Stay away from YES Bank till fund raising takes place: Gurmeet Chadha

There is news that YES Bank may deny Erwin Singh Braich’s offer. My sense is while the board recommended it, it is probably having a rethink on how it is going to work out with RBI. My advice to investors is to stay away from YES Bank till the fun...

AMC stocks offer a good long-term structural play, says Gurmeet Chadha, Co-founder, Complete Circle Consultants. Excerpts from an interview with ETNOW.

Why would YES Bank deny Erwin Singh Braich’s offer because that seems the most sizable bid and they are in desperate need of funds. I do not think you know beggars can be choosers at this stage?
Capital is capital. My sense is while the board recommended it, it is probably having a rethink on how it is going to work out with RBI. The credentials of the investors is something that RBI will have a lot closer look at. Mind you, 60% of the entire capital raise was to come from this one group. My advice to investors is to just stay away till the time the fundraise actually happens. This frequent flip-flop on fundraising is becoming a kind of a joke.

Also if you go to the balance sheet, the GNPA last year same time was at 1.4%. Right now, it is 7.2%. The corporate banking still is about 62% of the entire loan book and if you break up YES Bank income, they had very high fee income and a lot of that was processing fees, which was linked to the wholesale advances. I do not see the texture of the books suddenly changing.

I have been doing a lot of ground checks in terms of visiting branches, speaking to a few friends and colleagues. There is a lot of run they have had even on the liability side. There have been a lot of withdrawal from the deposits and premature breaking of FDs and money moving out from the CASA, which is not a good sign.

If your liability side also starts shrinking and you anyways would not grow the asset side because of the NPAs, I think you are in serious trouble. Also the BB and below book, there is a lot of fresh concerns over higher slippages related to Altico and Café Coffee Day. We hear now even the Café Coffee Day-Blackstone deal is under cloud.

Let the actual resolution happen. The market is very brutal when it comes to companies with high leverage and poor corporate governance. This is a very speculative trade in my view you could have a huge upside if you get your way but it is speculative.

The numbers coming in from the AMFI data reflect a major slowdown in the equity inflows. While one would have expected a minor slowdown, the AMFI numbers have taken us a little by surprise given markets currently quoting sub 12000 mark. How do you read into the latest data?

It is not surprising as the divergence in the market continues. Barring a few funds, on the equity side most are biased towards largecaps and within that, they have been picking top 6-8 stocks on Nifty, which have done well. If one looks at the three-year SIP returns for the most diversified funds, they have been very flattish -- even the SIPs, the smallcap and midcap. A lot of money came in small and midcap seeing 2017 performance, where the average category returns were 50-60%. Typically in smallcaps, you have one good year followed by two-three average year. So, we should not read too much into it. The retail flows are still quite sticky; the SIP book is still upwards of Rs 8,000 crore. I am not too worried here but if the market continues to be in a certain range, and with the divergence and the dichotomy in valuations, some part may come under pressure. But overall, from an investor perspective, the AMC stocks offer a good long-term structural play.

The basic point here is the asset itself will grow. ETFs are being launched now. We will have a bond ETF beginning mid December and that will bring a new category at play. The total AUM managed by HDFC AMC is over Rs 4 lakh crore. Of this, Rs 1.65 lakh crore is equity -- of which Rs 1.63 lakh crore is actively managed. The management fee on equity assets is reasonably higher vis-à-vis other assets.

In terms of aging, they have the highest old assets which means that we pay lesser fees to the intermediaries and therein lies the profitability. For a business which can add Rs 3,000-4,000 crore of PAT with almost no capital invested, the return on capital is extremely high. The business will grow, the size of the market will grow disproportionately. If the unique folios are just about 2 crore, when you compare it with the number of insurance policies, those are 15 times. There is no point looking for huge sizable dips in valuations to enter AMC stocks. These are a very long structural plays.

What about the divestment drive? The roadshows are going to start now. BPCL is up about 2.5% today. SCI, Concor will also be in focus.
I am extremely positive on some of these names which are up for divestment. BPCL is a great franchise with a very strong distribution network. The refineries are getting upgraded to comply with the BS-VI norms. Refining margins could come under pressure in Q3, but that would be an one-off. The valuation it will get eventually would be much higher than the current price it is quoting at.

Their per pump sales number, which measures productivity, show they do about 187 kilolitres per month per pump which is about 15% higher than the industry average. Also, in India if you want to come into a fuel retail play getting land clearances, setting up a network with the product pipelines in place, is an extremely tough job. There are very, very high entry barriers. BPCL would be a very prized asset from that perspective.

Across the globe, there is a lot of consolidation happening. So, while the Reliance BP deal is one, the Sonoco deal is there; then there is Woolworths in Australia. There are some four, five deals. Whereever there is a state fuel retailer and refiner up for grabs, there is interest. Container Corporation is another very good business. There was a bit of a setback due to the court verdict on the benefits it was supposed to accrue. There are three big plays here; one, the dependency on railways is gradually coming down. Currently, it is about 40% from railways in terms of the railways terminals they use; the dedicated freight corridor could be a bit of a game changer here and a key catalyst. They are also due to receive the new 25-ton axle wagons which will increase efficiency.

The short haul segment is where they are focussing on and where it is both profitable and where the overall load factor has gone up as well. Concor remains a very good play on broad logistics. The company is trying to migrate from being a pure railway freight transporter to a multimodal freight player. Both these assets deserve an allocation. If you want to be a little more conservative, maybe one can pick up a PSU fund which has about 8-10 names, which are up for divestment rather than just individually picking up these particular stocks.

On the financials,we saw PSUs take a bit of beating last week. We have seen some amount of stability return today. at least so far. What is your take on the PSU names, particularly the larger ones?
I am positive on SBI. I have been granularly breaking down the book in terms of the NPAs it has across corporate and some of the stressed sectors. Their provisioning is amongst the best. Their PCR coverage for traditionally stressed sectors like steel, telecom, textiles, power is upwards of 90%. I see a lot of write-backs and the Essar Steel verdict, is a big boost in terms of the way the process is going to unfold now. You will see more cases being expedited. Also the modifications to Section 227 in IBC with respect to financial institution is very welcome. RBI was very swift in taking over one of the NBFCs which was stressed. So you would see more faster resolutions even in some of the stressed NBFCs and housing finance companies. SBI is available at a very reasonable level. Also the subsidiaries seems to be doing very well whether it is Life or cards. SBI Cards IPO should be around. They now have 18% share, just behind HDFC. In terms of bottom line they have already crossed the profits they made last year in the first six months. It is going to be an interesting IPO to watch out for.

So on an SOTP basis, the worst of asset quality is behind us and SBI looks very good. Maybe Bank of Baroda, is another pick. I would stick to the top two names here rather again trying and to bottom fishing in terms of valuations.

How are you reading the comments from Kumar Mangalam Birla saying that they will have to shut shop if the government does not intervene when it comes to the AGR dues?
This is definitely not positive and somebody of the repute of Vodafone Idea talking of business being unsustainable has a lot of ripple-effect across. The recent government moratorium and the hike prices in terms of increasing the ARPU, will go to clear the government dues which might be good fiscally and also for some banks which have telecom as a major exposure as far as the overall loan book goes. But all that does not add up to much. Airtel would still have something up its sleeve. I think it will be a duopoly kind of a business and mind you it is not just AGR which is plaguing Voda Idea. They have not done great usage of their spectrum bank. They have been behind the curve in terms of the way they had to invest in technology and I think it is evolving into a much bigger play including content, commerce and communication.

The biggest beneficiary clearly will be Jio and if one has to take a contrarian call, Bharti Airtel looks good. They are showing intent. They have already applied for FDI approval for raising funds. I think it will be a duopoly and considering that Reliance has run up the way it has, Bharti could be considered as a contrarian bet for a high-risk high-reward kind of a trade.