Author - Mrunmayee Jogalekar

  • Mrunmayee Jogalekar
18 Nov

Gold Loan NBFCs should not be clubbed together with other NBFCs- Muthoot Finance MD

Update on the Indian Equity Market:

On Friday, NIFTY50 ended marginally positive with a 0.2% rise. Bharti Infratel (+9.7%), Bharti Airtel (+9.2%) and SBI (+5.5%) were the top NIFTY50 gainers. Telecom stocks gained on talks of a minimum charge for all tariffs for telecom players. Indian Oil (-3.9%), Hero Motocorp (-1.9%) and BPCL (-1.9%) were among the worst-performing NIFTY50 stocks. NIFTY PSU BANK (+3.5%) recorded handsome gains after the Supreme Court’s verdict in the Essar Steel case in favour of financial lenders. NIFTY PHARMA (+1.6%), NIFTY MEDIA (+1.1%) and NIFTY BANK (+0.9%) were among the other gainers. NIFTY AUTO (-0.5%), NIFTY IT (-0.5%) and NIFTY FMCG (-0.5%) were among the top losing sectoral indices.


Muthoot Finance
Excerpts  from the interview of Mr George Alexander Muthoot, Managing Director,  Muthoot Finance; dated 14th November 2019. Source: CNBC TV18

  • Muthoot Finance had a somewhat tepid loan growth in 2QFY20 as the company faced some incremental funding issues.
  • Funding problem has now been resolved. Muthoot Finance has collected Rs 4,600 mn last month via a private placement. The company is planning another issue of retail NCDs of similar amount. The company also holds ECB of Rs 4,500 mn. All this is sufficient to help Muthoot reach its FY20E target.
  • Muthoot Finance had a funding problem despite having a good P&L and Balance sheet. Gold Loan NBFCs get clubbed with all other NBFCs. Muthoot suffered as banks/ other lenders have limits for issuing funding to particular sectors which get exhausted.  
  • Mr George Muthoot said he is trying his best to get a separate classification for Gold Loan NBFCs. Gold Loan NBFCs do not have 2 major issues that other NBFCs/ banks face. These factors are: a) No NPA problem. None of NPAs have resulted in credit loss. b) No Asset Liability Mismatch (ALM) issues as the average loan period is 3-4 months.
  • The first 6 weeks of 3QFY20 have already seen good growth with Rs 13,000 mn increase in Asset Under Management (AUM). Management expects good growth to continue in 2HFY20E.
  • Muthoot Finance will be able to show good growth as there are funding issues for many small traders and retail customers because NBFCs are not able to fund them. For these people, gold loans are most convenient to tide over their needs in the next couple of quarters.
  • Muthoot Finance is targeting to end FY20E with 15%+ AUM growth.
  • Apart from Gold loans, Muthoot has exposure to Retail home loans and Vehicle loans. Management has toned down it’s FY20E projection for home loans AUM from Rs 27,000-30,000 mn earlier to Rs 23,000 mn. Management is cautious on the growth in retail home loans as many projects are stuck due to funding issues at builders’ end.
  • Muthoot has a Rs 4,500 mn vehicle finance portfolio. As per management, now is not the best of times to grow this segment aggressively.
  • Muthoot benefitted from the rise in gold prices as customers were willing to take back gold, leading to lower auctions and higher interest collections. This led to higher NIMs in 2QFY20E.
  • Muthoot increased interest rate by 1% 3 months back which also led to better yields in 2QFY20. This benefit will continue going forward.
  • Management expects to maintain spread target of 11% and NIM target of 11%-12% in FY20E.

Consensus Estimate (Source: market screener website)

  • The closing price of Muthoot Finance was ₹ 701/- as of 15-November-19 and traded at 2.4x /2.0x /1.8x the consensus BVPS for FY20E / 21E / 22E of Rs 287/344/400 respectively.
  • Consensus target price of ₹ 726/- implies a PB multiple of 1.8x on FY22E BVPS of ₹ 400/-.
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06 Nov

“The worst is behind us” says Ashok Leyland Chairman.

Update on the Indian Equity Market:

On Tuesday, NIFTY closed 0.2% lower. Bajaj Finance (+3.3%), Bharti Infratel (+3.3%) and Yes Bank (+3.2%) were the top NIFTY50 gainers. Zee (-3.7%), Indusind Bank (-2.3%) and Ultratech Cement (-2.2%) were the top NIFTY50 losers. Among the sectors, NIFTY FMCG (+0.3%) was the only sectoral index that closed positive. NIFTY MEDIA (-1.4%), NIFTY PHARMA (-1.1%), NIFTY METAL (-0.9%) were the worst-performing sectors.

 “The worst is behind us” says Ashok Leyland Chairman.

Excerpts from an interview with Mr. Dheeraj Hinduja, Chairman, Ashok Leyland broadcasted on CNBC on 5th November 2019.

  • Demand slowdown has been caused by multiple issues including issues faced by financing companies and the availability of liquidity in the market.
  • Last financial quarter is traditionally a strong quarter for Commercial Vehicle (CV) OEMs. 4QFY20 will be a strong quarter followed by a slow 1QFY21 due to the technology transition from BS-IV to BS-VI.
  • Management is looking forward to FY21. Historically, the year of transition is a strong year.
  • The transition from BS-IV directly to BS-VI in a 3 year period is one of the shortest transition times globally. Other countries have taken 7-10 years in which period the cost absorption has been done in a phased manner. There will be a significant cost-push on account of the transition.
  • Even post the cost-push due to BS-VI, management says Ashok Leyland will be cost-competitive as ever. The customers will see real value in products launched.
  • Looking forward, there are some good signs such as many initiatives that the government is taking and the revival of financing. Most of the OEMs have now corrected the state of their inventories that had built up. The next few months look to be quite positive.
  • The market is not going to recover overnight, but the worst is behind for Ashok Leyland.
  •  It’s been a year since the previous CEO, Mr. Vinod Dasari quit.  Search for the CEO is on. FY20 is a year of important changes with respect to BS-VI, their new modular platform and the introduction of a whole line up of LCV products. The Board had taken a decision that they did not want a major disruption in the Management at this important juncture.  But a new CEO is required and the Board will be announcing a successor in the next few months.
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29 Oct

Kajaria Ceramics CMD Ashok Kajaria: Reduction in FY20 revenue guidance

Update on the Indian Equity Market:

On Friday, NIFTY closed flat with a marginal 0.01% gain. Yes Bank (+11.2%), SBI (+7.6%) and ICICI Bank (+3.2%) were the top NIFTY50 gainers. Bharti Infratel (-8.6%), Tata Motors (-5.4%) and Titan (-2.9%) were the top NIFTY50 losers. Among the sectors, NIFTY PSU BANK (+3.4%), NIFTY IT (+0.8%) and NIFTY MEDIA (+0.5%) were the top performers while NIFTY METAL (-0.4%), NIFTY AUTO (-0.3%) and NIFTY FMCG (-0.2%) were the top losers.

Excerpts from an interview with Mr Ashok Kajaria broadcasted on CNBC on 23rd October 2019.

  • Kajaria Ceramics reported 1% volume growth in 2QFY20. The quarter was an aberration. Bad market sentiment, tight liquidity situation, floods in several parts of the country and Kashmir situation impacted the volume growth. Kashmir comprises 6% of Kajaria’s market share and there were no dispatches to Kashmir from 5th August 2019.
  • Things have started turning positive. 3QFY20E and 4QFY20E will be more like 10% volume growth reported in 1QFY20 or slightly better.
  • EBITDA margin was 14.7% in 2QFY20. Management has guided FY20E margins to be close to 15.0%-16.0%. 
  • Earlier the management had guided to volume growth of 15.0% for 2HFY20E and 12.0%-13.0% for FY20E. As per the current scenario, the growth guidance is moderated to 11.0%-12.0% for 2HFY20E and 10.0% for FY20E.
  • On the real estate demand front, retail demand is very good. Commercial real estate demand is very bad. Improvement has come in the government sector in healthcare and education by way of projects by various state governments. Marked improvement has been seen in these 2 sectors in the last 2-2.5 years. Private real estate is still very bad. 
  • Smaller business verticals of Kajaria have been growing faster than the overall business. Bathware and sanitaryware closed at Rs 2,000 mn in FY19. Management had guided to 30% growth in FY20E. They haven’t been able to achieve that yet but are confident of achieving the target. 
  • Plywood business was a Rs 170 mn business in FY19. Management is targeting Rs 360 mn revenue in FY20E.
  • On the industry in Morbi, Gujarat, the topline growth was negative in FY19 and FY20E is expected to be flat. The reasons being plant shutdowns in Morbi due to gasifiers being shut down, and the industry players being in deep trouble with a lot of cash flow problems due to GST.
  • One positive thing for the industry in Morbi is the exports. In FY19, the Morbi industry did  Rs 70,000 mn of exports out of total industry size on Rs 285,000 mn. In FY20E, the industry target for exports is more than Rs 90,000 mn. If the exports pan out, the players will be okay as the domestic market continues to have a lot of problems. 

Consensus Estimate (Source: market screener website) 

The stock price was Rs 548/- as of close price of 25-10-19 and traded at 30.8x /26.0x /21.8x the consensus EPS for FY20E / 21E / 22E of Rs 17.8/21.1/25.1 respectively.

Consensus target price of ₹ 608/- implies a Price to earnings multiple of 24.2x on FY22E EPS of ₹ 25.1/-.

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17 Oct

In 2-3 years, Bharat Forge will not look like a forging company.

Update on  Indian Equity Market:

On Wednesday, NIFTY was up 0.4% to close at 11,472 level. The top performers that aided the positive movement in the index were BPCL (+4.3%), Bajaj Finance (+3.8%) and Zee (+3.7%). Hero (-2.8%), Vedanta (-2.5%) and Hindalco (-2.4%) were the worst-performing NIFTY stocks. Among the sectoral indices, NIFTY IT (+1.0%), NIFTY MEDIA (+0.8%) and NIFTY REALTY (+0.8%) were the top gainers. NIFTY PSU BANK (-0.8%), NIFTY METAL (-0.5%) and NIFTY AUTO (-0.2%) were the top losers.

In 2-3 years, Bharat Forge will not look like a forging company.

Excerpts of an interview with Mr Baba Kalyani, Chairman and MD, Bharat Forge. The interview was published in Mint dated 15th October 2019.

  • There is some order coming back into the auto industry with retail demand beginning to increase and production being curtailed to get the inventory down. It will take a little while before the order is restored completely and growth will come after that. It will take a couple of months for the inventory to get to a proper level.
  • The largest slowdown is in domestic medium and heavy market with month on month declines of 40-50%. The industry has never seen this kind of slowdown.
  •  Among the international markets, North America and Europe are going at reasonable levels. There is some pick up happening in Brazil. The problem is in the Indian vehicle market which needs to get sorted out.
  • Bharat Forge is doing reasonably well in the railways’ segment. It is a niche market that is not high in volume. Bharat Forge has 4 customers which are the major OEMs. Along with crankshafts, the company is starting to move towards turbochargers, connecting rods. They are trying to enlarge the business by enlarging the product mix. 
  • In the aerospace segment, Bharat forge has consciously decided to move to high-value niche products. The company manufactures critical components such as turbine blades, shafts, and landing gears. They are not into the high volume structure side of the business as it has too many participants and the margins are not great.
  • It takes a long time to become a supplier in the critical components such as the turbine blades or rotating shafts. These are very critical and safety components that cannot be failing. Bharat Forge has been successful in becoming a supplier of these components and the management hopes to start seeing better volumes.
  • The current downturn, although painful, is helping the company to reshape and restructure itself from a product, process, and technology point of view. 
  • In the next 2-3 years, Bharat Forge will not be seen as a forging company. It will become a technology company.  The company is doing a lot of things in the electric vehicle space and other technology spaces. They have developed a promising new technology space using their nanotechnology expertise of converting waste to wealth. 

Consensus Estimate (Source: market screener website)

  • The stock price was ₹ 428/- as of close of 16-10-19 and traded at 20x/ 18x/ 16x the consensus EPS for FY20E / 21E / 22E EPS of ₹ 21.4 /23.5 /26.5 respectively.
  • Consensus target price of ₹ 444/- implies a PE multiple of 17x on FY22E EPS of ₹ 26.5/-.
By Auto , , 0 Comments Read more...
09 Oct

Edelweiss: Liquidity to improve after a few months

Update on the Indian Equity Market:

On Monday, NIFTY closed lower by 0.4%. NIFTY Media (+1.3%), NIFTY Pvt Bank (+0.2%) and NIFTY Bank (+0.1%) were the sectoral indices that closed positive. Among the decliners, the worst performers were NIFTY Pharma (-3.4%), NIFTY Metal (-1.2%) and NIFTY Realty (-1.2%).

Edelweiss: Liquidity to improve after a few months

Excerpts from an interview with Mr. Rashesh Shah- Chairman & CEO, Edelweiss Group published in Economic Times dated 4th October 2019.

  • Though Edelweiss has NBFC business, it is a diversified group. The business includes asset management, wealth management, Asset Reconstruction Company and a lot of other businesses. Edelweiss has always focussed on being a diversified group.
  • The overall book of Edelweiss is not expected to grow but the wholesale/retail mix will go more in favor of retail. Whatever repayments are coming in wholesale, are being used to grow retail.
  • The availability of liquidity has been fairly okay. The partial credit guarantee scheme that was announced in the budget will get operationalized soon and the expectation is about Rs 350-400 bn of the asset portfolios of NBFCs will be bought by banks. This will give a lot of additional liquidity to NBFCs. The credit cycle should start coming back because of this improved liquidity.
  • The stress in the corporate book, wholesale book, and the cash flow has been there for one year. The only good news is that there is no unknown anymore. Everybody knows what sort of cash flows can be expected and everybody is aligned with that.
  • In another three to six months, a lot of things should be back to normal for liquidity in the economy as a whole.
  • Overall, while credit was frozen around April- June, the banking system, especially the PSU banks have opened up the credit flow into the economy. The optimism is more now compared to three months ago.  On the whole, the banking system is on a much better footing to ensure that the economy does not freeze up and make sure that the free flow of credit continues.
  • In the next three to six months things should at least get normalized and then improvement should start. At least, things have stopped getting worse in the last four-five weeks.
  • In terms of real estate, in India, it has been observed that if the project gets completed, then usually recoveries and sales are not a problem. The current effort is to make sure the projects get completed. Also, the demand-supply equation in housing has started to correct. Due to slower launches, the supply of inventory will slowly reduce and as the demand comes back with interest rates coming down and banks pushing home loans, the demand-supply equation will correct.
  • Edelweiss has a 20% portion of its balance sheet exposed to real estate. The P&L is further diversified by earnings from other businesses. The real estate book is also spread over 160 projects and is fairly granular. Out of the 160 projects, all along for the last 8-10 years, about 10 to 20% of the portfolio is always under watch because some intervention is required to make sure the project execution happens, and those parameters have not worsened.
  • Edelweiss has a lot of experience with ARC where they acquire NPAs from banks. Last year Edelweiss resolved quite a few of them with Rs 70 bn worth of recoveries in the ARC business. This year, the aim is for a Rs 120 bn recoveries in the ARC business.

Consensus Estimate (Source: market screener website) 

  • The closing price of Edelweiss was ₹ 78 /- as of 07-October-19. It traded at 8.6x /6.8x/ 5.1x. The consensus EPS for FY20E/ FY21E/ FY22E of ₹ 9.1/11.4/15.3 respectively.
  • Consensus target price of ₹ 169/- implies a PE multiple of 11.0x on FY22 EPS of ₹15.3/-

By Edelweiss, NBFC , , 0 Comments Read more...
23 Sep

Bajaj Auto: Price hike of 1% across the sports segment, 5% in Dominar 400 and Pulsar 150

Update on Indian Equity Market

A slew of fiscal measures announced by the Finance Minister on Friday morning led to a strong rally in Indian equities. The crown jewel of the fiscal stimulus package was the cut in corporate tax rate from effective 30% to effective 22% plus surcharge (net 25%) for all domestic corporates. The announcement of tax cut led to increased street earnings estimates across sectors. The surcharge on capital gains made on equity that was announced in the Budget has also been withdrawn. Nifty closed 5.3% higher at 11,274. The rally was led by NIFTY AUTO (+9.9%), NIFTY BANK (+8.3%) and NIFTY FINSERV (7.2%). All indices except NIFTY IT (-0.9%) ended in the green.

Bajaj Auto: Price hike of 1% across the sports segment, 5% in Dominar 400 and Pulsar 150

(Highlights from interview hosted on CNBC)

  •  Bajaj Auto has been market leader in the sports segment for the past 15 months and even gained market share. Market share of the sports segment is now between 35-40%.
  •  Bajaj Auto has taken a price hike across SKUs in the sports segment. Price hike across SKUs is about 1% except 2 products. 5% hike each in Pulsar 150 (passed on ABS cost which was absorbed by co. till now) and Dominar 400.
  • Bajaj Auto is 2nd after Hero in terms of market share in the commuter segment. They don’t see pricing power in the commuter segment, hence haven’t been able to take any price hikes there except in one SKU (5% share of total volumes hence negligible impact).
  • The government should clearly convey there is no GST cut on cards as right now there is a detrimental effect on the channel. Some customers are waiting in anticipation of a GST cut which is not helping at all.
  • In terms of discounts, Rajiv Bajaj said, “I expect from Hero a mother of all schemes to start very soon towards the end of this month because unless they liquidate over a million BS-IV vehicles, they are going to have trouble with BS-VI just around the corner. So I think the industry will be shaken up by a huge promotion by the market leader and in anticipation, we have to be ready for that.”
  •  3 years ago when the industry was shifting from BS-III to BS-IV, discounts ranged from Rs. 3,000 to 20,000. Not in such a panic stage this time. But there is a need to be prepared for significant impact as the channel is bursting with stock.

Consensus Estimate (Source: market screener website)

  • The closing price of Bajaj Auto was ₹ 2,739/- as of 20-September-19. It traded at 17x / 15x the consensus EPS for FY20E/ FY21E of ₹ 161 / 178 respectively.
  • Consensus target price of ₹ 2,687/- implies a PE multiple of 15x on FY21E EPS of ₹ 178/-
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21 Sep

Government announcements for housing sector: Steps in the right direction

Dated: 18th September 2019

Update on the Indian Market:

Nifty closed in the red for the 2nd day on Tuesday. It ended 1.7% lower at 10,817 levels. Depreciating Rupee and rising tensions from the attack on Saudi Arabia oil supplies may be the reasons for this decline. Leading the decline were NIFTY Auto (-3.8%), NIFTY Realty (-3.7%) and NIFTY PSU Banks (-3.7%). None of the NIFTY sectoral indices closed positive. Hero Motocorp (-6.3%), Tata Motors (-4.9%), Tata steel (-4.9%) were the worst-performing stocks in NIFTY50 while GAIL (+1.9%), Titan (+0.9%) and HUL (+0.9%) were the top performers.

We offer research services on the Indian equity market and plan to offer investment advice shortly. For information on our services, please visit our website http://www.assetmultiplier.co.in/ 

Government announcements for housing sector: Steps in the right direction

Excerpts from an interview with Mr Keki Mistry, vice chairman and CEO of HDFC, printed in Mint dated 16th September 2019

·        The government announced setting up of Rs 10,000 cr fund for real estate projects requiring last-mile funding. Another Rs 10,000 cr is expected to come from the private sector.

·        The step is in the right direction and would help huge number of projects that are stuck due to the lack of last-minute funding.

·        Such a professionally managed fund would help the real estate issue to a large extent.

·        The fund is for projects in the middle income and affordable housing category that are 60% complete, are non-NPA and non-NCLT.

·        Today, if the project is NPA and requires the last 10% funding, nobody will be willing to put that 10% as the loan will be straightway classified as NPA from day one. That is why the fund eligibility might be for non-NPA projects. But on the other side, a project that is stuck is stuck because of lack of funds. If there is a lack of money, the builder may not have enough to repay loan instalments. So there is a chance that the project will become NPA. This needs to be looked at more carefully.

·        Non- NPA qualification is hard to understand. IF the builder is not able to complete a project, it is most likely already classified as NPA. There are many projects that have not yet slipped into NPAs and where last-mile funding would help.  

·        The fund could be operational in CY2019 itself, if not certainly in CY20.

·        Combining the government and private monies, a fund of Rs 20,000 cr if additionally leveraged 0.3 or 0.4 times, around Rs 26,000 cr will be available. This amount can take care of a huge number of projects.

·        Many projects will have a small last-mile funding requirement of Rs 50-60-80 cr. With Rs 20,000 cr plus leverage, many such projects can be helped.

·        Government has also proposed to relax External Commercial Borrowing (ECB) guidelines for affordable housing. This route could be a little cheaper than domestic borrowing. It could be a little cheaper than domestic borrowing. More importantly, it will open a new source of funding for some of the companies.

Consensus estimates (Source: Marketscreener website):

·        The share price on 05-09-2019 was Rs 1,996/- per share. It was trading at a P/B of 4.2x/3.8x its book value per share estimates of Rs 479/520 for FY20E/FY21E respectively. The consensus price target was Rs2355 implying P/B target of 4.9x/4.5x for FY20E/FY21E respectively.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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09 Sep

Excerpts of an interview with HDFC Chairman Mr Deepak Parekh published in Mint dated 4th September 2019

Dated: 6th September 2019

Update on Indian market: Nifty ended almost flat on Thursday (+0.03%). Within NIFTY stocks, top performers were Tata Motors (+8.1%), Coal India (+7.3%) and ONGC (+5.3%) and worst performers were HDFC (-2.8%), Indiabulls Housing (-2.3%) and ICICI Bank (-2.2%). Among the sectoral indices, best performers were Metal (+2.6%), Auto (+2.1%) and Media (+1.6%). Worst performing sectors were Realty (-1.8%), financial services (-1.2%) and Pvt Banks (-0.8%). RBI has mandated linking of housing and auto loan rates to the repo rate or other external benchmarks 1st October onward. Stock prices of HFCs (Housing Finance Companies) were down owing to the fear that HFCs will have to reduce their lending rates to remain competitive, effectively putting pressure on NIMs (Net Interest Margin). Auto stocks reacted positively to the same as lower borrowing costs to the customer can boost demand for vehicles.

Excerpts of an interview with HDFC Chairman Mr Deepak Parekh published in Mint dated 4th September 2019

·        In HDFC’s core business of housing finance, massive growth is seen in affordable housing. HDFC has launched a dozen projects in the last 3 months across Indian cities. Apartments that fit in the Pradhan Mantri Awas Yojana (PMAY) are selling fast. 70-80% is sold on the launch day.

·        Commercial real estate especially for IT back-office sector is also booming.

·        Real estate is in bad shape for homes that are larger and unaffordable.

·        The spiral down has continued after demonetization. The developers need help as without them there is no supply. There is a massive amount of unsold inventory and lack of fresh lending to the developers.

·        Regulators have to look at developers differently in terms of NPA recognition. Even if the developer is not able to build a phase due to demand shortage and is not able to repay the loan, he is sitting on the value in the form of land. When the demand picks up, the value will materialize.

·        50% of incomplete apartments need last-mile funding where 80%-90% work is complete. That should be done on an urgency basis. This will also boost confidence on the street. Currently, people prefer to buy a finished home rather than under-construction property as many people have booked under-construction flats and are still waiting. A solution could be a stressed asset fund initiated by National Housing Bank (NHB).

·        When IL&FS went down, it did not impact the Indian financial system. India has a strong financial base and a couple of players collapsing is not going to have a big impact.

·        Interest rate action helps in case of a slowdown but it is not the ultimate reason for the slowdown to go away. Self-confidence and confidence in buyers is required. India is a consumption-oriented economy and one or two-quarters slowdown is just part of the game. Even the auto industry has had phenomenal sales for many years and a slowdown for a few quarters will not have much impact.

·        The feeling is that slowdown will be short-lived. Good weather, upcoming festive season and easy availability of credit will cause spending.              

·        Consumption as a % of GDP is very low in India, less than half of China. So that has to grow. Even if there is a global slowdown, it is not so in India.

·        Ease of doing business in India has to improve. Large funds of billions of dollars have not yet invested long-term money in India. India specific funds have come in but global funds, sovereign wealth funds have just started looking at India. Still, massive amounts of investments can be expected from Australia, Canada and Japan. The sovereign wealth funds are underinvested in India but are looking at viable companies, good promoters and good track record.

Consensus estimates (Source: Marketscreener website):

·        The share price on 05-09-2019 was Rs 2,044/- per share. It was trading at a P/B of 4.2x/3.9x its book value per share estimates of Rs 479/521 for FY20E/FY21E respectively.

·        The consensus price target is at Rs 2,361/- implying P/B of 4.5x for FY21E BVPS of Rs 521.

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28 Aug

Most of the auto slowdown is the industry’s making

Dated: 23rd August 2019

Updates on the Indian market:

On Friday, markets closed in the green with BSE Sensex up 0.6% and NSE 50 up 0.8%. This was a reaction to the news that Finance Minister Nirmala Sitharaman was planning to hold a press conference after market hours.  The market expects a government intervention to revive the economy. The top gainers among NIFTY 50 stocks were Zee (+6.5%), UPL (+6.2%), Vedanta (+5.7%). Indusind Bank (-1.8%), ITC (-1.5%), Eicher Motors (-0.9%) were among the top NIFTY 50 losers. Among the sectoral indices, Media (+4.2%) and Metal (+3.4%) were the best performers while FMCG (-0.4%) and Private banks (-0.4%) were the worst performers.

Excerpts from an interview with Mr. Rajiv Bajaj- MD, Bajaj Auto published in mint dated 23rd August 2019: Most of the auto slowdown is the industry’s making

·       For the motorcycle industry, the YoY decline in sales is only 5-7%. This cannot be called a crisis. It is part of a normal industry cycle and a check for the robustness of a business model.

·       There are 4 areas where the auto industry has to improve before talking about government stimulus:

o   Industry’s domestic focus: Barring Bajaj Auto (40% revenue from exports) and TVS Motors (20% revenue from exports), other players have a negligible share of exports.  If companies had invested in global markets over the last 10-15 years and increased their exports, a 5-7% decline in one market would not have hurt them as much as it is hurting now.

o   Mediocre products: A lot of auto players are not able to export because their products are mediocre by world-class standards.

o   Innovation in the domestic market

o   Cost structure: Some manufacturers are guilty in terms of imposing very high fixed costs on their dealerships.  This works in good times but becomes a big burden in bad times.

·       Inventories have piled up since September 2018 when the industry was anticipating an extraordinary festive season. The situation is correcting now as nobody can hold BSIV stock for long. Therefore, there is a mismatch between wholesale (OEM to dealers) and retail (dealer to the customer) sales. The mismatch makes it look as if the industry is down by 15%-20% when in reality it is down by 5-7%. A 5%-7% retail decline is not enough for the industry to cry for help.

·       The industry has said there is a need for intervention in dealer/customer financing. Inventory financing should not be a big issue for large companies most of whom are cash-rich. In case of retail consumer financing, for a long time companies using their captive financing arms have shoved products in the hands of customers who didn’t really want to buy. This led to higher bad debts.  So pulling back of credit by some NBFCs is for a good reason.

Consensus Estimate (Source: www.marketscreener.com)

·       The stock price of Bajaj Auto is Rs 2,750/- as on 23rd August 2019 and trades at 17.2x/ 15.8x the consensus EPS for FY 20E/21E EPS of Rs 160/ Rs 173 respectively.

·       Consensus target price is Rs 2,686/- valued at 15.5x FY21E EPS of Rs 173.

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21 Aug

Ravneet Gill, MD&CEO, Yes Bank: Wants Yes Bank to retain its corporate character.

Dated: 20th August 2019

Excerpts from an interview published in The Hindu Business line dated 19th August 2019.

  • On the recent QIP: The Yes Bank QIP was oversubscribed over 3 times. This when two other IPOs in the market were undersubscribed.  Yes Bank could raise Rs 1,930 cr as the shareholders’ approval was limited to a dilution of 10%. The QIP impacted the CET-1 ratio positively by 60 bps (8.6% vs. 8.0% prior to QIP). Management plans to add another 20-25 bps through balance sheet rationalization. This will be done by reducing the corporate book.
  • Historically Yes Bank has been a strong structured finance bank.  Eventually, management wants to free up capital to grow on the retail side. Management plans to change the mix of corporate to retail in terms of revenue from the current 67:33 to 50:50 by 2025. But management wants Yes Bank to retain its corporate look, feel and character and not become a retail bank.
  • The stressed asset book is not very granular. There are a handful of entities that are facing illiquidity. If those are resolved, the complexion of the book would be completely different.
  • The sub-investment book (BB and below assets) currently stands at Rs 29,000 cr. Three names account for nearly 80% of the book. 2 out of these 3 that account for around Rs 9,000 cr should be fully resolved in the current quarter. This will release capital for the bank and risk perception around Yes Bank will moderate.
  • There is no other bank as digitally enabled as Yes Bank. The market does not recognize that yet.
  • Best way to lower Risk-weighted assets (RWA) is to try and lend to high-rated corporates. For that, cost of funding needs to be competitive which can be achieved by strengthening of the liability profile.

Share price performance of Yes Bank on 20th August 2019:

Yes bank share price declined by over 7% on Tuesday. Yes Bank holds 12.79% stake in CG Power and Industrial Solutions Ltd. The risk and audit committee of CG Power disclosed Corporate Governance issues in the Company. The issues include but are not limited to the understatement of liabilities, understatement of advances to related and unrelated parties, provision of certain assets of the company as collateral without due authority. These actions were allegedly carried out by identified company personnel (both current and past). Shares of CG Power tanked 20% on Tuesday.

Consensus estimates (Source: Marketscreener website):

  • The share price on 20-08-2019 was Rs 71/- per share. It was trading at a P/B of 0.60x/0.55x its book value per share estimates of Rs 118/127 for FY20E/FY21E respectively.
  • The consensus price target is at Rs 117/- implying P/B of 0.92x for FY21E BVPS of Rs 127.
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