Is it time to buy the fear and pick up Paytm or Zomato or Policybazaar?

“If the profit trajectory for companies do not revive in the next couple of quarters, banks might actually see slower growth and there might be increasing slippages as well and by that time, the interest cost would have gone up because there is a reduction in operating profit of companies which will impact the CASA balances of banks,” says Dhananjay Sinha, Head of Research, Institutional Equities, Systematix Shares

Some of the new age tech companies are now taking cognisance of their path to profitability. Do you believe that these stocks now deserve a relook on the back of this?
Given the context that there has been a fairly good rebound recently and the markets have been pricing in a certain amount of easing as far as the liquidity crunch is concerned, and in the context where the outlook presages continued tightening of rates, valuations can further erode at this juncture.

In this context, we still need to look at the visibility in earnings and where the market yields and the risk free rates are going up. It would be a weakish scenario for such companies.

What would be the ideal scenario in which you would say that it is time to buy the fear – be it Paytm or Zomato or is Policybazaar?
Right now, we are basically seeing a lack of visibility for conventional companies. We are seeing margin pressures emerging, especially in the manufacturing and consumer sectors. Hence, I would say that unless you get a good visibility in the normal steady state businesses, large companies need to sort of see some improvement in terms of business outlook. Companies that are in niche businesses and are a nascent sort of industry, structurally will do much better two or three years down the line.

But in the interim, if the conventional consumer businesses are struggling in terms of conserving their profitability, these businesses will also be facing sort of question mark in terms of profitability and return ratio and they will be far more vulnerable to what happens to the valuation with respect to the risk free rate etc. Maybe six months down the line, we will look at what the valuations are and possibly then look at it.

Is it time to be careful about buying PSU banks?
The market has basically been pricing in lower NPAs etc. for PSU banks. There has been a rebound in credit growth and the banks have reported better margins and earnings this quarter. This has been a pretty positive surprise as far as banking sector numbers are concerned. The flavour is basically in favour of PSU banks and they have done really well.

I am worried about the fact that we are seeing increasing stress as far as operating performance of companies are concerned. If you look at the manufacturing sector, we are seeing a reduction in operating profits and that i translating into a reduction in NPAs over March peak levels. We are basically seeing banks increasing exposure in such a scenario where the operating matrix is tightening. More so, banks are picking up exposure in high risk areas such as small and micro finances, retail lending, non collateralised lending etc. and that also significantly in the NBFC space.

If the profit trajectory for companies do not revive in the next couple of quarters, banks might actually see slower growth and there might be increasing slippages as well and by that time, the interest cost would have gone up because there is a reduction in operating profit of companies which will impact the CASA balances of banks. We might actually see a double edged kind of scenario in the next couple of quarters as we go forward.

Today we are rejoicing in the fact that we have large margins and operating performance of banks at the cost of the manufacturing sector. Eventually it will start biting as we move into the March quarter or thereabout. So I would be careful.

What is your outlook on FMCG companies because despite inflationary headwinds, a lot of these companies have managed to ride the tide and post fairly decent quarterly numbers. What has been some of your key takeaways?
It has been a mixed bag but in general, many companies have performed very well. For instance, Nestle has done fairly well but HUL has been consistently showing a positive volume growth. Last quarter, it was 6% growth, this quarter it is about 4% growth in a context where the overall category has been contracting over the past three quarters.

It tells us that these guys have been gaining market share. Nestle, of course, has been gaining market share or doing well in the urban areas. It has a very high concentration in urban areas. So, FMCG companies have been doing well. Their market share generally has been improving despite having a margin pressure or cost escalation. From a forward looking standpoint, if the commodity prices fall and there is an improvement in the cost pressure, these companies can show a significant profit growth going forward.

We have been overweight in this segment. ITC has also done well. GCPL has been very modest in terms of its various segments. The home insecticide segment has been a drag and other segments have been positive. I think it is kind of a mixed bag but by and large, I would say larger companies have gained market share and as commodity prices soften, especially agri commodity prices, these companies can benefit by way of operating. These stocks have done really well this year and can continue doing so going forward as well.