The key mantra in equity investment is to invest when your margin of safety is the highest. That’s when the biggest money is made.
This is the worst period we’ve been in the last 40 years (GDP decline) and the situation will get better from hereonBy Aishvarya Dadheech
BFSI is presenting a unique investment opportunity as market participants panic about severe post COVID impact. The market is expecting a huge impact on asset quality due to the economic slowdown, job losses and stress on SME/MSME. However, a lot of this pessimism is already priced in.
The GDP of a country is a factor of money supply (M1/M2) and the velocity at which that money moves. If our current GDP of INR 200tn is to reach INR 240-260tn, the velocity will have to pick up, implying strong credit (currently INR 100-150tn) growth. In addition to this, the consolidation theme will play out with the survival of the fittest, and big players getting bigger. Moreover, the IL&FS & DHFL crisis proved to be a blessing-in-disguise for the banking industry. It pushed them to correct their ALM mismatch, reduce wholesale funding, increase liquidity and create capital buffers, thus preparing them in advance for the worst.
One should invest in BFSI names that have the following traits: 1) Survived similar crisis in the past (GFC, IL&FS default) unscathed; 2) Strong Balance sheet with high capital adequacy, positive ALM and good asset quality; 3) Discreet lending practices like low LTV and high insourcing; 4) Ability to price the underwriting risk well; 5) Superior processes, which enable lenders to gain market share in a crisis.
The key mantra in equity investment is to invest when your margin of safety is the highest. That’s when the biggest money is made. Currently, the valuations have become attractive for the broad Bank Nifty universe (PB ratio of 2x compared to 3.4x in Dec-19) providing a healthy margin of safety. A wise investor once said – be greedy when others are fearful. This is the worst period we’ve been in the last 40 years (GDP decline) and the situation will get better from hereon. What better time to invest in the growth engine of the economy!
(Aishvarya Dadheech is the fund manager at Ambit Asset Management. The views expressed are the author’s own)
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