- 3 years ago
- Listing Of Jio Financial Services
- Markets Stuck In A Range: What's Next?
- Top Sectoral Bets
Watch Piper Serica's Abhay Agarwal on Talking Point #BQLive
- Markets Stuck In A Range: What's Next?
- Top Sectoral Bets
Watch Piper Serica's Abhay Agarwal on Talking Point #BQLive
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NewsTranscript
00:00 Thanks so much for tuning in to Talking Point.
00:01 I'm your host, Nijat Shah.
00:02 Lots of Talking Points today.
00:04 For a change, we'll start off with the micro
00:06 and then head towards the macro, because Geo Financial
00:09 Services, the big listing has happened.
00:11 It's trading at about a 10% or 10 rupee discount
00:16 to the derived book value--
00:18 derived price of 262, at which I think,
00:21 as per Jeffrey's note, the derived price to book
00:23 comes at about 1.9.
00:25 But there's a lot of debate around that as well.
00:28 Let me try and get in Abhay Agarwal, who
00:30 talks about the macro with aplomb,
00:32 to try and start off with the micro first.
00:34 Abhay, thank you for taking the time out.
00:35 I know we usually start off with the big picture
00:37 and then head towards the minutiae.
00:39 Can I start off with the specific first
00:43 and then move to the macro this time?
00:45 Is that OK?
00:46 No, thank you, Niranjan.
00:47 Always a pleasure.
00:48 And I enjoy being on your show, seeing your show.
00:51 So if it's your show, please go ahead and do it your way.
00:57 OK, thank you.
00:57 So I'll start off with the new listing.
01:00 I wouldn't call it the new kid on the block
01:02 under any fashion whatsoever.
01:04 But it's kind of listed around the derived price, obviously.
01:08 So what have you made of your analysis of JFS?
01:14 And the simple question, Abhay, would
01:17 be, if someone is listening to this conversation right now
01:20 and expecting to hear words of wisdom from you about what
01:24 should she or he--
01:26 how should she or he think about this JFS investment,
01:29 what would you advise?
01:32 So I'll break that answer into two parts, Niranjan.
01:35 One is on the structural impact on the financial services
01:40 industry in India.
01:41 And I think for the economy to grow,
01:46 we need more and more financial services players
01:49 who have the balance sheet strength to not only do
01:52 non-lending activities, but also integrate lending into it.
01:56 And while we have many financial service, financial payment
02:01 aggregators, lenders, who are typically
02:03 go to banks for selling the loan book,
02:07 that is a suboptimal model.
02:08 I mean, it has a huge in the industry and in the economy.
02:12 But really what you need, Niranjan,
02:14 are large players who have their own balance sheet strength
02:17 to provide consumer finance services,
02:20 formalize the bottom of the pyramid
02:24 or middle of the pyramid for us.
02:26 So an entry of a company of the size and scale of geofinance
02:31 is highly welcome from that perspective
02:33 that there's a large player that has its own balance sheet
02:36 strength, wants to work on scale, has done scale earlier,
02:42 and will impact, I guess, a million of--
02:45 millions of customers' life over the next three, four,
02:48 five years.
02:50 So it is a good outcome as investors, as fund managers.
02:54 We are happy that we get another opportunity
02:56 to look beyond the current players, some of them
02:59 who trade at a very high valuation.
03:01 Maybe this entry will bring down the overall industry
03:05 valuations, I would suggest, because there is no scarcity
03:09 now with a large entry of a player like Jio.
03:14 And if I see the information memorandum of Jio
03:17 that came out over the weekend, it
03:20 has laid a clear roadmap.
03:23 It wants to go into consumer financial space that
03:25 is [INAUDIBLE]
03:28 It wants to get into insurance.
03:30 It wants to get into payment systems.
03:35 It's already set up a payment bank around SBI.
03:38 It is looking at getting into asset management.
03:42 So it's a very wide lending and non-lending consumer finance
03:46 business that it is looking at.
03:48 And I think this will impact the whole industry
03:53 in a positive way, give more choices to customers,
03:57 bring down the costs, make it more
04:01 efficient for the entire industry.
04:03 They will be better use of technology.
04:04 From that perspective, it is good.
04:06 On your question about what should investors look at
04:10 or how should they read it, I think
04:12 the priority is the first day or first hour
04:14 that we're seeing the stock trade.
04:16 So there is going to be tremendous technical supply
04:20 and demand-related issues.
04:24 I think it will take about week 10 days for the real price
04:27 to be discovered, real book value to be discovered,
04:31 frankly, because I have seen three different book value
04:34 numbers that take into account Reliance-Brisby stock.
04:37 Some don't take that into account.
04:39 So I think people should not jump into it.
04:41 Let the price settle.
04:44 It will be removed from some indices,
04:45 some indices, it will stay.
04:47 So I think there's going to be a lot of technical corrections
04:50 on the way.
04:52 But yeah, I think the stock is where
04:55 it is right now, which is close to the discovered price.
04:58 Yeah.
04:59 You made an interesting point about the estimate of--
05:02 and the varying estimates of the book value here.
05:05 I read an article which said that the price to book
05:07 at the derived price is about 1.9.
05:09 And I read another which had a slightly different thought
05:14 out there on the price to book as well as the thought around
05:17 how to value this as well.
05:18 So here's the question, Abhay.
05:20 Forget the next 1 day, 10 days.
05:22 I wouldn't in any way call you to comment on such things
05:24 per se, because you look at things from a very broader
05:28 lens as well.
05:29 I heard you make a very interesting point
05:32 that JFS could actually bring about a moderation
05:36 in valuations for a bunch of other industry players.
05:39 At the same time, this is a behemoth
05:44 which is now listed and has interesting tie-ups.
05:47 I mean, asset management is not just a plain Jane 480s
05:50 with BlackRock.
05:51 I mean, they have their nuts and bolts
05:52 sorted out on multiple fronts.
05:54 Is this the vehicle that you would trust, I presume?
05:59 I'm asking you.
06:00 And maybe you don't have an answer, but I'm asking you.
06:02 Is it a good vehicle to trust your NBFC investments into?
06:07 Because there's a multitude of factors still available.
06:09 Or would you go for specialists?
06:10 Because there are companies which
06:12 are doing asset management well.
06:13 There are companies which are doing lending well.
06:15 And there are companies which are doing the other stuff well.
06:19 I think it's a very interesting question, Niranjit,
06:22 because you're basically asking a very interesting question
06:28 from a global perspective.
06:29 In fact, frankly, Jamie DeMond would ask the same question,
06:32 that look, am I better off being everything bank,
06:36 or am I better off being a consumer bank?
06:39 And there's a debate going on in the West
06:41 that is it better to split banks?
06:43 Is the time of having large banks doing everything over?
06:48 And we saw that.
06:48 We saw Citi recently exit emerging market consumer
06:52 finance business, consumer retail bank business,
06:54 which was its core bread and butter, not that far back.
06:57 So I think you're right.
06:58 People in the West are trying to become specialists
07:03 so they can get growth going.
07:05 But in India, I think, Niranjit, the problem
07:07 is the other way, because we have
07:08 a fair bit of investment in financial services space.
07:10 And we see that for the next 5, 8, 10 years,
07:15 scale will be a major differentiator, just what
07:19 you can do as a combined entity.
07:21 And frankly, the tie-in with BlackRock--
07:24 BlackRock is the largest asset management company in the world
07:28 with no presence in India.
07:30 And if BlackRock was to come in and say,
07:32 who is the large player I can tie-in with,
07:34 it's literally-- you can count them on fingertips.
07:37 It's the big industrial groups.
07:39 And if Reliance is there, a very attractive proposition,
07:41 because here is a group that has shown
07:44 what it can do in terms of not only dreaming, but executing.
07:48 We saw that in retail that has come up and surprised people
07:52 at the sudden speed and scale it has got.
07:55 Then telecom is a classic story.
07:58 And financial services, I think, is going to be the third leg.
08:01 So I think they've got the team.
08:03 They have got people.
08:05 And I don't think they're trying to do too many businesses also,
08:09 Neeraj, because if you look at it, it's insurance.
08:12 It is lending.
08:14 It is-- and lending also, consumer-to-government lending.
08:17 I don't think they're looking at anything beyond that.
08:19 Payments is a very attractive proposition.
08:20 And I think a lot of these are built around their existing
08:24 group operations that they run through geo retail and geo
08:29 telecom.
08:30 Both these give them like a million customers' footprint
08:36 from day one.
08:37 They can launch these services on their app from day one
08:40 and just switching on a button and offering these services.
08:43 So I think the scale is already inbuilt.
08:45 And what geo would first try to do
08:48 is to use the scale it has already
08:50 got through geo retail and geo telecom
08:52 to get this business going in the form and factor
08:55 that it wants to do.
08:56 So I think where they are, I think a long way to go,
08:59 a long way of value creation, disrupting the industry
09:02 through pricing technology.
09:04 So interesting days for both investors and customers,
09:07 I would say.
09:09 OK.
09:10 And viewers, it will be very difficult to give--
09:13 I think for anybody to give clear answers
09:15 at this point of time about--
09:16 because I think the actual price discoveries, as I said,
09:19 will probably happen not now, but I
09:21 think over the course of the next few days.
09:23 Only then one can probably even assess all the nuts and bolts
09:28 and try and figure out a JFS.
09:30 So just one final question, again,
09:32 a follow-up to your first question, first answer,
09:34 I bet.
09:35 I heard you, like I said, that there
09:38 could be a moderation in valuations
09:40 for a bunch of other players.
09:43 Do you-- would it be--
09:45 would it be, therefore--
09:47 am I being too presumptuous if I say that you might not
09:51 be too constructive on NBFCs going ahead?
09:57 Yeah, I think any NBFC that is competing now head-on
10:01 with reliance on the businesses that it has already
10:04 mentioned in its information memorandum
10:08 of geofinancial services--
10:09 I mean, it's very clear.
10:10 And you read it.
10:11 There are pages on it of big businesses, wide, size.
10:13 So it's a very thoughtful strategy.
10:15 So consumers' doable lending is something
10:18 that they have thought about, Mr. Tarmac and the team.
10:21 And they have said, this is the spot
10:23 that we want to get into because it's juicy, it's large.
10:26 So it would lead to typical reliance-style price-based
10:34 fighting also.
10:34 So companies in that space that are
10:36 used to a very high net interest margin,
10:40 and because of their OEM relationships,
10:43 getting very juicy deals at their retail stores,
10:46 being able to do EMI-based financing,
10:48 I think they will see pricing pressure.
10:51 So they will see margins going down.
10:54 And similarly, for companies that
10:57 are in other spaces like payment,
10:59 I think, again, a geo payment gateway
11:02 can compete with any other payment gateway that is there,
11:05 whether it's Paytm or Google Pay or Amazon Pay
11:09 or any of these payment gateways.
11:11 You have a very strong new nuclear coming in now
11:15 in the industry.
11:16 So that will shake up a large part of that.
11:20 So I think both these places, I would
11:22 say, will see margin compression for the existing players.
11:25 And they will have to now come out and clearly say
11:27 what their competitive strategy is going to be.
11:32 I like the term "new incumbent," for sure.
11:34 You can use it very, very often for this company.
11:37 OK, Abhay, let's just broaden the sphere a bit.
11:40 And financial services is a question.
11:44 One overall-- I mean, we've spoken about FDFCs.
11:46 But very interestingly, somebody was pointing out to me
11:50 that everybody's gung-ho on banks.
11:52 And at a point of time when the US
11:54 yields are moving up, like it or not,
11:56 but that is where Indian banks typically underperform.
12:00 There seems to be a very strong correlation.
12:02 And then I was reading a note from Dr. Sikhyanarayan,
12:04 who writes for us every week.
12:06 And in that note is when he pointed out
12:09 and I got to know that actually private banks have
12:11 underperformed PSU banks all the way from November 2020.
12:17 It's not just a very recent phenomenon.
12:19 So what's happening within this banking sphere as well?
12:22 Have you given some thought to it?
12:25 Yeah, we look at-- because this is our largest
12:28 holding in our portfolio, banks and lenders, I would say.
12:31 And in terms of lenders, we have some small banks
12:33 in the portfolio.
12:34 We have microfinance companies.
12:35 We have NBFCs.
12:37 And these are all, I would say, by traditional matrix small.
12:42 We have only one large bank in our portfolio.
12:44 We've seen price correction over the last five years.
12:48 You look at the top banks like Kotak and GFC
12:51 access over five years.
12:52 The CAGR return has been sub 10%,
12:55 which is underwhelming for any institutional investor.
12:58 And I think a large part of that is that a lot of action
13:03 has shifted to bottom of the pyramid.
13:07 There is a very large population that
13:09 borrows at exorbitant rates from unstructured,
13:13 informal lenders at grassroot level,
13:17 whether they are in villages or small cities.
13:19 If you're a street food vendor, Neeraj,
13:21 I've seen instances where a street food vendor in Lucknow
13:24 borrows, say, 100 rupees in the morning
13:27 and pays back 110 rupees in the evening
13:29 and doesn't know the cost that he's incurring of daily 10%,
13:34 because he's happy to make his profit selling food and keeping
13:38 that.
13:38 So I think a lot of action is happening at the grassroot level
13:42 because smaller banks, smaller NBFCs, microfinance companies
13:45 are able to capture in a much better manner,
13:48 show much better growth from a low base.
13:51 And their valuations are substantially lower
13:54 than the large bank valuations.
13:56 So I think that's where the action has shifted,
14:00 saying that, look, let us look at the smaller banks which
14:05 can grow faster and become bigger
14:09 without sacrificing the high NIMs and the high yields
14:15 that they make.
14:17 And what has worked also in their favor, Neeraj,
14:19 is that first, the large banks used to get paid--
14:21 large private banks used to get paid a premium because
14:24 of their better lending practices,
14:26 leading to lower NPAs.
14:28 And now we have got into an asset quality cycle
14:31 over the last couple of years, especially after COVID,
14:34 that generally there is an improvement in the credit
14:38 quality.
14:38 Lenders, borrowers are paying back on time.
14:41 So asset quality has improved across the board,
14:43 even for small banks.
14:44 People who had 5%, 6% GNPA have come down to 3% GNPA.
14:49 We're seeing a lot of banks at 3% NNPAs
14:51 are now down to 1.25% NNPAs.
14:54 So they are aggressively provisioned also.
14:56 PCR ratios are up for these small banks, 75%, 80%
15:00 in some cases.
15:02 So I think that is what is attracting investors away
15:05 from the large banks which are trading at, still,
15:07 whatever I'm saying, expensive valuations and moving
15:10 towards PSU banks plus smaller private banks plus NBFCs that
15:15 are growing faster and making better ROAs and ROEs.
15:21 Got it.
15:22 Now, Viyas, because we don't have as much time,
15:24 for a lot of things that Abhay Gargwal does like,
15:27 you can refer to the previous interactions.
15:29 He's given his rationale on why textile companies--
15:31 given his rationale on why--
15:33 I think, unless I'm very wrong, he's
15:34 moderated a little bit of his exposure
15:36 to even hotel companies.
15:37 Am I wrong?
15:38 You probably did that, right?
15:39 Yeah.
15:39 You were not in hotels--
15:40 Yeah, we did that.
15:43 We put it out in the investor letter also.
15:45 We had one hospitality company, hotel company
15:49 that we have exited, Lemon Tree.
15:50 Because again, when a story becomes very public,
15:53 the valuations run up.
15:54 And then we need to move on to something else.
15:58 So I think that's what we did.
15:59 And the textile stocks, textile stories
16:02 have worked out very well.
16:05 I think today also we are seeing some of the price action
16:07 in stocks that we own in that space.
16:11 So yeah, again, I think playing small caps,
16:14 mid-caps through a theme is a good way
16:17 to do it rather than taking single stock picks.
16:20 Got it.
16:21 So we'll just keep that in mind.
16:22 I mean, for that, you can refer to the previous conversation.
16:24 The reason I say this is because before I wrap up
16:26 this interview, I want to ask Abhay about the fear that
16:29 is plaguing the market at large, the macro question, which
16:32 is, what will happen, Abhay, to the market sentiment
16:35 or actual performance with the way the US yields are moving up
16:39 and what's happening in China?
16:43 Because I saw a tweet from you which rightly said
16:46 that this is not a fear of inflation, which
16:48 is leading to the yields moving up.
16:49 There are technical factors at play.
16:51 So please fill us in on this before we wrap up the show.
16:55 So I think this has been in the making again, Neeraj,
16:58 and you have seen it and I've seen this,
17:00 that China post-COVID has not recovered.
17:04 It has continued to worry about low growth
17:09 and also been shut out from a lot of global markets,
17:12 a lot of global capital that used to come to fund China's
17:15 growth is missing now suddenly.
17:17 So China has been left with no option
17:20 but to stimulate its economy by using its own resources.
17:24 And its biggest resource is about $1.5 trillion
17:28 of forex reserves that it has.
17:30 And those forex reserves are, again, a very large amount,
17:33 I think almost $800 trillion in US treasuries.
17:37 So you have to understand that when US borrows,
17:41 it issues US dollar treasuries.
17:44 And these treasuries are bought by central banks
17:46 all over the world.
17:48 And that's the way US has been funding its own ballooning
17:52 fiscal deficit.
17:53 But now we have come to a point that a lot of sovereign banks
17:58 and a lot of central banks are focused
18:01 on stimulating their own economy rather than buying or using
18:05 the money to keep buying US dollar treasuries.
18:07 So now US dollar treasuries, yields
18:10 are getting impacted because suddenly we're
18:12 seeing yields go up across the board, 30-year, 2-year, 10-year,
18:16 5-year US dollar treasuries are high only for the reason
18:21 that these treasuries are getting down.
18:23 So China is taking the lead in that.
18:25 It wants to stimulate its own economy.
18:27 There's nothing wrong with that.
18:28 That is what anybody would do.
18:30 Use its resources.
18:31 It will put pressure on US dollar yields.
18:33 But also, I think it will, in a indirect way,
18:36 get international investors to look at emerging markets,
18:39 especially India, that still have very low
18:41 weightage in the MSCI Global Index.
18:44 So I think all this is going to work out in India's favor
18:47 here, even with a lag.
18:49 But over the next one or two years,
18:50 I expect to see a lot of foreign capital,
18:52 both FPI driven for the markets and strategic capital
18:57 to come into the country.
19:00 Cross fingers for all of that.
19:02 Abhay, always a pleasure talking to you.
19:03 I know we focused a lot more on micro,
19:05 but JFS is a big event, so I thought
19:07 we'll get that out of the way as well.
19:08 Thank you for your time and for your wisdom.
19:11 Thank you so much.
19:12 It's my pleasure, Neeraj, always to be on your show
19:15 and share my wisdom.
19:16 Thank you.
19:17 Many, many thanks.
19:18 And viewers, thanks for tuning in to this edition
19:20 of The Talking Point.
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