27 May

Demand for home loans will rebound – HDFC

Update on the Indian Equity Market:

On Tuesday, Nifty ended marginally lower at 9,029. Among the sectors, Metal (+2.7%), Auto (+1.5%), and Realty (+1.2%) were the top gainers. IT (-1.9%), Pharma (-1.2%), and Media (-0.2%) were the only losers. JSW Steel (+5.9%), Eicher Motors (+5.7%), and Titan (+5.0%) led the gainers while Bharti Airtel (-5.9%), Bajaj Finserv (-5.1%), and TCS (-3.5%) ended in the red.

Excerpts from an interview with Mr. Keki Mistry, Vice Chairman & Chief Executive Officer, HDFC with BloombergQuint on 25th May 2020:

  • HDFC is offering a moratorium to all the customers. 79 percent of the borrowers have said they do not need it. A higher number of non-individual borrowers have opted for the moratorium compared to the individuals.
  • Since some developers are facing liquidity issues due to the lockdown, HDFC has to give them moratorium. The large developers are able to service their loans, with or without sales. Small and mid-sized developers have asked for the moratorium.
  • HDFC has not slowed down lending and is looking for fresh lending opportunities. In Mumbai and Madhya Pradesh, the offices are not open leading to slower disbursements. The offices which are currently open are working at 33 percent capacity and there will be a slowdown in disbursements during 1Q FY21. HDFC expects that 2Q FY21will be better than 1Q FY21 and consequently, 4Q FY21 will be back to 85 to 95 percent of normal levels.
  • Owning a home continues to be an important aspect of the lives of Indians. The lockdowns imposed in the aftermath of the virus outbreak has forced people to work from home, relying on internet connections and video conferencing apps. This trend could push people to buy larger homes or ones with a separate study room. Joint families could split into smaller units going forward meaning more people will be buying their own houses.
  • In the short term non-performing loans could rise but in the medium-to-long term, NPLs are expected to reduce. They have continued to tweak the credit underwriting model given the current situation.
  • In the affordable housing segment, the average loan size is Rs 17.7 lakh and most of the customers are salaried customers and not self-employed. The risk from job-losses or income cuts and its impact on NPLs is probably higher than in the pre-crisis period. There are co-borrowers to a mortgage, so if one person loses a job or faces a salary cut, they generally still do not default.
  • HDFC will be looking for opportunities to raise money. The liquidity level has been increased from around Rs 6,000 crores last year to around Rs 30,000 crores this year. HDFC has been recently sanctioned Rs 750 crores loan by the National Housing Bank recently.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFC was ₹ 1,506/- as of 26-May-2020. It traded at 2.8x/ 2.6x the consensus book value estimate of ₹ 531/ 574 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 2,406/- implies a PB multiple of 4.2x on FY22E BV of ₹ 574/-.

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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26 May

Over A Third of NBFC Loan book under Moratorium – Edelweiss

Update on the Indian Equity Market:

On Friday, NIFTY closed in the red at 9,039 (-0.74%). Top gainers in NIFTY50 were ZEEL (+7.1%),
M&M (+4.4) and CIPLA (+3.3%). The top losers were AXISBANK (-5.2%), HDFC (-5.1%) and
BAJAJFINSERV (-4.6%). Top sectoral gainers were IT (+1.4%), Media (+1.2%) and Pharma (+0.8%) and
sectoral losers were Fin service (-3.1%), PVT bank (-2.8%) and Bank (-2.6%).

Excerpts of an interview with Rashesh Shah, CEO, Edelweiss group with Bloomberg dated 20th May 2020:

  • Mr Shah said, “For us and for most NBFCs, about 35-38 per cent of the customers have availed of the moratorium. For the last 18 months, NBFCs have been squeezed for liquidity. Ironically, when we entered January 2020, I felt that liquidity had now been managed. And then Covid-19 happened.”
  • NBFCs have been coping with a liquidity crisis ever since the collapse of the IL&FS Group in 2018.
  • With the Covid-19 pandemic amplifying the economic slowdown, NBFCs are expected to face liquidity and solvency strains again. Moody’s Investors Services expects the moratorium to eventually weaken asset quality and add to liquidity stress.
  • April has been extremely challenging for NBFCs from a liquidity perspective. That was particularly because, for NBFCs, the moratorium was a one-way ride. While they had to offer moratoriums to their own customers, they themselves did not receive similar relief on repayments from banks—sparking concerns of asset-liability and cash-flow mismatches.
  • Non-bank lenders are continuing to repay their loans as scheduled. Most NBFCs have decided not to ask for a moratorium from banks and instead ask for fresh loans, as fresh funding can come on new terms and with a lot of specificity as to what you need.
  • Mr Shah expects the company to pay back Rs 4,000 crore to banks as part of its normal repayment schedule. Their ask is they get these funds back as long-term repo operation bonds, a loan or some other form so that they can maintain their liquidity reserves.
  • Mr Shah said Edelweiss, at any point, maintains at least Rs 6,000-8,000 crore of liquidity reserves. Over the last 18 months, the company has kept between 14-20% of its borrowings as liquidity reserves. That would be around 1.5-2.5 times their three-month repayments, Shah said. “We have been aiming for at least 2 times the three-month repayment as liquidity reserve and banks have seen that most NBFCs have reserves that will last at least till the end of July.”
  • Despite the government’s initiatives for the NBFC sector, Mr Shah believes that non-bank lenders have been treated somewhat unfairly. Increasingly NBFCs have been curtailed in what they can do and cannot do.
  • “The problem NBFCs are grappling with is asset-liability mismatch, when suddenly the commercial paper market and debt market closed down then the bank moratorium issue has come about, all this creates a lot of asset-liability mismatch risk.”, he added.
  • Someone in the system needs to take the ALM risk,” he said. “Banks can take it because they have the RBI backstop. But in the last 18 months, we said NBFCs cannot take it, now we say mutual funds cannot take it, then who will take that risk?”
  • Edelweiss also expects some amount of increase in stress and credit costs. However, since the company does not have a significant retail portfolio, it expects the risks to be limited. Credit cost was at 2% and then they had upped it to 4-4.5% of the book. It will now go to 5%.
  • For the industry though, retail loans will see some stress in the near-to-medium term. Long term, collateralized loans will not see much of an impact. Short term unsecured loans will see a lot of impacts.

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

  • The closing price of EDELWEISS was ₹ 42/- as of 22-May-2020.  It trades at 0.5x/ 0.4x its book value of ₹ 90.2 /100.0 for FY21E/22E respectively.
  • The consensus price target of EDELWEISS is ₹ 99/- which trades at 1.0x the book value of ₹ 100/-

 

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23 May

The Uncomfortable Truth

Jon wonders on his blog as to what’s the biggest determinant of investing success. Smarts, information, strategy, or skill are all worthy possibilities.

The market naturally triggers emotional responses that lead to mistakes. Those best equipped to handle those triggers are more likely to succeed. That shouldn’t come as a surprise. Most things in life worth achieving require mental toughness to get through the obstacles that are certain to arise. And investing is full of obstacles. For example, markets can trick people into thinking that investing is ridiculously easy. Raging bull markets, especially, create the illusion that you can earn returns without risk and get rich quick. But once the bull market ends, as they all do, the bear market that follows presents investing as a certain money loser. And to add insult to injury, the market spreads bull and bear markets out far enough for investors to forget how the last one ended.

It’s at these opposite extremes, the major turning points in the market, where the right temperament is in short supply but needed most. Successfully navigating major market turns requires a willingness to think and act against the crowd. Stock prices reflect the obvious, not the obscure.

If the crowd believes a bull market will continue, then it’s obviously already priced in. Which means anything that might disrupt that trend is not. It’s not even an afterthought in the most enthusiastic bull markets. But you can’t wait for the disruption to surface because once the trend breaks, once the crowd realizes it, then the selling begins, and it’s too late. So you have to be willing to be early. You have to be able to sell when prices are rising while the bull market seems endless. But you also must be willing to buy when prices are falling, while the bear market appears to only get worse. Both are difficult. (If it were easy everyone would do it. And if everyone did, the market turns would just happen sooner.)

The final twist in this saga is that betting against the crowd usually fails. It’s only at the turning points where it succeeds. Except, bull markets and bear markets don’t come prepackaged with expiration dates. Being invested during the length of a bull market is very profitable. Getting out early, while profits look good, is hard. Because betting against it, will certainly look wrong, but being wrong is costly. And few investors are willing to stomach that.

Jon concludes that to be successful you have to be independent and decisive, with the courage to appear wrong but ultimately proved right. That’s why the greats stand out. That’s the uncomfortable truth.

 

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22 May

We are deriving far more value by being together than being separate: ITC

Update on the Indian Equity Market:

On Thursday, Nifty ended 0.4% higher at 9,098. The top gainers among the Nifty 50 were ITC (+7.1%), Hindalco (+5.8%) and Asian Paints (+5.1%) while the losing stocks for the day Bajaj Finserv (-3.6%), Bajaj Finance (-2.9%) and NTPC (-2.9%). The gaining sectors for the day were Auto (+2.6%), FMCG (+2.2%) and Metal (+1.8%). The worst performing sectors were Pvt Bank (-0.7%), Financial services (-0.7%) and Bank (-0.6%).

Edited excerpts of an interview with Mr Sanjiv Puri, Chairman & Managing Director, ITC Ltd; dated 21st May 2020 from Retail Economic Times:

 

  • His understanding of the new normal: This current problem is not going away soon and will have to run the businesses and carry on with life and economic activity, taking safety precautions.
  • There are challenges in this current situation because of the impact on economic activity and certain sectors are very sharply impacted. ITC sees a fair amount of opportunities for them, particularly in their FMCG businesses. There is a lot of opportunity in the health, wellness, and nutrition and hygiene space. Consumers trust in the brands will add to the opportunities as well as the current geopolitical situation. There are going to be opportunities for sure, according to him and it is for the Company to be watchful and agile and make the best of the opportunities that fit into their capabilities and strategies.
  • In terms of the government package that is required, he added, one needs to reach out to the most vulnerable section of the society. The largest stimulus that can happen is actually getting back to work and how to adjust to the new normal. The longer one takes to adjust to the new normal, the bigger is the stress and the more resources will be required to pull it out. In order to get back to the new normal and get back economic activity in the new normal, first, the government has to tackle the issues of liquidity.
  • Going forward, India will see some measures to boost consumption. The reforms for the agriculture sector can have a transformative impact over a period of time. But at the same time, those measures are not going to give impact immediately but the medium term, these augur well for the economy.
  • FMCG the sector is slowly getting back to the normal demand levels. The demand varies across the categories. ITC is seeing good demand for staples.
  • The Company is seeing some stress but at an aggregate level for foods and personal care. Mr Puri believes over time, as the capacities scale-up and the distribution and logistics improves further, the opportunities in this category will go up further.
  • There are segments like education and stationery which have been severely impacted for the moment because the sessions of the schools have changed and the business is heavily indexed to the school sessions. But ultimately, children will have to go back to school and students will have to go through education.  So, it is more a timing issue than anything else.
  • ITC Hotels are adversely impacted. ITC hotels are supporting quarantine facilities/ dealing with helping some stranded guests. Most of the hotels are not operational as of now which is in line with the guidelines of the government.
  • The agriculture business of ITC is slowly getting back to normal and is indexed to food consumption, paper and paper board consumption. There is a little bit of lagging but once the economy fully opens up, ITC is hopeful to see more demand for paper boards and packaging.
  • Outlook for ITC 5 years down the line: 10 years back, it was 60% tobacco and 40% non-tobacco. Today, it is actually the other way around; about 60% is the non-tobacco. 80% of the capital employed is in non-tobacco business. 90% of employees are in the non-tobacco business which reflects the kind of investment ITC is making in the non-tobacco segments. This gives headroom for these segments to grow. Given the positioning of the Company, they are confident of expanding their footprints quite a lot in these segments.
  • Outlook for Tobacco Business: The biggest challenge that the tobacco segment faces in India is the threat of the illegal segment. As taxes have been rising, the illicit industry has been rising. Over a period of five-six years, the taxes on cigarettes tripled and at a CAGR level, the tax rate grew at about over 15% whereas the revenue growth was between 4% and 5%. ITC will see some improvement in the business once there is stability in the tax regime.
  • Dividing the two business- FMCG and Tobacco: There are a few things that are advantageous when they are combined as an organisation. ITC is able to leverage a large and robust distribution and logistics highway which are high-cost elements in any company’s operations. Splitting these two segments will mean duplication of resources. At some point of time in future, when each of these businesses is mature, the splitting thing will be revisited. But in today’s context, ITC is creating a lot of value through synergy.
  • The non-tobacco businesses are expected to grow at a much higher rate in the next 3-5 years. There will also be the base effect that must be factored in. But the rate of growth in the non-tobacco the segment will certainly be much faster, according to Mr Puri.

 

Consensus Estimate: (Source: market screener website)

  • The closing price of ITC Ltd was ₹ 188/- as of 21-May-2020. It traded at 15.5x/ 13.5x the consensus EPS estimate of ₹ 12.1/13.9 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 241/- implies a PE multiple of 17.3x on FY22E EPS of ₹ 13.9/-.

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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21 May

We are all about Made in India, Made for India– Nestle India

Update on the Indian Equity Market:

On Monday, Nifty closed higher (+2.1%) at 9,067. Within NIFTY50, DRREDDY (+5.9%), HDFC (+5.9%), and M&M (+5.7%) were the top gainers, while INFRATEL (-7.0%), INDUSINDBK (-2.6%) and HEROMOTOCO (-2.3%) were the top losers. All the sectoral indices gained in the session led by PHARMA (+4.1%), FIN SERVICE (+3.1%) and MEDIA (+2.4%).

We are all about Made in India, Made for India– Nestle India

Excerpts of an interview with Mr.Suresh Narayanan, Chairman, & MD –Nestle India published in Business Standard dated 20th May 2020:

  • Nestle has not been able to establish contact with all retail partners yet and does not have the exact count of stock in trade channel. As a result, it is difficult to quantify the business impact caused by the lockdown.
  • Nestle’s manufacturing had come to a halt and is gradually being ramped up to 70% of capacity.
  • On being asked whether the loss in business since April 1 could be at least 30%, Mr. Narayanan said that the impact could be higher than that.
  • Narayanan expressed that PM Modi’s call for swadeshi was misinterpreted by some. Nestle India is all about Made in India, Made for India, and serving India and Indian customers. Nestle is operating in India for the last 108 years, employees 7,200 Indians, works with over 100,000 Indian farmers and contributes ~ Rs 36,000 mn in taxes each year.
  • Narayanan observes that consumer preferences are changing. Many consumers may scale down due to poor consumer sentiment- leading to growth in popular products in essential categories. Some consumers may scale up towards safer/ more hygienic products. The shifting dynamics may lead to some product redundancy.
  • The ongoing reverse migration from urban to rural may boost rural market growth.
  • Nestle is working on its product portfolio to identify brands and products with better prospects. This exercise is also leading to a rescheduling of the innovation pipeline, wherein some projects may no longer be relevant. However, the pace of innovation will not slow down. Nestle has launched 50 products in last 3 years and will continue the trend.
  • Some operational issues still persist. Initial challenges like arranging trucks have become less severe. Obtaining permits (e-passes) for interstate transport is still an issue for Nestle. In terms of retail outlets, only 40%-50% have been activated so far.
  • Distribution in smaller towns and markets is better than large centers.
  • This crisis has accelerated e-commerce as a growth engine. Nestle has seen 90% jump in business through e-commerce (from 1.5% share of revenue a year ago to 3% now).
  • Narayanan expressed that he plans to be very conservative in terms of reopening of offices. The branch offices will remain shut for a few more weeks. Only the head office is functioning with a dozen employees vs. the capacity of 600. Even field executives have been allowed to operate only in green zones.

Consensus Estimate: (Source: market screenerand investing.com websites)

  • The closing price of NESTLEIND was ₹ 16,303/- as of 20-May-2020. It traded at 70.8x/ 59.5x the consensus EPS estimate of ₹ 230/ 274 for CY20E/ CY21E respectively.
  • Consensus target price of ₹ 16,464/- implies a PE multiple of 60.1x on CY21E EPS of ₹ 274

 

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 FMCG, Nestle India 0 Comments Read more...
20 May

A big opportunity is beginning to unlock for us in the US: Cipla

Update on the Indian Equity Market:

On Tuesday, NIFTY ended up 56 pts (+0.63%) at 8879 level. Among the sectoral indices, MEDIA (2.0%), AUTO (1.03%) and IT (0.99%) were among the top gainers while PSU BANK (-2.59%), REALTY (-0.7%) and PVT BANK (-0.49%) were the losers.
BHARTIARTL (10.81%), ADANIPORTS (+9.0%) and ONGC (+5.69%) were the top gainers. UPL (-9.78%), VEDL (-2.65%) and RELAINCE (-2.2%) were the top losers.

A big opportunity is beginning to unlock for us in the US: Cipla

Edited excerpts of an interview with Mr. Umang Vohra, Managing Director (MD) & Global Chief Executive Officer (CEO), Cipla:

Our ambition is to dominate the inhaler space across all markets and offer solutions to patients, says Umang Vohra, MD & Global CEO, Cipla.

• His comments on Profit Margins: Company has guided at the beginning of the year and that is standing up at close to 19% range. The fourth quarter is usually off-season for the company and therefore historically, have always been subdued. There are some of the specific one-offs:
o Company was not able to invoice about Rs 2000 odd mn of sales on account of the last week of Covid closure and that is pretty high margin sales. The impact would have been directly on profitability.
o In comparison to the base in the previous year where there was a huge amount of cinacalcet sales, that is not the right comparison for 4QFY20 and for 1QFY21E too.
o Cinacalcet itself had some charges in 4QFY20 as exclusivity has ended.
o In the last six to nine months, a fair amount of cost and effort on the remediation was required for Goa which is now completely in numbers. The remediation effort and work for Goa that is required will finish approximately by June/July, 2020. The charges have largely been taken in 3QFY20.

• His views on sale pick up in the year to come – A pretty solid year is expected on account of Sensipar, Albuterol approval and also esomeprazole granules approval received in the last week of 4QFY20.
• When asked about the US market he informed that US is a 55 mn unit market and with the recent shortage of Albuterol in the US, it moved to a 50-65 mn unit market. On the branded side, it is close to 4 bn in sales across the three brands of Albuterol. It is a very significant and sizable market for Cipla to play in.
• When asked about the main growth drivers going ahead he commented that respiratory franchise might be boosted by another complex inhaler filing. The inhaler opportunity can add to position Cipla as the lung leader. Already, Cipla is number two in terms of both Metered-dose inhaler (MDI) and Dry-powder inhaler (DPI) sold worldwide, just with the number of devices that Cipla sells worldwide in both these categories. Company’s ambition is to dominate this space across all markets and offer solutions to patients which they are not getting today.
• Cipla had albuterol approved that is a great validation for MDI. The trial just finished and a filing is imminent in the next one or two days for the Advair product which is a product that many companies have struggled to get a first part clinical trial approval and Cipla have just passed that.
• Cipla also filed another product which cannot be disclose right now due to IP. It has also filed another product which is again another inhaler in 4QFY20 and have a partnered asset which is another very large category where nobody else is working. That product is at the clinical trials stage with their partner.
• If we combine the above four and the rest of the products that Cipla is likely to do, a big opportunity is beginning to unlock for Cipla in the US and carries a fairly significant value for the company in the long term.
• His views on COVID-19, India and other emerging market business and the process for other prescription drugs: In the first two, three weeks of the lockdown, there was a serious dip because everyone was dealing with the lockdown initially. In week three and four, activity was resumed by doctors, who started interacting virtually with their patients. In the last week, the green and orange zones are opening up and activity is resuming in these areas. Of course, there are sections where the doctors are not meeting as much. For example, dentists and dermatologists because of the risk of this infection being real, are perhaps not meeting as much as interventionists, chest physicians etc. So, it is gradually opening up. As the red zones begin to open up, resumption in activity can be seen depending on the zone.

Consensus Estimate: (Source: market screener website)

• The closing price of Cipla Ltd. was ₹ 594/- as of 19-May-20. It traded at 25.4x/ 21.2x the consensus EPS estimate of ₹ 23.7/28.4 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 623/- implies a PE multiple of 22x on FY22E EPS of ₹ 28.4/-.

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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19 May

No asset quality challenges in gold loans- Manappuram Finance

Update on the Indian Equity Market:

On Monday, Nifty closed 3.4% lower at 8,823. Among the sectoral indices PVT Bank (-6.9%), Bank (-6.7%), Fin Services (-6.6%) closed lower. ITand Pharma closed marginally higher. Cipla (+5.5%),TCS (+2.5%), and INFRATEL (+2.3%) closed on a positive note. Indusind bank (-9.6%), Zee (-9.5%) and Eicher Motor(-7.9%) were among the top losers.

Excerpts from an interview of MrVP Nandakumar,MD & CEO, Manappuram Finance with ET Now 15thMay 2020:

  • Speaking about 4QFY20 profit jump, Mr.Nandakumar said the main gold business has grown well sequentially and in other businesses the growth is steady.
  • Speaking about provisions he said it is rather as a caution and that is the only reason for the higher provisioning.
  • Collections use to be higher in March-April period in non-gold portfolio, vehicle finance and home finance. But this time, March has been rather dull.From the very beginning, there were signs of lockdown in many places, particularly in places like Kerala. So from the second-third week of March, the collections slowed down. This also led to some increase in the provisioning.
  • Around 70% of branches are operational now and there is good demand for gold loans. At the same time there are lot of redemptions, people want to monetize the gold.
  • The demand for gold is at sub normal levels, as entire demand has not picked up.
  • Guiding for FY21 he said the first one or two quarters the company may not be able to grow gold loans, but there is expectation to grow in third and fourth quarter by 7-8%.
  • Speaking about non gold business share which declined from 34% to 33% on QoQ basis, he saidlast year there were advantages of price as well as demand, and the gold loan growth was much more than what was expected.The company have turned a little more conservative on non-gold business.Also there is some sluggishness in various economic activities.
  • Speaking about asset quality, he saidgold loan currently is around 69% and the company does not see any challenges in asset quality in gold loans. Gold loan tenure is three months and online gold loan is around 60%, even now regular transactions are taking place to the extent of Rs 700-800 crores, the interest collection is also taking place.
  • In other segments like vehicle finance, many of our customers have opted for moratorium. The collections are coming now through the online mode to the extent of 40-45%. Lending is primarily to the lower end that is light commercial vehicles and small commercial vehicles.
  • Another major part of portfolio is two-wheelers and the customer profile is self employed as well as salaried people and the collections are better there.

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

  • The closing price of Manappuram Financewas ₹ 122/- as of 18-May-2020.  It traded at 1.5x/ 1.25x the consensus Book value estimate of ₹ 80/97 for FY21E/ FY22E respectively.
  • The consensus average target price forManappuram Finance is ₹ 153/- which implies a PB multiple of 1.5x on FY22E BV of ₹97/-.

 

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 Gold loan NBFC, Manappuram Finance 0 Comments Read more...
18 May

Banking sector’s exposure to MSMEs at 12-14%- Amitabh Chaudhary, Axis Bank

Update on Indian Equity Market:

Nifty started the day with a sell-off but closed the week flat at 9,136. The only sectors to close in positive today were METAL (1.6%) and FMCG (0.1%) as all other sectoral indices traded lower with MEDIA (-1.8%), REALTY (-1.5%) and PVT BANK (-1.2%) were the biggest losers. Within the index, VEDL (3.9%), BHARTIARTL (2.8%) and BPCL (2.6%) were the highest gainers whereas M&M (-4.6%), ZEEL (-3.6%) and AXISBANK (-3.3%) were the laggards.

Excerpts from an interview with Mr Amitabh Chaudhary, MD & CEO, Axis Bank aired on CNBC TV18 on 14th May 2020:

  • Mr Chaudhary mentioned that the impact of this lockdown is widespread across all industries and no longer restricted to some. It will take more time for economic activities to pick up. IT will continue to remain tough for some period of time.
  • He mentioned that as a result of all this, non-performing liabilities (NPL) will rise. The economy needs support so that people can come back to business quickly and start producing the cash flow so that the NPLs will be lower.
  • He accepted that there is ample liquidity in the system. The challenge is to be able to deploy it effectively. This is resulting in the excess liquidity being parked with the RBI. There is a negative pressure on the net interest margins (NIMs) across the banking system because the cash which has been there is not getting deployed.
  • Government is slowly coming up with new schemes where the deployment of some excess liquidity will start happening. He is confident that this will help the NIMs positively.
  • He stated that if the NPLs rise and if moratorium is not given or some kind of one-time restructuring is not allowed, this will further lead to negative impact on NIMs. Next three to six months will determine the trajectory of the banking
  • Commenting on the fiscal package announced by the Government, Mr Chaudhary said that the Government further needs to provide support to the economy to prevent non-performing loan formation.

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

  • The closing price of Axis Bank was Rs 403/- as of 15-May-2020. It traded at 1.2x/ 1.1x the consensus Book Value estimate of Rs 324/ 363 for FY21E/ FY22E respectively.
  • The consensus target price of Rs 568/- implies a PB multiple of 1.6x on the FY22E BV estimate of Rs 363/-

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 Axis Bank, Bank 0 Comments Read more...
16 May

We’re all risk managers now

Dan Mikulskis writes that investing over the long-term is all about balancing risk: there are always hundreds of risks that could damage your portfolio or throw you off course, but hedging them all ends up with you stashing cash under your mattress. And we know there’s good evidence that investing “works”, over long periods in spite of – or perhaps because of – the risks.

When exploring the terrain of the area between the extremes, risk management is a key discipline and language to guide us. So potentially we have a lot to learn from risk managers and risk economists right now. Of course, we’re all inherently wired to dislike uncertainty and to try and remove it. But it’s not always possible, or at least avoiding uncertainty often comes with a heavy cost in itself, which we need to think hard about before paying. It’s risk management that lets us navigate uncertainty sensibly.

Renowned risk author and economist Allison Schrager has a simple but powerful model for how to manage risk.

  1. Get clarity on the objective against which you are measuring risk. It is worth remembering in day to day life we run all sort of risks leaving the house or getting in a car each day, so zero risk isn’t a reasonable objective. In investing the mistake is often to confuse a long-term income-generating objective for a short-term wealth preservation objective
  2. Use risk models for what they are worth, focus on communicating results well using natural frequencies rather than percentages. Particularly relevant now, of course, helping people understand their own risks (and those of the people around them), and how these vary by age and other factors is tough, but arguably never been more important.
  3. Understand how you can diversify, spread your risks/avoid concentration of risk, and do this as much as you can in your situation
  4. Figure out what hedges you have at your disposal, and how much these cost you to implement. A hedge is a position that gives an offset to an existing position, so you get an offset on both upside and downside.
  5. Figure out where you can deploy insurance (pay away a fixed cost to take away your downside, but you keep the upside). Insurance usually has to be put in place in the good times to work in the bad times. Fire and flood insurance get bought after fires and floods, but the next crisis won’t look the same as the previous.
  6. Deploy a suitable mix of hedging and insurance strategies to help manage your risks.
  7. Put resiliency into your plan so that you can keep going even if something totally out of the ordinary happens. One big challenge in building resiliency is that it has a cost, it often runs counter to optimisation and looks like inefficiency in the good times. Profit-maximising firms will struggle to build resiliency.

If you follow these steps you’ll be in a better place by judging any plan against the right objectives. Insurance, hedging and resiliency all come with associated costs, so don’t jump to paying away too much for certainty – you’ll want to explore the combinations of these approaches that can get you to an expected outcome you can live with, not forgetting to make sure that you see how far diversification can get you before you start paying for the additional certainty of insurance, hedging or resiliency.

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15 May

Full impact assessment after clarity on stimulus – Mr Uday Kotak, Kotak Mahindra Bank

Update on the Indian Equity Market:

On Thursday, Indian shares erased the gains of the previous day after the initial stimulus announced by the government to aid Covid-19 hit businesses was poorly received. The gloomy outlook from the head of the U.S. Federal Reserve did not help the market sentiment either, as Nifty ended 2.6% lower at 9,143. Among the sectoral indices, IT (-3.5%), Financial Services (-3.4%), and Bank (-2.9%) led the losers. FMCG (+0.7%) and Pharma (+0.3%) were the only sectoral gainers. INFRATEL (+4.9%), HEROMOTOCO (+2.9%), and ZEEL (+2.2%) led the gainers. TECHM (-5.4%), INFY (-5.2%), and HINDALCO (-4.8%) ended in the red.

Full impact assessment after clarity on stimulus – Mr. Uday Kotak, Kotak Mahindra Bank

Excerpts from an interview with Mr. Uday Kotak, Executive Vice Chairman & MD, Kotak Mahindra Bank published in Financial Express dated 14th May 2020:

  • Kotak Mahindra Bank (KMB) recently declared its 4QFY20 results. The bank has divided the stress tests to assess the full impact of Covid-19 into two sets- up to March 31 and after March 31. Gross provisioning done toward a specific account gives a net NPA of 0.71%. A look at standard provisioning plus Covid provisioning and others independent of direct provisioning led to total provisioning being greater than the total net NPA.
  • Starting FY21 with a clean slate in terms of the balance sheet and from the point of view of all provisioning, which was felt necessary.
  • In terms of FY21, the bank is in uncharted territory. While work has been done in different sectors, a lot will depend on how the lockdown opens up, and how the stimulus is given. Impact assessment of the virus’ impact on the bank’s loan book will be possible after there is some clarity on government fund flows to various sectors.
  • In regard to unsecured retail lending, the bank had become conservative on advances well before the pandemic started. Thus, growth in advances was more calibrated in design. He believes that retail unsecured is where pressure is going to come at some point in time. Hence, KMB’s portfolios on unsecured consumer retail have been far more conservative than earlier.
  • The post-Covid era will help reduce the impact of the potential burden which may come out of stress, particularly in unsecured retail which is pretty sensitive to the lockdown and the slowdown in the economy. So, they are waiting for the stimulus.
  • Talking about the credit growth, they have received wide estimates by expert economists on growth for FY21. KMB will be getting out there and supporting the economy provided they are comfortable with the risks.
  • They will continue to be cautious on unsecured consumer lending to make sure that the consumer is well-protected. He is of the opinion that if many companies start retrenching people, which is something we can assume may happen, then even unsecured lending to salaried customers will come under pressure.
  • They will watch out for sectors directly affected by Covid like tourism, hospitality, or retail malls.

Consensus Estimate: (Source: market screener website)

  • The closing price of Kotak Mahindra Bank was ₹ 1,177/- as of 14-May-2020. It traded at 3.0x/ 2.6x the consensus book value estimate of ₹ 398/450 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 1,399/- implies a PB multiple of 3.1x on FY22E BV of ₹ 450/-.

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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