I am positive on the telecom space and on Bharti and Reliance. Idea, according to me, is a lottery ticket, says the Founder of Capital Mind.

Who would have thought that after the 6% move last week, we are going to put another 3% today?

It is quite a surprise. I did think that with the GDP numbers, things would look a little subdued but it appears like foreign investors are buying. They bought a fair amount on Friday as well. We are off the morning highs of course but we have not seen a trend of any meaningful sort. So we do not know if this will sustain. But I guess there are a lot of expectations, rumours and build up over here. I do not see this supported by fundamentals yet but prices and liquidity are very different from fundamentals at this point. While we have a recession and a lot of markets are at near all-time highs, so maybe India is just trying to play catch up.

Financials are clearly the ones which have pushed the market higher purely because of the weightage that they have on the indices. Do you think it is time to jump into financials or do you think it is only a matter of time when reality will set in as the entire NPA versus growth debate will clear up. All the top rung banks have come on record and said that they are going to choose or rather sacrifice growth as it is the quality of the books that is imperative at this juncture. Do you think reality is going to set in and we will see some of this froth actually settle down?
What happens when you have a low interest rate regime is that margins compress. So a low interest rates regime is actually not very good for banks even in good times. In times like this, it is possibly even worse. The issue really is that banks have not started to cut rates yet and I believe the first bank that is goes in will say listen, if you getting a bank loan at 10% on a housing loan, I will give it to you at 8% or 7% because bank borrowing rates are now sub-4% for a 90-day period, and sub-6%, sub-5% for a couple of years. When that war starts happening, there would be another crimping of margins.

Of course, we have never seen a pricing power within banks for a long time now; nearly 10 or 11 years. So there is no reason for them to suddenly start fighting now but hopefully that will happen and it will reduce consumer rates. But it is bad for banks.

But having said that, what is happening now is the stocks have corrected so much relatively and interest rates are low; so you can pay a higher premium to book that. So even if you adjust for NPAs, some of these banks have been reasonably valued and they are going back to being slightly overvalued right now. The interest in financials is coming primarily right now from push into indexing; so a lot of people are buying back into India through indexes; both abroad and in India as well. So given the weight that these stocks have, the index obviously will also go up. That is the third factor that adds up to stock prices going up. The NPA situation is not going to be known till December. So I do not even think we have any pricing in concept on that front.

How are you looking at the telecom space? Where do you stand when it comes to the telecom space and is Vodafone Idea a lucrative buy now?
To be fair, we are long on both Bharti and Reliance; so we are a little biased there. But I believe going forward, there is this big sword on Idea’s head which is this exposure and the payments that have to be made, which is probably upwards of Rs 40,000 crore. That might go out in terms of liquidity. So anyone putting in money is literally going to be paying the Indian government and then will have to put more money for Idea to survive going forward.

So I do not know if Google will be that player or whether somebody else will be that player but it is definite that Vodafone UK is not going to be that player. So unless that view changes, I do not think Idea has a very strong future and the telecom space is going to be largely divided between two players and probably Jio and Airtel are going to battle it out. So, we are very positive on the space because increasing prices by 10-20% is not going to hurt a lot of people and hurt their revenues substantially also because it is such an important part of daily activity now to be able to just have a mobile phone and have fast data available. So given that, these people have some pricing power. They might choose to exercise it over the next year and the difference between current prices and a 20% higher price is fairly large profitability because most of their costs are fixed.

They have extremely high operating leverage. So there is a potential of them turning significantly profitable if the prices were to go up. So I am positive on the space and positive on Bharti and Reliance. Idea, according to me, is a lottery ticket. So if you buy it, seven times out of 10 or nine times out of 10, you would lose. One time things might work in your favour.

Is there anything that you have bought afresh in the last fortnight?

It has been kind of boring because you buy the same things all over again. But we do have a lot of interest in financials; some NBFCs, mostly in the gold finance space and a lot of banks. So we have been buying banks as they dipped quite substantially. And one of the reasons we believe that the spreads currently are wide and as long as they are wide, these companies will perhaps have a cushion to make profits.

However, it looks like the rest of the market is also quite attractive. We have been spreading our bets beyond financials. So financials as a percentage of our portfolios have come down by 3% or 4% in the last two months. Gold finance companies, for instance, are trading at a relatively low level. They are not afraid of NPAs over there. The fear is there is going to both NPA and growth problems in other banks and other financial institutions; but here at least, the credit is not a problem. So we are buying more of those. And as the situation evens out, we might actually start seeing some microfinance companies starting to do well. We will have to wait to see which ones survive but I am very interested in that space as well.

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