Brief Finance: India’s Automobile – Market Recovery and Opportunities in INR Bonds and more

In this briefing:

  1. India’s Automobile – Market Recovery and Opportunities in INR Bonds
  2. MSCI India Index Review – Big Changes
  3. LIC Housing Finance – Not Rational for Bulls or Bears
  4. YX Asset Recovery IPO Initiation: Something Doesn’t Add Up
  5. UOB Vs OCBC – Time for a Reversal?

1. India’s Automobile – Market Recovery and Opportunities in INR Bonds

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In the first of our local currency bond series, we look into Indian INR bonds in the auto finance industry in India. We believe there are some green shoots emerging amid a slowdown in the automobile industry in India. We also believe the worst in the automobile industry is behind us and, from a credit perspective, a rating action on automobile companies with strong parents, is less likely. 

Automobile company stocks have staged a rebound since August this year. The NIFTY automobile index recovery since August has been stronger than the overall NIFTY 50 index recovery. This is not yet reflected in local currency credit spreads of auto finance companies. For investors with high risk appetite, gaining exposure to well-rated INR denominated auto-finance corporate bonds offers value, in our view. Alternatively, stock market investors may consider switching out of stocks into bonds.

2. MSCI India Index Review – Big Changes

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MSCI announced the results of the November 2019 Semi-Annual Index Review earlier today. The constituent changes will be effective from 27 November and the rebalancing trades will need to be done at the close on 26 November.

There are eight inclusions: Berger Paints India (BRGR IN), Colgate Palmolive (India) (CLGT IN), Dlf Ltd (DLFU IN), HDFC Asset Management Co Ltd (HDFCAMC IN), ICICI Prudential Life Insurance (IPRU IN), Info Edge India (INFOE IN), SBI Life Insurance (SBILIFE IN) and Siemens Ltd (SIEM IN) 

Four stocks have been excluded from the index: Glenmark Pharmaceuticals (GNP IN), Indiabulls Housing Finance (IHFL IN), Vodafone Idea (IDEA IN) and Yes Bank (YES IN)

The free float on ICICI Bank Ltd (ICICIBC IN) has been doubled following foreign room going above the 25% threshold.

With only eleven trading days prior to implementation day there could be some big moves, especially on names that were not expected to be included in the index. That said, most of the additions have seen big rallies over the last few weeks and any further jumps could lead to profit taking.

3. LIC Housing Finance – Not Rational for Bulls or Bears

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  • Recent underperformance leads to a review of the bear thesis.

  • Low PE levels to be expected when the market has reassessed these companies as bank like with an NPL cycle.

  • NPLs are the key issue – as always with financial companies.

  • Growth is decent but NPLs could wipe out investors at any point with a growing risk of a capital call.

  • Declining interest rates and heavier competition continue to put margins under pressure.

  • The company has a structurally low RoAA due to its conservative nature but it has not been conservative enough.

  • Life Insurance Company of India (LIC), as the parent company, reassures debt investors, and rightly so, but equity investors would still be hit by any fall out.

  • Nothing for the bulls or the bears in this company unless you have a very small universe.

  • Long only PMs should buy peers with higher beta if they believe the sector’s problems are over or not invest here is they think there is more contagion and India’s economy will continue to disappoint (as we believe).

4. YX Asset Recovery IPO Initiation: Something Doesn’t Add Up

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Yx Asset Recovery (YX US) is a leading business service provider of delinquent consumer debt collection in China. According to iResearch, YX is the largest provider of delinquent credit card receivables recovery service in China as measured by the total value of receivables under collection and number of collection specialists employed as of 30 June 2019. It is seeking to raise $200 million through an NYSE IPO. 

Over the track record period, YX’s performance is mixed as the strong revenue growth has been offset by margin pressure and volatile cash flows. Promisingly, the 2MAug19 financials show a material step-up in profitability and cash flows. However, we are uneasy about recommending the IPO as the YX story does not quite add up.

5. UOB Vs OCBC – Time for a Reversal?

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United Overseas Bank (UOB SP) and Oversea Chinese Banking Corp. (OCBC SP) are highly correlated stocks belonging to the same sector and with similar market caps.

United Overseas Bank (UOB SP) has outperformed Oversea Chinese Banking Corp. (OCBC SP) by 12% over the last year. The price ratio of the stocks is now trading at a five year high, as is the difference in the Price to Book Value for the stocks.

In this Insight we look at the price performance and correlation of the stocks over the last five years and at some of the operational and valuation metrics that could help us formulate a trade.

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