Chris Wood rejigs Indian stock exposure; SBI Life replaces Arvind Fashions

The slowdown in the Indian economy and its impact on consumption-related sectors has made global investors, too, sit up and take notice. In his recent weekly note to investors GREED & fear, Christopher Wood, global head of equity strategy at Jefferies, cautions that the ‘consumer financing boom’ in India has peaked. On the other hand, the boom in insurance stocks thus far in calendar year 2019 (CY19) has made him alter allocation to Indian stocks, with the addition of SBI Life in his Asia ex-Japan long-only portfolio.

“There was a slowdown in loan growth reported by India’s HDFC Bank. This should be seen as further confirmation that the consumer financing boom in India in recent years has peaked, in part as a result of the ongoing fallout in the NBFC sector triggered almost a year ago by the default of triple-A rated IL&FS,” Wood wrote.

HDFC Bank’s total loans and advances surged 17 per cent year-on-year (y-o-y) in the first quarter if the financial year 2019-20 (Q1FY20), down from 24 per cent y-o-y at the end of FY19.

However, Wood has retained HDFC Bank in his Asia ex-Japan long-only portfolio despite the cyclical risks, since the bank remains India’s quality private sector consumer lender. However, the overall allocation / exposure to the consumer sector has been rejiged.

“It makes sense to reduce the beta on some other consumer related exposure. Arvind Fashions will be removed with the money moved into SBI Life,” Wood said.

Besides HDFC Bank, some of the Indian stocks in his Asia ex-Japan long-only portfolio are Reliance Industries, ICICI Bank, Axis Bank and HDFC. Thus far in calendar year 2019, most of his stock picks from the Indian basket have outperformed the S&P BSE Sensex. Godrej Properties, the top gainer in this pack, for instance, has surged over 45 per cent as compared to 4.9 per cent rise in the S&P BSE Sensex, ACE Equity data show.

Insurance boom

Listed stocks from the insurance sector have raced away in CY19, outperforming the S&P BSE Sensex by a wide margin. SBI Life, Wood’s latest addition to the portfolio, has been the top gainer in this space with a rise of 33 per cent on YTD basis, followed by HDFC Life (up 29 per cent) and ICICI Prudential Life (23 per cent), ACE equity data show.

Despite the run up, most brokerages have a buy rating on life insurers from a long-term perspective, and especially SBI Life. Nomura, for instance, has a buy rating on the stock with a target price of Rs 900. The stock, they say, has re-rated from 1.9x March-21 enterprise value (EV) to 2.5x March-21 book over the past three months.

“SBI Life’s performance remained strong in the June quarter, with a focus on increasing share of individual protection, best-in-class opex ratios, coupled with its parent’s distribution strength. We expect SBI Life to deliver over 20 per cent value of new business (VNB) CAGR over FY19-22F. We increase our target price to Rs 900 per share, based on 2.65x September-21 EV and 22x September-21 VNB,” wrote Adarsh Parasrampuria, Amit Nanavati and Tanuj Kyal of Nomura in a recent co-authored report.

Indian curry: Exposure to India in Wood's Asia ex-Japan portfolio

-	Weight (%)	YTD change (%)
Godrej Properties	6	45.40
SBI Life Insurance	4	33.76
Axis Bank	5	16.70
Bajaj Finance	5	15.34
ICICI Bank	5	13.63
HDFC	5	11.46
Reliance Industries	5	9.92
HDFC Bank	5	7.70
S&P BSE Sensex	--	4.89
Dalmia Bharat	4	-12.74
Gruh Finance	5	-20.36

Source: Wood's weekly newsletter, GREED & fear; stock data from ACE Equity