Why Muthoot, Manappuram stocks might beat other NBFCs

With a spurt in demand for gold loans after Covid, the shares of both gold financers Muthoot and Manappuram have rallied this year.
Siddhartha Khemka, Head of Retail Research, Motilal Oswal, believes that gold financiers will give superior return ratios compared to their NBFC peers. Both Muthoot and Manappuram could be in focus for the next few months, he said.

Edited excerpts from an interview

Is the rally in banks and other financial stocks sustainable ahead of the Supreme Court hearing on moratorium next week?

Banks and financials are holding out pretty well because they were beaten down in the last couple of months and are coming back into focus now.

HDFC has said its business is back to 100% of pre-Covid level, ICICI is saying that it is at 90%. These are positive comments. The Supreme Court verdict on the interest on loan moratorium is the biggest overhang, for which the market will need to wait for more clarity. The government has said that they will come up with a plan on the interest part. So banks may get certain benefits if they absorb the interest on interest component. Overall, that should not be much of a worry right now.

Gold finance segment is doing particularly well. We recently upgraded the sector with a positive view. We believe that within NBFCs and banking, the gold finance segment is relatively better placed. They are in a sweet spot with their niche business and have no competition from banks and NBFCs. Their asset quality is highest in terms of the liquid underlying asset. The LTV is also pretty stringent, above 75 per cent.

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While a lot of other NBFCs are grappling with asset-liability mismatch, the asset liability is on the favourable side here with a shorter tenure of loans. So we believe that gold financiers will give superior return ratios compared to their NBFC peers. Both Muthoot and Manappuram could be in focus going forward for the next few months.

Rakesh Jhunjhunwala is quite bullish on pharma and saying that the rally is going to continue from here. Where would you place your bets?
We have also been positive on pharma because the pandemic opens up a lot of opportunities, and also because some of the pharma, APIs and speciality chemical companies are shifting the global supply chain away from China.

China will continue to dominate the global supply chain but even a small percentage of market share gains will be significant for Indian companies. We like the API segment which would provide a steady 20-30% growth for the next few years given the increased focus on healthcare globally and diversification of the supply chain from China to other sources, including India.

We like some speciality chemical names where China does not have a very meaningful scale. Some players like PI Industries are there in the speciality chemicals, pharma CRAMS business and then also in the agri theme. The agri theme is doing well in India as the monsoon has been good, the government’s focus has been on rural spending and a lot of labour has gone back to work in the farms, leading to increased farm productivity.

Some generic players are also benefiting because of the changed regulatory environment. In the last few months, we have seen a host of approval from USFDA, right from plant inspection to product approvals, which opens up newer avenues for growth. These products are not only for Covid but for a lot of other lifestyles diseases. So our pecking order within the healthcare space would be a Divi’s which is primarily into APIs and CRAMS business, followed by a Dr Reddy which is a diversified player with API as well as some of the generic, and then some of the specialty chemicals like PI and SRF.

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Commercial vehicles were at the fag end when it came to auto recovery and now looking at Eicher’s numbers, do you think this is a very impressive mark?

If you look at the pecking order within the automobile segment, we were looking at tractors as the most resilient one with growth on a YoY basis followed by two-wheelers and passenger vehicles. CVs were at the fag end of the cycle. We were expecting recovery by the end of the current financial year. But going by the numbers given by Ashok Leyland, Eicher Motors, Volvo Eicher, it clearly indicates that things on the ground are improving at a much faster rate than what we were expecting earlier.

We are getting into the festive season, demand will improve and a lot of other sectors will start looking better. Q3 is generally one of the best quarters for a lot of companies in the consumer sector like consumer finance and rural finance companies.

Overall, these numbers indicate a positive outlook for on-ground economic activity.

What are your top bets within the midcap universe?
The overall large cap market might remain range-bound given the valuations and the underlining earnings growth but midcap, having underperformed for the last two years, are looking very good. One stock that we like is PI Industries as both its domestic and export supplies have picked up. The company has the levers to sustain growth in the near term. After the recent QIP, the company will look at both organic and inorganic growth. We like it because of its presence in the pharma as well as in the agri space.

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Another stock we like is also from the pharma space — Alkem Laboratories. The company has shown a strong traction in the US generics business and has been looking at significant savings in the operating expenses which is leading to offsets because of the decline in the domestic formulation business. Over the next few years, we expect it to report a strong 24 per cent earnings growth mainly on the back of new launches and a better traction in the existing products. The valuation also seems comfortable.



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