“So, at a time where concerns are growing on potential uptick in NPAs, there they could be more concerned. But housing finance tends to be a fully secured business. And as such, NPA concerns out there are lower. So, what you are saying could actually become a reality that this could become a preferred stock at a later date,” says Sandip Sabharwal, asksandipsabharwal.com.
I look at Bajaj Finance simply from a different prism and let us just spend some time on it that here is a HFC which got incubated in 2017-18. It is not like old legacy business of Bajaj Group. It is growing at a rate of 25% plus, which is double that of the industry average. And being a Bajaj Group company, they will have an advantage in terms of cost of liabilities. So, do you think now for a lot of investors now this becomes the go to stock in terms of owning an HFC rather than buying these small HFCs here and there, which are PE backed and where PE investors want to sell their shares and they get the carry home, just stay with this one, because this is from Bajaj Group. It is growing. And now they are the second largest in India after LIC.
Sandip Sabharwal: That is true because of the fact that the Bajaj Finance has shown the ability to grow much more rapidly than the overall industry. Now, Bajaj Finance as core business for the parent, they have more concerns because many of the loans tend to be small ticket or unsecured, etc.So, at a time where concerns are growing on potential uptick in NPAs, there they could be more concerned. But housing finance tends to be a fully secured business. And as such, NPA concerns out there are lower. So, what you are saying could actually become a reality that this could become a preferred stock at a later date.I want to go back again to that good old correlation. Weakness in dollar index translates into strength for commodity but that trade so far has not played out. Any particular reason why commodities are not going up when the dollar index is down?
Sandip Sabharwal: It is all about China because China determines what happens to commodity prices and the Chinese economy has been showing weaker and weaker trends. No growth uptick is happening. Inflation pickup is not happening in China at all. Their monetary policy has been so loose, despite that they have been unable to revive the economy. And when a country which consumes 50% to 60% of most industrial commodities, chemicals, etc, is not growing or showing a declining trend, there is no way commodities can show an up move irrespective of the dollar correlation. So, I think right now it is more about what is happening in China rather than what is happening on the US dollar.I will construct a scenario, which is that globally the growth scare comes back. India does better, but liquidity continues. Which is that whether it is domestic liquidity, whether it is from DII, whether it is from insurance, or whether it is from HNI. So, when global scare is coming back and commodities are down and Nasdaq is down and tech is down and in India liquidity is strong, do you see a strong sectoral rotation which could be at play?
Sandip Sabharwal: I think the concern is more and which is not discussed so much is about what I said earlier about the huge supply which is coming in. I do not think the markets, irrespective of liquidity, have the ability to absorb the kind of supply which is coming in. Secondly, we have been somewhat resilient on most global falls. So, if you see many of the Asian indices, they are now actually YTD negative, whereas we are still mid-teen positive and that has taken our valuations much-much higher than most other emerging market valuations.So, at some stage, the valuations also become a concern for the market. So, I would think that we should proceed cautiously in the near term while looking for opportunities to invest longer term as if the economy grows 7%, then obviously there will be many companies and sectors which will do well. But near term, I think we should be concerned.
I look at Bajaj Finance simply from a different prism and let us just spend some time on it that here is a HFC which got incubated in 2017-18. It is not like old legacy business of Bajaj Group. It is growing at a rate of 25% plus, which is double that of the industry average. And being a Bajaj Group company, they will have an advantage in terms of cost of liabilities. So, do you think now for a lot of investors now this becomes the go to stock in terms of owning an HFC rather than buying these small HFCs here and there, which are PE backed and where PE investors want to sell their shares and they get the carry home, just stay with this one, because this is from Bajaj Group. It is growing. And now they are the second largest in India after LIC.
Sandip Sabharwal: That is true because of the fact that the Bajaj Finance has shown the ability to grow much more rapidly than the overall industry. Now, Bajaj Finance as core business for the parent, they have more concerns because many of the loans tend to be small ticket or unsecured, etc.So, at a time where concerns are growing on potential uptick in NPAs, there they could be more concerned. But housing finance tends to be a fully secured business. And as such, NPA concerns out there are lower. So, what you are saying could actually become a reality that this could become a preferred stock at a later date.I want to go back again to that good old correlation. Weakness in dollar index translates into strength for commodity but that trade so far has not played out. Any particular reason why commodities are not going up when the dollar index is down?
Sandip Sabharwal: It is all about China because China determines what happens to commodity prices and the Chinese economy has been showing weaker and weaker trends. No growth uptick is happening. Inflation pickup is not happening in China at all. Their monetary policy has been so loose, despite that they have been unable to revive the economy. And when a country which consumes 50% to 60% of most industrial commodities, chemicals, etc, is not growing or showing a declining trend, there is no way commodities can show an up move irrespective of the dollar correlation. So, I think right now it is more about what is happening in China rather than what is happening on the US dollar.I will construct a scenario, which is that globally the growth scare comes back. India does better, but liquidity continues. Which is that whether it is domestic liquidity, whether it is from DII, whether it is from insurance, or whether it is from HNI. So, when global scare is coming back and commodities are down and Nasdaq is down and tech is down and in India liquidity is strong, do you see a strong sectoral rotation which could be at play?
Sandip Sabharwal: I think the concern is more and which is not discussed so much is about what I said earlier about the huge supply which is coming in. I do not think the markets, irrespective of liquidity, have the ability to absorb the kind of supply which is coming in. Secondly, we have been somewhat resilient on most global falls. So, if you see many of the Asian indices, they are now actually YTD negative, whereas we are still mid-teen positive and that has taken our valuations much-much higher than most other emerging market valuations.So, at some stage, the valuations also become a concern for the market. So, I would think that we should proceed cautiously in the near term while looking for opportunities to invest longer term as if the economy grows 7%, then obviously there will be many companies and sectors which will do well. But near term, I think we should be concerned.
I wanted to get in the latest note as well on the power sector with Goldman Sachs and they are talking about the draft ALMM for solar cells, what a positive move it is for the likes of Tata Power, Reliance. And it also signifies the government’s commitment towards self-sufficiency. Just curious to getting in your take as to how you are reading into this.
Sandip Sabharwal: So, I have not gone deeply into what you said. But the only limited point I can make through the analysis of whatever is happening on the solar side is that the bigger players will be the ones which could potentially survive the potential price war which is eventually going to come.
If you see the number of people getting into solar manufacturing, the kind of supply which is building up, I think one or two years from now we could have potentially a scenario where there is huge domestic oversupply and to that extent the larger players will be the ones which could survive this onslaught which is going to come.
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