Time to bet on good quality smaller banks

The focus has to be quality and we should look at some of the names because liquidity is trickling down and the interest rates have been low. The smaller banks are going to benefit, says Nischal Maheshwari, CEO-Institutional Equities, Centrum.

There has been a good move in the Bajaj twins and Finserv in particular. What is your take?
A large part of this runup that we are seeing across the finance space has to do with the good amount of buying by the FIIs. Historically FIIs largely invest in large caps and that is what we have seen here. In the NBFC space, Bajaj is the leader and we saw a huge amount of buying happening in the last 10 days; almost Rs 40,000-45,000 crore worth of stocks have been bought by the FIIs and we have seen the whole BFI space go up. Bajaj being a part of it, has also gone up. Finserv obviously has run up basically because it is owned through Bajaj and also the insurance has done well for Finserv. Both the parts are doing well for Bajaj Finserv.

The study paper put out by RBI shows some of these NBFCs will be allowed to get converted into banks and that will definitely be a positive because the cost of funds will go down. The front-end is already in place and thus deployment will be easy. It is a positive for the NBFC space and particularly for Bajaj as it is likely to get a banking licence.

What would be your favourite pick from the BFSI segment?
The obvious names are Bajaj Finance, ICICI Bank, HDFC but I would now start looking at some of the smaller quality banks and City Union Bank is one of them. We also like LIC Housing Finance, Ujjivan. One should look at some of the midcap stocks out there and may be some quality smallcaps also.

The focus has to be quality and we should look at some of the names because there are two things which are happening -- liquidity is now trickling down and the interest rates have been low. The smaller banks are going to benefit and we are looking at some of the names which I mentioned.

What about some of the auto names, particularly the two-wheelers?
They have already run quite a bit and festive numbers have come out strong but most analysts are going to wait for the post festive season to see whether the demand still continuous to remain there or not. The management, especially the Bajaj management, is very circumspect about the demand continuing post festive season also. I would want to wait because stocks have run pretty well. They are at an aggressive valuation. Some amount of profit taking is in order there as far as two wheelers are concerned.

Motherson Sumi has been the first one within the auto basket to see recovery from the March lows? With a five-year plan in place, could we see further headroom in the stock?
One has to see how the execution goes along basically. History shows that they have been very good in execution but the last two, three years have been a bit murky for them. It is largely because of the global cues in auto on which they are largely dependent as far as autos is concerned, given their spread is also world over. That is where we have to wait and see how the execution happens, how they open up in other geographies.

The other part, I am not very clear about is basically how strong the non auto companies are and what their thought process is because I was not part of that analyst meet which they held so we have to wait and see especially on that part.

Given that they are giving you a target of 40% ROCE, it is once again not going to be capex heavy. It should be in a good space but should watch out for the non auto space.