16 Feb

Performance Chasing and Outcome Bias

“Money flows into most funds after a good performance and goes out when bad performance follows.” (John Bogle)

We have all seen the wording discretely appended to mutual fund marketing stating that ‘past performance is no guide to future results’. Despite the ubiquity of this message, we struggle to heed its warning. This leads to the damaging behaviour of performance chasing, where we sell our holdings in laggard fund managers and reinvest in recent winners.

The tendency of mutual fund returns to experience mean reversion shows that our propensity to sell strugglers and buy recent winners is not just pointless; it is often the exact opposite of what we should be doing.

This damaging behaviour is driven by outcome bias.  Attempting to mitigate outcome bias and prevent performance chasing behaviour means overriding our instincts and also having a willingness to fail unconventionally.  Neither of these is simple, but that does not mean there is nothing we can do.

How Can We Prevent Performance Chasing?

Outcome bias cannot be switched off.  Whilst awareness is a starting point, it is evident from our continued performance chasing behaviour that it alone is insufficient.  We need to make clear and focused interventions to change our behaviour:

Stop Using Performance Screens: Mutual fund performance screens are ubiquitous across the investment industry. Everyone uses some form of historic performance screen to rank funds. Outcome bias and the performance chasing behaviour that follows are difficult enough to avoid even if you are not actively employing tools that encourage it. So, it is best avoided.

Create decision rules: A simple step to avoid performance chasing behaviour is to create fixed decision rules that strictly prohibit it. On average, it should be an effective means of avoiding the cost of purchasing active managers with a high potential for severe mean reversion.

Go Passive: The best behavioural interventions are the simple ones. Anything that requires behavioural discipline or continued effort raises the prospect of failure. Given this, what is the best way to avoid performance chasing in active mutual funds?  We can restrict ourselves to buying only passive market trackers.

Specify the activity in which you believe skill exists: When investing with an active manager, we are taking the view that the underlying manager has some form of skill. We tend, however, to be very vague about what we mean by this.

Extend your time horizons: Our susceptibility to outcome bias is greatly influenced by the time horizons involved. If we assess investment performance over one day it can be considered to be pure luck, but as we extend the period skill can exert more of an influence.

Performance chasing behaviour is, of course, not isolated to our selection of active fund managers.  It is also not entirely driven by outcome bias. This is not to say that outcomes do not matter.  Of course, all investors are seeking better long-term results for their clients. If we want to invest in active managers, we need to think far more about decision quality and process, and far less about yesterday’s performance.

Source: Why Do We Chase Past Performance and What Can We Do About It? By Joe Wiggins

Asset Multiplier Comments:

  • Selecting funds based on past performance is like driving a car by looking in the rear-view mirror. There’s very little correlation between past performance and future returns.
  • The best way to overcome outcome bias is to focus on passive index-linked funds, which remove the variability of performance chasing.
  • If investing in actively managed funds focus on investment thesis and stock selection process rather than past performance.

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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16 Feb

Deal closures in the USD 700mn- 1bn band expected to continue – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY50 ended the volatile session in the red at 17,322 (-0.2%). Among the sectoral indices, REALTY (+1.1%), CONSUMER DURABLES (+0.8%), and PHARMA (+0.5%) were the few gainers. PSU BANK (-1.2%), MEDIA (-0.6%), and METAL (-0.6%) led the laggards.

Among the NIFTY50 constituents, DIVISLAB (+3.1%), ONGC (+2.7%), and ADANIPORTS (+2.3%) led the gainers. SBIN (-1.9%), ICICIBANK (-1.7%), and NTPC (-1.7%) led the laggards.

Edited excerpts of an interview with Mr. Milind Kulkarni, CFO, Tech Mahindra (Tech M) published in Financial Express on 16th February 2022:

  • Due to furloughs, Q3 was a slow quarter. In 3QFY22 the communication, media, and entertainment (CME) vertical grew faster than the enterprise vertical for Tech M.
  • There are supply-side pressures for which the company has various offset actions. It has increased its presence in tier-II and tier-III cities. The company expects to mitigate the supply side pressure over the next few months and be on the path articulated in the past.
  • Attrition has been reduced by 300bps in 3QFY22 on the LTM (last 12 months) basis. This is a reversion of the trend witnessed in previous quarters.
  • The new deals were worth USD 704mn in 3QFY22. This was an increase from the average order book of USD 400mn. The deal pipeline in the last 8 quarters has gone up. The deal closures in the USD 700mn- 1bn range are expected to continue.
  • The company has hired 10,000 freshers in 9MFY22 and plans to hire 15,000 freshers in FY23. The intention is to get freshers, train them, put them on the right project early, and benefit from the structural change. This is the opposite of doing just lateral hiring.
  • Tech M will continue to hire in the business process services segment, and IT as there is a continuous demand for transformation projects- artificial intelligence, metaverse, etc.
  • Tech M is getting into more tier-II cities such as Coimbatore, Vijayawada, Nagpur, Indore, Bhubaneshwar, and Chandigarh to get access to talent and help in containing attrition. It is also expanding existing centers such as Pune, Bengaluru, and Hyderabad. The company is developing virtual centers in Mexico, Costa Rica, Romania, and Latvia.
  • The BFSI vertical was separated into two separate revenue streams as insurance is a prominent vertical that requires different skill sets. This followed the recent acquisition of European IT solutions provider Com Tec Co. As the company has another large insurance company as a customer, it has made a separate vertical for insurance.
  • The M&A strategy is to fill up niche capability gaps, and certain verticals it wants to scale up. The specific verticals are manufacturing, digital engineering, and BFSI. The focus is on areas such as cloud capability, where it will grow organically.
  • On the 5G front, IT firms will be providing support to service providers and for Tech M, it will boost the CME vertical. It will be playing a bigger role to boost demand for services and application in the telecom sector.

Asset Multiplier Comments

  • The entire IT sector faced supply-side pressures in FY22 due to a sudden spurt in demand. With WFH (work-from-home) settling down, in FY23 the focus is likely to be on reducing attrition and improving utilization levels.
  • Tech M has been investing in the areas of 5G, customer experience, data analytics, AI, IoT, and Cloud capabilities through organic or inorganic routes over the past few years. These investments are yielding results in terms of higher deal TCVs.
  • 5G has been a focus area for Tech M for the past few years. With 5G activity gradually picking up among the Indian telecom companies, Tech M’s investments into this vertical will start yielding results in terms of higher revenue growth.

Consensus Estimate (Source: market screener website)

  •  The closing price of Tech Mahindra was ₹ 1,440/- as of 16-February-2022. It traded at 23x/ 20x/ 18x the consensus earnings estimates of ₹ 63/ 72/ 82/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,791/- implies a P/E Multiple of 22x on FY24E EPS estimate of ₹ 82/-.

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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15 Feb

Economic activity and business expected to pick up – Muthoot Finance

 

 

 

 

 

 

 

 

Update on the Indian Equity Market:

On Tuesday, NIFTY ended at 17,352 (+3%), near its high of 17,372. Among the sectoral indices, AUTO(+4%), PSU BANK (+4%), MEDIA (+3.7%) were the top gainers and there were no losers today. Among NIFTY 50 constituents, TATAMOTORS (+6.7%), BAJFINANCE (+5.6%), and EICHERMOT (+5.5%) were the top gainers while CIPLA (-3.6%) and ONGC (-1%) were the only losers today.

MUTHOOTFIN declared 3QFY22 quarterly results. Following are the excerpts from an interview with Mr. George Alexander Muthoot, MD, Muthoot Finance (MUTHOOTFIN) with The Economic Times on 14th February 2022:

  • Despite getting hit by back-to-back covid waves, MUTHOOTFIN was able to increase its disbursals. The company’s focus was mainly on collections because the loans that they had given earlier were becoming stage three assets. These had to be taken back by the customers and those who did not take back had to be auctioned.
  • Disbursals saw an increase but there were repayments as well so the overall growth has been flat. MUTHOOTFIN was able to maintain its profit for the year.
  • As for the road ahead, the Company expects the economic activity to pick up. MSME, small traders, and businessmen are their main customers. As things start opening up in Kerala, more business is expected.
  • Muthoot expects the cost of funds to go up by 50 bps over the next 5-6 months. He is sure about costs remaining low and not going back to higher rates that were prevalent two years back. MUTHOOTFIN has been able to solve a good percentage of its borrowing cost to their customers to keep them satisfied because their businesses are also not doing that well.
  • MUTHOOTFIN will continue to support its customers and expects to see some growth in the business environment over the next few quarters.
  • As a result of MUTHOOTFIN’s work over the past few decades, it has become customers’ first choice for gold loans. They are seeing more and more players entering this sector which only shows that it is a good growth sector.
  • The gold loan market is expanding as customers have started considering gold loans for their business needs and this is expected to widen the market.
  • Once the economic activities pick up, Mr. Muthoot has observed that the new players in this sector lose interest as other forms of lending also go up. MUTHOOTFIN will continue to focus entirely on gold loans unlike other players as they believe this sector to be good in good as well as bad times.
  • As gold prices inch up, customers, as well as MUTHOOTFIN, get benefitted from these increased prices. The customer becomes eligible for more loans on the same gold and if and when, the customer abandons the gold, MUTHOOTFIN’s realizations from auctions of abandoned gold are improved as prices are higher.
  • MUTHOOTFIN can maintain its book as they factor in for steady-state or even a small fall in the gold price.
  • The only digital strategy that MUTHOOTFIN uses is digital interest payments, making top-ups or repaying the money. Customers are acquired digitally but they are required to give the collateral physically and then obtain loans or physically go to the branch to take back their gold.

Asset Multiplier Comments

  • Despite NPAs increasing since the last few quarters, MUTHOOTFIN is currently in a position to auction this gold and recover much better as gold prices have started going up.
  • With economic activity picking up, we expect steady growth in MUTHOOTFIN’s loan book.
  • Given the increase in competition in the gold loan sector, how MUTHOOTFIN maintains its position of being the customer’s first choice remains to be seen.

Consensus Estimate (Source: Marketscreener & investing.com websites)

  • The closing price of MUTHOOTFIN was Rs. 1,354/- as of 15-February-2022. It traded at 2.9x/2.4x/2x the consensus BVPS estimates of ₹ 455/551/663 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,844/- implies a P/BV Multiple of 2.7x on FY24E BVPS estimate of ₹ 663/-

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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14 Feb

Commodity price inflation? Not much of a worry for Hindalco

Update on the Indian Equity Market:

On Monday, Nifty ended at 16,843 (-3%), a fall of 531 points due to fear of rising inflation, oil prices and aggravating geopolitical uncertainties among Russia & Ukraine. Among the sectoral indices, PSU BANK (-6.0%), REALTY (-5.3%), METAL (-5.1%) were the top losers. In NIFTY 50, except TCS (+0.9%) all the other 49 stocks fell with JSWSTEEL (-6.5%), HDFCLIFE (-6.4%) & TATASTEEL (-5.7%) being the top losers.

Hindalco released its 3QFY22 results on 10th February. Following are the excerpts from an interview with Mr. Satish Pai, MD of Hindalco Industries (HINDALCO) with The Economic Times on 11th February 2022:

  • On a standalone basis, Hindalco Industries’ India Aluminium business reported its highest ever EBITDA of Rs. 33,640mn and 41% EBITDA margin.
  • On the back of favorable macros, with commodity price inflation affecting it in both ways, the price of aluminum has been higher and the input cost inflation was kept under control by holding inventory and doing upfront procurement.
  • In 4QFY22, the company expects to maintain the margins as the aluminum prices are already at $3,000 per tonne, up from about $2,670 per tonne in Q3. Furthermore, the company expects cost inflation to flatten out in the second half of CY2022.
  • The company expects the prices of aluminum and copper to remain at the existing elevated levels at least for this calendar year. This is largely due to the European energy crisis driving up gas prices further resulting in a rise in aluminum prices.
  • On the demand side, the growth drivers for aluminum and copper will be electric vehicles, solar panels, the housing sector, packaging. Looking at the stronger demand, the company is planning to ramp up capacity. Novelis, the American subsidiary, which is in the business of aluminum, volumes will be around 4mn tons per year. India will be producing about 1.3mn tons of aluminum and about 500,000 tons of copper.
  • The company significantly reduced its consolidated debt from Rs.538bn last year to Rs.437bn as of December 2021 end. The company is not planning for further deleveraging, after the repayment of Rs.6bn worth of bonds in 1QFY23. It is focused on putting the cash to use by doing organic capex projects.

Asset Multiplier Comments

  • The price of aluminum is likely to remain elevated from a short supply due to carbon emission-related concerns in China and smelter disruptions. But a quick resolution to the European crisis may lead to a major correction in aluminum prices as a result of correction in energy prices in Europe.
  • Looking beyond the short-term uncertainties, the medium to longer-term structural demand for aluminum will remain strong on the back of good demand for aluminum automotive sheets, aluminum beverage cans, and pent-up demand from the aviation industry.
  • Hindalco being the largest secondary aluminum producer and the largest aluminum recycling company in the world, is likely to be better positioned to digest the input cost inflation without taking a substantial hit on the margins.

Consensus Estimate (Source: Marketscreener & TIKR websites):

  • The closing price of HINDALCO was Rs. 520/- as of 14-February-2022. It traded at 9.8x/9.1x/8.8x the consensus earnings estimates of ₹ 53/57/59 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 640/- implies a P/E Multiple of 10.8x on FY24E EPS estimate of ₹ 59/-

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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12 Feb

This Week in a Nutshell (07-11 Feb)

Technical talks

NIFTY opened the week on 7th February at 17,456 and ended at 17,375 on 11th February. NIFTY fell 0.5% throughout the week. The next support and resistance levels for the index would be 17,330 and 17,419 respectively.

Except for METAL (+3%), all the sectoral indices fell this week, with REALTY (-2.5%), FMCG (-2.2%), and CONSUMER DURABLES (-2%) being the biggest losers.

Weekly highlights

  • Indian equity markets remained volatile at the start of the week ahead of RBI monetary policy and on Friday market ended the three-day winning streak. Markets declined after the US consumer prices data came in higher than expected which rose to a four-decade high.
  • On Thursday, the Reserve Bank of India kept the repo and the reverse repo rate and all other key policy rates constant and maintained its accommodative monetary stance amid the pandemic, and continue to provide support to growth. The current repo rate is at 4% and the reverse repo rate is at 3.35%.
  • Consumer prices in the US climbed to 7.5% in January on YoY, the sharp YoY increase since February 1982 the data released by Labor Department on Thursday. Ultra-low interest rates, strong consumption expenditure, supply chain concerns, worker scarcity, and federal reserve policy led to accelerating inflation.
  • All three major benchmark indices in the US fell on the 2nd consecutive session after Thursday’s inflation data came higher than expectations, amid bets on aggressive federal reserve tightening policy and rising worries about Ukraine-Russia tensions.
  • Oil prices settled at fresh seven-year highs amid rising fears of invasion of Ukraine by Russia and added to concerns over tight global crude supplies. Brent crude futures settled at 3.3% higher on Friday.
  • Industrial output in India fell to a 10-month low to 0.4% in December-2021 as per the data released by the statistics department on Friday. It was pulled down by manufacturing, capital goods, and consumer durables output, weak consumption and investment also lead to lower industrial output.
  • The tech giants in India have begun the process of getting employees back in the office. As the omicron wave subsides, companies have accepted a hybrid work model and will continue for a longer run.
  • On Thursday, the Government of India approved 20 applicants of the PLI scheme for the automobile and auto ancillary industry. The PLI scheme for the industry leads to gaining a share of India in the global automobile space.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 56,417 mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 49,554 mn.

Things to watch out for next week

  • Investors will turn their attention to economic factors as the earning season in India comes to an end in the next week.
  • The US Federal Reserve minutes from its meeting along with European GDP data for the 4QFY21 are going to be released next week. Investors will be watching the US producer prices and retail sales for January; these events are likely to drive the market next week.
  • Equity markets in India are likely to see more volatility ahead of the Fed meeting minutes and amid concerns over the Ukraine-Russia tensions.

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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10 Feb

Growth to be driven by entering new geographies– Granules India

Update on the Indian Equity Market:

On Thursday, NIFTY ended at 17,606 (+0.8%) as it closed near the intraday high of 17,639. Among the sectoral indices, MEDIA (+1.7%), METAL (+1.2%), and FINANCIAL SERVICES (+1.2%) ended higher, whereas AUTO (-0.1%), and PSU BANK (-0.1%) were the losers. Among the stocks, ONGC (+3.6%), TATASTEEL (+2.0%), and INFY (+2.0%) led the gainers while MARUTI (-1.7%), IOC (-0.9%), and SHREECEM (-0.7%) led the losers.

Granules released its 3QFY22 results on 8th February. Following aren the excerpts of an interview with Mr. Krishna Prasad Chigurupati, Chairman and MD of Granules India (GRANULES) with CNBC TV18 on 9th February 2022:

  • The company has been operating at 60% of its production capacity for Paracetamol due to raw material shortages. It sells only APIs (active pharmaceutical ingredients) in India. All of its FDs (finished dosages) are sold in Europe and the US.
  • The company’s FD segment is more profitable than its other segments. The share of FDs as a part of revenues fell by 3-4%. This fall is due to inventory rationalisation by its customers in US. The company states this as one of the reasons that the margins couldn’t improve. The management sees some uptick in FD sales going forward.
  • Paracetamol’s prices have been increased to pass on the raw material price increases to the customers.
  • The freight cost is an important component for the company and the costs haven’t improved in the last 6 months. The freight costs can go as high as 4-5% of the company’s revenues.
  • In FY23, the company will be crossing EBITDA margins of around 20-21%, but it is not confident of achieving the margins of 23%. The company expects to achieve a minimum of 12% growth in revenues by FY23 end.
  • The company received 3 ANDA approvals in the US in 3QFY22. The company expects the market size for their aggregate to be around USD 400-500 mn. The company doesn’t expect any growth in revenues from these products.
  • The company plans to enter new geographical markets such as the Canadian, and South African markets. The company expects its new markets to account for 35-40% of its revenues, instead of 25-30% of total revenue as of now.

 Asset Multiplier Comments

  • The raw material prices for the company’s molecules (core and non-core) and freight costs are likely to stay high for the next 2 quarters. Therefore, we expect the EBITDA margin to be under pressure during this period.
  • As the company’s supplier for Paracetamol-related raw materials is about to start its plant by 15th Feb 2022, we expect the situation of raw material shortage to reduce from March.

Consensus Estimate: (Source: market screener website)

  • The closing price of GRANULES was ₹ 312/- as of 10-February-2022. It traded at 18x/13x/11x the consensus earnings estimates of ₹17/24.2/27.9 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 359 /- implies a P/E Multiple of 13x on FY24E EPS estimate of ₹ 27.9/-

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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10 Feb

Expect the food business to clock Rs 8,500 to 10,000 mn revenues by FY24E – Marico

Update on the Indian Equity Market:

On Wednesday, Nifty closed higher at 17,463 (+1.1%) led by Auto (+2.2%), MEDIA (+1.9%), and METALS (+1.9%) while the only losers were PSU BANK (-0.6%) and OIL & GAS (-0.2%).

Among the NIFTY components, the top losers were ONGC (-1.5%), BPCL (-0.6%), and ITC (-0.5%) while COALINDIA (+5.6%), MARUTI (+4.2%), and IOC (+3.3%) were the top gainers.

Edited excerpts of an interview with Mr. Saugata Gupta, MD & CEO of Marico with CNBC TV18 on 7th February 2021:

  • Gross margins expanded sequentially due to falling copra prices which are currently in the deflationary phase. In terms of EBITDA margins, the company expects crude inflation to continue.
  • The management expects gross margins to rise in 1QFY23E. In the long-term, the company expects 19 percent plus EBITDA Margins. The company has significant innovation capabilities in food and digital.
  • On the demand side, due to rising food inflation, which is down-trading, rural demand has slowed from a high base. However, the management anticipates that, in the future, demand will begin to improve as a result of direct benefit transfers, MSP, and a successful monsoon season.
  • There was a broad-based growth in foods, where Marico maintained market share and penetration. The company intends to enter two or more food business categories by 4QFY22E or 1QFY23E.  By FY22E, the management forecasts the food industry to be worth about Rs 5,000 mn, with a target of Rs 8,500 to 10,000 mn by FY24E, implying a CAGR growth of 25% to 30%.
  • The company has greater competence in terms of food innovation pipeline execution, and the company is confident that the food sector will become one of its primary growth drivers, as the revenue goals and aspirations are well within reach.
  • The Company plans to grow its total addressable market by entering categories such as infant care, colors, and shampoo, as well as repeating its success in Bangladesh into countries like Vietnam, the Middle East, and North Africa. In India, the non-core product portfolio, which includes skincare and male grooming, is forecast to contribute to overall revenue in the mid-teens to high teens range by FY25E, which is currently in the single digits in terms of contribution.

Asset Multiplier Comments

  • The slow pace of recovery in rural demand post-COVID remains an important challenge for Marico. High growth premium segments are helping the company sustain its high EBITDA margin levels (~19-20%).
  • Digital Brands like Beardo and Just Herbs allow Marico to add to its topline and decrease its reliance on its traditional coconut oil business.

Consensus Estimate (Source: market screener website)

  • The closing price of Marico was ₹ 505 /- as of 9-February-2022. It traded at 51x/42x/ 39x the consensus EPS estimates of ₹ 10/ 12/ 13 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 579 /- implies a P/E Multiple of 45x on FY24E EPS estimate of ₹ 13/-.

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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10 Feb

Place your bets wisely!

The vast majority of people have no edge over others in the stock market. Even professional fund managers who have demonstrated skill in picking stocks in the past struggle to beat the market once their high costs are taken into account.

The way of the Rational Investor– Keeping costs low is vital to being a Rational Investor. Since you are not going to outperform the market, it makes no sense to pay a penny more than you have to in order to achieve as close to the market’s return as you can. By keeping costs low, you can end up richer than those who pay a high price to try to beat the market and fail.

Active management comes at a cost– Fees are always important in finance, but even more so for the Rational Investor.  Paying initial fees just to get into an active fund is becoming a thing of the past, but you might still save another 2% a year by investing in an index tracking fund, compared to an active one. If a 2% annual saving does not seem like a lot to you, then you’re forgetting the power of compounding returns. If you think you have great edge in the market and you could easily make up this 1.5% to 2% annual cost difference by picking stocks or choosing superior active fund managers or timing the markets or whatever other approach you take, then good luck to you. All the odds and evidence are against you. If you don’t have an edge, then the sooner you get out of the expensive investment approaches and into cheap index tracking products, the better off you will be.

How to get an active manager’s sports car– Conversely, consider the 85-90% of investors who invest in active managers as opposed to index tracking funds, either directly or via their pension funds. Over the long run only a very small percentage of investors who take the active approach will be lucky enough to invest with managers that give better returns after fees. The rest have simply paid a staggering amount of money to the financial industry over their investment lives, and will have less money in retirement as a result.

Passive investing requires patience– The key to reaping the greatest savings is to have the patience for the compounding impact of the lower expenses to take effect. It is like making money while you sleep; lower fees make a little bit of money, all the time.In the early years you can barely see the difference between the active and index tracking investment approaches. In the later years the benefits are obvious – but they are only there for the investor who kept his or her discipline with lower fees.

Ignore the siren songs of sexy managers– you must remember it will take discipline to stick to this approach. The index tracker will perform slightly better over the long-term than the average active fund, and that outperformance will come from the cumulative advantage of lower fees. Meanwhile the many active funds out there will be all over the map, the best performers will try to scream the loudest about how their special angle or edge has ensured their amazing returns that year. We might even be tempted to believe these managers and abandon our boring and average index tracking strategy. But please stick to your index investing plans unless you can clearly explain to yourself why you have edge. The chances are you don’t, and you will be wealthier in the long run from acknowledging this.

Source: The cost of active fund management published on Monevator

Asset Multiplier comments:

  • The most underutilised investment skill is patience, but it can be developed.
  • Fund outperformance is unpredictable, and forecasting a successful mutual fund may be difficult. An additional savings of 2% (of management fees) put in a low-cost passive route may be a better decision for an investor.
  • The gap between price and value, often known as the margin of safety, protects an investor from unanticipated occurrences and allows him or her to obtain extra profits in the absence of such events.

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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08 Feb

Focused on creating organic and inorganic business opportunities – IndusInd Bank


Update on the Indian Equity Market:

On Tuesday, NIFTY closed in the green at 17,266 (+0.3%) near its high of 17,300. Among the sectoral indices, PSU BANK (+0.8%), METAL (+0.8%), and PHARMA (+0.5%) were the top gainers and MEDIA (-1%), REALTY (-0.8%) and IT (-0.3%) were the sectoral losers. TATASTEEL (+3%), CIPLA (+2.0%), and RELIANCE (+1.7%) were the top gainers. ONGC (-2.8%), POWERGRID (-1.8%), and SBILIFE (-1.3%) were among the top losers.

Excerpts from an interview of Mr. Sumant Kathpalia, MD & CEO, IndusInd Bank (INDUSINDBK) with Economic Times dated 07th February 2022:

  • INDUSINDBK had slowed down their microfinance business and hence the disbursements grew only by 3% sequentially. Disbursement growth came at 4.5% without microfinance as always guided by the company.
  • On deposits, they are as good as the industry and are very comfortable with the way the growth is coming back.
  • Microfinance currently holds 12.5% of INDUSINDBK’s portfolio. It has guided about the proportion being limited to 15% of the total portfolio. It has diversified the rural vertical into various other businesses and is growing rapidly in the merchant acquiring business.
  • The deep rural book that is of ₹ 1500 mn currently, is expected to reach a value of ₹ 5,000 mn by the end of FY23E.
  • INDUSINDBK has launched a new platform with a focus on five verticals. Out of these, easy credit for personal loans and credit cards are already launched. It is in the market since January and the company is seeing a rapid increase in disbursements as well as the experience the clients are getting in it.
  • They have launched ‘Indus Wheels’ which specifically focuses on vehicle finance and they expect to see a different used car experience in the market from February end or March onwards.
  • INDUSINDBK has launched one or two commercials about their merchant acquiring business and saw a good response to the same. They have a few launches lined up that will be millennial prepositions, hugely interactive offering personalized user experience.
  • They have created provisions of ₹ 3,328 mn as a protection against any future shocks. They have also done a ₹ 1,400 mn provision on the restructured book.
  • The company will now lend at 230 bps and believes that the credit cost should settle around 120 to 150bps.
  • INDUSINDBK has always been interested in para-banking. They are looking to add a fourth domain which can come out of affordable housing, wealth management, mortgage, or a business like a merchant acquisition. The main objective of this domain is to create a business opportunity that can be organic or inorganic.
  • The promoters of the bank are awaiting the operating guidelines on the 26% promoter limit allowed by the RBI. Once these guidelines are clear and if the bank needs funds, the promoters will be the first ones to infuse capital into the company.
  • Vodafone-Idea business has to start playing out for INDUSINDBK to reverse its provisions. Vodafone is expected to come back to the banker’s consortium wagon with a definitive business plan about how they will raise funds and how the business is going to grow. Once that is finalised, how Vodafone’s business gets executed over two or three quarters will decide if the provisions will start reversing.
  • MSME and SME sectors are growing. On the corporate and on the MSME side, the company is confident about being ahead of the market and not an outlier.
  • Kathpalia expects the central bank will continue to support growth and the increase in rates will not be passed on to the end consumers immediately.
  • Four things to look at in FY23 for INDUSINBK: 1) Now that the balance sheet is stable, they will be focused on the bank’s growth momentum, 2) PPOP margins have been highest or second highest in the industry around 5.9% to 6% and will be maintained between 5.75% to 6%. 3) Credit costs are expected to swing back and land between 120 and 150 bps and 4) The bank’s fourth domain should come into existence in the form of para banking or affordable housing or wealth management.

Asset Multiplier comments:

  • With economic activities picking up, the disbursements in vehicle finance and microfinance are expected to start gaining momentum.
  • The bank has sufficient provisioning which is expected to reduce credit costs and improve its margin trajectory in the subsequent quarters.
  • We expect healthy traction in the bank’s loan book and an increase in disbursements due to the introduction of technology-driven services.

Consensus Estimate: (Source: Market screener and investing websites)

  • The closing price of IndusInd Bank was ₹ 938/- as of 08-February-2022.  It traded at 1.5x/1.3x/1.2x the consensus book value per share estimate of ₹ 611/688/784/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 1,267/- which implies a P/BV multiple of 1.6x on FY24E BVPS of ₹ 784/-.

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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07 Feb

Expect to launch Spiriva in 2HCY22 in the US – Lupin

Update on the Indian Equity Market:

On Monday, NIFTY50 ended in the red amid a broad-based sell-off, ahead of the RBI monetary policy meeting during the week. NIFTY50 ended at 17,214 (-1.7%), dragged by TATACONSUM (-3.9%), LT (-3.6%), and HDFCBANK (-3.5%). POWERGRID (+1.9%), ONGC (+1.3%), and TATASTEEL (+0.7%) led the gainers.

Among the sectoral indices, PSU BANK (+0.9%) was the only one to close in the green. FINANCIAL SERVICES (-2.6%), FINANCIAL SERVICES 25/50 (-2.5%), and PRIVATE BANK (-2.3%) led the laggards.

Lupin announced 3QFY22 results, which were lower than the street estimates. Ms. Vinita Gupta, the CEO, outlined the reasons for the lower revenue growth in Business Standard on 7th February 2022:

  • Respiratory products have become a major growth driver for Lupin in the US. Albuterol has ramped up well over the last few quarters and has a market share of over 20 percent. In Brovana, Lupin has about 45 percent market share. The rest of the business in the US has been stable.
  • In 2HCY22 the company expects to launch a few products such as Spiriva in the US. It also expects to launch the first biosimilar, Pegfilgrastim in the US for which US FDA inspection of the Pune plant is required.
  • The company has shifted production to India for some of its products such as nasal sprays. For some other first-to-file (FTF) products in the US, Lupin is transferring production to some contract manufacturers in India and the US.
  • In 3QFY22, the India business was up 12% YoY due to significant growth in the respiratory products portfolio in 3QFY21. The company launched molnupiravir in the Covid products portfolio. Practicing physicians see molnupiravir as an important part of the regimen.
  • The CEO foresees increasing contribution to the Indian business from the diagnostic business. Lupin has established a national laboratory and has seven centers (clinics) in place- four owned and three are partnered. In FY23, she expects a rapid expansion in both owned and partnered clinics. However, the diagnostic business will be small in the near term in terms of total India business.
  • It has recently announced a partnership with Fancoo for CNS products in China. Lupin is looking forward to getting those products approved and launched in China. It is also working on the respiratory and inhalation pipeline (products developed for the US) which provides an opportunity in China.
  • Apart from the US, Lupin is present in the UK, Canada, Australia. It has a presence in Japan through its partner and is working on more partnerships to have a pipeline of complex generics and biosimilars.
  • In Europe, Lupin is focusing on Germany, the UK, and France and has a big respiratory pipeline in Europe.
  • In Australia, it has acquired Southern Cross Pharma which will make Lupin among the top three generic players in the market.
  • About 25% of the raw materials are imported. The company is self-sufficient in terms of APIs and other materials. The company is trying to reduce the dependence on China by increasing suppliers in India. The CEO believes the PLI scheme will help to develop a more self-reliant supply chain.

 Asset Multiplier comments:

  • The entire pharmaceutical industry is impacted due to supply chain bottlenecks which are impacting margins. Reduced dependency on China, and building domestic capabilities are likely to aid margin recovery in the medium term.
  • Lupin’s 3QFY22 performance was impacted by higher price erosion in the US and raw material cost. While this is expected to impact the performance in the near term, the early launch of key products such as Spiriva is likely to provide some relief to investors.

Consensus Estimate: (Source: Market Screener website)

  • The closing price of LUPIN was ₹ 804/- as of 7-February-2022.  It traded at 21x/ 16x the consensus EPS estimate of ₹ 38.6/ 50.2/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 977/- which implies a PE multiple of 19x on FY24E EPS of 50.2/-.

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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