'SBI Cards among 3 companies that can re-capture lost ground'

Manali Bhatia

The current situation demands of investment opportunities in various stocks or sectors that one can look into. Valuations for most companies have dropped to nearly 50 percent making them lucrative.

Clearly, it's the right time for investment opportunities. But, in which stocks and sectors, is the question.

The global markets are settling now as the number of cases abroad is saturating. In India too, expected easing of restrictions in tranches is may fuel market further. A stimulus package has already been announced and another one is likely soon. Thus, at this time it is prudent to invest in a well-diversified portfolio consisting of strong fundamentals, healthy ratios and one which has the potential to re-energise post lockdown.

Given the uncertainties surrounding COVID-19, change in consumer behavior is much likely & thus the value for insuring oneself would be acknowledged as a pure risk cover rather than just an investment product. As a result, this would lead to higher demand for high margin protection products in the future. Thus, investment in such companies would give healthy returns once the market gets back on track.

ICICI Prudential Life is a leader in private sector life insurance companies in India with an AUM (assets under management) of Rs 1.71 lakh crore and in-force sum assured of approximately Rs 13.60 lakh crore. Its strong brand, robust distribution network, sustainable business model, and high persistency ratio adds competitive strength to its business model. In the next 3-4 years, the VNB (value of new business) is expected to double.

Similarly, Nippon Life Asset Management, being the sole promoter of Nippon India (75 percent holding) & given its credibility worldwide, shall remain stable. No doubt, the pandemic is likely to create a deep impact on profitability and earnings. But, we believe Nippon can shape up again in the next 3-6 months. It's true that whole Mutual fund industry cannot collapse, though revenue streams and cash flows may get minimal to some extent. Therefore, the near term outlook seems challenging but, we believe the industry will reclaim its lost ground with meaningful pick up in asset growth over the long term. In fact, growing consumer traction towards investment in financial assets, limited players, low penetration, huge market potential, high return ratios and zero debt, could lead the stock to higher levels but all this will happen in long term.

Also, we believe SBI Cards and Payment Services is another company to look into. It has the highest credit rating with AAA/stable rating (as per ICRA & Crisil). FIIs had increased stake from 3.53 percent (at the time of listing) to 4.03 percent (at the end of March), and DIIs to 3.04 percent from 1.6 percent. It is making up plans for special focus on online spends post lockdown. Generally, credit cardholders belong to educated, high rated and corporate clients having the capability to repay dues on time (especially for short term).

Thereby, a credit card holder would repay dues on priority rather than taking moratorium announced by RBI as one has to pay a huge interest of around 40-45 percent annually or 3-3.5 percent monthly. Instead, would prefer moratorium on term loans by banks or other financial institutions where the interest of 9-10 percent is being charged annually. Thus, it is quite clear that a good recovery for the credit card industry is expected.

Already, SBI Cards haS narrowed the borrowing limit. Therefore, altogether the risk of NPA for the credit card industry seems better than others. Though, the credit card industry is looking weak in the near term due to cautious discretionary spends, in the longer-term, as the businesses resume operations, we believe this industry will pick up pace.

Thus, SBI card being the sole listed player in terms of the credit card industry with extensive credit card portfolio would regain strength.

(The author is Senior Research Analyst at Rudra Shares & Stock Brokers.)