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    Why are HDFC group companies underperforming? Chakri Lokapriya answers


    “Chances of outperformance by HDFC Bank and HDFC are limited unless they accelerate their loan growth far above industry averages.”
    Barring the probability of a Third Covid Wave, as the economy unlocks, markets will trend upwards, says Chakri Lokapriya, CIO & MD, TCG AMC.

    June was all about reopening trade. Do you think July could be all about reality check?
    Other than the routine profit-booking type of corrections, this market is headed upwards supported by strong economic activity including opening up of the export markets.

    It is not just the stock markets. If you look at the employment generation in the US, there is a phenomenal rise in salaries and employers are competing for jobseekers. Secondly, look at their infrastructure plan and the demand for all kinds of commodities including metals. Therefore job creation will work well for India for all the metals, chemicals and export-oriented companies. Thirdly, there is the India centric story. Barring the probability of a Third Covid Wave, as the economy unlocks, markets will trend upwards.

    Why are HDFC group companies underperforming? HDFC Bank is underperforming SBI. is underperforming SBI Life. HDFC Limited as a stock is not going anywhere. Why is this happening?
    It is partly related to what is happening with the sector. These are companies, which are not just market leaders, they are also the market leaders in terms of valuations. HDFC Bank trades at 4 times book. HDFC also has similar valuations and against this backdrop, when we look at the loan growth of these companies -- be it home finance or banking industry -- there’s about 5-6% growth. That is below the inflation adjusted GDP growth.

    Normally in the emerging market and India in particular, loan growth for the banking sector is north of 20-25%. Of course, the pandemic has brought down corporate, consumer and government loan demand. All these will unlock. The insurance companies' valuations have not corrected. Only the business has come down. So these businesses will recoup. These stocks will do well as well as the index. But chances of outperformance for HDFC Bank and HDFC is limited at this point unless they accelerate their loan growth far above industry averages.

    There is a buzz that Vodafone is doing a QIP. Their quarterly numbers are not all that impressive but somehow the view in the market is that the worst is behind them?
    The worst is that today they are in a better place than they were two years ago, simply because they have managed to reduce their debt. They have gone through bad times but the debt levels are still very high. But ARPUs are stabilising and whenever the 5G rollout happens, despite being a huge capex guzzler, Vodafone could be a good longer term story. But in the short term, QIP demand will be fairly strong but the stock has done its bit.

    How are you looking at the overall interest rate environment and the impact of the pandemic on affordable housing and HFCs in general?
    The housing finance companies are well placed. From a valuation perspective also, they are very inexpensive. Look at the market leader HDFC and then the players after it. LIC Housing trades at one time book, Repco Finance trades under the book probably about 0.9 times book, Can Finance -- all trade at fairly attractive valuations. What was missing was loan growth in terms of new home sales adding to the loan book. Now that has picked up and the two ends of the market -- the affordable housing and the luxury segment. It is the mid segment which is not doing that well. All these companies focus more on the affordable and slightly above that affordable and therefore whenever the lockdown situation normalises, there will be an increase in loan growth for affordable housing. The valuations are on their side and therefore companies like LIC Housing abd Repco Finance will do well because they are trading a good 30-40% below their mean valuations.

    How are you looking at the entire hospitality space?
    The government wants to vaccinate a good chunk of people by October of this year which will be just before Diwali and all the festivals and the marriage season. That means opening up of banquet sales, hospitality sales and everything which has been largely at a standstill over the last year and a half. They are all operating at very low occupancies and the stocks have also corrected. They have not really participated in the rally.

    So whether it is which operates the Marriott Hotels in India or India Hotels -- all these companies are trading at very attractive valuations. What is missing is the business pickup. You can buy into these stocks. They are probably a bit too early in the game but these are stocks which will do well as unlock progresses and there is no third Covid wave as we head towards October.

    Given the volatility in gold prices, I am not sure whether the long term trend on gold will continue to remain intact. What happens then to the gold financers?
    Muthoot Finance stock has done very well over the last one year or so, whereas Manappuram has not done that well. Now both these companies benefit from the fact that the strong loan demand from people who are taking loans, giving gold as a collateral, will continue to remain strong. As lockdowns ease, the small business people start getting back to business. For them, gold prices are still at a very high level versus say one year ago and therefore it is still very good collateral and therefore the loan growth for both Manappuram and Muthoot will remain very strong going into the next year. The valuations are still fairly decent. Manappuram has underperformed Muthoot given its MFI business but the loan growth in the gold business of Manappuram will balance out the MFI concerns. Both these companies will do very well and they could have 30-40% upside from the current levels over next 6-8 months.


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