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My Best Pick
22 December 2017 / Outlook BUSINESSI
t’s amazing how things can change in
such a short span. Last year, when I was
pencilling the top pick for 2017 , demon-
etisation was announced, Trump was
elected as the US president and most market ana-
lysts had painted a picture of gloom and doom.
These are typical times that a value investor cher-
ishes. My last year’s pick was Reliance Industries. It
has done well (up 67. 7 % YTD), surpassing even my
expectations.
However, this year the overall mood towards eq-
uity is very positive. Contrary to what most people
had predicted at the start of the year, Nift y is up
25 % YTD with high beta cyclicals leading the way.
Such a sharp rally amid subdued returns of other as-
set classes (real estate, fi xed income, and gold) has
resulted in equities becoming the most preferred as-
set class among households. In such an environment,
one needs to be cautious in selecting stocks. As War-
ren Buff ett says, “One should be afraid when every-
body is greedy.” Nonetheless, investment opportuni-
ties always persist. So, my top pick for the New Year
is ICICI Bank. Here’s why.THE THREE Rs
Recognition, re-capitalisation and now resolution.
While investing in any company, I am a strong believ-
er that it is the macro environment rather than stock-
specifi c factors which drive return. Here, I think,
things seem to be, fi nally, moving. India’s corporatelenders have for long been kicking the can down the
road. Projects which were bid in the past decade under
optimistic assumptions have become unviable, owing
to the slowdown. In the early part of this decade, most
banks were unwilling to recognise these mistakes.
However, in recent years, the central bank has forced
a lot of recognition in these banks. Owing to lack of
capital, especially in public sector banks (PSBs) and
India’s poor bankruptcy framework, things were mov-
ing at a slow pace. But with the recent capitalisation
of PSBs, along with the new bankruptcy code, there is
light at the end of the tunnel. While this could entail
pain in the near term as it will cause more haircuts,
it will end the seven-year slowdown and, fi nally, help
the bank focus on growth rather than spend time on
managing non-performing assets.BETTER OF THE LOT
After spotting the macro theme, the next step is
to compare it with peers. This is where I think ICI-
CI Bank really stands out among corporate lenders.
Among private sector corporate lenders, its stress rec-
ognition is at a more advanced stage compared with
PSBs, despite the capital infusion by the government.
Hence, ICICI Bank is better placed owing to lower
stressed assets and a stronger retail franchise.ARE THERE ANY FREEBIES?
While buying socks or stocks, I always look for free-
bies — perhaps it’s my Marwari DNA! This is where I
think ICICI Bank scores well above its peers. Its sub-
sidiaries in life insurance, general insurance and as-
set management are among the largest and fastest
growing among peers. Despite making up for 30 % of
the stock value, the subsidiaries are least discussed in
my interactions with most institutional clients. Fur-
ther, these subsidiaries are the best play on India’s fi -
nancialisation story. Given the bank’s large customer
base, there are very high synergies that the subsidiar-
ies have with the bank’s core lending book. While life
and general insurance are listed, the AMC and secu-
rities businesses are still not. In other words, there is
further scope for value unlocking.Stress-free
Exposure to stressed segments is coming off gradually
Q2FY17 Q3FY17 Q4FY17 Q1FY18
Power 5 5.4 5.1 4.8
Iron/Steel 3.8 3.8 3.6 3.6
Mining 1.6 1.6 1.8 1.8
Cement 1.1 1.1 1.1 1.1
Rigs 0.4 0.5 0.4 0.4
Note: Sector exposure as % of total loan book Source: CompanyNote: Market related data as on December 1, 2017; Financials
for FY17; Consolidated fi nancials considered wherever ap-
plicable
Data: Ace Equitynet sales#60 ,940cr
stock price# 305 M-CAP#1 ,95 , 937cr
ROE 11.76%