Go with cyclicals, avoid high value stocks: Santosh Kumar Singh

“Insurance is a structural industry where the next couple of years are going to be quite interesting from a profitability point of view,” says Santosh Kumar Singh, Head of Research, Motilal Oswal AMC.


I remember your legendary call on insurance companies several years back and now we are talking about another unique insurance company making its way to D-Street — Star Health. What are your thoughts on that space?
This entire space has been impacted severely by Covid and so the negative impact was visible in numbers across the board in the entire general insurance space and more so for the health insurance companies like Star Health or Care Insurance. Now it is one year negative, but it has multi-year positive coming into it. As such my view is very simple in this particular space. These companies, like consumer companies, need these products. They have an additional advantage where they can pick their customers.

I would expect this entire space to grow in excess of 12% to 15% for almost a decade and within that space, the next two-three years could be significantly more positive because this loss which has happened needs to be absorbed by the insurance companies. There could be some pricing action as well in this particular space. You might see that in the next couple of years, the growth in profitability might be higher than the overall growth. It is a structural industry where the next couple of years are going to be quite interesting from a profitability point of view.

How are you looking at the NBFC/housing finance space, especially retail centric? NBFCs have borne the brunt of wholesale and are now turning into tech enabled retail. What do you like in this entire area?
The market only bites when numbers are there. Last time I had said that all these companies in the next one or two quarters, will get NPLs which they will need to write off. So the NPLs have happened, they are writing it off, they are keeping provision for next one or two quarters.

In this space, if a company has not suffered fraud, then in the next two-three years there will be high growth on the top line and even negative sort of credit cost in one or two years. Today we are seeing a surge in credit cost but it is very much possible that in the next two to three years, there could be one year where these companies can have even negative credit cost and this is what we have seen in the last 20 years in this particular industry.

We have seen multiple times that the cycle starts with housing wherein everyone wants to do housing and that is why there is a lot of pressure on yields. But when the cycle gets positive on the economy side, the pressure on the NIMs will also reduce. So we will have three levers to play with in this particular industry for the next two to three years. We have the top line lever through the loan book growth; we have the NIM lever because the competition might slow down a little bit and the better guys will keep on getting market share and then we have the credit cost lever which will definitely play out because a lot of assets have been written off and these are all secured loans. This is a space where one needs to be in for the next two to three years.

Do you believe that the start of the lending and credit cycle is happening and which are the companies that are best placed to achieve that?
I can clearly see that it has started in housing. But overall on the lending side, there are signs to show that even on the corporate side, we are seeing some bit of demand coming in. This was the area which was missing the corporate demand for loans. So on the corporate side also, we are seeing some demand.

If the positive commodity cycle continues for next two to three years and if there is an infra demand, then the corporate demand would kick in. So clearly the beneficiaries are going to be either the housing finance companies or the large banks. These are the two parts which will be clear beneficiaries of whatever is happening. There is a clear scenario wherein for the next two to three years, these large banks or the housing finance companies might do really well.

Apart from that where do you see margin of safety, which are the sub-themes you are working on which are not fully priced in right now?
The one area which I keep on talking about is the real estate companies because my belief is that last decade was written off for this entire sector. Real estate globally is one of the largest sectors. We will always need houses and offices. But for the last one decade, this sector was written off and that is why consolidation has happened in the sector. I think we are just looking at the tip of the iceberg with some bit of demand coming into real estate sector; The pricing action has not started yet and we have seen how vicious the pricing action could be in this particular space so I really like the real estate theme as such and we have been working a lot on this particular space and specifically now the commercial real estate side seems to be where the pricing action has not happened even from the market side. A lot of people believe that we will continue working from home and it will be a model wherein a lot of people will work from home and the realisation now is that actually everyone wants their employees to be in offices. So commercial real estate is another area where there could be a lot of action.

Which are the highest commercial exposure companies in India?
The largest would be the combined entity which is coming up from Indiabulls and the Embassy company which is coming up. The second one DLF. Then there is Prestige, Godrej, Oberoi. There are multiple players in this particular space which are really good and high quality.

What are the risks according to you?
The biggest risk to me is the fact that we are going to have a number of elections in the next two years. I do not want the government to go back on anything they have done on the reform side, like the Farm Bill though that is not going to impact much. I would definitely watch out for that particular risk.

Another risk which everyone keeps on highlighting is about inflation and lower liquidity. That to me is a big opportunity because generally if inflation is below 10%, it is great because inflation actually comes in when one sees high demand coming in. We do not want an inflation scenario like 2012-14 where it moved above into double digits.

Inflation between 4-5% and 7-8% is a good scenario to be in if the growth rate is very high. The authorities globally think that the economy can bear those shocks so actually the economy is in a better footing. Those risks will be more from a shorter duration perspective and will create volatility, but the bigger risk from the Indian market perspective is looking at these two years through the political lens.

If the next 12-24 months are going to be challenging and wobbly but at the same time economic expansion and earning expansion continues, which are the top three, four sectors that could present very good buying opportunities?
This time earning is expanding in sectors which have traditionally been non-quality. I do not believe in the quality or non-quality sectors, But the cyclicals are the ones wherein the most of the earning recovery is happening because they have come off from almost a lost decade and there the valuations are still quite cheap. I would stay with the cyclical part of it.

Even in auto, other than the two-wheelers, the rest of the segments are okay. The two-wheeler segment is a place where transition is happening. I do not know how the transition will play out.

Then there are cyclicals on the infra side, real estate side and even lending is one part I am really bullish on. Insurance has not done well from a stock perspective for the last two years but those companies have done exceptionally and these are the areas where I would like to be.

The one area I think where inflation is a problem is the high value stocks. For a very long period, I used to read notes that the valuations are justified because we are in a very low inflation environment. So we need to be worried about the very high valuation stocks.