Vantage Point

Dear Investor,

As I begin writing this note at the end of a delayed earnings season for Q4 FY20, it is important to acknowledge a surprising reduction of 2.5 million jobs in May’s Non-farm payrolls data from the United States as opposed to an expected addition of 9 million unemployed. This data has supported the bullish sentiment in favour of economy facing businesses such as Airlines, Cruises, Auto, Industrials, Banks etc. As we know, since the beginning of the global pandemic, all major markets have been following the way the US markets have been responding to the ongoing developments, both in the healthcare response to the virus and the re-opening of economic activity. The positive impact of the buoyancy in the US markets will flow into other markets in the days to come.

The stock market is the discounting mechanism that attempts to look through the near-term to make sense of the medium-term.

The stock market as we know is the discounting mechanism that attempts to look through the near term to make sense of the medium term.February 20thwas the high point for the markets before the rising infections, hospitalisations and fatalities began taking a toll. March 23rdturned out to be the day for market capitulation. Since the low point of March 23rd, the markets have bounced back rather sharply, though the drop from the Feb 20th highs is still quite large in many cases.It will be important to look at the data of the fall and rise of the leading financial sector stocks from both the high point and the low point in this cycle.

As you will notice in the tables below, the post-pandemic response to a variety of these financial sector businesses has been quite different. Markets have made a distinction between the “Epicentre stocks” that are much more adversely impacted due to the shutdown of the economy and the “Protection stocks” (showed inside the red boxes) that are either impacted much less or have in fact benefited from the shutdown.

Bounceback from the post-pandemic bottom
(23rd March – 05th June, 2020)

% Performance
Nifty Bank 24.3%
Muthoot Finance (Gold lender) 80.1%
ICICI Lombard General Insurance 57.7%
HDFC Life Insurance 50.8%
HDFC Bank 33.9%
Axis Bank 31.3%
ICICI Bank 25.8%
Kotak Mahindra Bank 21.8%
Aavas (Housing Finance) 14.3%
Bajaj Finance 5.5%
State Bank of India 3.4%

Drop from the pre-pandemic peak inspite of the bounceback (20th February – 05th June, 2020)

% Performance
Nifty Bank -32.0%
Bajaj Finance -51.0%
Axis Bank -45.5%
State Bank of India -42.7%
Aavas (Housing Finance) -39.0%
ICICI Bank -34.7%
Kotak Mahindra Bank -20.7%
HDFC Bank -15.1%
Muthoot Finance (Gold lender) 80.1%
ICICI Lombard General Insurance 57.7%
HDFC Life Insurance 50.8%

Note: The performance for Trivantage Capital Resurgent Financials is that of the model portfolio of the strategy and is net of expenses. Actual client performance may vary. Past performance may not be sustained in future.

Almost all lenders with the exception of Gold Finance businesses were at the Epicentre of this pandemic due to the concerns on loan losses and provisions. Insurers, on the other hand, were beneficiaries due to the increased attention on health and life insurance policies.

Our response to the rapidly developing situation was to re-align the portfolio such that we retain the best of the Epicentre stocks and add the weights in a few of the Protection Stocks.

This “bar-bell investing approach” was key to balance the portfolio to participate in a sudden rally in case of an absence of a second wave of infections after the re-opening of the economy and some downside protection in case of another shutdown after re-opening.

The tilt of our portfolio, however, was and continues to be in favour of the Epicentre stocks.

We continue to believe that the market overshot on the downside in March expecting the worst possible impact on the loan losses across Retail, SME and Corporate borrowers and has tried to mend that in the recent days.

As we began analysing the moratorium data across universal banks, small finance banks, NBFCs etc, we realised that many borrowers opted for moratoriums merely to create liquidity buffers in case of a prolonged lock-down and not because they were unable to pay back the EMIs.The table alongside lists the moratorium percentages of some of the leading lenders.

With the extension of moratoriums till 31stAugust 2020, the data on loan repayments will only start flowing in, effective 1stSeptember.

We believe the markets will be surprised by the extent of re-payments in case of many lenders and that would help in re-rating those lenders.

The valuations of many leading lenders have shrunk to multi-year lows and as we proceed towards the second half of FY21, the process of normalisation in valuations would be well underway on the back of improvements in return ratios. For example, we expect ICICI Bank to deliver 15% RoE in FY 22 and as the market also starts getting convinced of the same the valuations will move up towards 2.0x P/B.

Moratorium % Across Lenders

Moratorium %
ICICI Bank 30.0%
Axis Bank 30.0%
Bajaj Finance 27.0%
Kotak Mahindra Bank 26.0%
HDFC Bank 25.0%

Change in Valuations

Trailing P/B (Standalone)
20 Feb '20 5 Jun '20
Axis Bank 2.4 1.4
ICICI Bank 2.3 1.5
HDFC Bank 4.1 3.3
Kotak Mahindra Bank 4.8 3.8
Bajaj Finance 9.3 4.5

However, there are a few potential headwinds or risks that the markets may have to face over FY21. These could be:

  1. Escalation of US-China dispute
  2. Delay in the launch of an anti-viral drug and vaccine to neutralise the Corona Virus
  3. A second wave of infections as global economies re-open

A very important support to the markets has been the way the global central banks have responded to stimulate the economies. The Fed’s unprecedented stimulus has prevented many businesses from insolvency and revived them in a way that they could raise record levels of debt and equity capital. The abundant liquidity conditionshave energised the “Risk-On” sentiment in the markets thatis quite helpful for the flow of investments into Emerging Markets such as India, as has been evidenced recently.

There are a few other positives for us in India. RBI will try to keep short-term interest rates low which is quite positive for boosting demand for housing. Borrowers are currently paying the lowest interest rates ever particularly if they have linked their floating rates with Treasury Bills. We believe that the demand for residential housing will be the first to pick up after the “work from home” experiencegets extended for several employees across sectors as part of achieving cost efficiencies.


We, along with many in the markets, are beginning to see light at the end of the tunnel. We are confident that our portfolio companies represent the best the Indian financial services have to offer and will not only survive but will emerge stronger at the end of the pandemic induced economic crisis. The journey, however, is unlikely to be smooth and would need patience and ability to handle volatility.

Disclaimers: In the preparation of this material, the Portfolio Manager has used information that is publicly available, including information developed in-house. Some of the material used herein may have been obtained from members/persons other than the Portfolio Manager and which may have been made available to the Portfolio Manager. Information gathered and material used herein is believed to be from reliable sources. The Portfolio Manager, however, does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material, no such party will assume any liability for the same. We have included statements/opinions/recommendations in this material, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such expressions, which are “forward-looking statements”. Actual results may differ materially from those suggested by the forward-looking statements. This material has been prepared by Trivantage Capital Management India Private Limited and is meant for information purposes only. The Portfolio Manager and its clients may be holding positions in the securities mentioned in this communication.

Statutory Details: Trivantage Capital Management India Private Limited is a private limited company incorporated under the Companies Act, 2013 and having its registered office at 508, Arcadia, NCPA Marg, Nariman Point, Mumbai – 400 021, India and is registered with Securities and Exchange Board of India as a Portfolio Manager vide Registration Number INP000004656


Nikhil Johri

Nikhil Johri
Founder & Chief Investment Officer