Saurabh Mukherjea recommends stocks which are quality cash-generating machines

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Percy
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Saurabh Mukherjea recommends stocks which are quality cash-generating machines

Post by Percy » Thu May 21, 2020 12:10 am

Saurabh Mukherjea has recommended that investors buy stocks which are quality cash-generating machines such as an Asian Paints or a Pidilite.

He has advised investors that in financials, stay with the market-leading banks or the market-leading NBFCs.

If you do that, you stand to benefit from the relief rally which will eventually come as we start gradually coming out of the lockdown through the course of the monsoons, Saurabh Mukherjea said.

Thia is the text of the interview of Saurabh Mukherjea in ETNow:

"I was just running through some of the headlines from the Finance Minister’s announcements over the weekend. Talking about how it still has not addressed one major aspect, that is some kind of relief to India Inc, were you hoping to hear more? What are your reactions to some of the measures that they have announced?

I have to confess, I breathe the sigh of relief when the final package was announced. I think the government has shown admirable restraint in not listening to the sort of the desire of the businesses for a bailout. The government has said, ‘look we are suspending the IBC regime for a year’ but beyond that I do not think businesses are going to get too much by way of concessions out of this government. We should all applaud that it is all too easy under these circumstances for the government to bend over backwards to appease big businesses.

What the government has done: vulnerable section gets some Rs 40,000 crore and some Rs 3.5 lakh crore goes to MSMEs in terms of credit guarantees. Those are the two key constituencies. Obviously, they are big vote banks for the government as well -- farmers and the MSME community.

I thought the most intriguing aspect is how structural reforms were pushed through in the context of Covid; defence FDI limit going up to 74% for instance. Opening up of the defence sector, obviously, is something that the government would have wanted to do for a long time. Clearly they are using Covid context to expedite that. In my reckoning, we will get FDI announcements there. The second largest buyer of defence equipment, the government will have plenty of leverage to persuade global defence majors to set up facilities India in return for orders. Whether it is Lockheed Martin or whether one of the European companies, we can look forward to some FDI announcements there over the next 12 months.

Similarly, the announcement of sweeping privatisation was big. We can all have doubts about who will buy and what will be sold, but the fact is this government is making these whole announcements under the context of Covid. I find it intriguing. So let us focus on the structural reforms aspect, which is going to be far more powerful. The fact the PM said last week that the reforms would be in land, labour and liquidity.

I think that is the bigger aspect to focus on. The bailout was basically intended for small businesses and farmers. India Inc, as we put it, has nicely been told that there are no bailouts here, we will give you relief from bankruptcies, and that is about it.

I understand what you are saying about the broader strategic message here, and that is definitely to be lauded. I agree with you on that. The fact is, we are looking at some of these things playing out, as you said, over the next 12 months whether it is FDI or privatisation.

But these are not things that are going to happen overnight. What happens in the current scheme of things with the lockdown continuing. We were staring at a quarter getting wiped out. Now we are probably looking at two, How is business really going to survive, when there is no actual stimulus reaching them?

The survival point has been addressed adequately. If you notice, the aim has been laid out. On the one hand, governments in India and across the world are saying get ready for the long haul, the fight against Covid will be a prolonged one. There is no easy relief, there are no short cuts here.

On the other hand, we see what the government is doing; it is giving you relief through the 90-day moratorium, which I suspect RBI will increase as the lockdown has been extended. So a 90-day moratorium, plus relief on the IBC front. And then this Rs 3.5 lakh crore of credit guarantee for SMEs, MSMEs and so on. On the one hand, the government is telling the country brace for the long fight and on the other hand they are saying here is a band-aid which will give you some relief in the near term.

If you want to look for positive cues, what we have to study is how are other countries faring when they come out of lockdown whether it is China, or the European countries, or parts of America. The message is very clear: as soon as you come out of lockdown, a lot of pentup demand that is getting released.

Be it demand for cars, motorbikes, consumer durables, holidays, AirBNB spending, Disneyland spending. It is the same case whether in China, Italy, Spain or America. As soon as you are coming out of lockdown, consumer spending is beginning to recover. That is our next trigger for the market.

The government has said and showed a great deal of maturity by saying that I am not here to underwrite the stock market. If you guys want to go out and invest in weak, beaten down stocks. well you figure it out yourself -- whether their balance sheets can hold together in these difficult times.

Therefore, I said investors should not look to government for relief. If you are investing in weaker companies, switch to market leaders, high quality cash-generating machines such as an Asian Paints or a Pidilite that I have long advocated. In financials, stay with the market-leading banks or the market-leading NBFCs.

If you do that, you stand to benefit from the relief rally which will eventually come as we start gradually coming out of the lockdown through the course of the monsoons. I think summer is almost behind us. We are looking at gradually coming out of the lockdown over the monsoon. So this notion that I will buy a cheap stock and the government will give me an upside should be out of the window after what we heard in last five days.

If the market has taught us anything since March, it is to get away from weak names, get away from leveraged names and stick to quality. But right now even quality seems to have come under pressure. A case in point being what is happening within the financials. Who thought an HDFC Bank is going to fall below Rs 900 and continue to fall.

Or for that matter there is going to be pressure across key blue-chip financials like a Bajaj Financial. Do you recommend buying these dips in blue chips when you hear a weak commentary from an ICICI BankNSE 0.60 % saying that provisioning is going to come under pressure or be bloated for the next few quarters, and that 30% of their corporate book has opted for the moratorium. Are these the right opportunities?

There is a lot of actual data on this, as to what happens to blue chip financials in a crisis. For example if we take the 1998-99 fake NBFC crisis, where 80% of India’s NBFCs went bust. Even an HDFC held back by 60% in 1998-99. Within a year of that crisis dissipating in 2000-2001, HDFC bounced back strongly. It’s exit RoE from that crisis was 5% higher than the entry RoE, because its competition got wiped out.

Again focusing on the Lehman crisis, HDFC Bank got blasted when it came down 40-45% in eight-nine months. But within eight-nine months with the Lehman crisis ending, HDFC Bank went to a PE multiple of 30. I remember it was the all-time high PE multiple and it has not looked back since. So in a crisis, quality financials do pull back. It is but natural for investors to get scared about NPAs and pull back, but as long as we focus on financial services name where the liability side of the franchise is strong, the funding side is strong -- whether it is deposits, CASA for HDFC or Kotak BankNSE 1.51 % or in the case of Bajaj FinanceNSE 1.36 % whether it is the liability construct in terms of loans from ironically HDFC Bank and Kotak Bank to Bajaj Finance.

As long as the liability franchise is a rock solid, you are pretty much assured that the lender will pull through. Once it pulls through, half the competition would have gone bust. I am sure we will see that sort of a construct. So I think a good part of the NBFC sector will be decommissioned over the next six-seven months and similarly some private sector banks beyond four or five.

Source: ET

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