Category

India

Brief India: A Look at the CPSE ETF Ahead of a Potential Offering and more

By | Daily Briefs, India

In this briefing:

  1. A Look at the CPSE ETF Ahead of a Potential Offering
  2. IndusInd Bank – NPL Formation Doubling

1. A Look at the CPSE ETF Ahead of a Potential Offering

Cpse

The Central Public Sector Enterprises (CPSE) Exchange Traded Fund R* Shares CPSE ETF (CPSEBE IN) is a passive fund that was created to help the Government of India divest some of its stake in selected CPSEs through the ETF route. The ETF is based on the Nifty CPSE index and currently includes 10 listed Central Public Sector Enterprises. This will change to 12 securities once the latest round of rebalancing is completed on 23 January 2020.

Each time that the CPSE index has been rebalanced, a Further Fund Offering (FFO) has ensued. We believe this time it will be no different.

In this Insight we take a look at the history of the ETF, the current portfolio, historical changes to the index and their impact, and some main points on the potential offering.

2. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

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Brief India: A Look at the CPSE ETF Ahead of a Potential Offering and more

By | Daily Briefs, India

In this briefing:

  1. A Look at the CPSE ETF Ahead of a Potential Offering
  2. IndusInd Bank – NPL Formation Doubling
  3. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

1. A Look at the CPSE ETF Ahead of a Potential Offering

Cpse

The Central Public Sector Enterprises (CPSE) Exchange Traded Fund R* Shares CPSE ETF (CPSEBE IN) is a passive fund that was created to help the Government of India divest some of its stake in selected CPSEs through the ETF route. The ETF is based on the Nifty CPSE index and currently includes 10 listed Central Public Sector Enterprises. This will change to 12 securities once the latest round of rebalancing is completed on 23 January 2020.

Each time that the CPSE index has been rebalanced, a Further Fund Offering (FFO) has ensued. We believe this time it will be no different.

In this Insight we take a look at the history of the ETF, the current portfolio, historical changes to the index and their impact, and some main points on the potential offering.

2. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

3. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

Image 22892592331579491277918

The highlights for December are as follows:

  • Panasonic:
    • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
    • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
    • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.
  • There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
  • CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
  • South Korean players had no major battery highlights last month.
  • CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

Source: CapIQ

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Brief India: NIFTY 50 Index Review – YES, Third Time Unlucky and more

By | Daily Briefs, India

In this briefing:

  1. NIFTY 50 Index Review – YES, Third Time Unlucky
  2. HDFC AMC
  3. SBI Cards and Payment IPO: Valuation Insights
  4. Page Industries (PAG IN)
  5. Home First Finance Pre-IPO – Riding on Affordable Housing

1. NIFTY 50 Index Review – YES, Third Time Unlucky

Image

After being excluded from the MSCI indices in November 2019 and the S&P BSE SENSEX in December 2019, Yes Bank (YES IN) has now been excluded from the NIFTY Index (NIFTY INDEX). Last evening, the Index Maintenance Sub-Committee of NSE Indices decided to exclude Yes Bank (YES IN) and include Shree Cement (SRCM IN) in the NIFTY Index (NIFTY INDEX) with changes effective on 27 March 2020. Passive funds tracking the NIFTY Index (NIFTY INDEX) will need to trade at the closing VWAP on 26 March to rebalance their holdings.

We estimate over 10 days of buying on Shree Cement (SRCM IN) and less than half a day of selling on Yes Bank (YES IN) with negligible changes on the other index constituents. 

2. HDFC AMC

Hdfcamc%201%20year%20ag

HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 

A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.

Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.

However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

3. SBI Cards and Payment IPO: Valuation Insights

Val

SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.

In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.

4. Page Industries (PAG IN)

Pe

We argue that the rich valuations enjoyed by Page Industries (PAG IN) are not recession-proof as once assumed by many. Even products like Innerwear are subject to headwinds when the broader economic environment and consumer sentiment turns down.  

Volume recovery remains the key for PAG IN. The investments made by PAG IN in technology and sales may not yield the desired results as the operating environment has changed compared to the previous slow down.  Trading at ~52x FY2021 consensus EPS estimates the room for further disappointments from PAG IN remains. 

5. Home First Finance Pre-IPO – Riding on Affordable Housing

Image?1581998113

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company is backed by True North, GIC and Bessemer who together own over 90% of the company.

HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.

However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief India: IndusInd Bank – NPL Formation Doubling and more

By | Daily Briefs, India

In this briefing:

  1. IndusInd Bank – NPL Formation Doubling
  2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

1. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

Image 22892592331579491277918

The highlights for December are as follows:

  • Panasonic:
    • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
    • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
    • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.
  • There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
  • CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
  • South Korean players had no major battery highlights last month.
  • CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

Source: CapIQ

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief India: HDFC AMC and more

By | Daily Briefs, India

In this briefing:

  1. HDFC AMC
  2. SBI Cards and Payment IPO: Valuation Insights
  3. Page Industries (PAG IN)
  4. Home First Finance Pre-IPO – Riding on Affordable Housing
  5. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap

1. HDFC AMC

Hdfcamc%201%20year%20ag

HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 

A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.

Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.

However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

2. SBI Cards and Payment IPO: Valuation Insights

Val

SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.

In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.

3. Page Industries (PAG IN)

Shareprice

We argue that the rich valuations enjoyed by Page Industries (PAG IN) are not recession-proof as once assumed by many. Even products like Innerwear are subject to headwinds when the broader economic environment and consumer sentiment turns down.  

Volume recovery remains the key for PAG IN. The investments made by PAG IN in technology and sales may not yield the desired results as the operating environment has changed compared to the previous slow down.  Trading at ~52x FY2021 consensus EPS estimates the room for further disappointments from PAG IN remains. 

4. Home First Finance Pre-IPO – Riding on Affordable Housing

Image?1581998113

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company is backed by True North, GIC and Bessemer who together own over 90% of the company.

HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.

However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.

5. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap

Image

As announced in India’s 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment (FPI) limit in companies will be raised from 24% to the sectoral limits effective 1 April 2020.

The companies have an option to reduce the FPI limit to 24% or 49% or 74%, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively before 31 March 2020. Companies that reduce their FPI limit have the option to increase the FPI limit to 49% or 74% or the sectoral cap in the future. However, once the limit has been increased to a higher level, it cannot be reduced to a lower threshold.

With a month and a half to go, a few companies have sent out postal ballots to shareholders for a vote on lowering the FPI limit from the sectoral cap. We revisit our earlier Insight India – Increase in FPI Limits to Drive Passive Inflows and update the numbers.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief India: SBI Cards and Payment IPO: Valuation Insights and more

By | Daily Briefs, India

In this briefing:

  1. SBI Cards and Payment IPO: Valuation Insights
  2. Page Industries (PAG IN)
  3. Home First Finance Pre-IPO – Riding on Affordable Housing
  4. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap
  5. Morning Views Asia: JSW Steel Ltd, Modern Land China

1. SBI Cards and Payment IPO: Valuation Insights

Val

SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.

In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.

2. Page Industries (PAG IN)

Shareprice%201%20year

We argue that the rich valuations enjoyed by Page Industries (PAG IN) are not recession-proof as once assumed by many. Even products like Innerwear are subject to headwinds when the broader economic environment and consumer sentiment turns down.  

Volume recovery remains the key for PAG IN. The investments made by PAG IN in technology and sales may not yield the desired results as the operating environment has changed compared to the previous slow down.  Trading at ~52x FY2021 consensus EPS estimates the room for further disappointments from PAG IN remains. 

3. Home First Finance Pre-IPO – Riding on Affordable Housing

Image?1581998114

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company is backed by True North, GIC and Bessemer who together own over 90% of the company.

HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.

However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.

4. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap

Image

As announced in India’s 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment (FPI) limit in companies will be raised from 24% to the sectoral limits effective 1 April 2020.

The companies have an option to reduce the FPI limit to 24% or 49% or 74%, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively before 31 March 2020. Companies that reduce their FPI limit have the option to increase the FPI limit to 49% or 74% or the sectoral cap in the future. However, once the limit has been increased to a higher level, it cannot be reduced to a lower threshold.

With a month and a half to go, a few companies have sent out postal ballots to shareholders for a vote on lowering the FPI limit from the sectoral cap. We revisit our earlier Insight India – Increase in FPI Limits to Drive Passive Inflows and update the numbers.

5. Morning Views Asia: JSW Steel Ltd, Modern Land China

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief India: Home First Finance Pre-IPO – Riding on Affordable Housing and more

By | Daily Briefs, India

In this briefing:

  1. Home First Finance Pre-IPO – Riding on Affordable Housing
  2. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap
  3. Morning Views Asia: JSW Steel Ltd, Modern Land China
  4. Edelweiss Financial Services – Train Wreck
  5. The Guerrilla War Against The PBOC

1. Home First Finance Pre-IPO – Riding on Affordable Housing

Image?1581998113

Home First Finance (HFF) is an affordable housing finance company targeting first time home buyers in low and middle-income groups. The company is backed by True North, GIC and Bessemer who together own over 90% of the company.

HFF has grown rapidly over the past few years, driven by an expansion in its branch network and large number of new customers. Over FY17-19, HFF’s loan grew at CAGR of 70%, while its earnings grew even faster with NII growing at 76.2%, PPoP at 145% and PAT at 160% CAGR.  It still remains largely focussed on housing loans and has pristine asset quality.

However, its funding sources lack diversity and its margin is artificially inflated by its high capitalisation. Furthermore, the company talks a lot about tech but a lot of its functions appear to be still very contact heavy and hence, salesforce/customer service dependant.

2. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap

Image

As announced in India’s 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment (FPI) limit in companies will be raised from 24% to the sectoral limits effective 1 April 2020.

The companies have an option to reduce the FPI limit to 24% or 49% or 74%, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively before 31 March 2020. Companies that reduce their FPI limit have the option to increase the FPI limit to 49% or 74% or the sectoral cap in the future. However, once the limit has been increased to a higher level, it cannot be reduced to a lower threshold.

With a month and a half to go, a few companies have sent out postal ballots to shareholders for a vote on lowering the FPI limit from the sectoral cap. We revisit our earlier Insight India – Increase in FPI Limits to Drive Passive Inflows and update the numbers.

3. Morning Views Asia: JSW Steel Ltd, Modern Land China

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

4. Edelweiss Financial Services – Train Wreck

  • Weak Edelweiss Result:Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported earnings of INR 170 mn for FY 3Q20, a 67% and 92% linked quarter and YOY decline. Loan loss provisions were substantially higher, the agency business exhibited lower profits, and larger insurance and BMU losses all contributed to this disastrous result.

  • FY 4Q20 Should Be Special As Well: Edelweiss intends to complete a detailed review of its corporate loan book in FY 4Q20 and will update its Expected Credit Loss (ECL) model. If the organization is honest with itself, we’d anticipate a far greater level of NPLs next quarter. 

5. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief India: India – Companies Start to Amend FPI Limits Down From The Sectoral Cap and more

By | Daily Briefs, India

In this briefing:

  1. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap
  2. Morning Views Asia: JSW Steel Ltd, Modern Land China
  3. Edelweiss Financial Services – Train Wreck
  4. The Guerrilla War Against The PBOC
  5. Glenmark Pharmaceuticals – Earnings Flash – Q3 FY 2019-20 Results – Lucror Analytics

1. India – Companies Start to Amend FPI Limits Down From The Sectoral Cap

Image

As announced in India’s 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment (FPI) limit in companies will be raised from 24% to the sectoral limits effective 1 April 2020.

The companies have an option to reduce the FPI limit to 24% or 49% or 74%, with the approval of its Board of Directors and its General Body through a resolution and a special resolution, respectively before 31 March 2020. Companies that reduce their FPI limit have the option to increase the FPI limit to 49% or 74% or the sectoral cap in the future. However, once the limit has been increased to a higher level, it cannot be reduced to a lower threshold.

With a month and a half to go, a few companies have sent out postal ballots to shareholders for a vote on lowering the FPI limit from the sectoral cap. We revisit our earlier Insight India – Increase in FPI Limits to Drive Passive Inflows and update the numbers.

2. Morning Views Asia: JSW Steel Ltd, Modern Land China

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

3. Edelweiss Financial Services – Train Wreck

  • Weak Edelweiss Result:Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported earnings of INR 170 mn for FY 3Q20, a 67% and 92% linked quarter and YOY decline. Loan loss provisions were substantially higher, the agency business exhibited lower profits, and larger insurance and BMU losses all contributed to this disastrous result.

  • FY 4Q20 Should Be Special As Well: Edelweiss intends to complete a detailed review of its corporate loan book in FY 4Q20 and will update its Expected Credit Loss (ECL) model. If the organization is honest with itself, we’d anticipate a far greater level of NPLs next quarter. 

4. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

5. Glenmark Pharmaceuticals – Earnings Flash – Q3 FY 2019-20 Results – Lucror Analytics

Glenmark Pharmaceuticals’ Q3/19-20? results were again disappointing. Growth was more sluggish than expected, especially with the sharp slowdown in the US only partly offset by stronger-than-expected sales in India. Furthermore, not all was positive in India, where the consumer care business decelerated significantly, perhaps due to the weak economy. We note that Glenmark has consistently missed guidance in key areas since its USD ’21 bond issuance: revenue growth, profitability and deleveraging, despite a two-decade-long record of growth. Positively, the financial risk profile remains stable, with stable earnings and a small decrease in debt. Liquidity is weak, as the company will face large debt maturities in the next 1.5 years. This would improve if the company is successful in issuing new USD 200 mn Notes to refinance the existing USD 200 mn 2021 Notes (maturing August 2021).

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief India: IndusInd Bank – NPL Formation Doubling and more

By | Daily Briefs, India

In this briefing:

  1. IndusInd Bank – NPL Formation Doubling
  2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
  3. IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?

1. IndusInd Bank – NPL Formation Doubling

Image 71944491231579514748432

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

Image 22892592331579491277918

The highlights for December are as follows:

  • Panasonic:
    • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
    • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
    • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.
  • There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
  • CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
  • South Korean players had no major battery highlights last month.
  • CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

Source: CapIQ

3. IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?

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In a stunning non-disclosure, Indusind Bank (IIB IN) conveniently neglected to reveal, in its 3QFY2020 results, that it had reduced shareholder funds by around Rs 6.7 bn as a charge for frauds without charging it to profits. The bank reported a consolidated net profit of Rs 13.09 bn (Rs 14.01 bn in 2QFY2020); had the fraud amount been charged to profits, it would have reported only Rs 6.4 bn as net profit. While the Reserve Bank of India (RBI) permits this practice in case of frauds (banks are permitted to spread the provision over 4 quarters by reversing the debit to shareholder funds), the banking regulator also states that suitable disclosures have to be made pertaining to the amount of fraud and quantum of provision for it. As the bank did not disclose this amount of direct reduction from shareholder funds, it was the duty of Purushottam Nyati, partner, Haribhakhti & Co., the audit firm, to highlight it, which he, sadly, failed to do.  

The charge of Rs 6.7 bn was only revealed by Indusind Bank in the results conference call  when analysts enquired about the disparity between the shareholder funds and the net profits reported, and a vague disclosure in the analyst results presentation. Responding to this writer’s queries on the lack of disclosure, Indusind Bank said that the explanation in fine print on the analyst presentation was “self explanatory.” Unfortunately, this lack of transparency, which the RBI needs to investigate, adds to the litany of issues that this writer has been highlighting pertaining to the leadership of Romesh Sobti, CEO, Indusind Bank. These include untrustworthy financial accounts in FY2016 and FY2017, reckless lending to the insolvent IL&FS and other stressed groups, and the use of deferred taxes  to inflate profits. With Sobti’s retirement by March 2020, there will be a change in leadership at Indusind Bank, and shareholders should be extremely cautious regarding what else might emerge from the murky depths of this once fancied bank.

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Brief India: Morning Views Asia: JSW Steel Ltd, Modern Land China and more

By | Daily Briefs, India

In this briefing:

  1. Morning Views Asia: JSW Steel Ltd, Modern Land China
  2. Edelweiss Financial Services – Train Wreck
  3. The Guerrilla War Against The PBOC
  4. Glenmark Pharmaceuticals – Earnings Flash – Q3 FY 2019-20 Results – Lucror Analytics
  5. Defy Regulator, Win $3.3 Bn: Kotak Laughs All the Way to the Bank

1. Morning Views Asia: JSW Steel Ltd, Modern Land China

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

2. Edelweiss Financial Services – Train Wreck

  • Weak Edelweiss Result:Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported earnings of INR 170 mn for FY 3Q20, a 67% and 92% linked quarter and YOY decline. Loan loss provisions were substantially higher, the agency business exhibited lower profits, and larger insurance and BMU losses all contributed to this disastrous result.

  • FY 4Q20 Should Be Special As Well: Edelweiss intends to complete a detailed review of its corporate loan book in FY 4Q20 and will update its Expected Credit Loss (ECL) model. If the organization is honest with itself, we’d anticipate a far greater level of NPLs next quarter. 

3. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

4. Glenmark Pharmaceuticals – Earnings Flash – Q3 FY 2019-20 Results – Lucror Analytics

Glenmark Pharmaceuticals’ Q3/19-20? results were again disappointing. Growth was more sluggish than expected, especially with the sharp slowdown in the US only partly offset by stronger-than-expected sales in India. Furthermore, not all was positive in India, where the consumer care business decelerated significantly, perhaps due to the weak economy. We note that Glenmark has consistently missed guidance in key areas since its USD ’21 bond issuance: revenue growth, profitability and deleveraging, despite a two-decade-long record of growth. Positively, the financial risk profile remains stable, with stable earnings and a small decrease in debt. Liquidity is weak, as the company will face large debt maturities in the next 1.5 years. This would improve if the company is successful in issuing new USD 200 mn Notes to refinance the existing USD 200 mn 2021 Notes (maturing August 2021).

5. Defy Regulator, Win $3.3 Bn: Kotak Laughs All the Way to the Bank

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In a surprise capitulation, the Reserve Bank of India (RBI) has relaxed its rules regarding the ceiling on the percentage of shares held by founders of a private bank. But it has carved out this exception for just one bank, Kotak Mahindra Bank (KMB IN) (KMB), which has been permitted to reduce the founders’ stake to 26% (from the existing 30%) within 6 months from the date of final approval of the RBI. Thereafter no timeline has been set by the banking regulator for the founders’ stake to be reduced to 15%. Prior to this decision, KMB had agreed to the RBI’s decision of reducing the founders’ stake to 15% by March 31, 2020; even this timeline was a major regulatory forbearance, as the original February 22, 2013 notification required the founders’ stake to be reduced to 15% by March 31, 2015. In late 2018, KMB had filed a case against the RBI to permit preference capital (essentially debt) to be included in paid-up capital, so as to reduce the founders’ stake in the bank. As part of the ‘settlement’ with the regulator, KMB will withdraw the case against the RBI.

This major relaxation, given to only one bank, has seriously undermined the credibility of the banking regulator. To date, it has led to a staggering gain estimated at US$ 3.3 bn (Rs 233 bn) to the founders of KMB (essentially one individual, Uday Kotak) by allowing the original March 31, 2015 deadline to be ignored. In contrast, the RBI took stringent action  against Bandhan Bank in September 2018; when the bank did not reduce the founders’ stake, the RBI restricted its business by barring the opening of new branches. That the RBI has been partial only to one bank with regard to complying with the RBI’s guidelines on reducing founders’ ownership stakes in private sector banks has not resulted in any media outcry. Nor have the 44 sell-side analysts who cover KMB highlighted the huge potential loss to non-founder shareholders in KMB from this special treatment meted out by the banking regulator. In the normal course, the business media and sell-side analysts should have been in favour of the non-founder shareholder (majority) interests in KMB, but strangely, even when KMB filed a case against the RBI, the media by and large supported KMB. This writer has been the sole exception in highlighting (here and here) how the RBI has been extra-partial to KMB; how it has given KMB an extended time line not given to other banks to reduce the founder stake; and how the bank did not even comply with that extended time line, and had the temerity to take the regulator to court.

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