Let us start with NBFCs, that is something which we have been tracking really for a long time. You think that if there is any sense that rates in the system are peaking out, you think NBFCs will be the first one to benefit because they have not done as well as banks? Then you add the entire IL&FS issue, where NBFCs were forced to change their liability and asset models. How do you see the sector placed now?
I think with the rates peaking out because of whatever happens globally. There are two ways in which the rates can peak out; one is that we break the back of inflation and then the rates peak out. So that is a very good setup for a big macro rally in the economy, as well as in NBFCs. But here, we are seeing a little bit of peaking out of rate because I think there is a sort of demand destruction kind of a scenario globally.What happened in the US with the banking system and now it has spread to Europe. So I think this rate reduction is largely to do with demand destruction or a softer demand kind of a scenario. So I think it is a little early to celebrate and say that NBFCs will just start doing well because the rates are going to probably peak out or maybe they will start declining say six months down the line but the point is what happens to the demand, what happens to the end consumer segments?
So in NBFCs, the largest segment is the housing finance companies. Housing finance companies, are doing 9%, 9.5% kind of home loan rates. You are not going to see a massive growth. The premium end of the housing will still do well but those customers take loans from banks and not really from the housing finance companies.
Second, you come to CV finance companies. I think that is one bright spot because the underlying demand is very strong. The resale rates of the vehicles are quite high because of the inflation and the cash flows are good. So I think this is one segment where, I would really stick out my neck and say that, in the next 12 months, you can look at good positive returns in this sector.
And third is microfinance. Microfinance is again where it is in its own world and the demand has really started picking up. So that is one sector where you will see 25% kind of growth. But apart from these two, commercial vehicles and microfinance, I think it is a struggle.
Consumer finance will struggle, gold finance will struggle and housing finance will struggle. So I think you pick and choose, it is bottoms up even in the NBFC sector, not just like the whole sector rallying together.
I wonder if you have looked at the latest announcement coming in from Paytm regarding the interoperability because they have announced that Paytm wallet is now universally acceptable on all UPI QRs and online merchants as NPCI has announced that KYC wallet interoperability is now completed. Do you think that could materially change the fate of Paytm and overall your outlook as far as that stock is concerned?
I think incrementally Paytm’s payment business was always a loss-making business or at best a break-even business because that was the business which they used to recruit users like you and me and all the merchants, the kirana shops and the vegetable vendors and a lot of other merchants who do small time businesses. So this business was always thought of as you get people on your platform and then you try to cross sell something to them. And cross sell, I think Paytm, the only thing they have successfully cross sold is the loans. They have been successful at cross selling loans, the buy now pay later kind of consumption loans and the merchant loans.
So I think this interoperability, what it does is, it just increases the probability of customers sticking more to your platform. And once the customers stick more to your platform, you can cross sell them a little more. So I think in that sense, it is incrementally positive for Paytm but I think that the model still has a lot to evolve. All these new age companies, they really may or may not be fully compliant with what the RBI guidelines around lending and partnership with other NBFCs and banks are. So I think incrementally, yes, positive, but not something that we will just go gaga over as yet.
Do you track UPL closely or any of the chemical companies because there was China plus one earlier, now there is Europe plus one and it seems like a lot of these export orders are coming India’s way, especially in speciality chemicals?
We are tracking it only in terms of the top down as to when the pricing erosion stops and we had euphoria in the chemical sector in the last 3-4 years, the margins expanded, a lot of players announced capex and now suddenly there is a slowdown in demand across the world.
I think this sector is best left to its own, let it fight its own battle and I think it is another 6 months so to say before the stocks and the businesses bottom out. So I think we are watching this space but not like we are just very gaga over the space right now because I think it’s rallied like most of the stocks rallied 5-10x between 2018-21. And I think after such a rally and when there is capex and demand is slow, we see years of sideways consolidation.
So I think the down journey is probably over in many stocks but the sideways consolidation will still be there. So we have not done a lot of bottoms up work on the sector, let the top down settle first and then we will get into action in this sector.
