External broker reports(aggregated public sources), HDFC Securities

HDFC Securities

External broker reports(aggregated public sources)

Equity Bottom-Up

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,...

Specialist in Indian Banking and Economic Research

Hemindra Hazari

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

Yet another instance has come to light of the practice of disguising transactions by routing them through shell companies. As revealed by <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">ET Prime</a>, the Securities and Exchange Board of India (SEBI) issued show cause notice to Aditya Birla Finance (ABF) on the latter’s alleged role in transferring funds and assets from the erstwhile promoters/founders of CG Power and Industrial Solutions (CG Power) to CG Power. It has emerged that Ajay Srinivasan, non-executive director, ABF, and CEO, <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 immediate parent of ABF, was present at a meeting held in March 2016 with Gautam Thapar and his aides. The meeting was to discuss “Thapar Group Strategy” to close a loan facility of Rs 500 mn given to Graphic Paper Products, a step-down subsidiary of Ballarpur Industries, prior to extending further loans to the Thapar group. These revelations should send alarm bells ringing.  The transactions unearthed by SEBI can have only two explanations – (1) the board of directors of ABF was aware of these transactions and was complicit in the entire process or (2) the board of directors was kept in the dark by the executive management. The latter is difficult to believe, on account of the role of Ajay Srinivasan (a non-executive director) in the discussion on ‘Thapar Group Strategy” and in closing the Rs 500 mn loan facility.  Moreover, the size of each of the transactions to Blue Garden Estate Pvt. Ltd. (a shell company) would have required the board’s approval.In both cases it will imply that, in ABF, corporate credit appraisal, risk management, monitoring of end-use of funds and internal audit were non-existent. Thus it was able to approve and disburse Rs 3.9 bn spread over three loans to a shell company, where the security provided in the form of land parcels was dubious, as they were already encumbered. Hence the Reserve Bank of India (RBI), as the regulator for non-bank finance companies (NBFCs), would need to investigate ABF and ABC to determine whether these transactions were one-off or were there other similar transactions. That an individual of the stature of Ajay Srinivasan has been specifically mentioned in SEBI’s show cause notice adds to the gravity of the situation.Responding to a detailed questionnaire sent by this analyst, the official spokesperson of ABF said,<blockquote>Since the matter is sub-judice, it would be inappropriate for the company to respond to your specific queries. Aditya Birla Finance follows all applicable regulatory guidelines and the highest standards of corporate governance. Since your queries are based on incomplete and incorrect facts, any insinuations or conclusions drawn thereof, would give a distorted picture which would have the potential to cause harm to the reputation of the company and/or its officials. We are sure as a responsible analyst you would like to have correct and complete facts before publishing the story. </blockquote>Interestingly, <a href="https://www.linkedin.com/in/devangrawal/?originalSubdomain=in" target="_blank" rel="noopener">Devang Rawal</a> the then Business Head-Corporate Finance, ABF who probably initiated the transactions based on the March 2016 ‘Thapar Group Strategy’ meeting attended by Gautam Thapar and Ajay Srinivasan was elevated as Head–Corporate and Institutional Business in May 2018. His promotion is a testimony of the “highest standards of corporate governance” practiced by ABF.ABF is an unlisted company but its parent, ABC, is listed, and in both cases the equity and debt investors should be concerned at the manner in which these transactions were approved internally and by the board of directors. Far from setting the “highest standards of governance”, it sets a low bar in governance for a company belonging to the industrial house of Aditya Birla. It is precisely for such reasons as unearthed by SEBI at ABF that industrial houses should not be <a href="https://hemindrahazari.com/2020/11/23/rbis-working-group-recommends-foxes-be-put-in-charge-of-chicken-coops-cites-foxes-experience-management-expertise-and-strategic-direction/" target="_blank" rel="noopener">considered</a> for setting up banks, and their activities in the non-banking financial sector should be constantly monitored by vigilant regulatory authorities.

Yet another instance has come to light of the practice of disguising transactions by routing them through shell companies. As revealed by ET Prime, the Securities and Exchange Board of India (SEBI) issued show cause notice to Aditya Birla Finance (ABF) on the latter’s alleged role in transferring funds and assets from the erstwhile promoters/founders of CG Power and Industrial Solutions (CG Power) to CG Power. It has emerged that Ajay Srinivasan, non-executive director, ABF, and CEO, Aditya Birla Capital Ltd (ABCAP IN) (ABC), the immediate parent of ABF, was present at a meeting held in March 2016 with Gautam Thapar and his aides. The meeting was to discuss “Thapar Group Strategy” to close a loan facility of Rs 500 mn given to Graphic Paper Products, a step-down subsidiary of Ballarpur Industries, prior to extending further loans to the Thapar group. These revelations should send alarm bells ringing.  The transactions unearthed by SEBI can have only two explanations – (1) the board of directors of ABF was aware of these transactions and was complicit in the entire process or (2) the board of directors was kept in the dark by the executive management. The latter is difficult to believe, on account of the role of Ajay Srinivasan (a non-executive director) in the discussion on ‘Thapar Group Strategy” and in closing the Rs 500 mn loan facility.  Moreover, the size of each of the transactions to Blue Garden Estate Pvt. Ltd. (a shell company) would have required the board’s approval.In both cases it will imply that, in ABF, corporate credit appraisal, risk management, monitoring of end-use of funds and internal audit were non-existent. Thus it was able to approve and disburse Rs 3.9 bn spread over three loans to a shell company, where the security provided in the form of land parcels was dubious, as they were already encumbered. Hence the Reserve Bank of India (RBI), as the regulator for non-bank finance companies (NBFCs), would need to investigate ABF and ABC to determine whether these transactions were one-off or were there other similar transactions. That an individual of the stature of Ajay Srinivasan has been specifically mentioned in SEBI’s show cause notice adds to the gravity of the situation.Responding to a detailed questionnaire sent by this analyst, the official spokesperson of ABF said,Since the matter is sub-judice, it would be inappropriate for the company to respond to your specific queries. Aditya Birla Finance follows all applicable regulatory guidelines and the highest standards of corporate governance. Since your queries are based on incomplete and incorrect facts, any insinuations or conclusions drawn thereof, would give a distorted picture which would have the potential to cause harm to the reputation of the company and/or its officials. We are sure as a responsible analyst you would like to have correct and complete facts before publishing the story. Interestingly, Devang Rawal the then Business Head-Corporate Finance, ABF who probably initiated the transactions based on the March 2016 ‘Thapar Group Strategy’ meeting attended by Gautam Thapar and Ajay Srinivasan was elevated as Head–Corporate and Institutional Business in May 2018. His promotion is a testimony of the “highest standards of corporate governance” practiced by ABF.ABF is an unlisted company but its parent, ABC, is listed, and in both cases the equity and debt investors should be concerned at the manner in which these transactions were approved internally and by the board of directors. Far from setting the “highest standards of governance”, it sets a low bar in governance for a company belonging to the industrial house of Aditya Birla. It is precisely for such reasons as unearthed by SEBI at ABF that industrial houses should not be considered for setting up banks, and their activities in the non-banking financial sector should be constantly monitored by vigilant regulatory authorities.

ABF’s Loans to a Shell Company: Another Reason Why Corporates Shouldn’t Be Allowed to Control Banks

Consumer Analyst / Channel Surveillance Specialist, Trudence Capital Advisors

Pranav Bhavsar

Consumer Analyst / Channel Surveillance Specialist

ASA Capital Management

ASA Capital Management is a boutique Research and Investment Advisory firm focusing on primary research in India. ASA provides bespoke research services to Institutional Clients with a focus on due diligence backed with primary research, Field Trips & Channel Checks.

HDFC Asset Management Co Ltd / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/hdfc-asset-management-co-ltd" target="_blank" data-smartkarma-citation="entities:27027:1" rel="noopener">HDFC Asset Management Co Ltd (HDFCAMC IN)</a>  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 
A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.
Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.
However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock.

HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 
A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.
Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.
However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

HDFC AMC | Walk the Talk - Preferred Asset Management Play

Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Thematic (Sector/Industry)

RBI announced its monetary policy updates yesterday (Feb 6, 2020). While it left the interest rates unchanged, it signaled accommodative stance with a focus on supporting growth conditional upon inflation remaining within target range.
Alongside the regular monetary policy announcements, RBI announced a few pertinent policy measures to support stressed sectors like real estate, auto and MSME, which in turn is likely to have strong positive cascading effects for Indian financials.
Key Takeaway: All in all, while RBI did not cut rates, it announced several measures to boost liquidity and credit growth in the economy. Also, the signalling from RBI in terms of growth being a key priority and its focus on reviving the economy, was a strong positive. Inflation, while a concern at this point, appears to be under check as most drivers of uptick in inflation have been seasonal and unlikely to persist. Overall, RBI's policy measures bode well for reviving credit growth and liquidity availability with potential for positive knockdown effects for the overall economy. This should help Indian financials significantly across various metrics such as credit growth, NIM expansion and improvement in asset quality. We remain optimistic on the Indian financials sector, including select NBFCs and HFCs. For more details, please also refer to some of our recent coverage on Indian Financials:
<a href="https://www.smartkarma.com/insights/lic-housing-finance-asset-quality-weakens-but-green-shoots-emerging" target="_blank" data-smartkarma-citation="insights:36257" rel="noopener">LIC Housing Finance: Asset Quality Weakens But Green Shoots Emerging</a> 
<a href="https://www.smartkarma.com/insights/bajaj-finance-the-stellar-growth-streak-continues" target="_blank" data-smartkarma-citation="insights:36170" rel="noopener">Bajaj Finance: The Stellar Growth Streak Continues!</a> 
<a href="https://www.smartkarma.com/insights/ujjivan-small-finance-bank-growth-momentum-continues-ripe-for-scaling-up" target="_blank" data-smartkarma-citation="insights:36122" rel="noopener">Ujjivan Small Finance Bank: Growth Momentum Continues; Ripe for Scaling Up</a>
<a href="https://www.smartkarma.com/insights/edelweiss-a-turnaround-idea-shifting-from-fund-based-to-fee-based-business-model" target="_blank" data-smartkarma-citation="insights:35488" rel="noopener">Edelweiss - A Turnaround Idea: Shifting from Fund-Based to Fee-Based Business Model</a>

RBI announced its monetary policy updates yesterday (Feb 6, 2020). While it left the interest rates unchanged, it signaled accommodative stance with a focus on supporting growth conditional upon inflation remaining within target range.
Alongside the regular monetary policy announcements, RBI announced a few pertinent policy measures to support stressed sectors like real estate, auto and MSME, which in turn is likely to have strong positive cascading effects for Indian financials.
Key Takeaway: All in all, while RBI did not cut rates, it announced several measures to boost liquidity and credit growth in the economy. Also, the signalling from RBI in terms of growth being a key priority and its focus on reviving the economy, was a strong positive. Inflation, while a concern at this point, appears to be under check as most drivers of uptick in inflation have been seasonal and unlikely to persist. Overall, RBI's policy measures bode well for reviving credit growth and liquidity availability with potential for positive knockdown effects for the overall economy. This should help Indian financials significantly across various metrics such as credit growth, NIM expansion and improvement in asset quality. We remain optimistic on the Indian financials sector, including select NBFCs and HFCs. For more details, please also refer to some of our recent coverage on Indian Financials:
LIC Housing Finance: Asset Quality Weakens But Green Shoots Emerging 
Bajaj Finance: The Stellar Growth Streak Continues! 
Ujjivan Small Finance Bank: Growth Momentum Continues; Ripe for Scaling Up
Edelweiss - A Turnaround Idea: Shifting from Fund-Based to Fee-Based Business Model 

RBI Policy Update: A Boost For Indian Financials

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: 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

ABF’s Loans to a Shell Company: Another Reason Why Corporates Shouldn’t Be Allowed to Control Banks

SEBI’s investigations into ABF’s conduct underscore valid concerns about industrial houses being allowed to set up banks, as the opacity in...

Hemindra Hazari

HDFC AMC | Walk the Talk - Preferred Asset Management Play

HDFC Asset Management Co Ltd (HDFCAMC IN) is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a...

Pranav Bhavsar

RBI Policy Update: A Boost For Indian Financials

RBI announced its monetary policy updates yesterday (Feb 6, 2020). While it left the interest rates unchanged, it signaled accommodative stance...

Ankit Agrawal, CFA

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52-week Range

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