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Equity Bottom-Up

Aarti Industries: We maintain our BUY recommendation on Aarti Industries (AIL) with a target price of INR 1,330/share. We expect the company's PAT to grow at a 31% CAGR over FY22-24E. AIL's constant focus on Capex and R&amp;D will enable it to remain competitive and expand its customer base. The toluene segment in India is mainly untapped and catered to through imports; AIL will benefit in the long term by entering this segment. Q2 EBITDA/APAT were 4/2% below our estimates, attributable to significantly higher-than-expected raw material cost, higher-than-expected opex, offset by a 16% rise in revenue, lower-than-expected depreciation, and finance cost.
<div class="content-highlight">Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.</div>

Aarti Industries: We maintain our BUY recommendation on Aarti Industries (AIL) with a target price of INR 1,330/share. We expect the company's PAT to grow at a 31% CAGR over FY22-24E. AIL's constant focus on Capex and R&amp;D will enable it to remain competitive and expand its customer base. The toluene segment in India is mainly untapped and catered to through imports; AIL will benefit in the long term by entering this segment. Q2 EBITDA/APAT were 4/2% below our estimates, attributable to significantly higher-than-expected raw material cost, higher-than-expected opex, offset by a 16% rise in revenue, lower-than-expected depreciation, and finance cost.
Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

HSIE Results Daily: Aditya Birla Capital, Indian Oil Corporation, BPCL, Cholamandalam, Voltas,...

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Government banks have been derided for indulging in ‘phone banking’ (being instructed on the telephone by ruling party politicians and civil bureaucrats to lend to specific unworthy companies). But what the Enforcement Directorate’s (ED) affidavit in the Delhi Court (as disclosed by the media -- <a href="https://www.hindustantimes.com/india-news/71-loans-given-in-kapoor-s-tenure-turned-bad-ed-101633976406867.html" target="_blank" rel="noopener">here</a> and <a href="https://economictimes.indiatimes.com/industry/banking/finance/enforcement-directorate-says-bank-loan-fraud-was-mutually-beneficial-to-avantha-yes-bank/articleshow/86699558.cms?from=mdr" target="_blank" rel="noopener">here</a>)  reveals is that senior executives from the private sector <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> were no different from their government counterparts. The only difference is that the concerned senior executives at Yes Bank were excessively paid, and were highly qualified persons from premier institutions, as compared with government bankers. The ED’s charge sheet alleges that senior executives at Yes Bank knowingly engaged in sham transactions, and the accused Yes Bank officials put the onus on the transactions on the now jailed Rana Kapoor, the erstwhile founder-Chief Executive Officer (CEO), Yes Bank. Despite their educational qualifications, previous work experience and the senior positions they held, they allowed themselves to  be reduced to being low-paid clerks – or worse, since the latter at least know enough not to engage in fraudulent transactions. The entire edifice of Yes Bank’s credit appraisal, independent risk management and board oversight was a myth, as nobody recorded strong objections to giving loans to a shell company and structuring a product whose sole objective was a spurious show of compliance with regulatory guidelines.   Stakeholders, media and analysts rarely get to see the inner working of a bank and how loans are appraised, independently evaluated by risk management and subsequently monitored. The ED’s affidavit, as reported by the media, provides such a rare inside knowledge view of how a poor quality loan for a dubious purpose was conceived, structured and approved by an over-qualified and overpaid team, solely on the basis of instructions from the CEO. What is equally disturbing, but also telling, is that three of the accused have left the bank, and have taken up fresh engagements with their new organisations – who, presumably, were impressed with these persons’ work credentials at Yes Bank, and wanted them to continue the same practices for their new employers.What is worrying is that Yes Bank’s practice of having senior executives with impressive qualifications, stellar resumes, and imposing titles, knowingly engaging in such transactions may not be the exception in the private financial sector. Regulatory agencies have investigated or are currently investigating similar transactions at <a href="https://hemindrahazari.com/2021/06/16/cg-power-loan-scandal-indusind-bank-pioneers-lending-without-documents-to-a-firm-with-no-assets/" target="_blank" rel="noopener">Indusind Bank</a>, <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">Aditya Birla Finance</a>, <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-an-eur44-million-loan-from-stanchart-put-murugappas-cg-power-between-sebi-and-a-hard-place/primearticleshow/83285540.cms" target="_blank" rel="noopener">Standard Chartered Bank</a> and <a href="https://hemindrahazari.com/2021/08/31/sebi-exposes-kotak-mahindra-mutual-funds-policy-of-investing-blindly/" target="_blank" rel="noopener">Kotak Mahindra Mutual Fund</a>. This indicates that the situation may be systemic. It appears that, for all their experience and seniority, key senior executives in the private financial sector are paid inflated packages precisely for engaging in the intellectually undemanding task of ‘phone banking’. The valuations of private financial firms may need to be reassessed in the light of these disclosures.

Government banks have been derided for indulging in ‘phone banking’ (being instructed on the telephone by ruling party politicians and civil bureaucrats to lend to specific unworthy companies). But what the Enforcement Directorate’s (ED) affidavit in the Delhi Court (as disclosed by the media -- here and here)  reveals is that senior executives from the private sector Yes Bank (YES IN) were no different from their government counterparts. The only difference is that the concerned senior executives at Yes Bank were excessively paid, and were highly qualified persons from premier institutions, as compared with government bankers. The ED’s charge sheet alleges that senior executives at Yes Bank knowingly engaged in sham transactions, and the accused Yes Bank officials put the onus on the transactions on the now jailed Rana Kapoor, the erstwhile founder-Chief Executive Officer (CEO), Yes Bank. Despite their educational qualifications, previous work experience and the senior positions they held, they allowed themselves to  be reduced to being low-paid clerks – or worse, since the latter at least know enough not to engage in fraudulent transactions. The entire edifice of Yes Bank’s credit appraisal, independent risk management and board oversight was a myth, as nobody recorded strong objections to giving loans to a shell company and structuring a product whose sole objective was a spurious show of compliance with regulatory guidelines.   Stakeholders, media and analysts rarely get to see the inner working of a bank and how loans are appraised, independently evaluated by risk management and subsequently monitored. The ED’s affidavit, as reported by the media, provides such a rare inside knowledge view of how a poor quality loan for a dubious purpose was conceived, structured and approved by an over-qualified and overpaid team, solely on the basis of instructions from the CEO. What is equally disturbing, but also telling, is that three of the accused have left the bank, and have taken up fresh engagements with their new organisations – who, presumably, were impressed with these persons’ work credentials at Yes Bank, and wanted them to continue the same practices for their new employers.What is worrying is that Yes Bank’s practice of having senior executives with impressive qualifications, stellar resumes, and imposing titles, knowingly engaging in such transactions may not be the exception in the private financial sector. Regulatory agencies have investigated or are currently investigating similar transactions at Indusind Bank, Aditya Birla Finance, Standard Chartered Bank and Kotak Mahindra Mutual Fund. This indicates that the situation may be systemic. It appears that, for all their experience and seniority, key senior executives in the private financial sector are paid inflated packages precisely for engaging in the intellectually undemanding task of ‘phone banking’. The valuations of private financial firms may need to be reassessed in the light of these disclosures.

Yes Men at Yes Bank, and Elsewhere: ‘Phone Banking’ in the Private Sector

Senior executives are rushing for the exit door at Aditya Birla Finance Ltd. (ABFL), the non-bank finance company (NBFC) subsidiary of <a href="https://www.smartkarma.com/entities/aditya-birla-capital-ltd" target="_blank" data-smartkarma-citation="entities:27031:1" rel="noopener">Aditya Birla Capital Ltd (ABCAP IN)</a> (ABC), the holding company for all the financial services business of the Aditya Birla group. Since May 2021, at least five senior officials in-charge of business verticals and control functions including the Chief Financial Officer (CFO) have quit. Coincidentally, the Securities and Exchange Board of India (SEBI)  <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">issued</a>  a show cause notice to ABFL as the regulator was investigating the NBFC’s dubious role in structuring and disbursing loans to a shell company linked to the erstwhile promoters of CG Power wherein the funds were used to transfer liabilities from the erstwhile promoter companies to the listed CG Power. The SEBI show cause notice cited by ET Prime specifically mentioned the role played by <a href="https://www.adityabirlacapital.com/about-us/leadership-team/ajay-srinivasan" target="_blank" rel="noopener">Ajay Srinivasan</a>  (non-executive director, ABFL and group CEO, ABC) and <a href="https://abfl.adityabirlacapital.com/pages/individual/about-us/peopledescription.aspx?ItemID=67&amp;TeamType=SM" target="_blank" rel="noopener">Devang Rawal</a> (then Head - Corporate Finance and subsequently promoted as Head – Corporate and Institutional, ABFL).Interestingly, ABFL is led by two CEOs, <a href="https://www.adityabirlacapital.com/about-us/leadership-team/rakesh-singh" target="_blank" rel="noopener">Rakesh Singh</a> (Managing Director and CEO, ABFL) and <a href="https://www.adityabirlacapital.com/about-us/leadership-team/tushar-shah" target="_blank" rel="noopener">Tushar Shah</a> (CEO for infrastructure business) and all the five individuals who have resigned reported to the former. Incidentally, Devang Rawal’s division which is currently being extensively investigated by SEBI also reports to Rakesh Singh.ABC declined to respond to queries sent by this analyst to enquire why these executives had quit and whether the board of directors at ABFL and ABC, especially the independent directors were informed of their departure.Stakeholders are concerned when there is a flurry of exits by senior executives in any firm as was seen in the recent case of <a href="https://www.newindianexpress.com/business/2021/sep/02/top-level-exits-irk-investorsof-au-smallfinance-bank-2353132.html" target="_blank" rel="noopener">AU Small Finance Bank</a>. That such an event at ABFL coincides with agencies investigating dodgy deals at a NBFC belonging to a prestigious industrial house should send alarm bells ringing.

Senior executives are rushing for the exit door at Aditya Birla Finance Ltd. (ABFL), the non-bank finance company (NBFC) subsidiary of Aditya Birla Capital Ltd (ABCAP IN) (ABC), the holding company for all the financial services business of the Aditya Birla group. Since May 2021, at least five senior officials in-charge of business verticals and control functions including the Chief Financial Officer (CFO) have quit. Coincidentally, the Securities and Exchange Board of India (SEBI)  issued  a show cause notice to ABFL as the regulator was investigating the NBFC’s dubious role in structuring and disbursing loans to a shell company linked to the erstwhile promoters of CG Power wherein the funds were used to transfer liabilities from the erstwhile promoter companies to the listed CG Power. The SEBI show cause notice cited by ET Prime specifically mentioned the role played by Ajay Srinivasan  (non-executive director, ABFL and group CEO, ABC) and Devang Rawal (then Head - Corporate Finance and subsequently promoted as Head – Corporate and Institutional, ABFL).Interestingly, ABFL is led by two CEOs, Rakesh Singh (Managing Director and CEO, ABFL) and Tushar Shah (CEO for infrastructure business) and all the five individuals who have resigned reported to the former. Incidentally, Devang Rawal’s division which is currently being extensively investigated by SEBI also reports to Rakesh Singh.ABC declined to respond to queries sent by this analyst to enquire why these executives had quit and whether the board of directors at ABFL and ABC, especially the independent directors were informed of their departure.Stakeholders are concerned when there is a flurry of exits by senior executives in any firm as was seen in the recent case of AU Small Finance Bank. That such an event at ABFL coincides with agencies investigating dodgy deals at a NBFC belonging to a prestigious industrial house should send alarm bells ringing.

Flurry of Senior Level Exits at Aditya Birla Financial Services

Aditya Birla Capital Ltd / Equity Bottom-Up

Aditya Birla Capital: As outlined in our Initiation note, Aditya Birla Capital (ABCL) continues on its journey towards a credible makeover, driving consolidated return ratios closer to franchise potential over the next three years. We believe that ABCL is steadily repositioning its lending businesses towards retail and granular loans (58% of NBFC AUM towards Retail + SME + HNI; 29% of HF AUM towards affordable housing), likely to reflect in sustained improvement in franchise earnings. Although Q1FY22 was weak for insurers in general, we draw comfort from both of ABCL's insurance businesses steadily building their profitability trajectory (VNB margins +300bps YoY to -1.6% on account of better mix and all-time low loss ratios (40%) in the health insurance business).
<div class="content-highlight">Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.</div>

Aditya Birla Capital: As outlined in our Initiation note, Aditya Birla Capital (ABCL) continues on its journey towards a credible makeover, driving consolidated return ratios closer to franchise potential over the next three years. We believe that ABCL is steadily repositioning its lending businesses towards retail and granular loans (58% of NBFC AUM towards Retail + SME + HNI; 29% of HF AUM towards affordable housing), likely to reflect in sustained improvement in franchise earnings. Although Q1FY22 was weak for insurers in general, we draw comfort from both of ABCL's insurance businesses steadily building their profitability trajectory (VNB margins +300bps YoY to -1.6% on account of better mix and all-time low loss ratios (40%) in the health insurance business).
Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

HSIE Results Daily: Godrej Consumers, Cipla, GAIL, Gujarat Gas, Hindustan Petroleum Corporation,...

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-an-eur44-million-loan-from-stanchart-put-murugappas-cg-power-between-sebi-and-a-hard-place/primearticleshow/83285540.cms" target="_blank" rel="noopener">Standard Chartered Bank</a>, <a href="https://economictimes.indiatimes.com/prime/corporate-governance/how-a-usd40-million-loan-to-cg-power-arm-in-gift-city-put-indusind-bank-under-sebi-glare/primearticleshow/83342665.cms" target="_blank" rel="noopener">Indusind Bank</a>  and <a href="https://economictimes.indiatimes.com/prime/corporate-governance/sebi-slaps-show-cause-on-aditya-birla-finance-for-realty-loans-to-a-shell-firm-to-help-thapars/primearticleshow/83518285.cms" target="_blank" rel="noopener">Aditya Birla Finance</a> highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) <a href="https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MDC8CEB9A7BDE64745B9BE1DCEC3293CA1.PDF" target="_blank" rel="noopener">norms</a> for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (<a href="https://hemindrahazari.com/2021/06/16/cg-power-loan-scandal-indusind-bank-pioneers-lending-without-documents-to-a-firm-with-no-assets/" target="_blank" rel="noopener">here</a> and <a href="https://hemindrahazari.com/2021/06/23/aditya-birla-finances-loans-to-a-shell-company-another-reason-why-corporates-shouldnt-be-allowed-to-control-banks/" target="_blank" rel="noopener">here</a>) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.

The ET Prime 3-part series based on the Securities and Exchange Board of India’s (SEBI) show cause notices to Standard Chartered Bank, Indusind Bank  and Aditya Birla Finance highlighted the manner in which these institutions allegedly ‘evergreened’ their exposure and shifted their loans from the unlisted Thapar group entities to the listed CG Power and Industrial Solutions (CG Power) in 2017-2018. These transactions, if proven, would demonstrate the misuse of their banking and non-bank finance company license In all three cases a similar structure (see Annexure) was adopted: transactions were layered by providing loans to a shell company, thus eventually shifting liabilities from founder/promoter unlisted companies to CG Power and Industrial Solutions (CG Power), a publicly listed company. Obviously, this adversely affects the minority shareholders of CG Power.The modus operandi of providing foreign exchange loans to a foreign subsidiary of an Indian company to repay rupee loans of the parent, thereby ‘evergreening’ the loan, was not new. This analyst had first highlighted it in a research note in August 2012, when he was Head of Research and banking analyst with a sell-side firm. The dubious practice in these cases by the mentioned entities, apart from alleged ‘evergreening’, was the use of this route to shift liabilities from an unlisted company to a listed company. The ET Prime scoop has perhaps for the first time made public documentary proof of specific cases of the money trail and of routing funds through various companies to achieve the objective.The purpose of lending in foreign exchange to a foreign subsidiary of a domestic company, and layering the transactions through various companies, was to confuse auditors and regulators, and to hide the objective of the end-use of the loans. The brazenness of these transactions (transferring the funds to other companies within the same day or in a few days) and the possible violation of the Reserve Bank of India (RBI) norms for the end-use of external commercial borrowings indicate that these banks believed the regulators would not catch them, and it is therefore possible that it was a common practice.That these transactions were systemic, with a top-down approach, and not the work of ‘rogue’ employees, is visible in the fact that these dubious loans were cleared by the risk department and key divisional heads at Indusind Bank and Aditya Birla Finance, far from being punished for structuring the loans, were rewarded through promotions (here and here) and allowed to retain their jobs. It can therefore be presumed that these transactions had also been approved by their boards of directors, and they have to be held accountable.The important fact is that the three entities targeted by SEBI are not some fly-by-night operators. Rather, they are well established banks and an NBFC belonging to the house of Aditya Birla. If this analyst in 2012 was confident to publish and inform investors about such practices, as the facts were well known within banking circles, why was the banking/NBFC regulator not taking action against senior officials? It is on account of the lack of action by the RBI that senior officials in these entities were brazenly structuring such loans in 2017-2018. Sadly, to date, the Reserve Bank of India (RBI) has not exerted its considerable muscle to bring the key officials and the boards of directors in these institutions to account. So far the RBI has been content with levying monetary penalties on errant institutions; whereas in fact the regulator in the cases unearthed by SEBI should not only sack the key senior executives but render them unemployable in the financial sector, and also remove independent directors for their complicity. As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as, understandably, the culprits have no fear of the regulator.   

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

India

Aditya Birla Capital Limited (ABCL) provides financial services. The Company offers life and health insurance, private equity, corporate lending, structured finance, asset and wealth management, currency and commodity brokerage, online personal finance management, housing finance, pension funds, and other financial services. ABCL serves customers in India.

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Aditya Birla Capital Ltd (ABCAP IN)

HSIE Results Daily: Aditya Birla Capital, Indian Oil Corporation, BPCL, Cholamandalam, Voltas,...

Aarti Industries: We maintain our BUY recommendation on Aarti Industries (AIL) with a target price of INR 1,330/share. We expect the company's PAT...

HDFC Securities

Yes Men at Yes Bank, and Elsewhere: ‘Phone Banking’ in the Private Sector

It appears that, for all their experience & seniority, key senior executives in the pvt financial sector are paid inflated packages precisely for...

Hemindra Hazari

Flurry of Senior Level Exits at Aditya Birla Financial Services

When senior executives quitting an organisation coincides with regulatory investigations stakeholders should be concerned

Hemindra Hazari

HSIE Results Daily: Godrej Consumers, Cipla, GAIL, Gujarat Gas, Hindustan Petroleum Corporation,...

Aditya Birla Capital: As outlined in our Initiation note, Aditya Birla Capital (ABCL) continues on its journey towards a credible makeover, driving...

HDFC Securities

How Diversion and Layering Became a Common Modus Operandi, While the Regulator Slept

As long as the regulator mollycoddles errant senior executives and independent directors, such malpractices will continue to flourish as,...

Hemindra Hazari

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52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)