30 Jan

Looking to raise equity & cash through restructuring – Habil Khorakiwala, Wockhardt

Update on the Indian Equity Market:

On Wednesday, Nifty ended 0.6% higher at 12,130. Among the sectoral indices, Nifty FMCG (+1.3%), Nifty Metal (+0.9%) and Nifty Auto (+0.8%) were the top gainers. Nifty Pharma ended the day marginally in the red. Tata Motors (+6.8%), Bajaj Finance (+5.1%) and Infratel (+3.4%) were the top gaining stocks while Eicher Motors (-4.5%), Yes Bank (-1.4%) and Dr Reddy (-1.4%) were the top losers.

Looking to raise equity & cash through restructuring – Habil Khorakiwala, Wockhardt

Excerpts from an interview with Habil Khorakiwala, Founder, Chairman and Group CEO, Wockhardt:

  • The company is looking to raise some equity and cash through a restructuring of the organization. There are alternatives on which the company is working.
  • The restructuring process would likely be completed in the next month.
  • The Q3 financial results of the company were recently released, and sales are up 9-10 percent compared to the previous quarter. Expense management over the last 9-12 months has resulted in significant operating cost reduction.
  • The 3Q margins (17.7%) are among the highest in recent times and a result of product mix. Despite spending heavily on both R&D and capex, there is a significant increase in EBITDA without R&D.
  • Addressing the liquidity issue, he said that last year the company has repaid ₹ 780 crore of its debt. The net debt increase period has been supported by the promoter. The new cash is to sustain drug discovery research programme and go into growth momentum in 2021.
  • They have completed most of the remediation measures at their Waluj facility and are in communication with the US FDA and hopeful of being on track as far as the US business is concerned.
  • There are three components to their India business: branded, generic, and active pharmaceutical ingredient (API) business. The branded business is down by less than a single digit. Though mostly discontinued, the generic business is showing a decline. The API business in India is down but up in the international markets.
  • Globally, their focus is on three-four areas. Their pharma business is important worldwide, including India. The research programme with the new chemical entity (NCE) is very important for the therapy area antibiotics. Third, the biosimilars are very important since new FDA guidelines has them thinking about entering the US market biosimilars segment. Last, due to technology advantage in formulation, the worldwide diabetic portfolio is a favorite.
  • Strategy for the antibiotic drug is marketing themselves in the US and India and looking for partners in the rest of the world.
  • Two of their molecules (EMROK (IV) and EMROK 0 (Oral)) have been approved by the Drug Controller General of India, which will be in the Indian market in the next three-four months. Another molecule, 5222 is entering phase-III clinical trial in the next few months.

Consensus Estimate:

The closing price of Wockhardt was ₹ 349 as of 29-January-20. The consensus estimate for EPS of Wockhardt is not available. Wockhardt reported a loss of ₹ 10.6 per share for FY19 and ₹ 13.8 for 9 months ending December 19 respectively.

 

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29 Jan

C&S Electric acquisition is margin accretive: Siemens: Sunil Mathur, MD & CEO, Siemens India

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 12,060 (-0.5% down its previous close).  The top gainers for the day were BPCL (+2.5%), HDFC (+1.6%) and Bajaj Finance (+1.2%). The stocks that were down in today’s session included Vedanta (-4.5%), Bharti Airtel (-4.4%) and Tata Motors (-3.2%). The sectoral gainers for the day were NIFTY Financial services (+0.3%) and NIFTY IT (+0.3%). The top losing sectors were NIFTY Metal (-2.4%), NIFTY Auto (-1.2%) and NIFTY Media (-1.1%).

Excerpts from an interview with Mr Sunil Mathur, Managing Director and Chief Executive Officer, Siemens India from Livemint dated 28th January 2020:

  • C&S Electric is an excellent acquisition for them. They are in a space that is a market for the future. Infrastructure is a huge market in India. A lot needs to be done and this is in the low voltage space of infrastructure.
  • They were present in low voltage but very strong on the industrial side. What they lacked was a presence on the infrastructure side.
  • They are looking at smart infrastructure as being a thrust area for them in the country and so this is perfect in that space. So, strategically it is a very good growth area and it is EPS accretive as well.
  • C&S Electric did about ₹1,200 cr in terms of revenue and profitability in the range of 10-15% in last year. They are growing very well.
  • They see a huge potential in this business not only from a domestic purpose but also from an export perspective. They see markets that are hugely competitive and what they would like to use this acquisition for is to also develop a manufacturing hub here and they can use them for design and manufacturing into low-cost markets outside the country.
  • The profitability is in the 10-15% range, and if we look at the multiples from that perspective, both the revenue multiples as well as the EBITDA multiples, they are very comparable to the Schneider-L&T deal as well as compared to a lot of the other deals in the same space.
  • It will improve RoCE because they are sitting on a lot of cash. They have ₹5,000 cr of cash. This is a ₹2,000 cr acquisition. So this should improve their RoCE and as it is margin accretive so it will help return on investment (RoIs) as well.
  • A lot of it depends on when they get the regulatory approvals and when they start up over there, but if we take a volume of ₹1,200 cr topline and take a 10% bottom line and we are already there. Of course, that is a starting point.
  • For export businesses, they will have to use their global network to start getting into customers and introducing their products to customers. So, they will build this up over a period of time but the potential is huge.
  • The multiples today are terrifically high and so they have got to balance all that together and see whether it makes sense or not.

Consensus Estimate: (Source: market screener website)

  • The closing price of Siemens Ltd was ₹ 1,502/- as on 28-January-2020. It traded at 49x/ 36x/ 31x the consensus earnings estimate of ₹ 30.5/ 41.7/ 48.6 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 1,462/- which implies a PE multiple of 30x on FY22E EPS of ₹ 48.6/-
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29 Jan

Rajiv Bajaj recommends 3 steps to revive growth in the auto industry

Update on the Indian Equity Market:

On Monday, NIFTY closed at 12,119 (-1.1% down its previous close).  The top gainers for the day were Dr Reddy (+5.6%), M&M Ltd (+1.9%) and CIPLA (+1.2%). The stocks that were beaten down in today’s session included Vedanta (-4.8%), Tata Steel (-4.7%) and JSW Steel (-4.3%). The only sectoral gainer for the day was Nifty Pharma (+1.5%). The top losing sectors were Nifty Metal (-3.1%), Nifty PSU Bank (-2.3%) and Nifty Bank (-1.3%).

Excerpts from an interview with Mr Rajiv Bajaj, MD, Bajaj Auto Ltd on CNBC-TV18 on 23rd January 2020:

  • Mr Rajiv Bajaj, MD, Bajaj Auto said if the auto industry has to be put back on 15 per cent growth track then the government would need to do three simple things:
  1. The mandatory insurance that was brought into play in September 2018, should be rolled back.
  2. Imposing the anti-lock braking system (ABS) on 150 CC or 200 CC scooters or motorcycles was complete overkill and he urges the government to consider recalibrating this to at least for 250 CC plus two-wheelers.
  3. At a time when goods and services tax (GST) for electric vehicles (EVs) had been correctly lowered to 5 per cent, the government should also consider lowering GST for petrol or diesel vehicles from 28 to 18 per cent.

However, if these things are not done, then he anticipates around 20% plus decline from March or April once BS-VI prices come into play.

  • The industry has been systematically done in by over-regulation. This over-regulation, whether it is of insurance or of safety norms and now BS-VI, has pushed up the cost of two-wheelers ranging from between 20% and 30%, depending on whether it is a small or a big vehicle. If one is going to have this kind of cost escalation in a 12-18-month period then it is bound to have an impact on volumes.
  • Sharing his rationale for why mandatory insurance should be removed, he said that people are riding all kinds of two-wheelers, people are living in all kinds of circumstances. If somebody is buying a little vehicle that can do no more than 50 kilometres an hour, and living outside the city, there is no crazy traffic and he doesn’t have to be overly concerned as long as he is wearing a helmet then that choice should be left to him.
  • When asked about rural demand growth and whether there are any signs of recovery, he said he doesn’t see any signs of that.
  • In terms of sales, according to him, January is slightly better than December because December was impacted by a huge pre-buying in October. January-February would be better.
  • The auto industry is going to continue to see a decline in volumes, manufacturers are also very concerned about the billing of BS-IV and how things may pan out because there are two views again, one is that in March, Companies will have a lot of pre-buying of BS-IV and the other view is that they may not.
  • He said three years back when they moved from BS-III to BS-IV they had to follow their competition that put out discounts ranging from Rs 7,000 to Rs 25,000. Bajaj Auto don’t make that kind of money on most of their motorcycles. So, it is better to produce BS-VI, to let go of BS-IV because if one is left with BS-IV inventory with the dealers then between the dealer and manufacturer, the manufacturers are going to suffer a lot of pain.
  • Most of the auto players will be selling only BS-VI vehicles from March – from the middle of March or so. Bajaj Auto would not want to carry BS-IV stock beyond the first week of March etc. The Company has planned their production accordingly. Thus, he added saying, “If that means we are going to lose some share in March because competition will have heavy discounts on BS-IV vehicles and push up their share for the month, we are not playing that game”.
  • According to him, BS-VI models are going to be 15-20% more expensive which means a definite decline in the volumes. Thus, nobody knows the exact degrowth number but it is going to be very significant.

Consensus Estimate: (Source: market screener website)

The closing price of Bajaj Auto Ltd was ₹ 3,082/- as on 23-January-2020. It traded at 18.2x/ 17.0x/ 15.3x the consensus earnings estimate of ₹ 170/ 182/ 202 for FY20E/ FY21E/ FY22E respectively.

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27 Jan

For the next 3 years, we will set aside Rs 90,000 mn Capex, says Hari Mohan Bangur, Managing Director, Shree Cement

Update on the Indian Equity Market:

On Friday, Sensex ended up 227 pts higher and ended at 41,614 level and Nifty settled 68 pts higher at 12,248 level.  Pre-budget rally and decent Q3FY20 results throughout the day were the biggest factors driving the markets.

Among the sectors, Nifty Media (+1.0%), NIFTY Metal (+1.0%), NIFTY Financial Services (+0.9%) and NIFTY Bank (+0.8%) were the top-performing indices. All the key indices settled in the positive territory barring Nifty IT and Pharma indices. Among stocks, Powergrid, Cipla, Tata Motors and IndusInd Bank were among major losers on the Nifty, while gainers were AU Small Finance, Yes Bank, Ultracemco, Britannia and Tech M.

For the next 3 years, we will set aside Rs 90,000 mn Capex, says Hari Mohan Bangur, Managing Director, Shree Cement

Edited excerpts of an interview with Hari Mohan Bangur, Managing Director, Shree Cement; dated 24th January 2020:

  • Shree Cement is the country’s second-largest cement producer. It backed out of the race to acquire Emami Cement as it wants to focus on organic growth.
  • Company has raised Qualifies Institutional Placement (QIP) for the first time since listing decades ago.
  • The funds raised via QIP will be used to fund capacity expansion planned over a period of six years, a part of it will also be from internal accruals. The amount raised and the internal generation are expected to suffice the planned growth.
  • Shree Cement is a zero debt company and expects to maintain the status.
  • The expansion strategy or the target of the company is to reach at least 55 mn tonnes per annum (mtpa) by FY23. The current installed capacity is 41.9 mtpa and it will go up to 75-80 mtpa in the next six years. More capacities will come in North, East and South India where Shree Cement already has a strong presence and clinkerisation units.
  • The capex for the next 3 years is expected to be around Rs 90,000 mn. The capex projection for the next 6 years is difficult to say as it depends on many factors like USD behavior and market position.
  • Organic growth will be the prime focus for Shree Cement. As organic growth takes time, planning is started early. Presently, various projects are at different stages, some of which had started 10 years back.
  • If acquisition is available at reasonable cost it can be looked upon. Acquisition depends on the infrastructure in totality. USD 75-80 per tonne is the cost of putting a new unit, anything near to this rate or cheaper can be looked as an acquisition opportunity.
  • There is no competition between Ultratech and Shree Cement as they are growing at their own speed and their speed doesn’t challenge Shree Cement even though both are in the same business.
  • World GDP growth rate will be less than 3% and even with revised growth estimates, India’s GDP growth will be more than that.

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

  • The closing price of Shree Cement was ₹ 23,180/- as of 24th January 2020. It traded at 52x/ 41x/ 34x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 445/565/674 respectively.
  • Consensus target price of ₹ 19,917/- implies a PE multiple of 30x on FY22E EPS of ₹ 674/-.
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26 Jan

Why a Bull Market Ends

Jon writes about this on his blog. When? That’s what everyone wants to know. The answers to why a bull market ends come pouring in the second the when is confirmed. But the explanations why are usually complex. They certainly won’t help anyone predict the next turn. They’re often secondary, or scapegoats, to what really happened.

Peter Bernstein offered a simple answer to what triggers the end of all bull markets: What was the secret ingredient that kept investors buying and buying at higher and higher prices? Was it the myths that this market, like all bull markets, created to justify itself? Although the myths helped keep the pot boiling, the basic explanation for the bull market’s longevity and vitality in the face of so much economic difficulty is simpler, more fundamental, and more easily generalized. The same simple, fundamental explanation applies to the bull market’s sorry end as well.

The common thread that runs through all equity bull markets is confident expectations of higher earnings ahead. The common thread that ties the onset of all bear markets together is the loss of those confident expectations of higher earnings ahead. History shows us, over and over, that bull markets can go well beyond rational valuation levels as long as the outlook for future earnings is positive.

Bull markets require economic slack so that companies can grow, and positive trends in real business activity to take advantage of that slack. Remember, stock prices show no consistent relationship with interest rates, exchange rates, inflation rates, budget policy, monetary policy, or any of the other things professionals love to discuss. These forces matter only when they matter to the future movement of corporate earnings. Those same irrational valuations that seem to defy gravity spur the “myths” that get investors into trouble. The big mistakes — overconfidence, trivializing risk, chasing returns — can leave investors under-protected for what inevitably comes next. Overpaying for (optimistic) future earnings never ends well.

Jon concludes that the important thing is to recognize the role confidence has on market prices and the obvious risk of getting caught up in the excitement.

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24 Jan

Zee Entertainment: Margins will improve once ad revenues bounce back.

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green with 0.6% gains.  The gains were led by YESBANK (+6.6%), IOC (+5.9%), GAIL (+2.8%). The stocks that were beaten down in today’s session included ZEEL (-7.2%), UPL (-3.9%) and CIPLA (-1.4%). Most of the sectoral indices ended positive lead by REALTY (+2.1%), PSU BANK (+1.2%) and BANK (+1.0%). MEDIA (-2.1%) was the only sector that ended in the red.

Excerpts from an interview with Mr Rohit Gupta, CFO, ZEEL that aired on CNBC-TV18 on 22nd January 2020:

  • ZEEL reported 3QFY20 numbers. The growth in subscription revenue continued to be strong at 21.7% for 3QFY20 and 31.0% for 9MFY20. The economic slowdown and weakness in consumer sectors led to a decline in advertisement revenue.
  • In the last 5 years, ZEEL’s advertising revenue has grown at a CAGR of 16% while the topline growth has shown a CAGR of 12%. EBITDA also doubled in the same period.
  • Current year’s advertising revenue is impacted by 2-3 factors.  Two of ZEEL’s Free-to-air channels have become paid channels and removal of free dish had an impact of 500 bps. Also, in 3QFY19, the revenue growth was 20% on back of 30% growth in 3QFY18. On such high base, the decline this time is high at -15%. Advertising revenue should come back in the next 2-3 quarters.
  • After TRAI’s new tariff order last year (NTO 1.0), ZEEL has grown stronger. The reasons being very strong customer connect and brand pull of channel. The implementation of the NTO 1.0 has not completed a year yet and industry is still in a stabilizing phase for the entire subscription revenues. However, NTO 1.0 has been good both for consumers and industry.
  • ZEEL has been working on improving their balance sheet. The cash and equivalents have improved from 1,479 cr to 1,767 cr in 3QFY20. Management is working on improving FCF and PAT to cash conversion ratio. They expect to improve both in excess of 50% in the coming year.
  • ZEEL’s margins have been in excess of 30% for many quarters. However, 3QFY20 margins were lower than 27%.  The management says margins will improve as the advertising revenue bounces back.

Consensus Estimate: (Source: market screener website)

  • The closing price of ZEEL was ₹ 279/- as on 22nd January 2020. It traded at 15.9x/ 13.5x/ 12.6x the consensus earnings estimate of ₹ 17.6/ 20.7/ 22.2 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price is ₹ 334/- which implies a PE multiple of 15.0x on FY22E EPS of ₹ 22.2/-

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23 Jan

Growth is bound to come – Shyam Srinivasan, Federal Bank

Excerpts from an interview of Mr Shyam Srinivasan, MD & CEO, Federal Bank with CNBC TV-18 dated 21-01-2020:

Update on the Indian Equity Market:

On Wednesday, NIFTY closed -0.5% lower. Among sectoral indices NIFTY Metal (-1.5%), NIFTY PVT Bank (-1.0%), NIFTY Auto (-0.9%) closed lower. While Nifty Media (1.7%), NIFTY IT (+1.0%), NIFTY FMCG (+0.02%) closed on a positive note. The biggest gainers were Zeel (+4.9%), Grasim (+2.6%), Nestle (+1.8%) whereas ONGC (-5.3%), Cola India (-5.2%) and NTPC (-3.9%) ended with losses.

  • It was a weak third-quarter for Federal Bank as loan growth and net interest margins came in at an all-time low.
  • Mr Srinivasan says, there are no significant issues except for the two housing accounts which are under stress. Other granular businesses are showing marked progress and it will continue.
  • He says they don’t have a single case above 100 cr which is dodgy and therefore the outlook is positive.
  • Speaking about their non-corporate book, he says, their portfolio is significantly secured. Banks that celebrated unsecured success over many quarters had the gains and now have to face some pain.
  • As the portfolio is secured, between now and next 3-4 quarters, the bank does not expect any large formation of stress on the secured side unless property prices get crash.
  • On loan growth, he says, retail is looking north of 24-25 per cent. The large tickets are okay, so the blended margins as the bank exit FY20 will be between 14%- 15%.
  • The gold loan book is expected to grow at 25%. The bank is also gaining share in the auto loan segment, particularly in Mumbai, Kerala and south.
  • Agriculture is seeing pain across banks due to waivers announced by various states.
  • He says growth is bound to come. It cannot keep the system in paise mode. So, the focus will be on getting credit cost down.

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

  • The closing price of Federal Bank was ₹ 93.70/- as of 22-January-20. It traded at 1.2x / 1.1x / 1.0x the consensus Book Value for FY20E / 21E / 22E of ₹ 73.0/81.5/90.6 respectively.
  • Consensus target price of ₹ 112/- implies a Price to Book multiple of 1.2x on FY22E Book Value of ₹ 90.6.
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22 Jan

BFSI and retail will drive growth in the medium and long term: TCS

Update on the Indian Equity Market:

The markets continued the downward trajectory on Tuesday with the Nifty falling 55 points to close at 12,170. Monday’s fall was on the back of a combination of selling pressure from the DII and muted participation by FIIs. Within the index, some of the stock movements were a reaction to the quarterly results declared by the company. Within the sectoral indices, only Media (2.2%) closed the day in green while REALTY (-1.5%), AUTO (-1.4%) and METAL (-1.4%) led the laggards. Within the index stocks, INFRATEL (8.6%), ZEEL (4.5%) and BPCL (1.4%) were the top gainers whereas TATASTEEL (-3.3%), M&M (-2.9%) and TATAMOTORS (-2.4%) were the top stocks that ended in the negative.

Excerpts from an interview with Mr Rajesh Gopinathan, CEO – TCS. The interview aired on CNBC-TV18 on 20th January 2020.

  • TCS declared 3QFY20 results with a YoY increase of 0.2% in consolidated net profit at ₹ 81,180 mn. In this interview, he discussed the third quarter performance and the outlook in detail.
  • He is hopeful of sustaining margins at around 25 percent going forward on back of their strong delivery model. The company has been investing continuously in the organic talent building capability and over time, the investment into the group of 5-12 year old people has been significant. This has been going for on for last five- six years. He believes that the pool is now very strong and there is an opportunity to expand the base.
  • The company is aspiring to achieve margins of 26%. To achieve the target, the combination of operational elements and the currency needs to be supportive. Both the things came together in the 3QFY20. The currency will remain volatile. However, he believes that the way things are moving, probably that will also be supportive of the medium-term.
  • He said that the medium to long term growth trends will be based on BFSI and retail because the rest of the verticals are firing all cylinders. They are all well into the double digit space. In BFSI & retail, the company is observing very diverse performance across geographies and sub-segments. The weakness can be isolated down to the large banks and the large retailers in US and UK. The company is not losing wallet share in these geographies but it is the sub-segment that forms large part of the base business.
  • In terms of addition to headcount, he said that it is 23,500 this year, same as last year. The hiring was front-loaded during the current year.
  • In the retail space, more traditional retailers seem to be finding their groove. In the US, the players like Best Buy and Walmart are doing significantly better and standing up to the pure online players very well. He believes that the company will revert back to double digit growth in the retail segment.

Consensus Estimate (Source: market screener website)

  • The closing price of TCS ₹ 2,170/- as of 21-January-2020. It traded at 25x / 23x / 21x the consensus EPS for FY20E / 21E / 22E of ₹ 88.0/ 96.1/ 104.0 respectively.
  • Consensus target price of TCS ₹ 2,108/- implies a PE multiple of 20x on FY22E EPS of ₹ 104.0.
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21 Jan

Focus on medical value travel in the Union Budget- Suneeta Reddy, MD, Apollo Hospitals

Update on the Indian Equity Market:

After a volatile session, the Nifty closed 1 percent lower at 12231. This decline was the biggest in three months. The Nifty Realty (+0.4%) was the only sectoral index which ended the day in the positive. Nifty Media (-1.9%), Nifty PSU Bank (-1.6%), Nifty Pvt Bank (-1.6%) and Nifty Bank (-1.6%) were amongst those that ended in the red. Powergrid (+3.0%), Infratel (+1.6%) and Bharti Airtel (+1.4%) were the top gainers. Kotak Bank (-4.8%), Zee Entertainment Enterprises (-4.2%) and IOC (-4.1%) were the top stocks that ended in the negative.

Focus on medical value travel in the Union Budget- Suneeta Reddy, MD, Apollo Hospitals

Excerpts from an interview with Ms Suneeta Reddy, MD, Apollo Hospitals published in Livemint on 20th January 2020:

  • The utilization of proceeds from Apollo Munich transaction is definitely going to debt reduction. The stake sale proceeds received by the family after-tax is ₹ 980 crore and Apollo will get around ₹ 250 crore.
  • They will end the quarter in January with 28% promoter pledging and over the next two years, hope to bring it down to 10%. The cash flows from the education vertical will help bring down the pledge. The free cash flows from the education segment will help reduce the debt, so there won’t be a need for further promoter stake sale.
  • Gross debt will be around ₹ 2,900 crore and net debt will be around ₹ 2,500 crore this year.
  • The process of restructuring the pharmacy business is expected to happen in the next three months and it would generate ₹ 300 crore.
  • Although the focus is on debt reduction, the focus will also be on consolidating the assets and improving asset utilization. The replacement capex is about ₹ 250 crore.
  • They currently operate at 8.5% margin levels and are hoping to move to 14% over the next two quarters.
  • The new hospitals are operating at 21% EBITDA margin which is expected to move up 100 basis points (bps), through improvement in the quality of revenue. An 8% volume growth in this region is also expected.
  • There has been a growth of 22-24% in the pharmacy business. The EBITDA margin, currently at 5.4% are expected to improve on the back of new store additions and the old stores maturing.
  • Moving to the clinic segment which turned profitable for the first time in Q2, the 250 diagnostic centres will drive the growth in this segment, and will contribute to Apollo Hospital’s bottom-line.
  • The proton therapy segment, which is the first facility opened in South East Asia, will break even in the second year. Having finished 100 patents, there is a waiting list of patients and about 30 percent of the patients are overseas patients.
  • 12% of revenues of Apollo Hospitals comes from foreign patients. Since the budget is around the corner, she believes the focus will be to help hospitals and improve their margins. The focus will also be on infrastructure spending and there might be some incentives for hospitals to put up new infrastructure or add to the existing facilities.

Consensus Estimate (Source: market screener website)

  • The closing price of Apollo Hospitals as on 20-January-2020 was ₹ 1632/-. It traded at 61.6x / 45.3x / 32x the consensus EPS estimate for FY20E/21E/22E of ₹ 26.5/ 36.0 /51.1 respectively.
  • Consensus target price of ₹ 1667/- implies a PE multiple of 32.6x on FY22E EPS of ₹ 51.1.
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20 Jan

Repayment rates for all our loan portfolios very healthy: Chandra Shekhar Ghosh, Bandhan Bank

Update on the Indian Equity Market:

On Friday, NIFTY closed lower at 12,352. Among sectoral indices NIFTY Pharma (+1.7%), NIFTY Auto (+0.4%), NIFTY Media (+0.4%) closed higher. NIFTY Bank (-0.8%) and NIFTY Pvt Bank (-0.8%) were the losers. The biggest gainers were Bharti Airtel (+5.5%), Dr. Reddy (+3.0%) and Reliance (+2.8%) whereas Infratel (-11.1%), IndusInd Bank (-2.6%), and GAIL (-2.1%) ended with losses.

Excerpts from an interview of Mr Chandra Shekhar Ghosh (MD & CEO), Bandhan Bank with Economic times dated 15-01-2019:

  • There are two factors for profit growth; one is that they have controlled the non-performing assets. The repayment rates for all their loan portfolios have been very healthy which contributes directly to the interest income.
  • The second factor is their reach in rural areas, which at 70% while other private banks which have average deployments of 27%. Most of their business is in areas where costs are minimal, which is an advantage for them.
  • In his visits to most of their rural centres, he did not see any impact of the slowdown. There are talks at the top level, but at ground level, it is totally different.
  • They were a bit conservative in growing their books in the first three quarters. According to him, the next quarter the growth will normalize because the last quarters are generally strong.
  • They have taken a small portion of the reserves (₹200 crore) for additional provisioning due to political uncertainty as there have been talks of political unrest.
  • Normal repayment rates are above 98% on microfinance loans while in Assam it is over 99%. Three weeks ago, the repayment rates dipped to 78% in Assam because people couldn’t reach banks due to roadblocks and curfews. Within two weeks, it came back to above 93%.
  • About 16% of their microfinance loan book is in Assam. In some corners, there has been some political turmoil. They have made the provisions.
  • Penetration of housing loans is still low. They see opportunities in this segment.
  • MSME is a good market. However, there needs to be proper documentation by these businesses for banks to gauge repayment abilities and offer credit. Once awareness of these important aspects of documentation is spread, it’ll turn into a good opportunity.

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

  • The closing price of Bandhan Bank as on 17-January-2020 was ₹ 481/-. It traded at 4.9x / 3.9x / 3.2x the consensus Book Value for FY20E / 21E / 22E of ₹ 97.5/ 123.0/ 151.0 respectively.
  • Consensus target price of ₹ 641/- implies a Price to Book multiple of 4.2x on FY22E Book Value of ₹ 151/-

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