Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOMATO IN)</a> will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

The Indian mutual fund industry has assets of almost INR 7.93 trillion (US$106.3bn) across Multi cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap and Flexi Cap equity schemes. Equity schemes classified as large cap need to have at least 80% of their assets invested in large cap stocks, large and mid cap schemes need to have at least 35% of their assets in large cap stocks and at least 35% in mid cap stocks, mid cap funds need to hold at least 65% of their assets in mid cap stocks, and small cap funds need to hold at least 65% of their assets in small cap stocks. Flexi cap funds can invest across market caps.The Association of Mutual Funds in India (AMFI) publishes the list of the stocks in each market cap segment in January and July each year and mutual funds have one month to rebalance their portfolios to adhere to the new categorization.We are just past halfway through the review period for the second half of 2021. Using data to the close on 4 October, at the next recategorization in January 2022, we see 10 stocks moving from the mid cap segment to the large cap segment, 11 stocks moving from the large cap segment to the mid cap segment , 11 stocks are expected to move from the small cap segment to the mid cap segment, with16 stocks moving from the mid cap to the small cap segment. Zomato (ZOMATO IN) will be a part of the large cap universe, while 4 other newly listed stocks will be a part of the mid cap universe.Historically, stocks moving to a higher market cap category have outperformed stocks that migrate to a lower market cap category over the back half of the review period. In some cases, the outperformance continues past the announcement of the changes as well. This can be attributed to fund managers realigning their portfolios to meet the new categorization. This provides opportunities to pre-position for the move and unwind post the announcement of the reclassification.

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

Independent Research Analyst

Mamta Verma

DC India Research

DC India Research LLP (DCIR) is based out of Mumbai, India.

We specialize in providing customized, independent research across listed and unlisted companies in India across equities and credit including sectoral research. Our customers include India focussed PE funds, special situation funds, domestic AMCs, Wealth Advisory& PMS firms, Rating Agencies & Investment Advisors. 

The DCIR board consists of prominent names from the industry as well as CIO’s of Hedge funds.

Equity Bottom-Up

In this note, we have reviewed the 9m-FY18 performance of the listed players in the Indian Tyre Sector.Note - This review will be followed on with the q4-FY18 results of the companies.Companies covered - <a href="https://www.smartkarma.com/entities/8423" target="_blank" data-smartkarma-citation="entities:8423:1">Apollo Tyres Ltd (APTY IN)</a>, <a href="https://www.smartkarma.com/entities/2930" target="_blank" data-smartkarma-citation="entities:2930:1">Mrf Ltd (MRF IN)</a>, <a href="https://www.smartkarma.com/entities/18722" target="_blank" data-smartkarma-citation="entities:18722:1">Ceat Ltd (CEAT IN)</a>, <a href="https://www.smartkarma.com/entities/8501" target="_blank" data-smartkarma-citation="entities:8501:1">Jk Tyre &amp; Industries Ltd (JKI IN)</a>, <a href="https://www.smartkarma.com/entities/16789" target="_blank" data-smartkarma-citation="entities:16789:1">Goodyear India Ltd (GDYR IN)</a>, <a href="https://www.smartkarma.com/entities/9603" target="_blank" data-smartkarma-citation="entities:9603:1">Tvs Srichakra Ltd (SRTY IN)</a>, <a href="https://www.smartkarma.com/entities/15331" target="_blank" data-smartkarma-citation="entities:15331:1">Balkrishna Industries Ltd (BIL IN)</a>1. Summary -<table class="table table-striped"><tbody>
<tr>
<td>Net Sales</td>
<td>Q3-FY18 YoY</td>
<td>Q3-FY18 QoQ</td>
<td>9M-FY18 YoY</td>
<td>9M-FY18 (Rs. Mn.)</td>
</tr>
<tr>
<td>Apollo Tyres Ltd.</td>
<td>17.13%</td>
<td>16.49%</td>
<td>9.</td>
</tr>
</tbody></table>…

In this note, we have reviewed the 9m-FY18 performance of the listed players in the Indian Tyre Sector.Note - This review will be followed on with the q4-FY18 results of the companies.Companies covered - Apollo Tyres Ltd (APTY IN), Mrf Ltd (MRF IN), Ceat Ltd (CEAT IN), Jk Tyre &amp; Industries Ltd (JKI IN), Goodyear India Ltd (GDYR IN), Tvs Srichakra Ltd (SRTY IN), Balkrishna Industries Ltd (BIL IN)1. Summary -

Net Sales
Q3-FY18 YoY
Q3-FY18 QoQ
9M-FY18 YoY
9M-FY18 (Rs. Mn.)


Apollo Tyres Ltd.
17.13%
16.49%
9.

…

Equity Analyst, LightStream Research

Chacko Jacob

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<a href="https://www.smartkarma.com/entities/15331" target="_blank" data-smartkarma-citation="entities:15331:1">Balkrishna Industries Ltd (BIL IN)</a> is India's leading off-highway-tyre (OHT) player in the global market. The company has developed a wide-reaching network that spans the Americas, Europe and Asia. The company's four plants (all in India) have a total capacity to produce 300,000MT per annum. With only 65-70% of this capacity being utilised, BIL finds itself at a sweet spot - the company can avoid heavy CapEx while utilising the remaining capacity to consolidate its global market share. While we remain positive about the company’s growth in FY2018, we think the next fiscal period might throw some surprises despite the decent economic growth forecasted in its key markets. In the time between our last report and this, the company has undertaken a stock split (1:2) and seen its shares hit a 52-week high before paring most of its gains. The stock currently trades at 27x and 21x 1-Year forward and 2-year forward PE respectively, which are also still near historical highs. Given the considerable downside risk in the next fiscal period, we think the stock might decline further, leading us to consider it overvalued. Some of the underlying risks for the next fiscal period include:<ul class=""><li class="">Higher raw material costs as rains caused by the La Nina phenomenon could hamper supply of natural rubber.</li><li class="">Domestic shortage of carbon black due to the shutdown of a key manufacturer and because of steep duty on imports. </li></ul>

Balkrishna Industries Ltd (BIL IN) is India's leading off-highway-tyre (OHT) player in the global market. The company has developed a wide-reaching network that spans the Americas, Europe and Asia. The company's four plants (all in India) have a total capacity to produce 300,000MT per annum. With only 65-70% of this capacity being utilised, BIL finds itself at a sweet spot - the company can avoid heavy CapEx while utilising the remaining capacity to consolidate its global market share. While we remain positive about the company’s growth in FY2018, we think the next fiscal period might throw some surprises despite the decent economic growth forecasted in its key markets. In the time between our last report and this, the company has undertaken a stock split (1:2) and seen its shares hit a 52-week high before paring most of its gains. The stock currently trades at 27x and 21x 1-Year forward and 2-year forward PE respectively, which are also still near historical highs. Given the considerable downside risk in the next fiscal period, we think the stock might decline further, leading us to consider it overvalued. Some of the underlying risks for the next fiscal period include:Higher raw material costs as rains caused by the La Nina phenomenon could hamper supply of natural rubber.Domestic shortage of carbon black due to the shutdown of a key manufacturer and because of steep duty on imports. 

Balkrishna Ind: Higher RM Costs Could Cast a Shadow on Earnings Growth in FY2019

In 2Q, <a href="https://www.smartkarma.com/entities/18722" target="_blank" data-smartkarma-citation="entities:18722:1">Ceat Ltd (CEAT IN)</a> managed to overcome the GST blues and make a quick turnaround from the preceding quarter that saw its PAT plummet nearly 98.6%. Based on management's ambiguous comments on restocking by dealers, we estimated that growth will normalise only after two or three quarters. However, the stronger than expected showing in 2Q along with new developments in the market have made us take a bullish stance on the company.<ul><li>Anti-dumping duty on Chinese tyre imports will support Ceat's CV (commercial vehicle) business from which it draws 33% of its revenue.</li><li>Ceat's new plant in Nagpur, producing 2-wheeler tyres, has gone live and the company has also commissioned the second phase at the Halol plant to meet the demand in the PV (passenger vehicle) segment. </li><li>The company plans to foray into the high-margin OHT (off-highway tyres) space soon and has begun testing its products globally.</li></ul>While natural rubber prices have declined from their highs in the middle of the year, uncertain weather patterns can play spoilsport to the company's margins. However, on the whole, we have raised our outlook for the company based mainly on the above points.

In 2Q, Ceat Ltd (CEAT IN) managed to overcome the GST blues and make a quick turnaround from the preceding quarter that saw its PAT plummet nearly 98.6%. Based on management's ambiguous comments on restocking by dealers, we estimated that growth will normalise only after two or three quarters. However, the stronger than expected showing in 2Q along with new developments in the market have made us take a bullish stance on the company.Anti-dumping duty on Chinese tyre imports will support Ceat's CV (commercial vehicle) business from which it draws 33% of its revenue.Ceat's new plant in Nagpur, producing 2-wheeler tyres, has gone live and the company has also commissioned the second phase at the Halol plant to meet the demand in the PV (passenger vehicle) segment. The company plans to foray into the high-margin OHT (off-highway tyres) space soon and has begun testing its products globally.While natural rubber prices have declined from their highs in the middle of the year, uncertain weather patterns can play spoilsport to the company's margins. However, on the whole, we have raised our outlook for the company based mainly on the above points. 

Ceat: La Nina May Play Spoilsport in 2H; Restocking Post GST Served Well By ADD Imposed on Imports

BIL (<a href="https://www.smartkarma.com/entities/15331" target="_blank" data-smartkarma-citation="entities:15331:1">Balkrishna Industries Ltd (BIL IN)</a>) is the only tyre company in India that focuses solely on the production of OHTs (off-highway tyres) for the industrial and agricultural sector. In FY2017, export revenue accounted for over 84% of the company’s total revenue of INR 39bn. BIL holds 6% market share in the USD 10bn global market that is dominated by the likes of Michelin, Trelleborg and Titan. OHTs account for about 5% of the total global tyre sales. As of FY2016, Europe accounted for 53% of the company’s sales followed by the Americas at 16%. The company also has over 200 distributors in 130 countries offering a comprehensive product portfolio consisting of 2,300 SKUs. In view of recent developments in the global market, we maintain our bullish view on the stock.<ul><li>Michelin Tyres, the leader in the OHT space, expects the market to grow about 10-15% in 2017. This is about 3-5% above the volume growth expected by BIL. We think the company will soon revise its guidance as its serves the same markets as Michelin.</li><li>BIL is scaling up its capacity and production at the new Bhuj plant which will cater to the industrial segment in the USA. It is also building a carbon black plant for the purpose of backward integration.</li><li>The company aims to become debt free by FY2019 which will see PAT improve by about 400bps.</li></ul>At 20x 1-year forward PE, the company ranks higher than all its peers in the tire industry in India. However, BIL is well diversified geographically and does not have to deal with issues of domestic economic slowdown and poor monsoons. Using our 1-year forward PE estimate of 20x we arrive at a TP of INR 1,671. The stock closed at INR 1,701 on Friday, up by INR 33 during the session. Given the company's ability to penetrate markets with its competitive line up we think there is further potential around the corner to grow. For now, we think the stock is fairly valued.

BIL (Balkrishna Industries Ltd (BIL IN)) is the only tyre company in India that focuses solely on the production of OHTs (off-highway tyres) for the industrial and agricultural sector. In FY2017, export revenue accounted for over 84% of the company’s total revenue of INR 39bn. BIL holds 6% market share in the USD 10bn global market that is dominated by the likes of Michelin, Trelleborg and Titan. OHTs account for about 5% of the total global tyre sales. As of FY2016, Europe accounted for 53% of the company’s sales followed by the Americas at 16%. The company also has over 200 distributors in 130 countries offering a comprehensive product portfolio consisting of 2,300 SKUs. In view of recent developments in the global market, we maintain our bullish view on the stock.Michelin Tyres, the leader in the OHT space, expects the market to grow about 10-15% in 2017. This is about 3-5% above the volume growth expected by BIL. We think the company will soon revise its guidance as its serves the same markets as Michelin.BIL is scaling up its capacity and production at the new Bhuj plant which will cater to the industrial segment in the USA. It is also building a carbon black plant for the purpose of backward integration.The company aims to become debt free by FY2019 which will see PAT improve by about 400bps.At 20x 1-year forward PE, the company ranks higher than all its peers in the tire industry in India. However, BIL is well diversified geographically and does not have to deal with issues of domestic economic slowdown and poor monsoons. Using our 1-year forward PE estimate of 20x we arrive at a TP of INR 1,671. The stock closed at INR 1,701 on Friday, up by INR 33 during the session. Given the company's ability to penetrate markets with its competitive line up we think there is further potential around the corner to grow. For now, we think the stock is fairly valued. 

Favourable Growth in Global OHT Segment to Bolster Balkrishna Industries Topline in FY18

India

Balkrishna Industries Limited (BKT) is a leading global manufacturer of off-highway tires, specializing in products for agricultural, industrial, construction, earthmoving, mining, and port sectors. The company offers a comprehensive portfolio of tires for various niche applications. Balkrishna Industries is headquartered in Mumbai, India, and was founded in 1961.

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Balkrishna Industries (BIL IN)

India: Stock Reclassification & Active Portfolio Management (Dec 2021)

Halfway through the review period, we take a look at stocks that could migrate across the large, mid and small cap segments. With over US$100bn of...

Brian Freitas

Sector Capcule: India Tyre Sector

In this note, we have reviewed the 9m-FY18 performance of the listed players in the Indian Tyre Sector.Note - This review will be followed on with...

DC India Research

Balkrishna Ind: Higher RM Costs Could Cast a Shadow on Earnings Growth in FY2019

Balkrishna Industries Ltd (BIL IN) is India's leading off-highway-tyre (OHT) player in the global market. The company has developed a...

Chacko Jacob

Ceat: La Nina May Play Spoilsport in 2H; Restocking Post GST Served Well By ADD Imposed on Imports

In 2Q, Ceat Ltd (CEAT IN) managed to overcome the GST blues and make a quick turnaround from the preceding quarter that saw its PAT plummet nearly...

Chacko Jacob

Favourable Growth in Global OHT Segment to Bolster Balkrishna Industries Topline in FY18

BIL (Balkrishna Industries Ltd (BIL IN)) is the only tyre company in India that focuses solely on the production of OHTs (off-highway tyres) for...

Chacko Jacob

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