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It is a fair point given the fact that the lockdown may continue at least till 30 April. Clearly if you see, India’s largest consumer finance company Bajaj has mentioned that if that were to persist, earliest they would see a recovery would be by December quarter. So the fear of higher delinquencies is very real.
Reflecting on the valuations of all these players, I think they are progressively compressing. I would not be surprised if the NBFC space especially the consumer finance NBFC space sort of suffers even more because right now they have not been given the dispensation by RBI. So at one hand, they have to keep on paying the interest to the banks and the bond holders where as on the other hand they would have give a moratorium to their end customers. So I think the space is clearly under pressure and for the next six months, the entire financial space will remain under pressure.
The players who will do well will be the larger banks. The private sector banks have corrected quite a bit and if you take Axis and ICICI, they are trading close to book. HDFC has come down close to historic low valuations. Kotak is also compressing gradually. So in the short term, there is a pressure but I think in the longer term or if we take six months, these guys will come back far stronger because they are building this time to actually grow a significant CASA. It is more out of fear that people are actually moving money and consolidating their savings and deposits in some of these well-established larger banks.
An interesting move on Zee today. How do you read into that given that I am not seeing any immediate trigger, but the stock is definitely seeing huge volatility?
Zee has a concern more over this new investment that they are looking to make which in my view is a pretty brave step considering that the stock has been under tremendous pressure in regard to the promoter debt and balance sheet debt.
On top of this, you are seeing another commitment that they have made to one of their subsidiary companies in terms of supporting it. I think that is something which is adding to the pressure which already the stock was under, bringing back volatility. In fact, at one level people were starting to look at Zee purely from a valuation perspective but I think this development has spooked investors once again.
From the pharma pack, which of the heavyweights are you keen on right now; from a Dr Reddy’s to a Lupin to a Cipla, everything has been on the move?
Right now it seems to be that pharma has become a consensus trade and everybody is talking about ramping up pharma in their portfolios. But in such times, pharma seems to be the space where people feel that this is a nondiscretionary item and that its consumption will continue.
However, if you really look at it from a pure business perspective, nothing really has changed for most of these pharma companies in this last one month with regard to whether their plants were under compliance norms, with regard to the pricing pressure in the US market and so on and so forth. But we have seen a run up. Surely there are a few pharma companies who will do very well in this scenario and if I were to really take among the larger ones, I would sort of look at Sun more than anyone.
Do earnings really matter now or is it only the visibility in commentary on what these companies will actually see going forward is going to be critical because the quarterly earnings are going to be of the previous three months?
Most companies lost about 15 days of earnings. We heard about Godrej Consumers talking about quarterly numbers being down in the mid teens but the corresponding impact on profitability is far larger for the quarter. So, there is one stock where you could possibly have some negative surprise emanating from quarterly earnings and that would go across many many companies.
Clearly this year is virtually dusted and gone by and most people have discounted it. Most people will be looking for some sort of handholding or comfort or guidance from companies in terms of how they see their businesses coming back, by what period they see it and what are some of the strategies that some of the proactive companies have put in place to exploit this situation to improve the market share and profitability. This earning season is going to be more about looking for the commentary from managements rather than earnings that had gone by.
We all know the state of affairs of aviation. It is unlikely that people would want to travel immediately. On the other hand, airlines are readying with spaced out seating; not sure what pricing they will go for and whether it will actually be higher because there are fewer seats in order to attract people to travel. But what is your outlook on some of these aviation names?
Aviation is going to take a longer time. It is going to gradually limp back. You are right. With social distancing being the norm at least for the next few months, airlines are going to be focussing on ensuring that you do not really have to pick up tickets at the counter and most of it will be e-ticketing. However, you will have to sort of go through normal security procedures. So if you are going to have an airline flying, to understand from an airline perspective, most of its costs are fixed in nature; so what it pays to the airports in terms of parking charges, its staff costs and ultimately in terms of whether they can carry an x number of people. It is the load factor which determines the profitability.
So if you are going to work at much reduced load and same flight flying from one destination to the other and going to have low number of people, it means either ticket prices will have to go up or the government will have to significantly reduce duties as it is a highly taxed sector; whether it is in the form of lower charges that they pay at airports or in terms of lower excise on jet fuel and so and so forth if they do not want airline prices to go up.
But clearly, there is going to be a reluctance on the part of most fliers to fly where only the most urgent need-based flying will take place. So I would think that either they will have to come up with a package to help the airlines in terms of their cost structure or enable them otherwise to reprice their tickets. If they try to put a cap on tickets without doing the other, airlines are going to be in more trouble. In fact they are going to incur more losses on a continuous basis.
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