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    Top picks for 2023: Why Jigar Mistry is betting on Max Financials, IDFC Ltd & Antony Waste

    Synopsis

    “Banking still remains an interesting space because historically the rise in interest rates are followed by rising NPAs. We have to look at it from pre-2015 before the AQR and IBC was launched and post 2015 when over the past five years all incremental lending has gone to retail. So to that extent, this space is unlikely to see a huge blow out like we saw with the previous rising cycle ”

    Jigar Mistry-1200ETMarkets.com
    "Antony Waste has got a lot of stuff for Municipal waste cleaning in Noida, Varanasi, Jhansi. The waste needs to be cleared in a much more systematic fashion rather than just the ad hoc dumping on top of each other. Antony Waste is one such business which we own and we like because the future of municipalities has to be scientific segregation," says Jigar Mistry, Co-Founder, Buoyant Capital.

    You have talked about how 2023 is likely to be a year of two halves. What is your rationale and what is your thought process?
    If we end around here, then this will be the seventh consecutive year of positive close in the Sensex. In Indian history, there has never been an eighth year. The last time we had this bull market from 1989 to 1994, India was not this open and there were still seven years and after we peaked in 1994, we did not see those levels again till 1999.

    So that is the backdrop with which we are approaching the empirical odds stacked against the market. The repo versus the US Fed fund rate difference is only 200 bps and peak was 800. If we are going to have all of this, then flow is essentially the only thing that is driving the markets and of the last five months, four months saw outflows, if you remove the SIP flows right. FIIs obviously have been buyers but this year they would end up selling like $20 odd billion.

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    Your top pick in the sector is Max Financials. It has been beaten down this year and is down 30%. Do you expect a sharp reversal in 2023?
    Max Financial is basically an insurance. Last year was clearly one of financials doing fairly well and insurance got beaten down on a number of accounts. The first part was banks adopted a very open architecture where instead of having just HDFC selling just HDFC Life or Axis selling just Max Financial, they were asked to sell at least three each on their platforms and that resulted in the non-bank leaders gaining market share at the expense of say Max Financial and HDFC. I think that is getting reversed. The base line has been established and that is going to reverse now.

    Secondly, with Covid, the reinsurance rate shot through the roof and that is normalising again. If these two are combined and one looks at how penetrated life insurance is in India, we still think there is a long way to go. With the base now being back, we are looking at these companies growing VNB at almost 15%, APE growth is 15%, margins are 30% or there around, return on embedded value is something like 20% plus and they are available at 1.5 times price to embedded value. So Max Financial is one business we like a lot.

    What will be your next pick for our viewers?
    Banking still remains an interesting space because historically the rise in interest rates are followed by rising NPAs. We have to look at it from pre-2015 before the AQR and IBC was launched and post 2015 when over the past five years all incremental lending has gone to retail. So to that extent, this space is unlikely to see a huge blow out like we saw with the previous rising cycle and some part of it might be priced in with the largecap names.

    But IDFC Bank is one name which looks interesting. Historical legacy book of infrastructure had a lot of problems, the stock pick is limited but that is just the holding company called the bank. That bank has grown retail deposit 5x over five years and the liability franchise is growing, retail franchise is growing and they will do something like a 1.3% ROA year down the line, 14% ROE available at 1.2 times price to book.

    So the bank is interesting but the better way to own it is through IDFC Ltd. because I like it at 63 odd bucks on the bank you own 1.4 shares per share of IDFC. So 63 times 1.4 and you have just sold the mutual fund which will equate to something like Rs 26 odd more for per share basis. The better way to play this cycle still would be owning IDFC Ltd. rather than the bank and you will still continue to own the whole banking sweet spot.

    But we have seen time and again holding companies do not tend to rerate so much as the main companies. So why this name?
    The structure collapse is already pre-announced…

    So some day it will convert.
    No, not some day; they announced that once the mutual fund get sold. The mutual fund has just received the Sebi clearance, the foundation has received all clearance. Once the transfer happens, then there will be meetings in order to assess sometime around in CY23 and you will get to see the whole collapse of that structure.

    Talk to us about a pick coming in the smallcap space or a midcap category?
    We all live in Mumbai. We see those huge mountains in Deonar which we do not want to see but we do not know that a lot of methane is trapped in there and that becomes a potential sort of powder cake that can get blown up anytime.

    There is this one company which basically does this work for Mumbai. It has got a lot of stuff for Municipal waste cleaning in Noida, Varanasi, Jhansi. The waste needs to be cleared in a much more systematic fashion rather than just the ad hoc dumping on top of each other. Antony Waste is one such business which we own and we like because the future of municipalities has to be scientific segregation and a proper disposal of municipal waste and this company has tied up with a Brazilian company before and that is the way they are going ahead.

    I think at sub Rs 1,000 crore market cap, the opportunity is fairly large given the arrangement that they already have and with the contracts that they have got. The fair value is much higher.

    Where is that fair value? It is Rs 300-350 thereabouts.
    They have got this Kanjurmarg project which in my calculation is worth Rs 800 crore or more. Even if it is not renewed, there are all the future consignments. So the fair value of the current projects that they have got is at least 60% higher than the current market price. But we are much more excited about what this can bring as municipalities try to save a lot of waste being dumped in the open.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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