For financials, it is not bad. I mean, you keep banks aside, financial inclusion themes like a brokerage or AMCs or for that matter even a stock like NSE, BSE, they have done rather well. So, this financial inclusion theme minus banks has done rather well.
Digant Haria: Absolutely, the lending space is the one where there is some bit of problem. I would not say some, decent bit of problem, but yes, the non-lending space is doing quite okay. And in the lending space also there are some pockets which are doing well. But in general, when the top eight banks do not do well, it is just that the sector has a softer undertone and now you have the entire long tail of the microfinance companies, the personal loan companies, a lot of them are starting to enter the pain cycle. So, the traditional financials as we know are under pain. But you are right that the AMCs, the brokerages, some part of the insurance pack, these things have done very well. Banks were supposed to make a comeback and just when it was looking good for them, the economy has started slowing down. NPAs have started coming up in bits and pieces. So, do you think this entire template of banks make a comeback and will lead the market rally now gets delayed indefinitely?
Digant Haria: Let us see the deposit problem. Everybody thought that once the US Fed starts cutting the interest rates, the liquidity around the globe will be easy and that will give some headroom to RBI also to cut the deposit rates, that was supposed to be the largest problem that we had, which is a tight deposit and declining growth and declining NIMs to some extent.
This year it is not going to happen. And which is why, yes, the sector is getting narrower and narrower. In the large banks, the only one doing well is HDFC and see, it is like a negative race. Why is HDFC doing well? Not that it gave any great set of numbers or any.
It is just that their asset quality performance was a little better than everyone else and that is why HDFC is doing well. So, people will flock, those who have to invest in banks have to flock to HDFC, no other choice.And even in microfinance and all you see a lot of pain building up. So, banks parties definitely probably in 25, that too we can debate whether it happens in 25 or not, but definitely not happening right now.
I want to talk about the insurance space right now and especially in the backdrop of the reports which are doing the rounds that the government is mulling an exemption for health insurance products with coverage of up to Rs 5 lakh. What does it mean for the insurance sector?
Digant Haria: See, it is a noble gesture that the government is doing. But let me give you some statistics that health insurance in India is actually a rich man’s or an affluent man’s product. It is just less than 5% penetration is what health insurance have and it is only the aware people who really go ahead and buy insurance. And I think a lot of them do end up buying 10 lakh, 15 lakh, 20 lakh cover because we all know what hospitalisation expenses have increased over the last 10 years.
So, this is just some bit of icing on the cake in some way, you have not expanded the cake very meaningfully by reducing GST just on the ticket size or coverage amount less than 5 lakhs. So, it will not be a game changer. What this sector really needs is one good year, it has been suffering for the last two years either COVID related hospitalisation, the discretionary hospitalisation and these companies have been bleeding. I think next one year can be really good just because of that cyclical recovery and I do not think what the government has done really changes the game for the sector. Government should have done more, maybe 10 lakhs, and more, that would have really helped. But 5 lakhs I think is a half-hearted measure.
In general, the sector, which is the insurance sector has not seen growth rate, the template was that post COVID Indians will have a better realisation of the value of their life, whether it is life or whether it is health. COVID was an outlier, they had to pay extraordinary claims and things were supposed to settle out or even out in FY24 and FY25. But that is not happening. Even though the sector is growing, there is still cutthroat competition, distribution channels are getting retested and profitability is still a distance away. Why is that?
Digant Haria: See, it was a dilemma, like before COVID we used to think 15% growth is given in this sector, nobody can take that 15% CAGR away from the sector. But as I said that insurance has probably penetrated the affluent class of India and now if it has to go down the products have to be really more innovative, they have to be priced in a slightly different way and that will require a little bit of regulatory flexibility.
The entire health insurance sector is hardly doing profit of 2000 crores. It is peanuts when you compare to how much of health insurance India really needs over the next 15-20 years, 2000 crores is nothing, even one NBFC does more than that in terms of annual profit.
So, health insurance sector, government, regulator, everybody will really need to come and lighten up the rules and ensure that this sector really grows because it is in everyone’s interest.
But right now, we are not seeing any of those things, so which is why be it Star Health or Religare we were positive on these, but it is going to be a slow journey, no magic pill is going to revive the growth unless the government and the regulator comes in.
So, complete avoid, and if you hold it a sell, I guess that is the verdict for insurance?
Digant Haria: Not really. See, it is just that things would not happen fast. And see, in India, we have always seen that for a few years growth does not come and then suddenly the growth bounces back. So, we have seen two bad years for health insurance already. So, I would like to believe that the next year will be better and that would be better even if there is no respite from government or the IRDA. So, it is definitely not a sell, but not among our top picks, maybe it will come somewhere in the mid-tier kind of picks, not in the top.
What are your top picks within financials? I am keeping it open in terms of insurance, healthcare, distribution, everything, NBFCs?
Digant Haria: I think gold and silver both are in an uptrend of its own and that is happening after a long time, a lot to do with the de-dollarization trade that is happening across the world. So, these gold companies really benefit out of a good gold price.
So, Muthoot Finance is amongst our only pick in the lending financial space because that benefits. There were other gold loan companies, but, some of them have run into RBI related problems, some of them have been scolded by RBI for their microfinance problems and so on.
Lending financials is a very narrow space right now. Outside of lending financials, we feel that capital market plays still have a long runway to go. Of course, the Angel Broking and the AMCs of the world have rallied a lot, so I do not think there is a lot of multi-bagger kind of return should be expected here. But there are companies like JM Financial which are just turning around, shutting down the lending businesses and trying to focus more on the fee-based investment banking kind of business, so that is where we see some real good action which can happen over the next 12-18 months.
Yes, one pick in the balance sheet financial, one in the non-balance sheet financial, these spaces should do well and then someone like Religare, it is a special situation, the care health is housed inside Religare so that has a lot of value, not that that value is going to get unlocked very fast, there is a corporate battle going on between two groups. Whenever that battle settles, I think Religare also offers a lot of value.
So, if you are bullish on NBFCs, if I may just throw in one more dimension based on RBI’s last credit policy, which is that NBFCs are growing at a rate which is higher than the industry average. They are high risk by ignoring the basic facts about the borrower and government on RBI is not comfortable with the kind of borrowing they have, which is largely dependent on banks. Could that be a spanner in the works, which is that regulatory tailwind now could become headwind for NBFCs?
Digant Haria: I think that has always been the cycle. See, microfinance as a sector has survived or thrived because of government allowing the PSL benefits, so they get as much funds from the bank as they want. And it is in government’s interest to ensure that the rural borrower or the poor people get as much loans as they can. But we have overdone that in the last two-three years, we have really overdone that. The rural incomes are growing at 4%, but the loans outstanding on these rural borrowers are growing at 22%. This is definitely not a sustainable situation. And we have reached a point where RBI is saying, boss, you really need to slow down. Otherwise, we will be in big soup later on.
So, RBI is taking precautionary steps. This entire unsecured lending space, the personal loans, microfinance loans, this is where most of the pain is. Secured lending space still remains good.
There is still a lot of upside in the secured lending space. And when I say secured lending space, it is gold loans, commercial vehicle loans, and housing finance. These are the three spaces which are relatively insulated. Growth will be there. Amongst these three, we like gold finance the most. And amongst personal loans and microfinance, we have to wait. December should be the worst quarter, that will be like when hell breaks loose kind of a quarter and after that, maybe, we can start picking up the good business models because microfinance, personal loans, it is the need of the country, need of the people but we have to wait and we have to wait for December when the worst comes out from this sector.