05 Jul

When should you sell your stocks?

Ben Carlson reminds us that there is always going to be a good reason to sell out of the stock market. When stocks were getting slaughtered in March, investors wondered if they should sell because it felt obvious stocks would fall further. Now that stocks have rallied, investors are wondering if they should sell because it feels obvious stocks have risen too far, too fast.

So when should you sell some or all of your stocks?

  1. When you need to rebalance: The simplest form of selling comes when you have a target asset allocation in mind and religiously rebalance back to your target weights on a set schedule or pre-determined threshold. The timing of a rebalance will never be perfect but setting up a specific asset allocation that takes into account your willingness, ability and needs to take risk removes the temptation to go all-in or all-out based on your gut instincts and sell based on a set plan.
  2. When you’ve been proven wrong about an investment thesis: This one is more relevant for those who hold more concentrated positions in a single stock. Every investor should perform a premortem that signals when it’s time to pull the plug and bail on an investment idea that simply didn’t pan out. This can be harder than it seems because What if I just wait until it breaks even?! or What if it rallies right after I sell?! are both rather compelling arguments in a loser position.
  3. When you’ve won the game: If you’re lucky enough to amass something in the neighbourhood of 20-25x your expected living expenses in retirement and have a decent handle on your spending habits, at a certain point you may ask yourself—What’s the point of playing anymore?
  4. When you’ve determined your risk profile, time horizon or circumstances have changed: Every portfolio decision doesn’t have to come down to market fundamentals. You must also consider how your current circumstances impact your risk profile. Sometimes you need to dial down the risk because you’re in a better place financially than you expected. Maybe you received an unexpected windfall or aren’t spending as much as you budgeted for.

Carlson concludes that it is impossible to create a portfolio if you don’t have a handle on your goals and a reason to invest in the first place. Markets matter but you should always begin the investment decision-making process by thinking about where you are—and where you’d like to be.

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03 Jul

We plan to raise Rs 6,000-8,000 crore in FY21 – Canara Bank

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 10,552 (+1.2%). Top gainers in NIFTY50 were M&M (+6.4%), HEROMOTOCO (+5.2) and TITAN (+3.8%). The top losers were AXISBANK (-1.9%), UPL (-1.0%) and VEDL (-0.9%). Top sectoral gainers were Auto (+2.8%), IT (+2.6%) and Metal (+0.6%) and sectoral losers were Bank (-0.1%) and PSU banks (-0.1%).

Edited Excerpts of an interview with Mr. LV Prabhakar, CEO, Canara Bank Ltd with Financial Express dated 2nd July 2020:

  • They have recovered from written-off accounts about Rs 1,470 crore, which is nearly 13% higher. Apart from that, the CRAR has been maintained at 13.65% and gross NPAs have been brought down by 62 basis points to 8.21%. PCR has increased by 773 bps to 75.86%.
  • This time, sufficient provisioning for all the expected risks has been made. For staff expenses, they have extra provision of about Rs 1,100 crore. NPA provisioning, they have set aside about Rs 11,596 crore for the year and for the quarter, they have made about Rs 5,300 crore.
  • As Syndicate Bank is getting merged with them, they have made Rs 340 crore extra provisioning.
  • In Q1FY21, they declared Dewan Housing Finance as a fraud. They have taken the impact in Q4FY20, which is about Rs 497 crore of extra provisions.
  • They have done extra provisioning because in the Covid scenario, they want to make their balance sheet strong. So wherever possible, they have proactively made provisioning. Simultaneously, they have taken care that CRAR did not get affected.
  • In the first month of Q2, they will have a board meeting, in which they are planning to get an approval for Rs 6,000-8,000 crore of capital. As of now, their capital ratios are adequate.
  • In order to factor in growth and any probable effect (of Covid), they are planning to go for a capital raise. This will be raised in Q3 or Q4 of FY21 in the form of or maybe AT-I (additional tier-I) bonds.
  • There is a risk there because now nobody wants to subscribe to AT-I bonds after some problems with another bank , or they could go for some kind of tier-II issue. In March 2020, they raised Rs 3,000 crore at 7.12% in tier-II category.
  • In terms of the number of borrowers, 19% and in terms of amount, 17% of the borrowers have availed moratorium.
  • Some people have preferred to pay back. In the MSME segment, about 38% of the people have opted for it, whereas in retail it is only 5%. Some of them are housing loans and a few for vehicle loans.
  • Whatever deferment is available is going to be for accounts which have defaulted after March 25. Before that the cases that came can be taken forward.
  • They expect that about Rs 3,700 crore will be recovered from NCLT in FY21. The main account expected (to be resolved) is Bhushan Power and Steel.
  • With Canara Covid support and the 100% government-guaranteed emergency credit line, in the last three months they have already disbursed about Rs 91,600 crore.
  • In FY21, they expect growth ranging around 7-8%. There will definitely be demand from retail for housing and vehicle loans. With all the support that MSMEs, there should be traction there, too.
  • NBFCs always need money because they invest further. As soon as the infrastructure side picks up, there will be demand from corporates as well.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of Canara Bank Ltd was ₹ 105/- as of 02-July-2020.  It traded at 0.3x/ 0.3x the consensus book value of ₹ 337 /336 for FY21E/22E respectively.
  • The consensus price target of Canara Bank is ₹ 127/- which trades at 0.4x the book value of ₹ 336/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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02 Jul

Steel consumption up in sectors linked to rural economy – Tata Steel

Update on the Indian Equity Market:

On Wednesday, Nifty ended 1.2% higher at 10,430. The top gainers for Nifty 50 were Axis Bank (+6.3%), UPL (+5.3%), and Bajaj Finserv (+5.2%) while the losing stocks were NTPC (-2.1%), Nestle (-2.1%) and LT (-2.0%). Sectoral gainers for the day were PSU Bank (+3.6%), Bank (+2.8%) and Financial Services (+2.7%) while the losers were Pharma (-1.0%), Realty (-0.7%) and IT (-0.2%).

Edited excerpts of an interview with Mr TV Narendran, CEO & MD, Tata Steel Ltd; dated 30th June 2020 from Economic Times:

  • The Company had tough six-seven months of the financial year starting from April last year till maybe October or November. Things started looking up after November. The demand started picking up. January to June is a peak season for steel consumption in India. So the steel demand was picking up. Apart from the auto industry, other industries were looking better and the steel prices were moving up. The Company started sensing things were going wrong because of the pandemic. It impacted them in Europe in February and they knew it was going to come to India as well. Tata Steel started taking some precautions by the end of February in India.
  • Prices in India were static because there were no sales but the fact that inventories were building up meant that all Indian producers were trying to export. So the export markets were crowded with Indian suppliers towards the end of March and early April.
  • By the end of April, China started pulling in quite strongly so a lot of steel exports started going to China. The Company saw a recovery of the international markets starting in April.
  • Between April, May, and June, steel prices have gone up by about $50 a tonne. The fact that Indian steel producers could export and had an export option, kept the domestic prices quite stable.
  • There was some pricing pressure because the prices have been trending upwards till March. There were some price corrections in May when the transaction started but the international prices were quite strong.
  • Consumption growth was seen in sectors which are linked to the rural economy.
  • In the automotive business, the tractors business has been reasonably strong. Motorcycles have been stronger than scooters because they are both dependent on the rural economy.
  • Rural infrastructure spending by the government has been positive. Tata Steel sells a lot of steel i.e., about 20% of their revenues, to the rural economy. The roofing sheets and reinforcing steel for the individual house builders segments are panning out strong.
  • The non-tractor and non-motorcycle automotive commercial vehicle, passenger vehicles are still quite a weak sector. There is some sign of improvement. Any improvement is only going to get them back to where they were last year and not where they were a year before last. So, it is a long haul back for them, according to Mr Narendran.
  • Tata Steel saw an EBITDA improvement in Kalinganagar and Jamshedpur of about Rs 2,000-2,500 a tonne Quarter on Quarter (QoQ) which was on the back of cost takeout and price hikes. Tata Steel would have sold at least half a billion tonnes more had there been no lockdown. This would have helped them in cost as well as realisations. They have lost half a billion tonne of March sales which was at the highest price.

Consensus Estimate: (Source: market screener website)

  • The closing price of Tata Steel Ltd was ₹ 324/- as of 01-July-2020. It traded at 6.8x the consensus EPS estimate of ₹ 47.8 for FY22E.
  • The consensus target price of ₹ 376/- implies a PE multiple of 7.9x on FY22E EPS of ₹ 47.8/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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01 Jul

Replacing China as a global chemical supplier is a medium to long term story- Lupin

Update on the Indian Equity Market:

 

On Tuesday, Nifty closed marginally lower at 10,302. Within NIFTY50, SHREECEM (+3.1%), MARUTI (+2.7%), and ICICIBANK (+2.6%) were the top gainers, while BPCL(-2.5%), POWERGRID (-1.9%) and SUNPHARMA (-1.9%) were the top losers. Among the sectoral indices, AUTO (+1.1%), FMCG (+0.3%), and FIN SERVICE (+0.3%) gained the most.  PSU BANK (-1.8%), MEDIA (-1.7%) and PHARMA (-1.5%) were the losing sectors.

 

Replacing China as a global chemical supplier is a medium to long term story- Lupin

 

Excerpts of an interview with Mr. Ramesh Swaminathan, Global CFO –Lupinpublished in Economic Times dated26thJune 2020:

  • The US Generic market has seen different phases in terms of pricing in the last 2 decades. Pricing was good during 2001-2005. In the 2005-2009 period, there was a sharp decline in prices which picked up later. 2011-2015 saw some tailwinds for pricing. 2015 onward due to customer consolidation and increased competition in generic space, the Pharma companies lost bargaining power leading to pricing pressure. However today, the situation has stabilized and everything depends on the portfolio.
  • There have been a lot of Indian generic entrants in the US generic space and that is where the competition is higher. US companies such as Teva, Mylan, and Sandoz have lost market share to the new entrants. But the smaller companies are now realizing that earning ROCE is not as easy. Companies have to invest in FDA approved manufacturing facilities of different kinds, there is a waiting period for getting ANDA approvals, and there is a working capital blockage. As a result, some players are backing out which will bring some pricing stability going forward.
  • In the last several years, Lupin, along with the other bigger companies, is focusing on delivering more complex generics including complex injectables, inhalation, etc. Complex injectables as a segment are growing at over 6-7%. Inhalations segment is growing at over 15%. These segments have lower competition because of the complexity involved.
  • In the specialty segment, a lot of the products are coming into the market over the next few years, which will help with the realizations for Indian generic companies. Companies need to have deep pockets because Specialty calls for a very different kind of approach. Innovation quotient and clinical data play a critical part.
  • Biosimilars is the sunrise industry for Indian pharma companies. There are considerable entry barriers, but once a company has a clone, has done immunogenicity studies well and, then potentially development risk will be mitigated. The pricing will also be better due to lower competition. Europe has adapted more to biosimilars. Once the American market picks up, the realization for players in that market would be much higher.
  • Lupin has got into women’s health because that is one space which has been vacated by big pharma and to that extent, the competition there is much lower.
  • Replacing China as a chemical producer for the world will be a medium to long term story. India has about 25% of USFDA approved API capacities in the world but there is still some way to go when it comes to supply. The government is trying to encourage this shift but the investments have to materialize.
  • There are 3 specific growth drivers for Indian pharma companies. One is the large American market, specifically the complex products which Lupin is also getting into. Second, the Indian domestic market is still underpenetrated. Due to the COVID-19 situation, there is going to be thrust from the Indian government and more public awareness which will aid faster growth. Third, many emerging markets are underpenetrated and if the portfolio is right, there is potential for growth in those markets.
  • There might be some demand contraction in India as well as America due to COVID-19 disruption. However, it is a very temporary situation and the second half of FY21E will be much better.
  • The flavor of the day seems to be a nationalistic foot forward. We can see in India as well as in America and other parts of the world. Lupin has been conscious about this for a while and has local manufacturing in countries where it operates. For Indian pharma companies, the basic paradigm should be low-cost manufacturing from India but supplemented with local manufacturing capabilities in overseas markets.

Consensus Estimate: (Source: market screener website)

  • The closing price of lupin was ₹ 910/- as of 30-June-2020. It traded at 31.9x/ 23.4x the consensus EPS estimate of ₹ 28.5/ 38.9 for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 852/- implies a PE multiple of 21.9x on FY22E EPS of ₹ 38.9.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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30 Jun

We import as there is little choice, should be self-reliant – Maruti Suzuki

Update on the Indian Equity Market:

On Monday, NIFTY ended down 71 pts (-0.7%) at 10,312 amid weak global cues.
Among the sectoral indices, FMCG (+0.7%) was the only gainer while REALTY (-3.6%), PSU BANK (-3.3%) and METAL (-2.6%) were among the top losers.
Among the stocks, BRITANNIA (+2.1%), HDFCBANK (+1.8%) and CIPLA (+1.4%) were the top gainers. COALINDIA (-5.0%), AXISBANK (-4.7%) and TECHM (-3.2%) were the top losers.

We import as there is little choice, should be self-reliant – Maruti Suzuki

Edited excerpts of an interview with Mr. R C Bhargava, Chairman, Maruti Suzuki with Business Standard dated 28th June, 2020:

• The answer to calls for boycotting Chinese imports lies in making Indian manufacturing much more competitive, deeper and widespread, but people should remember that shunning products from the neighboring country may lead to them paying more for goods.
• While stating that importing continuously for long period is not really in anybody’s commercial interest, he also asserted that certain products continue to be imported as there is little choice in the matter due to their non-availability in India, or because of quality and pricing issues.
• Everybody knows that importing products over time actually becomes more and more expensive as the rupee gets weaker. If you were importing something 10 years ago, the same product today will cost 60-70 % higher. So it is not really in anybody’s commercial interest to continue to import, you import because you really have little choice in the matter.
• The answer to the sentiments which are being expressed is to make Indian manufacturing much more competitive, much deeper, and much more widespread. What the Prime Minister has said about ‘Atmanirbhar’ means exactly that. If you start making more products in India at competitive prices, people will not import those products.
• Asked if companies, including those in the automotive sector, need to worry in the wake of rising voices against Chinese imports following Indo-China border clashes in Ladakh, Mr. Bhargava commented that this is a natural reaction to what has happened on the border. We had this happen with Pakistan also. It doesn’t become policy. He thinks the policymakers think carefully before they make or unmake a policy. They don’t react to popular sentiments.
• Explaining why industries in India import, he said that the reason why anybody imports is that either the product is not made in India, not available or what is made in India is not at the right quality or the product made in India is too expensive.
• He also underlined the need to understand whether stopping import will hurt or benefit India. If it is non-essential products it will not hurt us, but if it is essential then stopping imports is going to hurt us much more than it will hurt China. We need to see what the import is, what does it do to our whole industry, whether stopping imports is going to hurt us or benefit us.
• When asked if importing from China is inevitable under the current circumstances, Mr. Bhargava stated that it is inevitable unless we can find alternative sources of imports and which do not raise the prices to a level that consumers will get hurt.
• We should remember that consumers ultimately pays the price of imports, the same people who are asking for a boycott have to remember that in some cases it may lead to them being asked to pay more for the same product and asked are they ready for that.
• He also called for a comprehensive understanding of the circumstances and taking informed decisions on the pros and cons of importing from China before being swayed by sentiments.
• In case of stopping imports from China consumers will not get a car if a car has 2 per cent Chinese imports. He asked that if we stop that 2 per cent and stop making the car, who will it hurt, India or otherwise, how many jobs will Indians lose, how many people will lose a living, how much taxes will be lost.
• Commenting on instances of consumers cancelling bookings of vehicles from a Chinese auto firm, he said that it is the expression of a sentiment and he understands popular sentiment.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of Maruti was ₹ 5,701/- as of 29-Jun-20. It traded at 39x/25x the consensus EPS estimate of ₹ 147/231 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 5,519/- implies a PE multiple of 24x on FY22E EPS of ₹ 231/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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29 Jun

Cement prices have managed to hold up – Heidelberg Cement

Update on the Indian Equity Market:

On Friday Nifty closed 0.9% higher at 10,383. Among the sectoral indices, IT (+4.1%), PSU Bank (+1.0%), Metal (+0.6%) closed higher. FMCG (-1.2%), Realty (-0.9%) and Pharma (-0.5%) closed lower. Infosys (+6.6%), BPCL (+6.5%) and TCS (+4.9%) closed on a positive note. Bajaj Finance (-3.1%), ITC (-3.1%) and Bharti Infratel (-2.8%) were among the top losers.

Excerpts from an interview of Mr Jamshed N Cooper, MD, Heidelberg Cement with ET Now 25th June 2020:

  • Cement prices have managed to hold up even when the construction activity has halted. Mr. Cooper said it is a different mix and varies from state to state.
  • Government spending is higher in many of the projects, the company is trying to complete before monsoon sets in.
  • The labor availability is better in central India and South is weak as the market depends on migrant labor.
  • Capacity utilization will be between 55% and 60%. Many of the cement companies have a very high breakeven. Most of the companies have high debt and to serve high debt with lower volume is a task. The cement companies have a pressure to keep price up as they have to maintain margins with lower volumes.
  • The construction industry is not going to be hit so badly except for the monsoon period. Building industry, construction industry is one of the largest employers of the labor workforce, with their employment the infrastructure industry will come in picture.
  • Either the government will provide employment or somehow employment is going to get generated in the building industry because there is a huge demand for housing. He added that it is the best time for the government to use this work force to start building rural houses for the poor so that this cycle can continue.
  • About lockdown effect he said a mistake was made by keeping cement plant shut during lockdown. The cement was not getting in market place and labor force was ideal which had a cascading effect.
  • A little bit of slowdown is expected in the construction industry and hence in the demand for cement. Going forward the labor will start returning after the monsoons sowing happens.
  • It is expected that at least 60% of the labor is likely to return after Diwali. Once workforce gets back to their workplace’s things should be moving perfectly well.
  • On housing infrastructure push led by the government, he said whole push has to be from the housing sector because 60% of the cement is used in the housing sector and in this at least another 5-7% will come from the government.
  • The pricing is here to stay as companies cannot breakeven with lower volumes and if they don’t breakeven the companies will get in trouble.

Consensus Estimate: (Source: market screener and Investing.com websites)

  • The closing price of Heidelberg cement was ₹ 182/- as of 26-June-2020.  It traded at 19.5x/ 12.2x the consensus Earnings per share estimate of ₹ 9.3/14.8 for FY21E/ FY22E respectively.
  • The consensus average target price for Heidelberg is ₹ 197/- which implies a PE multiple of 13.3x on FY22E EPS of ₹14.8/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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28 Jun

Thinking about Losses?

With huge volatility in shares markets in the last few months, many investors are sitting on large notional losses on their investments made over the past few years. In many cases these losses led investors to sell out at wrong time and lose out on sharp rally seen since March 2020. How investors should look at the losses during their investing careers. We turn to some of the respected investors to get clarity.

“Even the most conservative investors can be paralysed by large losses, whether due to mistakes, premature judgements, or the effects of leverage. If losses impair your future decision making, then the cost of a mistake is not just the loss from that investment alone, but the impact that loss may have on the future chain of events. If a loss freezes you from taking full advantage of a great opportunity, or pressures you to make it a smaller position than it should or would otherwise be, then the cost may be far greater than the initial loss itself” Seth Klarman

“It is easy to underestimate what a 30% decline does to your psyche. Your confidence may become shot at the very moment opportunity is at its highest. You – or your spouse – may decide it’s time for a new plan, or new career. I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets can model the historic frequency of big declines. But they cannot model the feeling of coming home, looking at your kids, and wondering if you’ve made a huge mistake that will impact their lives.” Morgan Housel

“I learned early in my career to be skeptical and flexible, not stubborn about a stock. I also learned to take quick, small losses rather than get emotionally involved in a stock that was dragging me down. When I am wrong about a security, I try to take my loss at the 10% level” Roy Neuberger

“There is no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating. That’s what I tried to avoid doing.” Peter Lynch

“A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise.” Daniel Kahneman

“Profits always take care of themselves, but losses never do.  The speculator has to insure himself against considerable loss by taking the first small loss.” Jesse Livermore

“I like to repeat to myself a rule of Philip Carret, written some 86 years ago: ‘Be quick to take losses and reluctant to take profits‘.” Francois Rochon

Source: www.masterinvest.com

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26 Jun

Focus on cash conservation & tightening capital allocation – M&M

Update on the Indian Equity Market:

Markets remained muted amid monthly F&O expiry as Nifty closed the day 0.2% lower at 10,289. The top gainers for Nifty 50 were ITC (+5.6%), HEROMOTOCO (+2.9%) and BAJFINANCE (+1.9%) while the losing stocks for the day ASIANPAINT (-3.1%), HINDALCO (-2.3%) and IOC (-2.1%). The gaining sectors for the day were FMCG (+2.3%), PHARMA (+0.8%) and BANK (+0.4%) whereas IT (-1.2%), REALTY (-1.0%) and METAL (-0.6%) were the losing sectors for the day.

Edited excerpts of an interview with Mr Pawan Goenka, Managing Director, Mahindra & Mahindra Ltd (M&M); dated 15th June 2020 from CNBC TV-18:

  • Mr Goenka said that the board took a decision that the Company needs to be much tighter on  capital allocation and prioritize where they want to put the money.
  • M&M is looking at all the subsidiaries right now to see whether they will be turning around profitable in the next two years. The company will take the decision in the coming few months about its subsidiaries.
  • Speaking about Peugeot Motorcycles, he said it was hit due to the pandemic. As per the plan, it could have been profitable during this year. However, due to COVID-19, the factories in China are down for quite some time. The company has lost the full peak season in Europe. The management will take the decision on the future of Peugeot motorcycles after reviewing its future.
  • Mahindra Electric turned EBITDA positive in FY20 and the company is on the way to become profit positive or cash-flow positive in the coming quarters.
  • He is confident about the strength of the balance sheet to fight the pandemic. The company holds a fairly strong cash position with more than Rs 100,000 mn cash on its balance sheet.
  • In the near term, the company’s primary objective is to find a third party investor in Korean manufacturer SsangYong as it is in need of cash for survival. 
  • The company reported a consolidated net loss of Rs 32,550 mn during the 4QFY20 due to the COVID-19. In the tough economic period, the company is looking to focus on capital allocation strategies.

Consensus Estimate: (Source: market screener, investing website)

  • The closing price of M&M Ltd was ₹507/- as of 25-June-2020. It traded at 20x/ 15x the consensus EPS estimate of ₹ 25.3/ 33.6 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 558/- implies a PE multiple of 17x on FY22E EPS of ₹ 33.6/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

By Auto, Mahindra & Mahindra , 0 Comments Read more...
25 Jun

Capping test prices unviable for private labs – Metropolis Healthcare

Update on the Indian Equity Market:

On Wednesday, the indices ended lower after four straight sessions of gains amid fears of a rise in defaults due to the pandemic. The Nifty ended 1.6% lower at 10,305. Among the sectors, FMCG (+0.5%) was the only one that ended higher. PRIVATE BANK (-4.0%), BANK (-3.8%), and FINANCIAL SERVICES (-3.0%) led the losers. ASIANPAINT (+3.8%), ITC (+3.4%), and EICHERMOT (+3.1%) closed in the green while ICICIBANK (-7.1%), INDUSINDBK (-6.6%), and POWERGRID (-5.1%) dragged the index lower.

Edited excerpts of an interview with Ms Ameera Shah, Managing Director (MD), Metropolis Healthcare with Business Standard on 23rd June 2020:

  • There are three approved tests for conducting the confirmatory test for COVID 19: TruNAT, GeneXpert (CBNAAT), and RT PCR test. Both TruNAT and GeneXpert incur high costs and the price per test is expensive. Due to the high costs, many of the 195 private labs approved for RT PCR testing are conducting less than 100 tests per day. Increasing volumes can help reduce the analytical cost of an RT PCR test, the servicing cost will continue to be high and will increase as the test load goes up.
  • Those unable to afford testing are well-supported by the 723 approved government laboratories.
  • All private labs who have been at the forefront in the pandemic would be forced to incur losses, should the government cap the prices at a very low level. This will not only impact the capacity of Covid testing but also impact non-Covid tests because of the losses incurred.
  • Only large private lab chains have a high throughput in conducting the RT PCR tests. However, investments in infrastructure in terms of test kits, bio-safety cabinets, RT PCP machines, skilled manpower for conducting the test, trained phlebotomists for sample collection, and documentation for compliance all together tend to increase the cost. Metropolis is stretching its resources to ensure good quality testing is undertaken and also reducing the turnaround time to get the reports to the doctors and patients.
  • With the government intent on providing the services independently, rules are different for public labs as compared to private labs. The highly manual nature of tests and increased ancillary costs has led to private lab players conducting less than 100 tests per day because they lack the resources to scale up.
  • The business was down 90 percent in the last two weeks of March and all of April. In May, recovery of about 50 percent was seen and June has been slightly better. The second quarter of fiscal 2021 is expected to be better than the first one and the industry will see greater consolidation once normalcy returns in the next 2-3 quarters.
  • Metropolis has good cash reserves and does not foresee the need for working capital loans right now.
  • They request the government to provide forecast numbers to enable labs to provide best capacity and also to look at private healthcare providers as equal partners in the fight.
  • Labs are approved by ICMR but governing the function of labs has been left to the states. This has been a big hurdle as the guidelines keep changing. With ICMR governing all private and public labs with the same guidelines, it is possible to scale-up testing over the next few weeks, which could help flatten the curve.
  • Going forward, the focus will be to provide the highest quality services keeping safety and hygiene as the top priority.

Consensus Estimate: (Source: market screener website)

  • The closing price of Metropolis Healthcare was ₹ 1,401/- as of 24-June-2020. It traded at 58x/ 33x the consensus earnings estimate of ₹ 24/ 42.2 per share for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 1,566/- implies a PE multiple of 37x on FY22E EPS of ₹ 42.2/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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24 Jun

We expect many M&A opportunities in our subsidiary businesses- HDFC

Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the green at 10,471 (+1.5%). Top gainers in NIFTY50 were Bajaj Finance (+9.3%), Larsen & Toubro (+6.7%) and IndusInd Bank (+6.5%). The top losers were Reliance (-1.4%), Bharti Airtel (-0.6%) and VEDL (-0.1%). Top sectoral gainers were PSU BANKS (+3.4%), REALTY (+2.9%) and PVT BANKS (+2.7%) and there were no sectoral losers.

Excerpts of an interview with Mr. Keki Mistry, CEO, HDFC with Economic times dated 22nd June 2020:

  • Over the next one-and-a-half to two years, a number of opportunities will come up to make investments. They will look at good M&A transactions not just in the mortgage business but also in their subsidiaries – be it life insurance, general insurance, or AMC.
  • If such an opportunity does come up, then they do not want to start looking at whether they have adequate capital or not. That’s why at this point they want to take an in-principle approval from shareholders, which would take about five to six weeks roughly.
  • After they get the approval, they will be ready with some plan; whether they would do equity or do some other instrument which will convert into equity at a future date.
  • Today the plan is that out of that Rs 14,000 crore, some part will be pure equity and some part will be an instrument convertible into equity at a future date – could be two years later, three years late.
  • One must also remember that every rupee they invest into their subsidiaries reduces resources from a tier one point, and therefore, the need for capital at that point of time. It impacts their capital ratios.
  • When they invest, say, Rs 5,000 crore into a subsidiary, that sum gets deducted straight away from their net worth and capital for the purpose of calculating capital issued. So that is the only reason why they are looking at capital raising.
  • Whenever they believe the opportunity is right and it is a good time to go to the market that is the time they will reach out to the market. Their capital adequacy as of March 31, 2020, for tier one capital was 16.6% and total capital was 17.7%.
  • Housing loan is a lot more secure, than a car loan or a consumer loan or a personal loan. The reason being that is the advance has already been paid for a property, which always has a value.
  • This is obviously a much greater crisis than we had in the past, but what we had in 2008-2009 was also an economic crisis and to some extent in 2002, 1992, 1998 and at various other points of time.
  • In the short term, one might see non-performing loans inch up, but once normalcy comes back, non-performing loans will come back to normal levels. Something similar will happen this year also.
  • Recovery is on track, which has been a lot faster than what he would have expected it to be. The entire month of April was lockdown, offices were shut and there was very little business that they could do. They could do some disbursements, but that was for loans taken earlier.
  • What they have seen from the second half of May is that with every passing day, loan disbursement is getting better and better compared with what it was in the previous year. That trend has fortunately remained.
  • Business is picking up, disbursements are picking up. As there was little business for one-and-a-half months, they are still not close in their average.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of HDFC Ltd was ₹ 1,843/- as of 23-June-2020. It traded at 3.5x/ 3.2x the consensus book value of ₹ 529 /571 for FY21E/22E respectively.
  • The consensus price target of HDFC Ltd is ₹ 1,982/- which trades at 3.5x the FY22E book value of ₹ 571/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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