Within pharma and healthcare which are your top recommendations?
So, we again are tracking diagnostics. Initially, we had issues when the disruption happened by the new-age companies. I think consolidation is coming back to stronger names. So, we tracked Dr Lal while Q1 was a little soft because of a bit of seasonality but they continue to improve on the test mix as well as the new distribution reach as they are setting up both in terms of collection centres as well as the super speciality test.
I think the patient realisation has also gone up. It is nearing almost per patient to about 800 bucks or something and I think there is a lot of unorganised market here.
So, we probably see some movement also which we call informal to formal over a period of time, so that is something we are tracking now.
Hospital space we like but it is just that the stocks have just run up too quickly and as I said, in hotels, even in hospitals again the capital allocation has improved significantly. So, for example, Max is only focussed on Delhi, Mumbai, largely metros.
And Narayana Hrudayalaya again is more in tier II towns and then we like one name, which is into child paediatric care which is Rainbow. So, we are tracking them. But valuation wise, again, not much comfort in these markets.
Bajaj Finance continues to be your favourite there. You talked about Jio Financial as well. But let us say from the micro finance, from the other select NBFCs, any other name that you would want to recommend?
So, we like the affordable housing space. The SARFAESI Act Rs 15 lakhs, which means the asset recovery is pretty good, plus it is secured lending and banks do not get much into affordable housing. They actually buy the portfolios to meet the PSL requirements.
So, we like Home First, a very good team, and a good pedigree. They have been in various cycles, very focussed as well and they have guided for a 30% growth which makes the case stronger. We like some of the names which are adding more new credit customers to the system, including Five-Star, including CreditAccess.
So, these are some of the names we like. Poonawalla, we were lucky in terms of getting very early when they acquired Magma Fincorp.
So, we like some of these spaces, but you have to be right on the credit cycle. At some point of time, this will turn and at that point of time you have to be quick enough and nimble-footed enough to reduce some exposure because it will not give you much time. But now I think we are good for a few quarters.
But do you say Five-Star you like?
Yes, FiveStar and CreditAccess.
But why do you like FiveStar or for that matter, in the small space? I will tell you why. My logic is that I have been asking this question to everybody and no pun intended, I also like Five-Star but I like chocolate more. But the challenge with the economy is that we have seen a K-shape recovery, which means rural India is not doing well. Two-wheeler sales are not coming up. SME and the rural facing businesses are under pressure. If that is the underlying bent of the economy, then why should one buy microfinance or banks or NBFCs which have a large exposure to that category or that cohort?
So, I will tell you why we like it. So, lending is not just ability to pay, it is also, more importantly, microfinance is willingness to pay and how it is also not an art as much as a science. So, if you see the way they do credit underwriting, there is bias towards the woman owners. They also take different forms of collateral which are both soft and hard and they have been tested in a lot of cycles because in India you have state elections and there are a lot of freebies and exemptions given more often than not.
So, the business gets evolved over a period of time and credit is not something which everybody understands. So, we are actually wary of people who actually grow too fast, especially in banks.
But in these both cases, we have seen how they have done over a period of time. We track the stress pool, how the recovery, etc, happens. The local guys actually know everyone in the area where they lend. Even UP has done very well for them. UP was considered a no-go area for microfinance for some part of time but that is again coming up.
So, we are as I said, but you have to play the cycle well. You cannot take a let us say seven-eight-year view on it. If you play the cycle well and when things turn, you should be nimble footed enough to get out of it.
What are your top three bets from auto and auto ancillaries?
So, still overweight on assets versus others. So, Tata Motors, M&M being our top holdings in the portfolio and we are playing the value chain completely. So, we are playing Uno Munda, Sona BLW, Sandhar. Sandhar is a two-wheeler. Even Uno Munda has 40% mixed with two-wheelers. But in all three cases, we believe the content value and the kick value per vehicle will keep going up. There is a lot of innovation, a lot of JVs they have done and a lot of new labels added as well. So, we want to play the complete value chain and auto ancillaries give you a wider play because some of the names in PV and two-wheelers may not be listed like Hyundai, Toyota, or Kia, etc.
HFC, on paper, is great, fantastic, powerful, but companies have struggled here.
No, they have and I agree with you, that is why I said we were into affordable housing, with Home First, and we hardly have any exposure to HFC. And there we said the banks actually collaborate, they do not compete and I think also in HFC you have to get the model right. So, mortgage is about focussing on what geographies and segments you want to do.
If you want to do Delhi, Mumbai, urban, you cannot compete with banks because the cost of funds are lower, the rate is lower and NBFC, the cost of funds would always be higher.
Plus, some regulatory arbitrage has also disappeared over the period of time, a lot of regulations by RBI. So, play affordable housing more, in my view, and get into more digital lenders which are expanding the net base rather than competing with banks.