The Price of Certainty

Ian Cassel writes that an investor learns from hindsight and get paid for foresight. Often times an opportunity exists because the conditions aren’t perfect yet. Investor has to pull the trigger in advance of all the pieces coming together. Investment success is determined by two things: First, How well you assimilate imperfect information and Second, Your ability to identify when you are wrong quicker.  

Jeff Bezos of Amazon said the following about decision making. Cassel thinks that it is the perfect description of investing: “Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”

The price of certainty is expensive because it slows you down. We want to know everything. If I just knew a little more. A little more. A little more. But knowing more often times breeds confidence but not accuracy. 

Cassel thinks if Bezos would have continued his quote he would have said focus on the 70% that matters and be okay if the 30% you don’t know hurts you. You have to live with the possibility that you could be wrong. You can’t let the fear of the 30% steal your courage to move forward if you believe the odds are in your favor. 

How can you be both quick and accurate?  Cassel applies four filters to every new company he evaluates: An organization with signs of intelligent fanaticism; A business that can grow through a recession; A balance sheet that can weather a storm and act with occasional boldness; A stock that can conservatively double in 3 years.

When Cassel applies these four filters he might miss something, but it cuts to the core of what is important. He can normally size up a new opportunity that he is attracted to in a few hours. Over the years Cassel found being quick has served better than being slow. If it takes a long time to get to a buy decision then it probably isn’t a buy. The great opportunities are normally obvious, at least to an investor.

In addition, Cassel found buying small and averaging up later as you gain additional conviction is a great way to counterbalance being fast and right with the risk of being fast and wrong. You aren’t going to be right all the time, but try to be wrong as fast as you can and move on. 

“Be willing to make decisions. That’s the most important quality of a good leader. Don’t fall victim to what I call the “ready-aim-aim-aim-aim” syndrome. You must be willing to fire.” – T. Boone Pickens

Blue Star- The demand in the festival season is expected to grow 12% YoY in FY20

Update on the Indian Equity Market:

On Thursday, NIFTY was up 1.07% to close at 11,586 level. The top performers in the index were yes bank (+15.47%), Tata motors (+13.27%) and Eicher Motors (+7.96%). HCL tech (-1.06%), VEDL (-0.97%) and Grasim (-0.59%) were the worst performing NIFTY stocks. Among the sectorial indices, NIFTY Auto (+3.13%), NIFTY PSU Banks (+3.0%) and NIFTY PVT Bank (+1.71%) were the top gainers. NIFTY IT (-0.41%) was the only negative performing index today as all the other indices were in green.

Excerpts of an interview with B. Thiagarajan, managing director, Blue Star (From Livemint dated 17/10/2019)

  • According to Mr. Thiagrajan, the festival season has been good.   Summer season has been great. Starting with Onam, the Dussehra season and now leading up to Diwali the consumption seems to be good and they are doing better than the market.
  • They are launching new TV commercial, print and digital campaigns in an orbit-shifting move. It is because the market is doing well.
  • They have engaged Virat Kohli and it is a new orbit-shifting move as far as Blue Star is concerned.
  • Advertising expesnes will be somewhere around 12% over last year in value terms. Considering the entire festival season up to New Year perhaps starting from Onam. So far that figure is holding good.
  • They would like to grow faster than the market. If the market is growing by 12%, they would aim to have 17% growth in the festival season. He expects between 10-12% market growth, anywhere between 15-17% Blue Star growth. This is in terms of room air conditioners.
  • In air conditioners the penetration levels are around 6%, there are many first-time buyers, low-end products are getting sold, and consumer finance is at an all-time high.
  • 90% energy consumption reduction has been achieved in AC. So it is no longer viewed as an energy guzzling device. Altogether, the monsoon season has ended well. Though there will be some delayed crops, he thinks agriculture income will be good.
  • Therefore tier-3-4-5 markets also should be doing well. This prompts him to say that anywhere between 10% and 12% growth should be taking place in the market.
  • Association with Virat will be for 14 months. Just like Virat is good in T20, one day and test cricket, Blue Star is a player in corporate commercial; light commercial like shop, showroom, and boutiques and residential. They need the mass connect because tier-3-4-5 towns are doing well. They are proud of that association.
  • They will spend around ₹550 mn out of the revenue target in this association. In terms of percentage of ad expenses to revenue it is not going to make a difference because they are growing and this association is going to bring more sales, they are excited about this.

Consensus Estimate (Source: market screener website)

  • The stock price was ₹ 826/- as of close of 17-10-19 and traded at 39x/ 29x/ 23x the consensus EPS for FY20E / 21E / 22E EPS of ₹ 23.1 /28.3 /36.1 respectively.
  • Consensus target price of ₹ 805/- implies a PE multiple of 22x on FY22E EPS of ₹ 36.1/-.

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/-.

IndusInd Bank says growth will bounce back to mid-20% from 3QFY20

Update on the Indian Equity Market:
On Tuesday, BSE benchmark Sensex gained 291 points, while Nifty ended above 11,400-mark. Nifty Auto was the outperformer, FMCG and private bank stocks were strong while IT stocks dragged. Nifty Bank rose 1.3%, Bandhan Bank jumped 11% while Vedanta, ONGC, Maruti Suzuki were among the biggest Sensex gainers. Railway PSU IRCTC shares closed down 1.6% down at Rs 716.65. Indian Railway Catering and Tourism Corporation (IRCTC) got listed at Rs 644 on Monday on the BSE, more than doubling investor wealth since its IPO.

Key takeaways from the interview of Mr Sobti, MD & CEO, IndusInd Bank; dated 11th October 2019 with CNBC TV18:

  • Loan growth comes in at a multi-year low for IndusInd Bank in 2QFY20 while stressed assets woes added to the bank’s worries. Mr Sobti shared his views and outlook.
  • In terms of the pain in the banking sector, he said that compared to last year, net slippages are lower, gross slippages are the function of some technical issues because there are downgrades and then there are upgrades within a few days. The net figure for gross slippages is Rs 1700 mn. The Bank has had handsome recoveries in the stressed groups which were never non-performing assets (NPAs). The Bank is still hopeful that these stressed accounts will not leave any residual cost which hits the profit and loss (P&L).
  • He clarified that they have been more than transparent on disclosures as far as real estate exposures are concerned, they have remained steady in terms of percentage. Special mention accounts (SMA) data and the SMA-I data has been provided every quarter and the overdue is just Rs 280 mn of the whole lot.
  • In terms of market share, Mr Sobti mentioned that the Bank has gained market share in the vehicle finance area, it has grown 21 percent and in the auto industry, commercial vehicles (CVs) grew around 14 per cent, cars grew 19 per cent, two-wheelers grew 24 per cent. According to him, it’s a very handsome growth in a market which is shrinking.
  • Microfinance grew by 32 per cent; the bank has not lost market share anywhere and has received some repayments towards the end of Sep-19 quarter.
  • Mr Sobti thinks the underlying fundamentals are sound and the bank will bounce back to the mid-20s, if not better, Q3 onwards in terms of growth rate.
  • The total exposure to non-banking financial companies (NBFCs) is around 3.5 per cent.
  • Speaking about IndusInd Bank’s exposure to Indiabulls group, he said that exposure was 0.35% of the bank’s exposure which has come down to 0.27%.
  • Exposure to real estate financers remains steady at 3.8 per cent and has always remained below 4 per cent.
  • On loan growth, he further mentioned that in Q1 the loan growth was 28 per cent. So, for 1HFY20, the bank is in the mid-20s. In 2QFY20, the bank got some nice and strong repayments. For IndusInd Bank to get back to the mid-20s and beyond, might not require doing unusual sort of a stretch. Mr Sobti thinks IndusInd Bank should be ending the full year at least in the 25 per cent range if not better.
  • When asked about the next CEO appointment he mentioned that the next CEO will be appointed sooner than later.

 Consensus Estimate (Source: market screener website)

  • The stock price was ₹ 1,272/- as of close price of 15-10-19 and traded at 15x /12x /9x the consensus EPS for FY20E / 21E / 22E EPS of ₹ 84/108/133 respectively.
  • Consensus target price of ₹ 1,704/- implies a PE multiple of 13x on FY22E EPS of ₹ 133/-.

Sundaram Finance – Grabbing little pockets of opportunities available

Update on the Indian Equity market:

On Monday, NIFTY closed +0.22% higher. Among sectoral indices NIFTY Realty (+1.64%), NIFTY Auto (+1.47%), NIFTY Pharma (+1.19%) closed higher while NIFTY PSU Bank (-0.53%), NIFTY IT (-0.32%) ended on a negative note. The biggest gainers were ONGC (+5.50%), TATA Motors (+5.03%), Bharti Airtel (+2.62%) whereas Infosys (-3.50), Bajaj Finance (-2.65%), Bajaj FinServ (-1.22%) closed with high losses.

Excerpts from an interview with T.T Srinivasaraghavan, managing director, Sundaram Finance with CNBC- tv18

  • Talking about prevailing scenario in NBFC space Mr Srinivasaraghavan says NBFCs is probably the lousiest coinage that you could have for any industry, this is because it is as heterogeneous as anything could be.
  • However, he says, that clubbing everything together and saying NBFC is stressed sector will probably will be overstatement
  • Speaking about on ground situation he says, it is not looking much different and there are no signs on reviewal in short term.
  • There is overcapacity and nothing has happened much on the manufacturing side to soak up this additional capacity. Plus, the uncertainty about BS VI continues.
  • Right now, growth is not a priority from company’s point of view, because in a market which is tanking, it is not appropriate to swim against the tide and growing topline in an aggressive way is certainly not a part of the Sundaram Finance DNA.  
  •  The focus is making asset quality robust and grabbing coming opportunities.
  • Speaking about further quarters he says, higher delinquencies cannot rule that out, because in many states, there have been local issues where governments have either held back on payments to contractors or governments have rescinded contracts.
  • So, these local issues will certainly affect the cash flows.
  • Speaking about government purchases or the State Transport Undertaking (STU) purchases, he says, it is not really going to feed into business for banks and NBFCs but it will be a benefit for original equipment manufacturers’ (OEMs).
  • Mr Srinivasaraghavan says, now that interest rates have come down, corporate tax Is reduced. Corporates should come up and take some responsibility and do something that will help in near future instead of cribbing.
  • Mr srinivasaraghavan says the overcapacity is cyclical but this the longest one. He says, we should not worry about it in long term.
  • Scrappage is a welcome thing but it wont act as a magical wand. It has to accompanied by several other things.
  • He says, monsoon have been a great positive news in a gloomy horizon. At least we can hear about people enquiring, people may be looking at perhaps some buying, so post Diwali perhaps there could be some buying taking place.
  • He adds, that this time we will have a ‘pa’ shaped recovery, which is a Tamil alphabet. It is a flat line at the bottom, it is neither a U nor a V. It is two vertical lines on the side and a horizontal line connects both of them.

Consensus Estimate (Source: market screener website)

  • The closing price of Sundaram Finance was ₹ 1,610/- as of 14-October-19. It traded at 24.5x/ 21.5x/ 21.0x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 65.6/ 74.7/ 76.5 respectively.
  • It trades as P/B 3.1x/2.8x/2.6x the consensus Book value per share for FY20E/FY 21E/FY22 of 507/568/607.

TCS: Focus on getting double-digit growth in retail and BFSI

Update on the Indian Equity Market:

Following the global peers, the markets traded higher on Friday with the Nifty closing 0.6% up at 11,305. The September quarter result season started on a negative note with TCS and IndusInd bank declaring the results lower than street estimates. Among the sectoral indices, 9 out of 11 major indices were up with Metal (2.3%), IT (1.5%) and FMCG (1.0%) leading the gains while Media (-0.3%) and Pvt Banks (-0.03%) were the only sectors that closed in the red. Within the stocks, Cipla (4.7%), Infosys (4.1%) and Vedanta (3.9%) led the index higher while Indian Oil (-3.3%), Yes bank (-2.9%) and GAIL (-1.8) brought the gains down.

TCS: Focus on getting double-digit growth in retail and BFSI

Key takeaways from the interview of Mr Rajesh Gopinathan, MD & CEO and Mr Ganapathy Subramaniam, COO, Tata Consultancy Services Ltd. (TCS); dated 11th October 2019 with CNBC TV18:

  • Mr Gopinathan mentioned that the March quarter is a very crucial quarter for the company as December is the weakest quarter for the company.
  • The focus of the company is to get back to double-digit growth. The company believes that the opportunity for growth is present in the markets. Irrespective of volatility, the company has a full list of services to achieve the growth in both weak as well as strong markets scenario.
  • On the possibility of a global slowdown, Mr Gopinathan mentioned that North America till a quarter back was growing in double digits and BSFI was back in double-digit. In Europe and the UK, the company has experienced high double-digit growth for a long period of time. It is just an adjustment phase and the company is confident about future growth.
  • About future prospects, Mr. Subramaniyam said that the net customer additions, as well as customer band movements, have been great. The employee addition during the quarter was at an all-time high. All this will help the company to grow. The order book including in BFSI (Banking, Financial Services, and Insurance) that the company has signed during the quarter was also impressive according to him.
  • The focus in the future is to get double-digit growth in the retail and BFSI segment for the company.
  • About the margins for the quarter, Mr. Subramaniyam said that they had planned for much higher growth and the intake of employees was also high during the quarter. So when the company has additional hiring related cost and the revenue do not commensurate with that, that puts pressure on the margins.
  • About the employee structure, they mentioned that the company has front-ended the entire human resource thing this year and 30,000 people are already in the system which has never happened before. All these employees are going through rigorous talent development and they will be deployed in the 3rd and 4th quarters. The entire learning infrastructure has been significantly strengthened so that the employees will be at certain competencies.

Consensus Estimate (Source: market screener website)

  • The closing price of TCS was ₹ 1,989/- as of 11-October-19. It traded at 23x/ 21x/ 19x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 87.4/ 96.5/ 105.0 respectively.
  • Consensus target price of ₹ 2,118/- implies a PE multiple of 20x on FY22E EPS of ₹ 105/-.

Embracing Mistakes

Jon writes about this on his blog https://novelinvestor.com/. He quotes Stan Druckenmiller “Every great money manager I’ve ever met, all they want to talk about is their mistakes. There’s great humility there.”

Investing is just a long series of decisions where some end in gains and others end in losses. If you’re doing it right, the gains outweigh the losses in the end, hopefully, by a large enough margin that your goals are reasonably satisfied. In other words, every investor makes mistakes. Those that don’t are lying. That’s the uncomfortable truth. Those that go on to be great investors, learn this through experience…and apparently love to talk about it. So what’s the benefit of constantly talking about their mistakes? For one, they embrace the inevitable.

Peter Bernstein writes about the importance of this realization and why it matters: The trick is not to be the hottest stock-picker, the winningest forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive! Performing that trick requires a strong stomach for being wrong because we are all going to be wrong more often then we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future. The nature of uncertainty in the process makes being wrong inevitable because not only will you make mistakes, you can make the right decision and still lose money. So are you prepared for it? Survival is about planning for the inevitable losses in advance.

Following a few basic investing principles help with this.

Ben Graham introduced the idea of margin of safety decades ago as a way to embrace mistakes from the start. It’s as simple as leave room for error. He believed the possibility of being wrong should be factored into the price you pay for an investment. The idea is to pay a low enough price, so even if you’re wrong, you only lose a little. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches… The riskiest moment is when you’re right. That’s when you’re in the most trouble because you tend to overstay the good decisions.

When you combine it with diversification — spreading your money across multiple investments — if one turns out bad, it won’t be devastating.  That’s what diversification is for. It’s an explicit recognition of ignorance. And I view diversification not only as a survival strategy but as an aggressive strategy because the next windfall might come from a surprising place. You reap further benefits when you diversify. If some investments inevitably turn out worse than expected, the opposite could happen to others — some turn out better. In other words, you get unexpected opportunities. Not a bad consolation prize for survival.

Godrej Consumer Products: On track for a gradual recovery in volume growth

Update on the Indian Equity Market

On Thursday, NIFTY closed 79 points lower to 11,234 reversing Wednesday gains. Result season began today with TCS and IndusInd bank. Market movements will be influenced by quarterly financial performances. Amongst the NSE 50, top gainers were BHARTIARTL (+4.4%), GRASIM (+3.7%), RELIANCE (+2.7%) while INDUSINDBK (-6.0%), YESBANK (-5.4%) dragged index down. In the sectoral indices, Pharma remained stable; while all others saw a decline. Banks (-2.7%), Realty (-2.1%), Financial Services (-1.9%) were the biggest losers.

Godrej Consumer Products: On track for a gradual recovery in volume growth

Key takeaways from the interview of Mr Vivek Gambhir, MD & CEO, Godrej Consumer Products Limited (GODREJCP); dated 9th October 2019 with CNBC TV18:

  • GODREJCP expects to deliver higher single-digit volume growth in 2HFY20 if the recovery sustains. There is a Month on Month (MoM) volume growth since July 2019.  The demand in 2QFY20 was stable Quarter on Quarter (QoQ).
  • GODREJCP has been launching new products in the insecticides segment. It expects to turnaround this segment on the back of new innovations. 
  • In the soaps segment; GODREJCP has maintained the price levels in the competitive pricing environment.
  • Margins are volume-driven. The company is positive on maintaining margins as long as the volume growth sustains.
  • GODREJCP enjoys a strong market position of the ‘Ezee’ and ‘Genteel’ brands in the liquid detergents segment. It intends to capitalize on the market leadership and scale up the presence in the liquid detergents and specialist laundry solutions over the next few years.

Consensus Estimate (Source: market screener website)

  • The closing price of GODREJCP was ₹ 680/- as of 10-October-19. It traded at 43x/ 36x/ 33x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 16.0/ 18.7/ 20.9 respectively.
  • Consensus target price of ₹ 688/- implies a PE multiple of 33x on FY22E EPS of ₹ 20.9/-

M&M Finance- 2HFY20 to be better

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 1.7% higher. Among the sectoral indices NIFTY Bank (+3.7%), NIFTY PVT bank (+3.5%), NIFTY PSU bank (+3.1%) closed higher while NIFTY Media (-0.3%), NIFTY FMCG (-0.2%) NIFTY IT (-0.8%) ended on a negative note. The biggest gainers were IndusInd Bank (+5.5%), Infratel (+5.3%), Bharti Airtel (+5.2%) whereas Yes bank (-5.2%), Hero motocorp (-2.8%), Zee (-2.4%) ended on a negative note.

Excerpts from an interview with Mr. Ramesh Iyer – Chairman & Managing Director, M&M Financial Services.

  • Mr Ramesh said, “We have been focusing on the semi-urban rural market and we do see that the festival demand, at least the footfall at the dealerships are much much higher than what it was in the last six months.”
  • According to him, the festival season would turn out to be good and normally the second half for the rural market is always good, given the festival, and harvest has been in widespread range. Put together, he expects demand to pick up and the second half to be good.
  • They have revised FY20 loan growth numbers and there are four reasons for that:
    • Their deeper penetration is an advantage as they get volumes from the deeper pockets. 
    • Multi-product approach that they have been taking. Their growth is not dependent on a single product. 
    • They have been little more aggressive in pre-owned vehicle like pre-owned cars, tractors, UVs, etc, and they do see demand for a pre-owned vehicle in the rural market picking up.
    • Large customer base.
  • They have not seen too much competition and they expect some market share growth. So, that is one growth possibility.
  • Pre-owned vehicle segment has been a little aggressive and they do see growth coming from there. While the heavy commercial vehicle segment is not growing, they have a very small base or a low base and they do expect some volume growth there, given the total volume.
  • As far as the pre-owned vehicle is concerned, they were concentrating on cars and UVs. Now, they have also gone into pre-owned tractor financing and that is another very exciting segment.
  • These are the growth drivers and market share gain from their prime products like UV or car segment altogether is helping them maintain growth.
  • They do not see an issue to really worry about from the asset quality front but it all depends on yields. What is going to be the price that will get announced because the farm cash flow is important from a rural perspective, but they believe that given the widespread monsoon, at least in some of the states, the yields would be good.
  • They do not, therefore, see a spike in NPAs but there are some pockets where one could witness delay.
  • Their focus area is going to be semi urban, rural market and that is what they have done for the last 25 years. They do see a pick up in sentiment and they expect that in the next six months, with the festival and the harvest coming up, they should see some buoyancy in that market.
  • They are borrowing from banks, own debentures, fixed deposits and that has helped them maintain growth. But yes, there has been some increase in cost that they have witnessed initially but now that is climbing down.
  • Liquidity has not been an issue and as cost seems to get addressed, they feel a little more comfortable than that of six months back.
  • They will be open to any inorganic growth opportunity, but they do not have anything on the tables at this stage. But clearly, it has to have a strategic fit, a cultural fit and that is what they will look for.

Consensus Estimate (Source: market screener website & Investinng.com website)

  • The closing price of M&M Finance was ₹ 334 /- as of 09-10-19. It traded at 1.7x /1.5x/1.4x x the consensus book value for FY20E/ FY21E/FY22E of ₹ 194 /₹ 218/ ₹242 respectively.
  • Consensus target price of ₹ 378/- implies a P/B multiple of 1.6 x on the FY22 book value of ₹242 /-

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/-