market strategy: NBFCs set to shine in easing rate regime, banks to see measured gains: Sandip Sabharwal

“So, now we are at a scenario where there is huge inventory in the system and there could be price cuts, etc, to push volumes and next year’s again the dispatches from companies could get impacted because the system is so overstuffed,” says Sandip Sabharwal, asksandipsabharwal.com.

But Banks vis-à-vis NBFCs which is looking better to you right now because in this rate cut cycle what we have seen and what is the expectation ahead believe that this another rate cut could put some pressure to the Nims for the banking space but indeed could be very good for the NBFCs.
Sandip Sabharwal: So, what has happened now that after the rate cut cycle has started, now for banks it is coming to a stage because we have had previous cut so we are coming to a stage where bank’s NIMs will start getting adjusted. So, although there will be a near-term, short-term impact, but longer term it improves the prospects because lower interest rates lead to better asset quality and better asset quality is always better than having a five basis point extra margin.

But you rightly said that NBFCs tend to benefit much more in a rate cut cycle because banks have casa deposits which are more or less fixed rates which can vary maybe a little bit here or there, but NBFCs tend to be more bulk borrowers and with lot of NBFCs having loans which are fixed rate, so a rate cut cycle typically would benefit NBFCs much more, so directionally some NBFCs like the high quality ones would outperform banks, but overall for banks also it is not bad at all.

What are you making of these notes coming in from Antique this morning? How do you believe that sectors that could be hampered by this early monsoon like cement and now air conditioning too could pan out going ahead because Antique believes the only trigger here could be the festive season, otherwise it looks pretty lacklustre for companies belonging to these sectors?
Sandip Sabharwal: Yes, for air conditioning companies obviously this has been a negative development because last year growth came back after a very long period of time and this year there was the expectation of high growth and as such many of these companies just stuffed the overall system distributors, retailers with huge amount of inventory because the initial prediction if you see by the IMD was for a very severe summer and then, we had early monsoons, unseasonal rains, etc.

So, now we are at a scenario where there is huge inventory in the system and there could be price cuts, etc, to push volumes and next year’s again the dispatches from companies could get impacted because the system is so overstuffed.

So, it will be a challenging time for this segment at least. And cement also like the companies tried to increase prices, obviously early monsoons need lower demand in the near term and the valuations of most of the cement companies are very-very high given that it is a commodity business, many of the stock if you see something like Ambuja Cement it trades at some 60 times earnings.So, we need to see these stocks correct and once the correction plays out, a normal monsoon would actually mean better longer-term demand because as water availability improves. So, if many of these stocks actually correct during the monsoons, then it might be a good time to actually look at them at that point of time.