Why Manish Sonthalia is betting on AU SFB and Voltas

By Ayesha Faridi

Head of PMS, Motilal Oswal AMC, explains how strong fundamentals give these stocks huge long-term potential. He was speaking at ETNow webinar.

Why do you like AU Small Finance Bank?
First of all, I like this bank because the MD and CEO of the bank, Sanjay Agarwal, has skin in the game. He still owns 30.95% and we have found that entrepreneurs who actually have a skin in the game manage the show much better than those who do not. It is a universal truth. They also have a very strong second-tier management line-up and that lends a lot of comfort in the capability of the management.

Secondly, the bank actually hands out loans based on a philosophy that the assets are income bearing and not against just the value of the collateral. The income bearing capabilities are based on daily or monthly cash flows. So, these are fully secured loans. If the cycle also goes back, it does not really mean that much of these loans are going to convert into NPAs and that is what they have demonstrated.

Third, they have very strong collection agents or field folks and that gives a lot of comfort in the fact that these guys are handing out low-ticket loans also to the self-employed segment where the income profiles are not very very streamlined. But because these are very strong field collection agents and in banking and lending and borrowing business, it is all about collections and that gives us comfort.

At the same time, they have a very strong knowledge about the community and the areas where they are lending to that is really giving them a very strong competitive advantage as opposed to private sector banks, where they have a template based lending.

The last point is that they are trying to maintain their lending book in areas which they understand. As they have a very good track record as far as automobile financing is concerned, within that, they are trying to find a niche that does not lead to a lot of cyclicality.

So because of the execution track record and the fact that there is a huge runway to growth, the valuations are likely to remain slightly on a higher side when compared to the banking sector. The stock has corrected but can be a very steady compounder of 20-25% over the next decade.

Financials as a cluster has recovered quite a bit in the last month, month and a half. Leaders like Bajaj Finance or a Bandhan Bank, have done well. AU Small Finance Bank has recovered barely 1% from the March lows and it is barely even half way from its 52-week high. Does that make it a more lucrative buy. Also why has it not participated in the financial rally?
The 52-week high on the stock was Rs 1200 and currently the stock price is Rs 600. So, it is roughly 50% down from its all-time high.

The markets are a bit apprehensive about the CEO selling a portion of his stake at a lower price of Rs 400 odd. Maybe that is the reason but that has nothing to do with working of the bank according to me and slowly and gradually over a period of time, the shares that have been sold out have gone to stronger hands. It is the confidence on the fundamentals and the intricacies of their going about the lending and collection business that gives me comfort that this stock has a long way to go.


You also like Voltas. Why?
I like Voltas for the simple reason that India is a much warmer country as opposed to China. China basically manufactures and sells something like 93 million room air conditions every year. Out here, we are just about selling 7 million air conditioners and the penetration rate in this category of consumer durables is just about 6% to 7%.

So given the fact that the size of the opportunity is immense, given the size of our country and it is a much larger country than what the 7 million indicates, the category growth is here to stay for many years.

The second reason is the affordability, The price of an air conditioner has broadly remained the same in the last 10 years or so. Today we are getting better quality air conditioners, the inverter ACs so on where you have a 15% lower power consumption cost and many features like air purifiers have been added. One can see the size of the opportunity going forward given the fact that the category has seen a 14% CAGR growth over the last 10 years. Only mobile phones as a consumer durable category has seen a higher growth than air conditioners. So a J-curve is possible out here.

Now Voltas comes from the house of Tatas, they have top notch management execution. The customers have a huge trust in the Tata branding and they have a very wide distribution reach, highest in the country. They have a 25% market share and after sales service is a very important distinguished point between competition and them. The distribution points after sales service, trust factor as well as the execution from the management has allowed it to have a market share of something like 25%.