26 Nov

Entering Mutual Fund Space to Cater to Customers’ ‘Changing Needs’ – Muthoot Finance CFO

Update on the Indian Equity Market:

On Monday, Sensex ended higher across-the-board buying and US-China trade talks optimism, Sensex gained 530 pts and Nifty ended at 12,079. News reports that China and the United States were ‘very close’ to a phase one trade deal, boosted investor sentiment further.

Among the sectors, all but media stocks ended in the green. Metal stocks rallied the most on renewed hopes of positive developments in US-China trade talks. The Nifty Metal index climbed over 3 per cent to 2,599 levels. Auto and Pharma stocks were next on the list. On the downside, Nifty Media index slipped over 1.5 per cent to 1,946 levels.

Among stocks, Bharti Airtel (up 7 per cent) emerged as the top gainer on the index while ONGC (down over 2 per cent) was the biggest loser. 

Entering Mutual Fund Space to Cater to Customers’ ‘Changing Needs’ –  Muthoot Finance CFO 
Key takeaways from the interview of Mr Oommen K Mammen, Chief Financial Officer, Muthoot Finance; dated 25th November 2019:

  • When asked about entering into the Mutual Fund space Mr Mammen said that Muthoot Finance Ltd.’s foray into mutual funds by acquiring IDBI Asset Management Ltd. will help cater to the changing needs of its two lakh customers.
  • Mammen told in an interview that if they don’t provide alternative investment products, customers might look into other opportunities.
  • He  stated that offering mutual fund options will help take care of their customer’s changing needs.
  • According to Mr Mammen, Mutual funds are the best asset class.
  • The acquisition worth Rs 2,150 mn is subject to regulatory approval and is expected to be completed by February next year.
  • Muthoot Finance will purchase 100 per cent equity shares of IDBI AMC and IDBI MF Trustee Company for a total consideration of Rs 215 crore, according to exchange data. IDBI Mutual Fund has an asset base of over Rs 5,300 crore. Muthoot Finance will acquire 66.67 per cent stake in IDBI AMC from IDBI Bank and 33.3 per cent from IDBI Capital Market & IDBI Securities.

Consensus Estimate (Source: market screener website)

  • The closing price of Muthoot Finance was ₹ 685/- as of 25-November-19 and traded at 10.5x /9.6x /8.2x the consensus EPS for FY20E / 21E / 22E of Rs 65/71/84 respectively.
  • Consensus target price of ₹ 765/- implies a PE multiple of 9x on FY22E EPS ₹ 84/-.
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25 Nov

Bandhan Bank: Assets Under Management in North-East is low

Update on the Indian Equity Market:

The markets ended the weak on a negative note as NIFTY settled 54 points lower at 11,914. Among the sectoral indices, METALS (2.1%), MEDIA (2.0%) and AUTO (0.4%) topped the chart whereas IT (-1.9%), BANK (-0.8%) and PVT BANK (-0.7%) pared the gains. Within the index stocks, TATASTEEL (4.2%), EICHERMOT (4.1%) and ZEEL (3.1%) led the index higher whereas INFRATEL (-4.1%), INFY (-2.9%) and TCS (-2.4%) were the laggards.

Bandhan Bank:  Assets Under Management in North-East is low

Key takeaways from the interview of Mr Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank  dated 22nd November 2019 published in LiveMint:

  • Mr Ghosh started the interview with his remarks on the current situation in Assam. He said that the bank is operating in Assam for the last 13 years. Two out of 30 districts in the state are being protested by some women, backed by political groups for certain demands. 2-3% of the total loan book of the bank is from those districts.
  • He stated that the protests started two weeks ago. They are demanding three things. First, to lower interest rate. The micro-finance industry is totally regulated by the Reserve Bank of India (RBI). The Apex banks cap the interest rates. The interest rate charged by Bandhan is 17.95%. This is low as compared to the cap provided by RBI.
  • The second demand is to have an agreement on loan applications in the local language. On this issue, Bandhan is specific in using language for all applications.
  • Third, they want the government to monitor these types of activities. He mentioned that it is a good step and is manageable.
  • The micro-credit portfolio in Assam is 18% of the total loan book. The bank has experienced such kind of issues in some corners of states. He is confident that everything becomes normal in a few weeks’ time.
  • Bandhan measures its growth based on the number of new customers, not on the basis of AUM. The bank has added 20% new customers compared to last year. He is confident to be able to sustain that growth.
  • On being asked about diversifying in new areas, he said that the bank is already diversified. Bandhan is present in 34 states and union territories (UT) as a bank. By micro-credit, it is present in 29 states and UT.
  • About GRUH merger, he said that currently, GRUH operates through 195 branches that were opened earlier. From day one, 106 out of 1,009 Bandhan branches have opened GRUH housing loan desk. In a similar way, Bank is driving the affordable housing loan to citizens in West Bengal, Bihar, Jharkhand and Assam. This will help the Bank to diversify its portfolio.

Consensus Estimate (Source: market screener website)

  • The closing price of Bandhan Bank was ₹ 526/- as of 22-November-19. It traded at 5.3x/ 4.2 x/ 3.5x the consensus BV estimate for FY20E/ FY21E/ FY22E of ₹ 97.7/ 124.0/ 152.0 respectively.
  • Consensus target price of ₹ 636/- implies a PB multiple of 4.2x on FY22E BV of ₹ 152.0/-.
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23 Nov

The Price of Excellence

Jon writes on his blog that some people happily pay a premium for quality. If you think a product — like iPhones, designer bags, or shoes — is higher quality, it might be worth paying more. Sometimes you actually get more than your money’s worth. Other times, the premium is the cost of being associated with the logo. It’s no different from stocks. Investors pay a premium for stocks labelled “quality” or “excellent.” Sometimes, it’s worth it.

In 1987, Michelle Clayman tested the performance of so-called “excellent” companies based on fundamentals relayed in the book In Search of Excellence. The book labelled 36 publicly traded companies as “excellent” based on specific fundamental criteria: asset growth, equity growth, return on capital, return on equity, return on sales, and price to book. At the same time, she tested 39 “disaster” companies. These were the worst companies based on the same criteria. Over a five year period, the disaster companies beat the excellent companies handily! This result was repeated over studies conducted by Barry Banister over a longer period of time.

Here’s how Clayman explained the unexpected results: Over time, company results have a tendency to regress to the mean as underlying economic forces attract new entrants to attractive markets and encourage participants to leave low-return businesses. Because of this tendency, companies that have been “good” performers in the past may prove to be inferior investments, while “poor” companies frequently provide superior investment returns in the future. The “good” companies underperform because the market overestimates their future growth and future return on equity and, as a result, accords the stocks overvalued price-to-book ratios; the converse is true of the “poor” companies.

Banister concluded that while financial “excellence” is a laudable management achievement, he found that it tends to produce a high-priced stock with the potential for downward mean reversion. It is his view that a more rewarding investment strategy over time is the purchase of a portfolio of equities in financially solvent companies whose abysmal growth record of late has washed the last glimmer of hope out of the stock price. As the “Un-Excellent” companies revert to the mean, their stock performance is anything but average.

Jon concludes that the market is a popularity contest driven by short-term thinking. Short-term thinking would suggest that great companies will continue to do great and poor companies will continue to do poorly and nothing will change that. The reality is far different. Poor companies may never become great or even good companies, but their fundamentals mean revert. The same happens to good (and most great) companies too. In the long run, the market reflects it in prices.

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22 Nov

Corporation Bank: Margins to expand on recoveries

Excerpts from an interview of Ms P.V. Bharathi, Managing Director, and Chief Executive, Corporation Bank with CNBC-Tv18:

Update on the Indian Equity Market:

On Thursday, NIFTY closed -0.3% lower. Among sectoral indices, NIFTY Metal (-2.2%), NIFTY Auto (-1.0%), and NIFTY FMCG (-0.6%) closed lower. While NIFTY Media (+4.1%), NIFTY Realty (+0.6%) and NIFTY Financial services (+0.3%) closed on a positive note. The biggest losers were BPCL (-6.0%), Coal India (-3.4%), Tata Steel (-3.3%) whereas Zee (+11.7%), Eicher Motors (+2.1%) and Dr Reddy (+1.4%) ended with gains.

  • Speaking about Essar steel judgement Ms P.V. Bharathi said that the Essar recovery which was long pending has now come. The bank expects that by November 2019 around ₹1,300 crore will be coming in.
  • The bank had already targeted recovery of ₹ 6,000 cr, including National Company Law Tribunal (NCLT) recoveries.
  • In the Essar Steel case, the bank has already provided 100% in respect of this account, so the entire amount of recovery will help to improve profit. In this process, the net interest margins (NIMs) will also increase by 40-50 bps.
  • The bank’s exposure to Bhushan Steel is small, it is ₹150 cr. The bank has around ₹2,500 cr exposure to Videocon.
  • The recoveries will increase profit; for the first half of the year net profit was up 24%.
  • Total profit by the end of FY20 would go up to ₹2,000 cr out of which ₹1,300 cr will directly come from recoveries.
  • The NPAs are less than 6%, the bank has been able to bring it down to 5.59% and by the end of FY20, it will be near 5.3%.
  • The targeted loan growth is ₹1,30,000 cr and at the beginning of the year, it was around ₹1,20,000 cr. The bank has targeted 60% growth in RAM (Retail, Agri and MSMEs) and 40% in corporate.
  • Speaking about the merger, Ms P.V. Bharathi said that it is expected to take place from 1 April 2020, once the process of valuation is over then swap ratios will come out.
  • Ms P.V. Bharathi says this is peak period for retail home loan growth as well as vehicle growth.
  • The total exposure to private sector NBFCs is ₹4,000 cr and the  exposure to Dewan Housing Finance Corporation is around ₹500 cr.
  • The bank has factored in around ₹750 cr of slippages in third quarter, last quarter it was ₹950cr.

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21 Nov

“Royal Enfield’s looking to create a new product every quarter”- Vinod Dasari, CEO, Royal Enfield

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 0.5% higher at 11,999. Zee Entertainment (+8.1%), Sun Pharma (+5.3%) and IndusInd Bank (+4.9%) were the top NIFTY50 gainers. Infratel (-3.2%), IOC (-1.5%) and Kotak Mahindra Bank (-1.4%) were the top NIFTY50 losers. Among the sectors, NIFTY Pharma (+3.3%) and NIFTY Media (+3.2%) were the sectoral indices that closed positive. NIFTY Realty (-1.5%) and NIFTY PSU Bank (-0.7%) were the worst-performing sectors.

Excerpts from an interview with Mr Vinod Dasari, Chief Executive Officer, Royal Enfield published in  Livemint on 20th November 2019.

  • He looks at downturn or short term difficulties as a blessing in disguise and according to him, one should never let go of a downturn as an opportunity.
  • Looking at the long-term picture, whether it is their processes or manufacturing plant, they continued with the capex and completed it.
  • Vallam phase II is done now, they have the capacity of a million bikes, they are not going to build any new big plants anytime in near future.
  • The first strategy that they had is that they connected marquee rides to their hobbies. Every rider can do something to support a cause. So, when one thinks about Royal Enfield rider, one thinks of a gentler soul.
  • The second major thing was making the stores much more accessible. Over the last ten years, there were 900 outlets across the country and mostly in cities but they came up with this concept, a Studio Store and they initially planned to put up around 200 stores during the year.
  • But by October, they put up 500 and those are doing extremely well. More than 90% of them are profitable within two months. That has increased the reach and more and more people who are worried about not getting service they now want to do.
  • Historically, whatever Royal Enfield was making was selling. When the downturn came, it was a blessing in disguise. They thought why they should make this and tell the customer you must buy this, they will make whatever is available for customers to choose. So customer chooses the colour, the branding etc.
  • In November 2019, they launched ‘Make-Your-Own’. This is the first time in the world somebody can actually – on their mobile phone choose graphics, choose accessories, choose all of that and the order goes directly to the factory. So they brought down stock so much, they have less than three weeks stock now.
  • In our country like many other places, a lot of things happen on sentiment. When they see that they had a record retail sale that helped boost the morale, reduce inventory, our dealers are excited.
  • All those 500 studio stores that they have, 100% of them were done by existing dealers. That shows the confidence their dealers have in Royal Enfield and the product plans and things that they are willing to do.
  • 90% of their sales were coming from products sold in India, less than 5% was from outside; this is a year ago, and less than 5% was from the aftermarket. In the long term, they will significantly want to grow that percentage from outside India and as much they get from the aftermarket.
  • They had 900 stores in India, they have 600 outlets outside India, and in places like Barcelona, Madrid, Paris, London, all of these places where people go and visit and they see a Royal Enfield and they say this is our country’s product and I should buy it in India or wherever they go from.
  • They are proud of the fact that an Indian company based in Chennai exporting worldwide and giving riding experience worldwide.
  • The CKD plant will be announced shortly in the next few months. It is very small; it is maybe a USD 1 million investment. So, no plan changes.
  • Good thing is even though they had a 20% volume drop in wholesale, revenue drop was only 9% and that was because they had newer products like the Interceptor with much higher average selling price than compared to a Bullet.
  • They have had growth in the export market that has a much higher revenue base. So, according to him, they will not see a 10% growth, but they will continue to try and do as well as they did last year.

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

  • The closing price of Eicher Motors Ltd was ₹ 21,485/- as of 20-November-2019. It traded at 28x/ 25x/ 22x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 774/ 870/ 998 respectively.
  • Consensus target price of ₹ 20,606/- implies a PE multiple of 21x on FY22E EPS of ₹ 998/-.

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20 Nov

SBI: FY20 expected to be the big year of recoveries for the banking sector

Update on the Indian Equity Market:

On Tuesday, NIFTY closed marginally higher at ~11,940 points (+0.5%). In the sector-wise performances, PSU BANK (+3.9%) was the best performing sector while METAL (-0.9%) was the worst-performing sector. Amongst the NIFTY 50 Stocks, INFRATEL (+11.0%), BHARTIARTL (+8.7%), AXISBANK (+3.7%) and RELIANCE (+3.6%) were the top gainers while YESBANK (-2.5%), M&M (-2.1%), ZEEL (-2.1%) and TCS (-2.0%) were the worst performers.

SBI: FY20 expected to be the big year of recoveries for the banking sector

Key takeaways from the interview of Mr Rajnish Kumar, Chairman of State Bank of India (SBI); dated 19th November 2019 on CNBC-TV18:

  • The Supreme Court recently set aside the July 4 order of the National Company Law Appellate Tribunal (NCLAT) approving ArcelorMittal’s Rs 42,000-crore bid for acquiring debt-laden Essar Steel. The bench clarified that financial creditors enjoy primacy and the adjudicating authority cannot interfere with the decision approved by the committee of creditors.
  • Talking about the Supreme Court (SC) decision, Mr Kumar said that it was a big positive and he expects the Essar deal to conclude by the end of November 2019.
  • He is of the opinion that this was a landmark judgement, upholding the validity of the rules, laws, as per the Insolvency and Bankruptcy Code (IBC) Act and the recent amendments carried out by the Government of India (GoI) almost in entirety. SC made only one change; it removed the mandatory 330-day period. In case of unusual circumstances, National Company Law Tribunal (NCLT) can relax or allow the time for a resolution plan to be implemented even beyond 330 days. 
  • Mr Kumar expects FY20 to be the year of recoveries for the banking sector with Essar Steel (~₹ 42,000 cr) judgement and the likes of Bhushan Power and Steel (~₹ 20,000 cr), Ruchi Soya and others (where the banking system’s exposure to each is ~ ₹ 5,000-8,000 cr) being lined up for under IBC.
  • The government introduced rules to resolve cases involving finance companies under section 227 of the IBC.  The Reserve Bank of India (RBI) has been vested with the power and, in consultation with the concerned ministry in the government, they can notify which company to be taken to the NCLT.
  • No financial creditor can take any Non-Banking Financial Company (NBFC), Housing Finance Company (HFC) to NCLT. The power vests with the regulator (the RBI, in this case) to identify in consultation with the central government. It will take the matter u/s 227 to the NCLT and appoint an administrator. Once the NCLT has admitted the case, then the committee of creditors’ concept will come in. The rules also talk of an advisory committee. There will be clarity on this when a case is actually taken up.
  • Coming back to the Essar judgement, Mr Kumar mentioned that SBI has fully provided for the outstanding amount. Thus, any recovery will directly be recorded in the quarters’ profit and loss statement.

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

  • The closing price of SBIN was ₹ 327/- as of 19-November-19. It traded at 1.3x / 1.2x / 1.0x the consensus Book Value for FY20E / 21E / 22E of ₹ 251/ 280/ 319 respectively.
  • Consensus target price of ₹ 366/- implies a Price to Book multiple of 1.1x on FY22E Book Value of ₹ 319/-.
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19 Nov

Essar Steel Judgement Discussion by panel

Update on the Indian Equity Market: 

On Monday, NIFTY50 ended marginally negative at 11,884 (-10 bps). Bharti Airtel (+4.6%), Tata Steel (+4.4%) and UPL (+3.7%) were the top NIFTY50 gainers while Yes Bank (-4.3%), Bajaj Auto (-2.0%) and Britannia (-1.7%) were the worst-performing NIFTY50 stocks. NIFTY Metal (+1.8%), NIFTY PSU Bank (+1.4%) and NIFTY Pharma (+1.2%) were among the gainers. NIFTY AUTO (-0.4%), NIFTY FMCG (-0.4%) and NIFTY Financial services (-0.1%) were the top losing sectoral indices.

Essar Steel Judgement Discussion by the panel
Excerpts from the interview of Mr Rashesh Shah, Chairman and CEO, Edelweiss Financial Services; Mr Arijit Basu, MD, State Bank of India; Mr Bahram Vakil, founding partner, AZB & Partners; and Mr Shardul Shroff, executive chairman Shardul Amarchand Mangaldas & Co and dated 18th November 2019. Source: Livemint

The Supreme Court’s judgment awarding Essar Steel Ltd to Arcelor Mittal has strengthened the Insolvency and Bankruptcy Code, empowered the committee of creditors and set a precedent for other similar cases, participants at a panel discussion said. 

Mr Rashesh Shah, Chairman, and CEO, Edelweiss Financial Services: Edelweiss Asset Reconstruction Company (ARC) has over ₹ 7,000-8,000 crs of exposure in Essar Steel Ltd.

  • According to him, it will take a couple of weeks for the recovery to come through.
  • Edelweiss ARC will receive 25% of the payment while the balance will go to the respective banks.
  • According to him, the important thing is not only Essar Steel judgement, but there are at least another 8-10 cases which are also hinging upon the same principles which were raised on the Essar Steel case and those will also quickly get released.
  • He thinks between now to March 2020, there is a fair amount of liquidity that will get released in a lot of these NCLT cases because of the clarity of the judgement and the clarity on the grounds on which how all these NCLT cases will be resolved.
  • Edelweiss is expected to receive the money in two-three weeks’ time. This will require some paperwork, to make sure that due process is followed in allocation to avoid any kind of missteps in execution. This account is a large one with payment of almost US$6 billion.

Mr Arijit Basu, Managing Director SBI: State Bank of India (SBI) was to get around ₹ 12,000 crore

  • Mr Basu said, “We are working on the process, we would like things to move very fast now that everything has been now cleared by the Supreme Court. Let us see how it goes, I think the expectation is that things should move very fast.”
  • According to him, it is not just about Essar Steel but he feels that this judgement will bring in finality to the entire NCLT and the IBC process as was set up in 2016.
  • Various NCLT and NCLAT courts were giving diverse judgments and were leading to a lot of confusion.
  • The previous ruling of the Supreme Court: the amendments brought by the government in the IBC code itself now and this final judgment will lay down not only the rules for Essar Steel but will also give a very clear idea as to how everyone has to move forward including the committee of creditors.
  • Mr Basu thinks that an assessment has to be made which SBI is trying to work out of course regarding how much of more such cases are exclusively dependent on clarity coming in the NCLT process and how much of it is due to other delays which are happening because of the resolution process itself. So, maybe in a couple of days, SBI will be able to frame that.

Bahram Vakil, founding partner, AZB & Partners:

  • He said, “23rd October 2018 was when National Company Law Tribunal (NCLT) Ahmedabad approved it. So it is not a small amount of time, I have not done the internal rate of return (IRR) calculation, but we have lost from October 23 till November 15, so just over a year if they had accepted it then.”
  • Recovery rates have been doubled from 25% to 46%, this judgement will probably take it to 48-49%, but the best in class worldwide is in the 80%.

Mr Shardul Shroff, executive chairman, Shardul Amarchand Mangaldas & Co.:

  • The NCLAT has to go both by letter of the law and the spirit of the law. It is unequivocally clear that the Supreme Court has reiterated the fact that the decision of the Committee of Creditors (CoC) is final, they have the primacy and there is no authority in law for the NCLAT to substitute the judgement of the CoC by their own judgement.
  • According to him, now the question which will survive if at all is that if the CoC has made a decision which is contrary to the IBC, therefore for example if they have miscalculated the liquidation value or if they have not followed the requirement of ensuring that the operational creditors get the first bite at the cherry, those kinds of things if they are wrongly done by the CoC, those are the issues which will go by remand.

Consensus Estimate (Source: market screener website) 

  • The closing price of Edelweiss Financial Services Ltd was ₹ 129/- as of 18-November-19 and traded at 1.5x /1.3x /1.3x the consensus BVPS for FY20E / 21E / 22E of ₹ 85.7/95.7/102.0 respectively. Consensus target price of ₹ 157/- implies a PB multiple of 1.5x on FY22E BVPS of ₹ 102/-.
  • The closing price of State Bank of India Ltd was ₹ 325/- as of 18-November-19 and traded at 1.3x /1.2x /1.0x the consensus BVPS for FY20E / 21E / 22E of ₹ 251/280/319 respectively. 
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18 Nov

Gold Loan NBFCs should not be clubbed together with other NBFCs- Muthoot Finance MD

Update on the Indian Equity Market:

On Friday, NIFTY50 ended marginally positive with a 0.2% rise. Bharti Infratel (+9.7%), Bharti Airtel (+9.2%) and SBI (+5.5%) were the top NIFTY50 gainers. Telecom stocks gained on talks of a minimum charge for all tariffs for telecom players. Indian Oil (-3.9%), Hero Motocorp (-1.9%) and BPCL (-1.9%) were among the worst-performing NIFTY50 stocks. NIFTY PSU BANK (+3.5%) recorded handsome gains after the Supreme Court’s verdict in the Essar Steel case in favour of financial lenders. NIFTY PHARMA (+1.6%), NIFTY MEDIA (+1.1%) and NIFTY BANK (+0.9%) were among the other gainers. NIFTY AUTO (-0.5%), NIFTY IT (-0.5%) and NIFTY FMCG (-0.5%) were among the top losing sectoral indices.


Muthoot Finance
Excerpts  from the interview of Mr George Alexander Muthoot, Managing Director,  Muthoot Finance; dated 14th November 2019. Source: CNBC TV18

  • Muthoot Finance had a somewhat tepid loan growth in 2QFY20 as the company faced some incremental funding issues.
  • Funding problem has now been resolved. Muthoot Finance has collected Rs 4,600 mn last month via a private placement. The company is planning another issue of retail NCDs of similar amount. The company also holds ECB of Rs 4,500 mn. All this is sufficient to help Muthoot reach its FY20E target.
  • Muthoot Finance had a funding problem despite having a good P&L and Balance sheet. Gold Loan NBFCs get clubbed with all other NBFCs. Muthoot suffered as banks/ other lenders have limits for issuing funding to particular sectors which get exhausted.  
  • Mr George Muthoot said he is trying his best to get a separate classification for Gold Loan NBFCs. Gold Loan NBFCs do not have 2 major issues that other NBFCs/ banks face. These factors are: a) No NPA problem. None of NPAs have resulted in credit loss. b) No Asset Liability Mismatch (ALM) issues as the average loan period is 3-4 months.
  • The first 6 weeks of 3QFY20 have already seen good growth with Rs 13,000 mn increase in Asset Under Management (AUM). Management expects good growth to continue in 2HFY20E.
  • Muthoot Finance will be able to show good growth as there are funding issues for many small traders and retail customers because NBFCs are not able to fund them. For these people, gold loans are most convenient to tide over their needs in the next couple of quarters.
  • Muthoot Finance is targeting to end FY20E with 15%+ AUM growth.
  • Apart from Gold loans, Muthoot has exposure to Retail home loans and Vehicle loans. Management has toned down it’s FY20E projection for home loans AUM from Rs 27,000-30,000 mn earlier to Rs 23,000 mn. Management is cautious on the growth in retail home loans as many projects are stuck due to funding issues at builders’ end.
  • Muthoot has a Rs 4,500 mn vehicle finance portfolio. As per management, now is not the best of times to grow this segment aggressively.
  • Muthoot benefitted from the rise in gold prices as customers were willing to take back gold, leading to lower auctions and higher interest collections. This led to higher NIMs in 2QFY20E.
  • Muthoot increased interest rate by 1% 3 months back which also led to better yields in 2QFY20. This benefit will continue going forward.
  • Management expects to maintain spread target of 11% and NIM target of 11%-12% in FY20E.

Consensus Estimate (Source: market screener website)

  • The closing price of Muthoot Finance was ₹ 701/- as of 15-November-19 and traded at 2.4x /2.0x /1.8x the consensus BVPS for FY20E / 21E / 22E of Rs 287/344/400 respectively.
  • Consensus target price of ₹ 726/- implies a PB multiple of 1.8x on FY22E BVPS of ₹ 400/-.
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16 Nov

Winners bet selectively

Ravichand on his blog writes about how winners bet selectively. The Question that investor face – Do you chase many mediocre opportunities in the market and bet frequently or search for a few great opportunities and bet selectively?

In the absence of a crisis, great investing ideas/opportunities are very rare and you generally get one or two of them in a year. Many good ideas can only be a poor substitute for a single great idea. Yet we want some “action” in the market every single day and many times we end up placing bets on even moderately good ideas. Why?

 The possible reasons: Need for “action” or seen doing something;  No one is sure when the next great opportunity will come and/or how big it will be;  Professional fund management compulsions; Sitting on Cash on the sidelines without swinging your bat is nerve-wracking;  Not many have the luxury to sit all day long “reading” (working)

Quoting Buffett is a cliché but many times it’s the most appropriate. If you think that you would need a large number of investing bets because you have a big corpus then spare a minute to have a look at Warren Buffets investments in marketable securities. Around 87% of his USD 173 billion worth investments at the end of 2018 were concentrated in just 15 securities. By betting selectively on a few great ideas, Buffett has made a fortune.

The research study also highlighted this fact that investing only on our high conviction ideas and consciously avoiding mediocre lower conviction ideas will do wonders to our portfolio returns and our investing career.

5 C’s of selective betting

 Competence: The skill required to find great ideas. You cannot become a great Pastry chef if you don’t know how to bake. Similarly, if you are going to bet selectively on great ideas then you should first be competent enough to identify one.

Cash: Adequate Funds to back the great ideas What is the use of a great idea if it cannot be backed by adequate funds. Allocate too little and you cannot really feel the impact. Allocate too much and your portfolio can get wiped off. Always back great ideas with materially significant allocation which is neither too little or too much

Conviction: High confidence in your idea When you bet, place your stakes on an idea on which you have the highest conviction. The one which you believe has the best chance of success backed by research, data and thought. Betting selectively in great ideas only requires a bundle of confidence. Confidence is needed in your investing process, in your investing strategy and most importantly in – YOURSELF

Courage: Courage in times of crisis. Great opportunities come usually when there is a crisis or what you say as “when there is blood on the street”. There could be great opportunities when outstanding companies are going through a temporary problem. Courage to back up your great ideas during a crisis is priceless.

Character: Ability to say “No” Last but certainly the most important “C” is your “character” – your basic nature, trait and mental make-up. Similarly, for an investor, the ability to say “No” is a tremendous advantage. When your friends and colleagues are caught in the market frenzy, maintaining a Zen level of calmness and not biting at every cookie thrown at you requires a great temperament. Sitting on cash without hitting the buy requires character.

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15 Nov

UPL eyes ₹5600 mn of synergies from Arysta deal

Update on the Indian Equity Market:On Thursday, Sensex ended higher led by gains in financial services and IT sectors, Sensex gained 170 pts and Nifty ended at 11,872. Retail inflation jumped to 4.62% in October from 3.99% in September. Vodafone Idea fell 20.27% after the department of telecommunications (DoT) asked operators to conduct a self-assessment of pending dues after last month’s Supreme Court verdict that upheld the government’s definition of adjusted gross revenue.
Among sectoral Indices, BSE IT was the biggest gainer with a rise of 1.1% followed by BSE Consumer Durables 0.9% and BSE Finance 0.8%.  BSE Telecom lost the most at 2.8%, BSE Metal was down 2.0% and BSE Capital Goods slipped 0.8%.
Among stocks, ICICI Bank Ltd, Bajaj Finance Ltd, HDFC twins—HDFC Bank Ltd and HDFC Ltd, Axis Bank Ltd, and Yes Bank were the biggest gainers in the financial services sector. In the tech sector, Infosys Ltd, Tata Consultancy Services Ltd, and Tech Mahindra Ltd gained the most.



UPL eyes ₹5600 mn of synergies from Arysta deal
Key takeaways from the interview of Mr Anand Vora, Chief Financial Officer, UPL; dated 11th November 2019:

  • When asked about the Arysta acquisition and synergies, Mr Vora mentioned that UPL has already achieved Rs 3200 mn of synergies and targets ~ Rs 5600 mn of total synergies benefit to reflect in Profit and Loss Account for FY20.
  • Mr Vora said that the EBITDA margins will improve to about 16-20% due to the merger.
  • He commented on the tough external environment factors like the trade war and swine flu, not letting UPL take any price increase to push the volumes.
  • Mr Vora added that the debt increase is due to the seasonality of the business and high working capital which will decrease significantly after December as cash inflows start against the receivables and this has been the trend for the last three years.
  • He stated that the receivables have decreased as compared to last year and UPL is working in that direction. On average the net working capital of Arysta is higher than UPL but they are working on it and expect the working capital to trend closer to that of UPL.  
  • When asked about the pressure on demand globally, he commented that they are in crop protection chemical business and farmers rarely keep their land vacant. In fact, once they have invested in seeds and spent on fertilizers, they are left with no choice but to use the crop protection chemical to protect their crops.

Consensus Estimate (Source: market screener website)

  • The closing price of UPL was ₹ 535/- as of 14-November-19 and traded at 17.5x /11.5x /9.8x the consensus EPS for FY20E / 21E / 22E of Rs 31/47/55 respectively.
  • Consensus target price of ₹ 704/- implies a PE multiple of 12.8x on FY22E EPS ₹ 55/-.
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