NBFCs play an incredibly important role in the system and those which have an advantage in terms of retail distribution and better management practices, have a long way to go, Shailesh R Bhan, Deputy CEO, Reliance Capital AM, tells Ajaya Sharma of ET Now, at an exclusive interview at the sidelines of the Morningstar conference.
Edited excerpts:
Nifty is down 12-13% on a year till date basis and in the broader markets — smallcap and midcap — the damage has been 40-50%. As a fund house. how are you approaching this bearish phase in the market if you will?
After a very strong outperformance, the markets have corrected. Between 2013 and 2017, there was a very big run rate. After that, in pockets of the market, valuations had gone into very expensive zones, especially the small and midcap places where we have seen a pullback.
Generally good quality businesses which were rationally valued have done well even in this environment and hence the differential. Two years back, the talk was midcaps outperforming largecaps and the premium to their valuations was 20, 30, 40% higher. Now that has given away. So, the distortion which was there in terms of relative valuations of largecaps and midcaps has corrected.
Our approach is simple. From a three-year point of view, we are studying which kind of businesses have an earnings momentum, are directionally seeing an improving operating environment and how supportive are the tailwinds for those companies. That is our construct for investing. We continue to believe that the largecap space is still rational and over a three-year period provides a good opportunity.
Over a period of time, people can look at other spaces as well but at the moment given elections and given the volatility, the largecap or multi cap space is a better space to be in.
The latest letdown in the market was triggered by a liquidity crunch in the system and NBFCs sold off big time and were followed by all financials. Which are the companies from the NBFC space you think will survive the shock and which are the ones which may fall by the wayside?
NBFCs had a very good run in the last three, four years, you had other challenges in the banking sector which created a very good runway for non-banking finance companies to lend and grow. In that phase, there were many companies with strong capabilities doing exceedingly well and companies with average capabilities getting a good reward in the market. It was kind of a semi bubble in NBFC companies at that point of time.
Now after things have changed and easy money is not available to lend, you will find companies with significant retail presence, who have strong credit processes that can handle the volatility in the credit market. Those sets of businesses are very well placed. NBFCs play an incredibly important role in the system and those which are able to have an advantage in terms of retail distribution, better management practices and all that, have a long way to go.
Companies which were just an arbitrage will be challenged. So, retail driven franchises with reasonable ability to manage liabilities are doing very well.
Are you still saying that the structural story is intact?
NBFCs are needed in places where banks cannot reach. India is a large country and there are a lot of products where banks have not reached because it takes that much time to penetrate and do that risk profiling of customers.
There was a huge window which did not have traditional banking. The NBFCs had a significant role to play and they still have a granular significant role to play. Wherever there was lazy banking, NBFCs had an advantage and reached out to the customers.
There are still a lot of places where credit is required where now you have tools also to monitor and manage, retrieve and handle the whole process. Those sets of businesses have a good long-term opportunity.
You have seen several corrections and boom phases. How much pain is there and how many months could this last in your view?
You have seen a four, five-year, substantially elongated run and some of this run was also on the back of strong earnings in certain sectors which were given significant valuation by the market players. The market actually was in some sense split into two pockets; one segment of the market being overvalued for the growth they were delivering and other pocket was undervalued because there was no momentum in that spaces.
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ET Markets
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