Within the NBFC pack, MFI looks very attractive: Jigar Mistry

"I think you are broadly right, the core is that the inflations, if you look at across developed markets, it is sort of cooling off. In India, the RBI policy, at least in our opinion, had moved towards managing the currency rather than the inflation because inflation was not really as big a trouble for India as much as it is for the west and whereas in the west your core inflation is still above 5%, so the base case is that the RBI would follow the west where they continue to keep the rates at a flattish five-quarter on the Fed fund target rate, upper bound and then we will continue to maintain the differential with two caveats," says Jigar Mistry, Buoyant Capital.

The broad view is that RBI will actually be heading towards a pause, that is fine, that is the broad view. I want to understand a step beyond that. Will it be right to assume that in the next six to eight months, forget the pause, but actually a rate cut cycle could start in India or do you think that is going a little ahead of the curve now?
I think you are broadly right, the core is that the inflations, if you look at across developed markets, it is sort of cooling off. In India, the RBI policy, at least in our opinion, had moved towards managing the currency rather than the inflation because inflation was not really as big a trouble for India as much as it is for the west and whereas in the west your core inflation is still above 5%, so the base case is that the RBI would follow the west where they continue to keep the rates at a flattish five-quarter on the Fed fund target rate, upper bound and then we will continue to maintain the differential with two caveats.

The first part is that if you look at the differential between repo and the FFTR, upper bound, then that is today at 125 basis points. Now, that is the lowest number that we have seen in 23 years. Correct? It has never been lower. Now, if you juxtapose this again, what could potentially happen, if with the recent announcement if oil starts moving towards 80, the gross FDI continues to be very strong but net FDI is almost at a decadal low and let us not forget that there will be $280 billion worth of short-term maturities that will come up for renewal in the next nine months or so.

So, if like a perfect storm were to happen where the oil goes to 80 plus, your FDI continues to remain low, FPI which has turned positive since March sort of flatlines and at least say half of the short-term maturities actually get refinanced in India, then I think what you are suggesting could be very difficult as in the RBI might have to maintain the rupee levels and therefore not cut as fast as the Fed does, something very similar to what happened in 2006-2008 cycle.

2006, we were again at 125 basis points, but with the cut in the west, we could not follow, so the differential which was 125 basis actually increased and expanded to something like 800, now again that was a different time. The Indian economy is a lot better in terms of macros compared to 2008. So, we are not suggesting we could go back to those levels, but this is something we keep in mind at the back of our mind as a non-zero probability.


How are you guys approaching the market in terms of what are the three-four largest over-rate positions and also are you running some cash or fully deployed?
Since March, if you glance on the market, the index since 28th March if you take Nifty, it is what, 10% higher. But if you look at the breakdown of that, some 75 odd percent companies of BSE 500 have outperformed the Nifty, number one.
Number two, some 13% plus companies, so 150 sort of number of companies have actually given returns in excess of
40% in just the two months. So, a lot of the small and midcaps which were battered down completely in March have really risen very-very smartly and obviously our fund has benefited with some exposure there as well. But as we speak, there are a few things which are positive, there are equally a number of things that makes us cautious. But in terms of positioning, I would say that we are running something like 14 odd precent in cash and our exposure to small cap in the month of March was much larger, closer to 50% and with the smart rally that a lot of the small caps have seen, we are booking out where things are looking a little bit heady. So, yes, continue to sort of look at a balanced scenario rather than getting swayed away with what is happening in the markets.

Tell us where you have booked out, talk to us about areas where you have completely booked profits right now.
Not completely, see with us what typically happens is that weight is a very active part of our strategy. So, if the business actually moves into zones which is uncomfortable for us, we do reduce weights and one such space where it warrants some amount of understanding is the banking and financial space.

I have only spoken positive things with you, but if you break it down in those three or four cycles, we are possibly looking at almost everything being priced to perfection. It is not expensive, but we were running a very large overweight position in banking in the run-up here and it is time where we are looking a little more towards NBFCs rather than banks.

So, if you look at the credit growth cycle that continues to be very sharp, although at 15% growth number that we got for April, my sense is that towards December that could moderate a little bit given the base effect.

Your NIMs cycle which will sort of see some amount of contraction especially for the private guys. Your credit cost continues to be benign, so I do not think we are looking at credit costs rising in a hurry. But the fourth cycle which we typically look at is the valuation cycle and there adjustments have happened. So, from 2018, the way we looked at the smaller banks, then smaller banks like ICICI and SBI catching up to HDFC, a lot of other investors played the same thing with the PSU pack where they bought a lot of PSU banks compared to SBI and I think now that alignment has happened and some amount of sort of opportunity do exist in smaller banks where we are active.

But I think NBFC as a space over the next year might get interesting. So, if your credit growth continues to remain strong and cost of borrowings for most of them have come to a peak level, then over the next three or four quarters you can see NIMs for most of them being much more comfortably placed and they are not really sort of as expensive as a few of the banks have gotten. So, incrementally I think NBFC, could it be in MFIs, those spaces look relatively much more interesting.

NBFCs, what exactly would you buy? Would you buy microfinance? Would you buy the tech-backed kind of NBFC plays, the traditional ones, Bajaj Finance or Poonawalla Finance or even some of the kind of MFIs which are doing very good numbers, all of that. What would exactly interest you in NBFCs?
See, MFI is sort of the highest cyclicality in the lending business you can see because their average tenure tends to be something like 13-14 months and that is like you are replacing a large part of your portfolio every year, every two years, that is not an easy business to run and that also is actually very-very localised because factors like Amphan or floods or some or the other states sort of taking some moral hazards as in loan waivers, etc, does impact their business.

So, when you are looking at an MFI business, one needs to be extra cautious. But the way we see the undercurrents today, after two or three events in succession, we are now in a scenario where the business is looking reasonably okay, credit cost for most of these companies have come down dramatically and valuations have not really caught on. So, within the NBFC pack also I think MFI looks very attractive to us.