market strategy: Is there more consolidation in store for HDFC Bank? Deepak Shenoy answers

“I think that way there is a slight set of headwinds. But I feel given the criteria that RBI seems to be talking about from MFIs and from NBFCs that are lending to retail whether cutting down on usurious loans being made through say digital channels or something like that, there is a potential that the larger banks may see more credit growth and effectively deposit growth because that is a function of credit growth really,” says Deepak Shenoy, Founder, Capital Mind.

Why do not we get in your take first up as to how you have looked at the earnings within the heavyweight banking names, Kotak Bank as well as HDFC Bank and do you believe that there is still more consolidation in store?
Deepak Shenoy: To be fair, I think the results have been not so great and we have invested in some of these banks. But I think we expected what would come with HDFC Bank. It is only a 6% profit growth and a bunch of one-timers, provision write-backs, tax increases. Net of it still I do not feel there is a significant double-digit profit growth really.

So, I think they will take another quarter or a couple of quarters for this to consolidate. Plus, they have the spectre, both Kotak and HDFC Bank have the spectre of this new draft circular from the RBI which says that their sub-entities which are NBFCs which are lending in the same space, they should find a way to consolidate or perhaps lend through one entity. If the rules eventually become a reality, that will be some sort of a negative for the NBFC parts of those holdings, especially when at least HDB will probably be going public by next year.

So, I think that way there is a slight set of headwinds. But I feel given the criteria that RBI seems to be talking about from MFIs and from NBFCs that are lending to retail whether cutting down on usurious loans being made through say digital channels or something like that, there is a potential that the larger banks may see more credit growth and effectively deposit growth because that is a function of credit growth really.

And I think it may be interesting to still have a contraposition on the banks because the NBFCs will not be in favour.

Wanted your takeaway from the IT big boys. Now that all of them are out with the earnings, while they are a pretty hopeful that bfsi is going to be that firing engine going forward, the results have been a mixed bag.
Deepak Shenoy: They have been. I think the problem with results right now is that even this coming quarter is not going to be that great because you have a US election that is extremely polarised.

A lot of their revenues at least come from that place and therefore policies will probably change based on who becomes the US President and therefore, I think people will be loath to kind of give big contracts especially where outsourcing contracts in a format where you might have some kind of counter duties or something like that applicable.

They may have to change structures before you do a lot more contracting. So, there will be that fear that, who is going to come and what are they going to do. So, I do not think even this coming quarter that the results are going to be meaningfully good.

All of them are equally not so great. BFSI will probably do well because in a scenario where rates come down, in a scenario where their bond profits start to show on their books, they still have extremely high amount of unrealised losses on their bond portfolios.

But that loss quantum may come down if rates come down further. So, they will have some more room for perhaps expansion plus even regulatory exposures, they will have to do a lot more work on with companies like Infy, TCS and so on.

We have some positions here but I think it is too early to call a turnaround. I will wait for US elections. I will wait for the time when we have more clarity. Jan, Feb, March might be the first time we actually get some decent amount of clarity. Prices though have started to stabilise on some of the stocks. So, prices may give indication earlier than the fundamentals will.

What the long-term implications could be for something like a Manappuram Finance with the RBI restricting the subsidiary of the company from the sanctions and the disbursements. Is this going to play long-term havoc with the stock?
Deepak Shenoy: Well, I was actually surprised that the RBI came in so strongly. But then it must have been after a lot of negotiations and talks. In fact, the governor actually mentioned in the MPC speech that he was concerned that this level of lending in a way was affecting the way credit was growing in these areas.

They have not actually specified what has happened. They are going to have a call today at 5:30, hopefully, we will get some inputs there. But the idea over here has been that RBI has said, listen, you should have had a stated policy and you should have stuck to that policy. It is possible that some of the effective lending rates because of high processing fees, say 3% to 5% on a six-month loan translates to 10% on an annualised basis, which adds to the interest rate you are already paying on the loan which can be significantly high for a small borrower.

If that becomes the problem, I think the NBFCs will have to change their track, show RBI. It will take six to eight months just as JM has taken about six months to be able to convince RBI about their share-based lending.

For six months there is going to be trouble in these companies, but if they get their act together and they are able to show the RBI that they have set up processes to ensure that the rates are within their own defined limits, I think that will help. But for six months, expect nothing. Manappuram will probably see that income hit for the next six months. Starting from today, they cannot lend anymore until RBI comes back.

I believe that they have seen these kinds of things in the past and they know how to handle it. The other players probably do not so they will have to learn it for the first time. I do not see this as a long-term problem, but in the short term Manappuram is going to take a hit. We do not have a position here.

The earning season so far has attracted more downgrades. Hardly any upgrade barring one or two and this is for the second quarter now that earning estimates have been downgraded. What does that mean for the overall market because markets have moved independently of what the economic reality is or the earnings picture is?
Deepak Shenoy: In fact, I think markets have moved independently of everything. But earnings are under a little bit of stress. Last time we saw a problem with the earnings in retail. We have had not enough retailers give results, but there is some stress. We have seen this in Reliance Retail. We have seen this D-Mart to that extent I think there is some kind of consumption level stress. Diwali quarter will probably determine how bad it really is or if there was a push towards Diwali rather than in the earlier quarters.

But rural consumption should be doing well. I think there has been both an increase in prices, inflation in which vegetables in the last month or last month and a half or so, it has also been a fairly good harvest, so I do not think, and plus elections, so that trickle-down effect will probably come in towards the latter half of this year.

So, overall, we are seeing some kind of subdued results in most of the larger corporates. We should see some of the industrials come back to life because government orders were stalled because of elections in the earlier quarter, so we should see some kind of revival now. But I do not see huge earnings increase this time. If we were to get at a Nifty level 10% to 11% in this quarter, I think that would be fantastic.

Right now the visibility is not there. The top banks are at 5% or 6% bottom-line growth, even Reliance is at par or just a little bit below last time. So, I do not see this as a very big quarter for the largecaps. The midcaps and smallcaps may surprise us, so I think that is the thing to look out for. Right now, the downgrades in earnings are coming in only because of the larger cap results. Let us see how the small and midcaps come. Some of them have actually come out quite decently.

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