Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Thematic (Sector/Industry)

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:<a href="https://www.smartkarma.com/entities/hyundai-motor-co" target="_blank" data-smartkarma-citation="entities:155:1" rel="noopener">Hyundai Motor Co (005380 KS)</a>, <a href="https://www.smartkarma.com/entities/top-glove-corp-bhd" target="_blank" data-smartkarma-citation="entities:20759:1" rel="noopener">Top Glove Corp (TOPG MK)</a>, <a href="https://www.smartkarma.com/entities/naver-corp" target="_blank" data-smartkarma-citation="entities:16029:1" rel="noopener">Naver Corp (035420 KS)</a>, <a href="https://www.smartkarma.com/entities/coupang" target="_blank" data-smartkarma-citation="entities:28425:1" rel="noopener">Coupang (CPNG US)</a>, <a href="https://www.smartkarma.com/entities/hon-hai-precision-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:745:1" rel="noopener">Hon Hai Precision Industry (2317 TT)</a>, <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>, <a href="https://www.smartkarma.com/entities/tata-consultancy-svcs-ltd" target="_blank" data-smartkarma-citation="entities:18708:1" rel="noopener">Tata Consultancy Svcs (TCS IN)</a>, <a href="https://www.smartkarma.com/entities/infosys-ltd" target="_blank" data-smartkarma-citation="entities:267:1" rel="noopener">Infosys Ltd (INFO IN)</a>, <a href="https://www.smartkarma.com/entities/hcl-technologies-ltd" target="_blank" data-smartkarma-citation="entities:20025:1" rel="noopener">Hcl Technologies (HCLT IN)</a>, <a href="https://www.smartkarma.com/entities/wipro-ltd" target="_blank" data-smartkarma-citation="entities:15360:1" rel="noopener">Wipro Ltd (WPRO IN)</a>

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:Hyundai Motor Co (005380 KS), Top Glove Corp (TOPG MK), Naver Corp (035420 KS), Coupang (CPNG US), Hon Hai Precision Industry (2317 TT), TSMC (2330 TT), Tata Consultancy Svcs (TCS IN), Infosys Ltd (INFO IN), Hcl Technologies (HCLT IN), Wipro Ltd (WPRO IN)

Global Emerging Markets Weekly: 2 April 2021

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

The <a href="https://www.smartkarma.com/entities/s-p-bse-sensex-index" target="_blank" data-smartkarma-citation="entities:31494:1" rel="noopener">S&amp;P BSE SENSEX Index (SENSEX INDEX)</a> is the flagship index of the Bombay Stock Exchange (BSE). The index has 30 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 18 June.The June review uses the market cap and turnover data from 1 November to 30 April to determine the stocks to be included and excluded from the index, and the announcement of the changes is done 4 weeks before the rebalance effective date.At the current time, we see <a href="https://www.smartkarma.com/entities/wipro-ltd" target="_blank" data-smartkarma-citation="entities:15360:1" rel="noopener">Wipro Ltd (WPRO IN)</a> being included in the index and <a href="https://www.smartkarma.com/entities/oil-natural-gas-corp-ltd" target="_blank" data-smartkarma-citation="entities:3456:1" rel="noopener">Oil &amp; Natural Gas Corp (ONGC IN)</a> being deleted.<a href="https://www.smartkarma.com/entities/tata-steel-ltd" target="_blank" data-smartkarma-citation="entities:20934:1" rel="noopener">Tata Steel Ltd (TATA IN)</a> could be included in the index at the expense of <a href="https://www.smartkarma.com/entities/wipro-ltd" target="_blank" data-smartkarma-citation="entities:15360:1" rel="noopener">Wipro Ltd (WPRO IN)</a> if it jumps one rank - it has around two and a half months to do that, though each passing day will require a bigger outperformance to make that possible.

The S&amp;P BSE SENSEX Index (SENSEX INDEX) is the flagship index of the Bombay Stock Exchange (BSE). The index has 30 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 18 June.The June review uses the market cap and turnover data from 1 November to 30 April to determine the stocks to be included and excluded from the index, and the announcement of the changes is done 4 weeks before the rebalance effective date.At the current time, we see Wipro Ltd (WPRO IN) being included in the index and Oil &amp; Natural Gas Corp (ONGC IN) being deleted.Tata Steel Ltd (TATA IN) could be included in the index at the expense of Wipro Ltd (WPRO IN) if it jumps one rank - it has around two and a half months to do that, though each passing day will require a bigger outperformance to make that possible.

Sensex June21 Index Rebalance Preview: Deletion Almost Certain; Addition a Wild Card for Now

The earnings momentum behind the sector is currently extraordinarily strong, with all four companies reporting an acceleration in revenue growth rates, record operating margins and a continued strong medium-term demand outlook, driven by accelerated cloud adoption and digitalisation, across many verticals and geographies. These companies are also set to record strong y/y growth numbers over the next two quarters given the low base from last year’s pandemic-hit fiscal 4Q20 and 1Q21. However, following phenomenal share price performance from its March-2020 lows, this has been reflected in valuations as these companies now trade at record valuation multiples, on based on significantly upgraded earnings growth expectations. In this insight, after a brief overview of the recent reporting season and the outlook for the industry, I look at what long-term growth expectations are implied by current valuation levels, based on the Justified PE calculation. I also compare this to other high-quality Indian companies.

The earnings momentum behind the sector is currently extraordinarily strong, with all four companies reporting an acceleration in revenue growth rates, record operating margins and a continued strong medium-term demand outlook, driven by accelerated cloud adoption and digitalisation, across many verticals and geographies. These companies are also set to record strong y/y growth numbers over the next two quarters given the low base from last year’s pandemic-hit fiscal 4Q20 and 1Q21. However, following phenomenal share price performance from its March-2020 lows, this has been reflected in valuations as these companies now trade at record valuation multiples, on based on significantly upgraded earnings growth expectations. In this insight, after a brief overview of the recent reporting season and the outlook for the industry, I look at what long-term growth expectations are implied by current valuation levels, based on the Justified PE calculation. I also compare this to other high-quality Indian companies.

Indian IT Services: What Justified PE Ratios Tell Us About Sustainable Growth Expectations

The key takeaways, from the recent reporting season, was that 1) management teams seem more upbeat about growth going forward, driven by accelerated adoption of cloud services and investments in technology solutions, which they believe could drive a multiyear growth story, 2) the significant majority of deal momentum is driven by smaller engagements (apart from maybe Infosys), and 3) companies are reinstating salary increases given confidence on the growth outlook and significant margin recovery following steep discretionary cost cuts in reaction to the COVID-19 pandemic. The sector has significantly outperformed the local index over the past 3-months, delivering over 30% local currency share price return, on average. These companies are, however, currently trading at peak valuation multiples, based on sell-side estimates which, in most cases, are already well ahead of management guidance.Given the strong share price performance and peak valuation multiple levels, based on arguably elevated earnings, I am turning bearish on the sector despite the strong medium-term growth outlook. The numbers which are currently baked-in leave truly little room for disappointment at a time when we are going into a seasonally weaker quarter, impacted by employee furloughs and possible margin headwinds. These remain extremely high-quality companies which will benefit from accelerated technology investments in the wake of the COVID-19 pandemic, but I would wait for a better entry point.<div class="content-highlight">
 Please also see previous notes on the subject:
<a href="https://www.smartkarma.com/insights/smartkarma-webinar-indian-it-services-picks-and-pans" target="_blank" data-smartkarma-citation="insights:42241" rel="noopener">Smartkarma Webinar | Indian IT Services: Picks and Pans</a> 
<a href="https://www.smartkarma.com/insights/indian-it-services-covid-19-revenue-impact-troughed-recovery-already-priced-in" target="_blank" data-smartkarma-citation="insights:41387" rel="noopener">Indian IT Services: COVID-19 Revenue Impact Troughed, Recovery Already Priced In?</a> 
<a href="https://www.smartkarma.com/insights/wipro-net-cash-equal-to-24-of-its-market-cap-deep-value-or-a-value-trap" target="_blank" data-smartkarma-citation="insights:39663" rel="noopener">Wipro: Net Cash Equal to 24% of Its Market Cap, Deep Value or a Value Trap?</a> 
<a href="https://www.smartkarma.com/insights/tata-consultancy-services-premium-at-excessive-levels-pricing-in-overly-optimistic-relative-growth" target="_blank" data-smartkarma-citation="insights:38750" rel="noopener">Tata Consultancy Services: Premium at Excessive Levels, Pricing in Overly Optimistic Relative Growth</a> 
<a href="https://www.smartkarma.com/insights/hcl-technologies-doubts-over-organic-growth-eroding-returns-drives-undeserved-discount-rating" target="_blank" data-smartkarma-citation="insights:38545" rel="noopener">HCL Technologies: Doubts over Organic Growth, Eroding Returns, Drives Undeserved Discount Rating</a> 
</div>

The key takeaways, from the recent reporting season, was that 1) management teams seem more upbeat about growth going forward, driven by accelerated adoption of cloud services and investments in technology solutions, which they believe could drive a multiyear growth story, 2) the significant majority of deal momentum is driven by smaller engagements (apart from maybe Infosys), and 3) companies are reinstating salary increases given confidence on the growth outlook and significant margin recovery following steep discretionary cost cuts in reaction to the COVID-19 pandemic. The sector has significantly outperformed the local index over the past 3-months, delivering over 30% local currency share price return, on average. These companies are, however, currently trading at peak valuation multiples, based on sell-side estimates which, in most cases, are already well ahead of management guidance.Given the strong share price performance and peak valuation multiple levels, based on arguably elevated earnings, I am turning bearish on the sector despite the strong medium-term growth outlook. The numbers which are currently baked-in leave truly little room for disappointment at a time when we are going into a seasonally weaker quarter, impacted by employee furloughs and possible margin headwinds. These remain extremely high-quality companies which will benefit from accelerated technology investments in the wake of the COVID-19 pandemic, but I would wait for a better entry point.
 Please also see previous notes on the subject:
Smartkarma Webinar | Indian IT Services: Picks and Pans 
Indian IT Services: COVID-19 Revenue Impact Troughed, Recovery Already Priced In? 
Wipro: Net Cash Equal to 24% of Its Market Cap, Deep Value or a Value Trap? 
Tata Consultancy Services: Premium at Excessive Levels, Pricing in Overly Optimistic Relative Growth 
HCL Technologies: Doubts over Organic Growth, Eroding Returns, Drives Undeserved Discount Rating 


Indian IT Services: Valuation and Earnings Levels Suggest We Are Nearing the Point-Of-Peak-Optimism

Index Rebal Trades & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal Trades & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

On 21st September, Australian IT services company <a href="https://www.smartkarma.com/entities/dws-ltd" target="_blank" data-smartkarma-citation="entities:10622:1" rel="noopener">DWS Ltd (DWS AU)</a> agreed to be acquired by an  Australian subsidiary of Indian Tech Giant <a href="https://www.smartkarma.com/entities/hcl-technologies-ltd" target="_blank" data-smartkarma-citation="entities:20025:1" rel="noopener">HCL Technologies (HCLT IN)</a> in a Deal that valued the company at a market cap of A$162mn (~USD118mn). The Scheme consideration will be A$1.20 per share in cash and the Deal is expected to be completed in December 2020. The transaction is conditional on receiving Target Shareholder approval and regulatory approvals. With less than 3 months to completion, DWS's shares are currently at A$1.17. <div>As always, there is more below the fold. </div><hr><div>For more information about M&amp;A rules, regulations, and practices in Australia, please refer to <a href="https://www.smartkarma.com/insights/quiddity-australia-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:30118" rel="noopener">Quiddity Australia M&amp;A Guide 2019</a> and <a href="https://www.smartkarma.com/insights/quiddity-m-a-australia-foreign-investment-reforms" target="_blank" data-smartkarma-citation="insights:40210" rel="noopener">Quiddity M&amp;A: Australia Foreign Investment Reforms</a> </div>

On 21st September, Australian IT services company DWS Ltd (DWS AU) agreed to be acquired by an  Australian subsidiary of Indian Tech Giant HCL Technologies (HCLT IN) in a Deal that valued the company at a market cap of A$162mn (~USD118mn). The Scheme consideration will be A$1.20 per share in cash and the Deal is expected to be completed in December 2020. The transaction is conditional on receiving Target Shareholder approval and regulatory approvals. With less than 3 months to completion, DWS's shares are currently at A$1.17. As always, there is more below the fold. For more information about M&amp;A rules, regulations, and practices in Australia, please refer to Quiddity Australia M&amp;A Guide 2019 and Quiddity M&amp;A: Australia Foreign Investment Reforms 

India

HCL Technologies Limited provides software development and related engineering services.  The Group's technologies utilize a variety of technologies, including Internet and e-commerce, networking, internet telephony, embedded software, ASIC/VLSI design and testing, satellite and wireless communications, and component based object technologies, including COM, DCOM and COBRA.

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HCL Technologies (HCLT IN)

Global Emerging Markets Weekly: 2 April 2021

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity...

Wium Malan, CFA

Sensex June21 Index Rebalance Preview: Deletion Almost Certain; Addition a Wild Card for Now

ONGC is an almost certain deletion at the Sensex review in June. The inclusion at the current time is Wipro, but Tata Steel could be included if it...

Brian Freitas

Indian IT Services: What Justified PE Ratios Tell Us About Sustainable Growth Expectations

In this insight, I look at the long-term growth expectations implied by current valuation levels, based on a Justified PE calculation. I also...

Wium Malan, CFA

Indian IT Services: Valuation and Earnings Levels Suggest We Are Nearing the Point-Of-Peak-Optimism

Given the strong share price performance and peak valuation multiple levels, based on arguably elevated earnings, I am turning bearish on the...

Wium Malan, CFA

HCL-DWS(DWS AU): Cash Deal Trading Wide

Dws Ltd (DWS AU)

Janaghan Jeyakumar, CFA

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