29 Jul

Confident of future as a lot of new demand has come in June – Asian Paints

Update on the Indian Equity Market:

On Tuesday, NIFTY ended up 169 pts (+1.5%) at 11,300.
Among the sectoral indices, AUTO (+3.2%), METAL (+2.2%) and IT (+2.4%) were top gainers while MEDIA (-0.2%) was the only loser.
Among the stocks, ULTRACEMCO (+7.0%), KOTAKBANK (+4.7%) and TCS (+4.7%) were the top gainers. ICICIBANK (-1.8%), INFRATEL (-1.6%) and NESTLEIND (-1.4%) were the top losers.

Confident of future as a lot of new demand has come in June – Asian Paints

Edited excerpts of an interview with Mr. Amit Syngle, Managing Director & Chief Executive Officer, Asian Paints with Economic Times dated 27th July, 2020:

We saw a lot of secondary demand come up across the cities and that has boosted our confidence that a lot of new demand has come in areas of painting, waterproofing and so on, says Amit Syngle, MD & CEO.

• His comments on 1QFY21 result: There was no business activity from 20th March to end of April due to the lockdown. The entire month of April was an absolute washout. A lot of pent up demand was seen in May and people had to look at some of those real pent up maintenance issues. Therefore, in May, there was very satisfying pent up demand across the country. However, a good part of it was seen in June, triggered by Asian Paint’s safe painting campaign which gave people confidence that it was safe to get a set of painters to get your house painted. A lot of secondary demand came up across the cities and that has boosted the company’s confidence that it was not only the pent up demand which we saw in May but a lot of new demand which came in both in the area of painting, waterproofing and so on. This was also led by another campaign which Asian Paints did with terrace waterproofing. A lot of demand which has come in the June is new paint demand and that has boosted confidence in the market.
• When asked about how confident he is of this new paint demand trend continuing he replied that the month of July has been more challenging in terms of the sporadic lockdown across various states. But till now, the indications have been good in terms of looking at how the paint demand is coming and he feels that today the trend is changing. Some of the tier one-tier two cities which were slow to kind of recover are recovering at a higher rate the surge was possibly shown at the smaller cities which were the tier three, tier four cities. He further added that there might be slowing down a little as Covid is spreading more into the hinterland but there is a balancing which is happening with respect to that and therefore the current indications are that volumes are still looking decent.
• When asked about the demand pattern of premium decoratives, he stated that some products are at the luxury and premium end and are also solutions based. If people are looking at that kind of an antibacterial protection for their homes, it is still value for money coming at the luxury end. But in general, there is a little bit of downtrading where people are coming down from the luxury end and looking at more premium products and upgrading far more strongly. A lot of discretionary spend is happening in terms of maintenance rather than absolutely décor. Therefore, he is of the view that a part of this painting has come in because people would like healthy and hygienic homes, fairly clean and beautiful homes
• His stated his views on pricing strategy: Overall, the company has been very cautious and is looking at ways and means in terms of better material costs, sourcing efficiencies and formulation efficiency. As of now, there is a little bit of neutrality coming because there is a rupee which has depreciated. Raw material prices are going up as demand comes back. Volatility will continue and he will be more focused in terms of internal efficiencies and going ahead, he doesn’t see any changes in terms of prices till the time there is a stability in terms of the environment we are in.

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

• The closing price of Asian Paints was ₹ 1,756/- as of 28-July-2020. It traded at 67x/ 51x/ 44x the consensus earnings estimate of ₹ 26.7/34.9/40.9 per share for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 1,810/- implies a PE multiple of 44x on FY23E EPS of ₹ 40.9/-

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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28 Jul

Export strategy worked out – Jindal Steel & Power Limited (JSPL)

Update on the Indian Equity Market:

On Monday Nifty closed 0.6% lower at 11,132. Among the sectoral indices PVT Bank (-3.6%), Bank (-3.6%) and PSU Bank (-3.1%) closed lower. IT (+2.0%) and Metal (+0.3%) closed on a positive side. Asian Paints (3.5%), HCL Tech (+3.1%) and Infosys (+2.6%) closed on a positive note. ICICI Bank (-6.0%), ZEEL (-4.0%), and HDFC Bank (-3.5%) were among the top losers.

Excerpts from an interview of Mr. V.R Sharma, MD, JSPL with ET Now on 23rd July 2020:

  • The quarter one of the current financial year was very challenging, as the entire nation was under lockdown.
  • The company charted out policies and switched from domestic market to export market.
  • It took sleepless nights to adapt to new polices and because of that, the company could reach to 1.67 metric tons production.
  • While the industry was down by 50% in terms of volumes, JSPL could increase production by 8% which led to 12% sales growth quarter on quarter. The strategy worked out very well.
  • In the quarter, EBITDA increased from Rs 10,600 a ton to Rs 11,700 a ton, an increase of about Rs 1,100.
  • Economies of scale, reduction in cooking coal and iron ore prices led to higher EBITDA. The company also managed to keep a control on overall costs.
  • JSPL could do a sale of exports in April for 2,48,000 tons; in May, it was 4,01,000 tons and in June it was 2,50,000 tons. In July the company is planning to bring it down to 2,00,000 tons, and the target for August is also 2,00,000 tons. So, on a monthly basis, dependence on exports would be only 30% and 70%. The company will focus back to sell in the domestic market because the market is picking up and a lot of new projects are coming and that is a good sign.
  • The power business was also challenging because power consumptions in the country was very low, industries were closed, offices were closed, no malls, no shopping centers were working. However, the company managed to maintain and EBITDA of Rs 368 crore.
  • The coal prices have come down. Coal India is very pragmatic and it is working on a right price strategy from 84 paisa per megawatt, now they have come down to 52-53 paisa per MW. The prices will come down further and it should be somewhere about 40 to 42 paisa. Once these numbers are achieved, hopefully JSPL will be in a position to maintain the profitability as well as the overall EBITDA level.
  • The company is expecting an EBITDA of more than Rs 500 crore in Q3, as the sale of power has increased and there is a flexibility now in iExchange.
  • The company has reduced debt by Rs 1,562 crore. Initially, the plan was a Rs 5,000 crore reduction but now the company is sure debt can be reduced by Rs 6,000.
  • The company aims to reach aim is to reach at Rs 15,000 crore debt by 2023 from current level of 29,000 crore with an EBITDA of about Rs 12,000 crore.

Consensus Estimate: (Source: market screener)

  • The closing price of JSPL was ₹ 176/- as of 27-July-2020.  It traded at 82x/16x the consensus earnings per share estimate of ₹ 2.15/11.0 for FY21E/ FY22E respectively.
  • The consensus average target price for JSPL is ₹231/- which implies a PE multiple of 21x on FY22E EPS of ₹ 11/-.

 

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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27 Jul

Chances of recovery depend on economy – Bank of Maharashtra

Update on the Indian Equity Market:

Following the global indices, markets started the day on a negative note but shrugged off most of losses as Nifty closed the week at 11,194 (-0.2%). Within the index, HCLTECH (+4.7%), RELIANCE (+4.4%) and TECHM (+3.6%) were the largest gainers whereas ZEEL (-4.8%), HINDALCO (-3.5%), and AXISBANK (-3.2%) were the highest losers. Among the sectoral indices, only one index, IT (1.4%) ended the day in green while METAL (-2.1%), PSU BANK (-1.9%) and REALTY (-1.7%) led the losing sectors.

Excerpts of an interview with Mr A S Rajeev, CEO of Bank of Maharashtra with ET now dated 19th July 2020:

  • The impact that the pandemic will have on the economy would be much larger than the global financial crisis of 2008. This has resulted in significant reduction in capex as well as lower discretionary spending. All this is going to impact credit off-take in the near term. 
  • Going forward, as the economy opens up fully post lock down, chances of recovery are very good. The demand has started to pick up, although it is still lower than the pre-Covid levels. At present, the agriculture sector is likely to pick up primarily due to good monsoon expected this year. In other sectors, recovery is likely to pick up from the third quarter onwards
  • 35% of term loan borrowers of the bank have opted for the moratorium. The number is around 20% of the total advances. The bank has kept their provision ratio high at 84% to tackle the bad loans.
  • The bank is well capitalized with the capital adequacy ratio at 13.5% which is reasonably high to grow the assets. The board has created an enabling provision to raise up to Rs 30,000 mn including Rs 20,000 mn through equity when it is required in the next one year. The bank would look at raising capital once present market conditions improve.
  • In order to grow the loan book, the bank is focusing on government undertakings which are generally large ticket sized and “A” and above rated corporates for optimizing risk rewards. Among midsize corporate accounts having ticket size of Rs 500 mn to Rs 1,500 mn,the bank is exploring sunrise sectors such as pharmaceutical industries and FMCG, which are safer bets now.
  • The present promoter holding in the bank is 93.32% after considering capital infusion of Rs 8,310  mn by the government in March. The bank is in touch with authorities to allow some time to achieve minimum public shareholding to 25%. The present deadline will be expiring in August.

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

  • The closing price of Bank of Maharashtra was ₹ 12.4/- as of 24-July-2020.  It traded at 0.6x the consensus book value of ₹ 20.3 for FY20.
  • The consensus price target for Bank of Maharashtra is not available on the stated websites.

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 Jul

Good things taken too far

Morgan Housel reminds investors that good things can be taken too far – helpful at one level and destructive at another. They can be more dangerous than bad things because the fact that they’re good at one level makes them easier to rationalize at a dangerous level. A lot of things work like that, don’t they? Good things – praise-worthy things – that in a high enough dosage backfire and become anchors?

A few Housel sees in investing:

  1. Contrarianism is great because the masses can get it wrong. But constant contrarianism is dangerous because the masses are usually right. Identifying and avoiding times when millions of people have been derailed by bad incentives and a viral narrative is a wonderful thing. Most investment fortunes come from a bout of contrarianism. But a larger group of investors has turned contrarianism into something closer to cynicism. Their contrarianism is constant – at all times, for all things. The quirk is that if you survey the list of extraordinarily successful investors, entrepreneurs, and business owners, virtually everyone has been a contrarian. But none – not a single one – is always a contrarian. There’s a time to bet against mass delusion, and (more frequent) times to ride the progress that comes from billions of people collectively searching for the truth.
  2. Optimism is great because things get better for most people over time. But it’s dangerous when twisted into the belief that things will never be bad, which is never the case. A lot of people pick optimism because they rightly, correctly, get excited about the long history of progress mixed with confidence in their own skills. But when optimism is taken so seriously that it assumes things will never be bad – that every period long or short will work out in your favour – it turns into complacency. It encourages leverage and promotes denial. It leaves you without backup plans. Worst, it causes you to wrongly second-guess your long-term optimism when faced with an inevitable setback. You can be right about optimism in the long run but fail to ever see it because you overdosed on it in the short run.
  3. Being open-minded is great because the truth is complicated. But being too open-minded backfires because objective and immutable truth exist. Every smart attempt to be open-minded has to be accompanied by a strong nonsense detector. The detector should go off when any of a handful of laws are violated when the author’s incentives favour an outcome, and when a complex answer is given if a simple one would suffice. You have to be firm enough in your views to make confident decisions while being open to new views in a way that lets you occasionally update and change those decisions. “Strong beliefs, weakly held” as they say.
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24 Jul

A tremendous shift to mindful shopping seen – Havells India

Update on the Indian Equity Market:

On Thursday, Nifty50 ended 0.7% higher at 11,215 after reports citing India and the US are close to inking a trade deal. EICHERMOT (+4.9), ICICIBANK (+3.6%), and RELIANCE (+3.6%) topped the gainers. AXISBANK (-3.8%), SHREECEM (-1.9%), and HINDUNILVR (-1.4%) led the laggards. PHARMA (+1.4%), REALTY (+1.4%), and AUTO (+1.4%) led the sectoral gainers while IT (-0.2%) was the only sector to end the day in the red.

The buying pattern of consumers has undergone a transformation since the pandemic started and businesses have had to device new strategies to get consumers back. Mr. Ravindra Singh Negi, President, ECD (Electrical Consumer Durables), Havells India talked about the company’s online to offline model with Economic Times.

Here are the edited excerpts of the interview published on 22nd July 2020:

  • The online to offline program combines technology and execution at the local level. This model provides a solution to customers worried about going out and partners concerned about sales. Products can be selected, and payment made online and delivery is made at a fast pace by local channels.
  • The launch of the beta version of the program led to a 4 times surge in the average monthly revenue generated by the e-store. The response led to the program being rolled out across the country in June, except for in Kolkata and Maharashtra.
  • Cognizant of the potential of digital power, Havells has made the swift movement to online sales and invested in the e-store for the brand at large. The hybrid model will be integral to business recovery as it aims to remove customers’ hesitance to go and shop offline due to health and safety concerns.
  • There has been a profound impact of the Covid-19 on the business due to the dependence on domestic consumption. April was a washout and May witnessed little recovery. June was better than the previous two months with a considerable contribution from smaller towns and semi-urban geographies. Although semi-urban and rural are almost back to normal, urban centers will take a while to get back on track.
  • Customer behavior has settled into the new normal significantly and there has been a tremendous shift to mindful shopping. There has been an uptake of domestic appliances such as air fryers, mixers, juicers, and blenders as these seem to invade the essentials category.
  • With the spas and salons shut for a long time, the grooming products too are high on the consumers’ shopping list. Beard trimmers sale has seen a spike of 5x.
  • Consumers are going to look at buying safe and quality products with superior after-sale service, which adds brand recall and loyalty. During the lockdown, more than half of their service issues were solved digitally through video calls or through do-it-yourself videos on their social media channels, which was appreciated by consumers.
  • The pandemic has revamped the business structure altogether. The focus remains on ramping up Make in India capabilities to offer better quality products to customers.

Consensus Estimate: (Source: market screener website)

  • The closing price of Havells India was ₹ 608/- as of 23-July-2020. It traded at 68x/ 42x/ 38x the consensus earnings estimate of ₹ 8.9/14.4/16.2 per share for FY21E/ FY22E/ FY23E respectively.
  • The consensus target price of ₹ 547/- implies a PE multiple of 34x on FY23E EPS of ₹ 16.2/-.

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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23 Jul

Crude prices will continue to be less than $45 – HPCL

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in red at 11,132 (-0.3%). Top gainers in NIFTY50 were Axis Bank (+6.7%), Titan (+4.9%) and Power Grid (+3.6%). The top losers were Hero Motocorp (-3.3%), BPCL (-3.1%) and HUL (-3.1%). Top sectoral gainers were PVT BANK (+0.7%), MEDIA (+0.5%) and BANK (+0.4%) and sectoral losers were PSU BANK (-1.6%), AUTO (-1.3%) and IT (-1.1%).
Excerpts of an interview with Mr M.K.Surana, CMD, HPCL with ET now dated 22nd July 2020:

  • Demand had picked up quite sharply after June and it reached around 88% or so. Normally in the Q2 of the financial year, because of the onset of the monsoon, demand reduces generally on a tonnage basis. The same effect is being seen this July as well.
  • It is slightly aided by some of the localised lockdowns in Karnataka, Maharashtra and other states. That’s why demand has been lower on the diesel side. Petrol demand is good more or less.
  • It is still 84% of normal and the trend is in line with what happens every year in the second quarter of the year as soon as the monsoon sets in.
  • Last year the monsoon was slightly delayed and so if you see year on year, that will also have some impact and this time it is slightly early.
  • There has not been any substantial worrisome trend as such. Rather it has been a consistently improving trend as far as demand is concerned. The impact that is seen is only because of the monsoon and the local lockdowns.
  • Next month, it should rebound to June level. Beyond 90%, definitely it will take some time to reach 100% as industrial and construction activities pick up. That should happen in the third quarter of the year.
  • He has maintained this view for a long time that the oil refining and marketing companies did not get fully valued the way our markets work. There is a huge potential, huge value in terms of the asset base.
  • Total demand consists of two parts – one is essential requirements for normal transportation of the people, for agriculture and industrial use. There the price elasticity has not been seen in the past to any extent.
  • As far as exports are concerned, it anyway happens on international pricing and one should remember that even the domestic prices are aligned to international pricing and the exports or imports whatever happens on the international pricing.
  • HPCL projects are at a very advanced stage. They will be trying to complete major projects like Vizag refinery expansion or Mumbai refinery expansion in the next calendar year.
  • Every year they take up some new projects that they may prioritise depending on the situation, but as far as all the projects which are already onsite and under construction are concerned, they do not have a rethinking on that.
  • They are comfortable with the borrowing level, as of today, their debt to equity ratio is less than one and long-term debt is less than around Rs 23,000 crore. Even short term debt they have brought down substantially to around Rs 32,000 crore.
  • Indian fuel retailing was started by MNCs like Esso, Burmah Shell, Caltex etc. Some of these MNCs after nationalisation became PSEs. It is done globally and it was not vastly different in India as compared to other parts of the world.
  • As far as the demand front is concerned, 85-90% of the demand has already come. By the end of June, they had touched 91%. The onset of monsoon may cause some reduction in the diesel demand but it will pick up. On the demand front, it has shown a very smart and quick and V-shape recovery and they are very happy with that.
  • As far as the prices of crude are concerned, they have remained in the $40 range and they think that it will continue to be less than $45 because some of the shale players will start returning as they are comfortable with $40 as the breakeven price.
  • With the reasonable crude prices and with improving cracks demand recovery, he believes that they would do well.

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

  • The closing price of HPCL was ₹ 228/- as of 22-July-2020.  It traded at 7x/ 6x the consensus earnings estimate of ₹ 32.1/ 39.4 for FY21E/22E respectively.
  • The consensus price target of HPCL is ₹ 272/- which trades at 7x the earnings estimate for FY22E of ₹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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22 Jul

Demand momentum could stay for 6-9 months – Britannia

Update on the Indian Equity Market:

On Tuesday, Nifty ended 1.3% higher at 11,170. The top gainers for Nifty 50 were Power Grid (+6.4%), IOC (+5.7%), and BPCL (+5.4%) while the losing stocks were Bajaj Finance (-4.0%), Bajaj Finserv (-3.5%), and Britannia (-2.4%). Sectoral gainers for the day were PSU Bank (+2.1%), Bank (+2.1%) and Financial Services (+2.0%) while the losers were Pharma (-1.5%) and FMCG (-0.8%).

Edited excerpts of an interview with Mr Varun Berry, MD, Britannia Industries Ltd; dated 21st July 2020 from Economic Times:

  • Britannia started completely on the back foot. They were not sure where they were going because factories were closed, and distribution systems were in a disarray.
  • It was everyone with their shoulder to the wheel, executing at a rate which was outstanding.
  • The demand for food that human beings eat is about the same. It is just that there was no out of home or on-the-go consumption happening during this time. It was all home consumption and that gave them an advantage, he added.
  • There was some amount of larder stocking but that was at the beginning of this pandemic. Thereafter, it has been regular consumption for most consumers.
  • The demand momentum is going to continue, albeit at a slightly slower pace as they go through the year.
  • In the last seven years, Britannia has done a lot of work in rural areas and that is keeping them in very good stead as far as the numbers are concerned. The rural trends are a lot more aggressive than urban trends. Even the pandemic has not hit the rural consumers as much as what they are seeing in the urban centres. From 21,000 rural distributors in February, they have been able to take this up to 22,000 distributors in June.
  • He doesn’t think that 21% margin is sustainable but they are going to make sure that they try and see whatever they can get out of it, there will be almost 50% of this will go right back because advertising and sales promotion will get back to normal as soon as they have a full product out in the market. Similarly, there are certain other costs which will get back but Britannia is looking at every possibility of getting as much out of this period so that it can get as many savings out of this.
  • Britannia is not seeing inflationary trends as far as the raw materials are concerned. On all of the raw materials, it has been a very reasonable level of inflation at about 3% and Britannia sees that to continue through the year.
  • The distance travelled by Britannia’s biscuits has come down from 370 km to 320 km during the last quarter so shortening supply chains, getting products domestically all of that is becoming important.
  • There was a huge surge in modern trade in the past three-four years, modern trade was growing at almost 2-2.5 times the growth of the traditional trade business but during this pandemic, people are depending more on their neighbourhood stores and hence traditional trade has started to see a huge rebound. Britannia has to make sure that it takes that into its plans as well.
  • Their bread business has outgrown its overall bakery business, not just in terms of top-line but also in the bottom-line sense. Similarly, their cheese business has grown almost two times the overall growth. He is of a strong opinion that these are not sustainable growth numbers because they are one-off, but it is just giving them a very clear outlook about the opportunities and areas they can concentrate on.
  • There is down-trading happening as people are not going out and eating in restaurants. Biscuits are the cheapest form of the snack and it comes from a highly trusted company and a highly trusted brand. Within the category, for Britannia, there has been no downgrading. He has heard from a competitor that there is serious down-trading in their portfolio but from Britannia’s product portfolio, it has been the premium products which are holding sway.
  • The R&D centre is working overtime on the kind of products that the consumers are looking for. The first objective for Britannia was to match the core but beyond that, they have gotten into categories and a lot of work is happening in those categories. Market research, insights work, could not happen during the four-month period of lockdown and that has delayed the rollout of some of their products. But they are going to be back with a bang as far as category growths and new innovation of products are concerned. Britannia is also working on some immunity products and is doing research to make sure that it brings in absolutely the right products which give the consumers the genuine results they are looking for.

Consensus Estimate: (Source: market screener website)

  • The closing price of Britannia Industries was ₹ 3,883/- as of 21-July-2020. It traded at 50x/47x/41x the consensus EPS estimate of ₹ 78/82/95 for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 4,064/- implies a PE multiple of 43x on FY23E EPS of ₹ 95/-.

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 Jul

Increasing number of borrowers are moving out of moratorium- L&T Finance Holdings

Update on the Indian Equity Market:

 

On Monday, Nifty closed 1.1% higherat 11,022. Within NIFTY50,BRITANNIA (+5.1%), WIPRO (+4.4%), and INFY (+4.4%) were the top gainers, while SUNPHARMA(-3.9%), CIPLA (-2.2%) andZEEL (-1.7%) were the top losers. Among the sectoral indices, IT (+2.6%), FIN SERVICE (+1.6%), and BANK(+1.6%) gained the most.  PHARMA (-1.6%) was the only sector to close in red.

 

Increasing number of borrowers are moving out of moratorium- L&T Finance Holdings

 

Excerpts of an interview with Mr. Dinanath Dubhashi, MD&CEO, L&T Finance Holdings Ltd (L&TFH)published on Economic Times website dated17thJuly2020:

  • In 1QFY21, entire Rs 2,250 mn of exceptional gains have been put towards one-time provisions for COVID-19 impact.
  • In 1QFY21, the three months- April, May and June have been 3 very distinct months. Moving from lockdown to unlock, there was an uptick from April to May to June. The uptick has been very good in rural areas and noticeable everywhere else also. That is reason for being optimistic.
  • In terms of sectors showing revival, tractor is one industry where there is actually positive growth in the month of June 2020 versus June 2019. All disbursements to tractors have grown by 19% YoY in June 2020. The quarterly numbers are negative because April was zero but June has shown the first uptick.
  • There is no concrete answer on how NPAs will be but there are a few noticeable trends in terms of moratorium. For micro loans, loans under moratorium in June have reduced to 48% from 100% in April and May 100%. In the same period, for 2-wheelers, loans under moratorium in June have gone down to 33% from 58-60%. In April, the overall portfolio under moratorium was 75%, it has reduced to 18% in June 2020. Substantial number of accounts under moratorium in June have already paid off in July. So an increasing number of people are paying.
  • L&TFH is holding Rs 90 bn of excess liquidity vs normal levels of around Rs 35-40 bn. As a result of this excess cash, there was a negative carry of Rs 840 mn in 1QFY21. This resulted in NIMs being lower in 1QFY21.

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

  • The closing price of L&TFHwas ₹ 62.8/- as of 20-July-2020. It traded at 0.8x / 0.7x the consensus BVPS estimate of ₹ 77.3/ 89.0 for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 72.3/- implies a PE multiple of 0.8x on FY22E BVPS of ₹ 89.0/-.

 

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 L&T Finance Holdings, NBFC 0 Comments Read more...
20 Jul

We will be very sensible in our lending – Federal Bank

Update on the Indian Equity Market:

On Friday, NIFTY ended up 162 pts (+1.51%) at 10,902. Among the sectoral indices, FIN SERVICE (+1.94%), PSU BANK (+1.84%) and AUTO (+0.73%) were top gainers while IT(-0.62%) was the only loser. Among the stocks, BPCL (+12.43%), ONGC (+5.84%) and INFRATEL (+4.32%) were the top gainers. HINDALCO (-1.90%), BRITANNIA(-1.86%) and NESTLEIND (-1.47%) were the top losers.

 

Edited excerpts of an interview with Mr. Shyam Srinivasan, Managing Director & Chief Executive Officer, Federal Bank with Economic Times dated 16th July, 2020:

We have grown ahead of the market for the last 14-16 quarters: Shyam Srinivasan

  • Comments on 1QFY21 result: 1QFY21 numbers are quite encouraging. It is quite a balanced outcome. There is no one area that has outdone or given unique benefits but it is spread out between both credit and deposits. Credit grew by 8% YoY. Federal Bank did have businesses like gold loan parts of retail and parts of commercial banking did very well, in particular, gold loan had a remarkably good quarter it grew by 10% QoQ and 36 % YoY. Good credit growth in the higher-margin products and low-cost deposits resulted in 12% income growth YoY. CASA deposit ratio has moved from 30.5% to 32%, So, the 150 bps increase in CASA is driven by sequential growth of 7% in savings. It is an improvement consistent with what the bank has been working on for many quarters and that is why the interest income was at an all-time high of Rs 12,970 mn.
  • Outlook on PCL (provision for credit losses) ratio he said that he would like the coverage ratio including technical written off to be well above 70% and currently it at 75%. Everything depends on how the next 2-3 quarters shape up, given all that is going on in the environment and the challenges that we are all facing. The bank wants to keep coverage portfolio well covered much higher than the likely loss given default. He added that when the bank’s loss given default was in the early 40s, they had a coverage ratio closer to 47-48. When they visualized that the environment is getting stickier and the loss given default might go up, they took the coverage up to almost 59. Depending on how things shape up, Federal Bank will be well provisioned.
  • On the NPA (Non-performing Assets) he stated that we are all part of the same economy so we cannot be totally insulated from all the challenges that globally everybody is facing, given the COVID situation. Federal Bank’s portfolio generally is more secured and a relatively higher credit standard book. For very long, net NPA is at 1.22. In fact, it had a 20 quarter low. This gives confidence that the bank is better placed now to face the likely challenges that may arise over the next six months-nine months. The provisions have been made and will keep increasing the coverage at every available opportunity and post the moratorium liftoff when you can really make sense of how the credit books of everybody is performing, the visible impact will be in September-20 and in the December-20 quarter. He further added that he won’t be able to guess the exact level of deterioration but the bank is ensuring and is in continuous dialogue with customers and expects the deterioration to be manageable.
  • Comments on declining operating profits: The sequential number on operating profit may not reflect the reality because last quarter there was a significant one-off gain on the treasury and the sale of investments was not there in 1QFY21. Rs 9,320 mn of operating profit in 1QFY21 and Rs 9,590 mn in 4QFY20, both are by way of record, the highest the bank has ever done. But Rs 9,590 mn had some larger one-off gains because of the sale of investments which do not repeat itself. In that context, Rs 9,320 mn 1QFY21 is a more sustainable credible consistent number. Operating cost efficiency increase is the productivity drive of the bank. There are many elements of activity going on and that will continue to improve. The Bank is centralizing, standardizing, renegotiating, and deferring a bunch of stuff to maintain the costs.
  • Guidance on NIMs (Net Interest Margin) going forward: In the last three quarters, margins have been moving up sequentially between 4 bps one quarter 3 bps in the next quarter. In the normal course of events, a similar kind of rate of increase could be seen, but we are in a relatively low-interest environment. To that extent, margin expansion does not happen significantly. Second, as credit slippages increase which is likely to happen after the moratorium is lifted off, there certainly will be impairment which will have revenue impact as well. He said that he cannot comment on NIMs but expects to keep the current level of margins which is their top priority and number one effort. For improvement on this, we will have to see how things shape up.

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

  • The closing price of The Federal Bank was ₹ 52/- as of 17-July-20. It traded at 0.68x/0.62x the consensus BV estimate of ₹ 77/83.4 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 67.8/- implies a PB multiple of 0.81x on FY22E BV of ₹ 83.4/-.

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 Jul

What Risk Isn’t

Nick Maggiulli asks the investors what is the risk? Wikipedia defines it as “the possibility of something bad happening.” In the investment industry, we commonly associate risk with standard deviation, or how often an investment’s return varies from its average return.  More simply, if investment A has annual returns of +4%, +4%, +4% and investment B has annual returns of +4%, -9%, +19%, then investment B would be deemed “riskier” than investment A despite having the same long-term growth rate. But is the standard deviation the best definition of investment risk?  Not necessarily.

For any prudent investor, the difference between volatility and risk comes down to what is known versus what is unknown.  As Donald Rumsfeld once said: There are known knowns; things we know we know. There are known unknowns; things we know we do not know. But there are also unknown unknowns — things we don’t know we don’t know.

Volatility is a known unknown, while the risk is an unknown unknown. Volatility is a known unknown because though we cannot predict future volatility, we can make reasonable guesses about its future range. This is why Maggiulli doesn’t equate risk with volatility.  People will say that an investment is “too risky” for them, but what they usually mean is that it is too volatile.  Some investors prefer the predictability of bond income while others want the thrill of individual stocks, options, and leverage.  This isn’t about risk, but about the kind of expected returns, an individual investor prefers.

But, the risk is another beast entirely.  Because risk is about the things that happen that can’t be expected.  As Josh Wolfe has preached many times: Failure comes from a failure to imagine failure. That’s where risk lives. Maggiulli says that 2020 has made him realize that black swans (an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences) are the only kind of risk that matters.  Why?  Because they are the only kind of risk that can’t be prepared for, and, thus, the only kind of risk that can cause catastrophic loss.

Maggiulli asks so how do you prepare for something that can’t be prepared for?  You try the best you can.  Do scenario planning.  Have ample liquid savings.  Search for flaws in your investment hypotheses.  If you spend time to think about what is possible, then you might just be able to save yourself from some of these black swans. Yes, there will always be future scenarios that you can’t conceptualize or account for initially.  But, where is the harm in trying?  Because risk isn’t the possibility of something bad happening.  Risk is the possibility of something bad happening that you didn’t plan for.

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