2 stocks Pankaj Pandey is bullish on from NBFC sector

"So not major challenges we see from earnings growth perspective given the fact that most of the bigger sectors, especially banking are sort of firing all cylinders," says Pankaj Pandey, Head Research, ICICIdirect.com.

While everything is looking good, Nifty is up 10% from the recent low, Bank Nifty double digit gains. Are you a bit surprised that in this rally, Reliance and HDFC Bank have not participated at all?
Overall, not surprised by the kind of rally what we are seeing in the market. I think our sense is that probably towards the end of this year, we might be heading towards 20000 kind of levels largely because last three year's earnings have been 22% CAGR, expectation is about 15% CAGR for next two years.

So not major challenges we see from earnings growth perspective given the fact that most of the bigger sectors, especially banking are sort of firing all cylinders.

Now when you sort of look at stock specific, I think HDFC declined largely because of technical factors. Otherwise, our sense is that this bank is also looking good. Here, our target price is 1970. And I think largely moves are expected once this merger completes. I think Reliance relatively has been underperforming largely because of two-three factors. One, I think when you look at GRMs, the GRM for Reliance is lower so some of the PSU GRMs are at $15, the likes of say IOC, largely because they have been buying more of cheaper Russian crude which is helping them to sort of deliver better especially on the GRM.

And I think the biggest segment for Reliance which is retail, our sense is that retail has sort of done well last year. But what you are seeing is that in the metro the demand is still sort of holding up which is what you look at when you look at Shopper Stop or say Trend numbers.

But I think in general, retail is still looking a bit soft and I think that is sort of driving the overall softness in Reliance. And I think most of your capex are still sort of panning out. Earnings growth will happen once this capex sort of comes on stream which could be one or two years down the line.

Which end of the banking cycle do you like corporate banks, mid-tier bank, PSU banks or microfinance?
What we like is more of NBFCs. So we have started liking M&M Finance. One is I think they are looking to double their book over the next two-three years and looking to expand into newer geographies so that is one stock which we are liking.

The other one is L&T Finance where our expectation is that you will see good 30% plus growth over the next two years. And lastly, most of the book is going to be retail.

So there is a shift happening from wholesale to retail. So upside in these NBFCs looks a lot more higher. Banks will continue to deliver well in line with the overall credit growth. So credit growth is still holding at 15%-16% odd and no major asset quality concerns. So that way, I think our sense is that banks will keep doing say 15-20% kind of a return but NBFCs can offer more returns because valuation wise so far even for L&T Finance as the ROAs could inch up to 2%.

Just wanted to get in your take as to how you are looking at the auto sales numbers, given that we are expecting a bit of a cool off when it comes to two wheelers. What is your expectation?
Overall, yes we would expect a softer set of numbers in the PV side largely because Maruti has been highlighting the chip issues impacting. CV has done well. So you have a high base especially in the month of March because of the pre-buying which happened because of Bharat stage 6, stage 2 norms. And I think two wheelers is largely going to be okay so that is the only slightly better spot from a monthly perspective.

But structurally, we still like the CV plus and PV segment more because in CV, if you look at most of the players, they have reported very impressive margins.

So margin profile for all the players on the CV has definitely improved so that is one space which we are liking. And I think PV will take its own sweet time to sort of improve probably after a quarter because I think the volumes are still getting impacted because of chip supply issues.
So we like more PV and CV. We are very selective in two wheelers, especially Eicher Motors so that is the only spot which is looking brighter on the two wheeler side.

What is your view on the entire microfinance space of late we have seen a meteoric rise in a lot of these names today?
Within microfinance space we have a coverage on CreditAccess Grameen so that is one company which we like and I think they have done relatively better compared to peers. And the parent also has been in this business for a very long period of time. So from that perspective, I think this is the one space what we like. I think there the growth profile looks quite good. They are venturing into new market. And I think overall credit cost which used to be higher, I think is trending downwards. So that is going to help this company. So CreditAccess Grameen is the only and the top pick in the microfinance space as of now.

But it has been interesting the way the real estate sector has shaped up. For instance, it was one of the top sectoral gainers for the month gone by. Are you very selective within this space or believe that there is a lot of opportunity in the sector as a whole?
I think we are very selective in this real estate space largely because one the overall macro tailwinds are turning better because we have seen 250 bps kind of rate hike so home loan rates have crossed 9% for most of us.
I think that is trending lower going forward with inflation not really looking to go higher so that is one thing. And I think we are very selective in this space because what we like is Brigade Enterprises or Mahindra Lifespaces largely because of their selective exposure in some markets.

So for example we are still not comfortable recommending Oberoi. I think Thane launch is still pending and it is still into one particular market.

We are looking at companies or we prefer companies which are there into multiple markets. So, accordingly, I think Brigade Enterprises looks best because I think they have very little debt on the residential side which is what ideally it should be.

And Mahindra Lifespaces has been sort of meeting the targeted land acquisition targets so from that perspective these two companies are the top bets in the real estate space.