going to drive the business? We have to see whether operational management is going to be good enough to drive the business going forward. From a 3-5-year view, Zee looks interesting.

The $1.2-billion fund raising almost turned out to be a buy on rumour sell on news kind of story for YES Bank. More importantly, the market seems a little circumspect about this new investor. What is your view?
One would be circumspect about anybody with the kind of background that one is discussing about this new investor. I would definitely be circumspect about that. I am not sure whether RBI is going to allow that particular investor to enter the Indian banking system. One should remember that even if that money does come through, there is a substantial amount of write off or provisioning that the company would have to do even going forward with the kind of NPAs that it has on its books. So, there are going to be multiple rounds of fund raising to reach a level which would comfort institutional investors.

So, I would not be in a hurry to get into Yes Bank at this point in time. I would wait and watch whether they can execute this fund raise and what happens after that in terms of what more money can be brought in by the current management into the company. So those who have bought it at sub 30 levels, have had a fairly decent ride to where it is right now. But from here on, it could be a bit of a challenge for the company.


Let us work with two assumptions here; a)YES Bank gets capital. If they get capital, markets would say it does not matter who the investor as $1.2 billion comes into the balance sheet.What happens then? b)If they do not get capital, what happens in both the scenarios for the shareholder?
If they do not get capital, it is going to go back down to that Rs 30 mark. It is quite possible, it is going to go back there. Survival comes into the picture again and you will probably see single digit kind of prices on that particular company. If it does get capital, then one needs to look at how things are going to pan out from an asset quality situation -- the watch list. YES Bank has got a fairly large watch list, running close to Rs 30,000 crore of loans. What kind of provisioning is going to be done there? How does that get bridged? Also, how much of extra capital is going to come on board even after this first raise?

Those are some things to watch out for. If money does come in the current prices will sustain, maybe it may go up a tad, after than one needs to see what more provisioning they do and how do they actually handle further capital raises from here on.

The three-day meet of the Monetary Policy Committee (MPC), has begun today. Especially in light of the GDP coming in at a six-year low, do you think the central bank is likely to cut interest rates further this time?
Yes, the consensus view is interest rate is going to be cut by at least 25 bps. Whether it is going to do much more than that is something one needs to watch. Had the inflation, especially food inflation not been so high, I would have probably bet on a situation where we could have more than 25 bps, maybe even a 40 bps or even a 50 bps cut because the growth situation warrants that.

We are probably going to land with a real GDP growth rate of 4.5-5% for the full year. Current official estimate is close to 5% but I think even Q3 numbers are not going to be too great from a GDP standpoint. So the 4.5 to 5% rate is significantly lower. In the last 10 years, we have probably not seen a number that would lead to RBI cutting rates beyond 25 bps, but I would wait to hear what the RBI thinks of inflation. Whether this is just a temporary phase based on food inflation or if it is going to focus more on the core inflation, which has come to almost 3.3%. . If they are going to focus on that, we could see a 35-40 bps cut come through.

Both Lakshmi Vilas Bank and City Union Bank have origins in south India, but while City Union Bank has gone up, Lakshmi Vilas has come down. In the last 52 weeks, the stock has taken a knock of 78%. Karnataka Bank has not given great returns even though the proposition is very attractive in terms of what they own and what they hold. Would you still buy City Union?
If you have 12-month plus perspective, this is a good bank to buy into. It will keep compounding at mid teens kind of rate. If that is the kind of rate you are satisfied with, maybe you will get a little bit of price to adjusted book multiple expansion also.

If you are happy with 15-20% CAGR in terms of returns, then you need to be patient. But retail investors are never patient. They want to make that quick buck in terms of trade. You should trade in YES Bank which goes from Rs 30 to Rs 60, rather than City Union Bank.

A Karnataka Bank, Federal Bank or a Karur Vysaya Bank have not created wealth. Why is City Union so different?
We track this stock very actively. We have liked it for a long time. This is one of those unique mid-sized financial plays, which has not seen any kind of material NPA situation. For many decades now, City Union Bank has delivered more than 1.5% ROA through all credit cycles, which tells us something about the credit origination capabilities. It has got a very granular asset book, a very granular liability book, its net interest margins are in the 4% region and it has delivered an ROA of 1.5% plus. These days, it is delivering 1.7-1.8% ROA.

Most of the stocks that are in the headlines in the financial services side, have to do with some problem or the other. City Union Bank has been delivering pretty good numbers, its cost structure is very good, its cost income ratios are close to 40-41% because it has been able to control its employee cost.

You would be very surprised to know that the average age of an employee in City Union Bank is just 27 years. You will not come across that in any place. It is a Tamil Nadu focussed bank. It has also benefited from a couple of things; a)some of its regional peers like LVB, KVB and Tamil Nadu Mercantile Bank, have gone through serious asset quality issues. City Union has gained market share at those banks’cost.

Some of the PSU banks focussed on Tamil Nadu like Indian Overseas Bank has been in the PCA framework and has not been able to lend out too much. It has gained market share from both its private peers as well as some of the PSU peers. It is expanding beyond Tamil Nadu and going into other southern states. They are even going outside the southern region. So, it has done a fairly good job. It has been delivering 15% CAGR in assets, very steady net interest margins, good ROA.

It is not the cheapest bank, it is probably going at 2.5 times FY21, if I am not mistaken, price to adjusted book. It is a decent price to adjusted book multiple and it has also been a compounding story. It is a very rare financial services stock which has delivered that because every now and then you have something or the other blowing up.