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

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Equity Bottom-Up

Cholamandalam Investment and Finance / Equity Bottom-Up

Back in November 2020, M M Murugappan retired and Vellayan Subbiah joined the board as Chairman. At the time, the move seemed like a non-event, as it seemed like a group-wide replacement than a targeted role. But subsequently the CEO, Arun Alagappan, cousin of Vellayan Subbiah, who joined as Executive Director in 2017 and was elevated to CEO not too long ago in 2019, also resigned in Jan 2021. Meanwhile, since Nov 2020, there has been an increasing emphasis from RBI on converting large NBFCs into banks. These events together have translated this seemingly innocuous move (Vellayan Subbiah joining as Chairman) into a meaningful leadership change at <a href="https://www.smartkarma.com/entities/cholamandalam-investment-and-finance" target="_blank" data-smartkarma-citation="entities:17583:1" rel="noopener">Cholamandalam Investment and Finance (CIFC IN)</a> ["Chola"]. Going by the commentary from Vellayan Subbiah at the recent earnings call, this can potentially lead to long-run transformational changes at Chola. Below we share the history of Chola and the role Vellayan Subbiah has played in shaping it, to put in perspective our favorable view on the leadership change and highlight what could be in store for Chola.

Back in November 2020, M M Murugappan retired and Vellayan Subbiah joined the board as Chairman. At the time, the move seemed like a non-event, as it seemed like a group-wide replacement than a targeted role. But subsequently the CEO, Arun Alagappan, cousin of Vellayan Subbiah, who joined as Executive Director in 2017 and was elevated to CEO not too long ago in 2019, also resigned in Jan 2021. Meanwhile, since Nov 2020, there has been an increasing emphasis from RBI on converting large NBFCs into banks. These events together have translated this seemingly innocuous move (Vellayan Subbiah joining as Chairman) into a meaningful leadership change at Cholamandalam Investment and Finance (CIFC IN) ["Chola"]. Going by the commentary from Vellayan Subbiah at the recent earnings call, this can potentially lead to long-run transformational changes at Chola. Below we share the history of Chola and the role Vellayan Subbiah has played in shaping it, to put in perspective our favorable view on the leadership change and highlight what could be in store for Chola.

Leadership Change Alert | Chola Investment: Vellayan Is Back; Watch Out for Transformational Leap

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Home First Finance / Equity Capital Markets

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Home First Finance (HFF), an affordable housing finance company targeting first time home buyers in low and middle-income groups, raised around US$160m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.
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I have covered various aspects of the deal in my earlier notes,  <a href="https://www.smartkarma.com/insights/home-first-finance-pre-ipo-riding-on-affordable-housing" target="_blank" rel="noopener">Home First Finance Pre-IPO - Riding on affordable housing</a>,  <a href="https://www.smartkarma.com/insights/home-first-finance-pre-ipo-earnings-not-showing-the-covid-strain-but-other-metrics-are" target="_blank" rel="noopener">Home First Finance Pre-IPO - Earnings not showing the COVID strain but other metrics are</a> and <a href="https://www.smartkarma.com/insights/home-first-finance-ipo-it-s-not-really-cheap-banking-on-momentum" target="_blank" rel="noopener">Home First Finance IPO - It’s Not Really Cheap, Banking on Momentum</a>.
In this note, I'll talk about deal updates and provide a table with implied valuations at different share price levels.
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Home First Finance (HFF), an affordable housing finance company targeting first time home buyers in low and middle-income groups, raised around US$160m in its India IPO. It is backed by True North, GIC and Bessemer and has recently obtained an investment from Warburg Pincus as well.


I have covered various aspects of the deal in my earlier notes,  Home First Finance Pre-IPO - Riding on affordable housing,  Home First Finance Pre-IPO - Earnings not showing the COVID strain but other metrics are and Home First Finance IPO - It’s Not Really Cheap, Banking on Momentum.
In this note, I'll talk about deal updates and provide a table with implied valuations at different share price levels.


Home First Finance IPO Trading - Hot Space but Limited Discount

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Quantitative Analysis

In this report, we screen for the largest overweight Country/Sectors across Global EM by analysing the allocations of long-only active Emerging Market funds.In part one of the series, we focus on Indian Financials.  We look at where current allocations sit versus history, drill down to find the most widely held stocks in the sector, the key overweight and the key underweight holdings. We find that despite it being the largest overweight holding, Indian Financials exposure is far from excessive, both versus its own history and versus peers.  Furthermore, recent activity points to an increase in exposure among managers.Our Emerging Market fund universe consists of 242 Global Emerging Market active long-only funds, with combined AUM of $450bn.

In this report, we screen for the largest overweight Country/Sectors across Global EM by analysing the allocations of long-only active Emerging Market funds.In part one of the series, we focus on Indian Financials.  We look at where current allocations sit versus history, drill down to find the most widely held stocks in the sector, the key overweight and the key underweight holdings. We find that despite it being the largest overweight holding, Indian Financials exposure is far from excessive, both versus its own history and versus peers.  Furthermore, recent activity points to an increase in exposure among managers.Our Emerging Market fund universe consists of 242 Global Emerging Market active long-only funds, with combined AUM of $450bn. 

Emerging Market Overweights Series.  Part 1:  Indian Financials

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Weakened Results: Kotak Mahindra Bank (KMB.IN) [KMB] reported FY 3Q21 results of INR 18.5 bn, declining INR 3.3 bn (15.2%) linked quarter. Results were challenged by two factors: a) an INR 2.3 bn (62.5%) increase in loss provisions which still appears light given the continued and accelerated breakdown in credit quality; and b) an INR 1.9 bn (9.2%) increase in costs led by a 14.0% increase in other operating expenses; and*Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarter of stated PBT.

*Weakened Results: Kotak Mahindra Bank (KMB.IN) [KMB] reported FY 3Q21 results of INR 18.5 bn, declining INR 3.3 bn (15.2%) linked quarter. Results were challenged by two factors: a) an INR 2.3 bn (62.5%) increase in loss provisions which still appears light given the continued and accelerated breakdown in credit quality; and b) an INR 1.9 bn (9.2%) increase in costs led by a 14.0% increase in other operating expenses; and*Credit Risks Substantially Increasing: While KMB’s metrics were not nearly as ugly as Yes Bank’s (YES.IN), KMB’s credit break is tracking the financial sector - which is not exhibiting any sign of recovery. By our calculation, we find that both net new NPLs and impaired loans increased excessively with annualized growth rates of 122.8% and 143.2%, respectively. Given the worsening of KMB’s credit metrics and current weak reserve cover, we find that reserves at FY 3Q21 fall short by INR 78 bn - about three quarter of stated PBT.

Kotak Mahindra Bank – Credit Falling Off Of A Cliff

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue.

*Absolutely No Reason To Report Profitability With This Balance Sheet: State Bank of India’s (SBIN.IN) [SBI] 30%-owned Yes Bank (YES.IN) [Yes] reported FY 3Q21 results of INR 1.6 bn, increasing INR 213 mn (16.5%) linked quarter.  However, when we exclude Yes’ interest recovery  of INR 5.4 bn during the period, core operating results amounted to a loss of INR 3.8 mn; and*Time To Sound The Alarm:  Even at such an elevated level of bad loans, Yes’ net new problem loan and net new NPL growth amounts to INR 115.1 bn and INR 22.8 bn, respectively, for annualized growth rates of 99.5% and 26%.By our calculation, reserves need to be buttressed  INR 863 bn or 234% of FY 3Q21 stated capital levels – or nearly 100 quarters of PBT based on the current period.   Yes’ Board approval to raise INR 100 bn in new equity seems futile given current capital needs. It’s probably fair to say that Yes is in more trouble today than it was when SBI stepped in for the rescue. 

India

Bajaj Finance Limited is a financial services company that operates branches in India, which provide an assortment of financial services.

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Bajaj Finance Ltd (BAF IN)

Leadership Change Alert | Chola Investment: Vellayan Is Back; Watch Out for Transformational Leap

With Vellayan back at the helm and with the kind of vision he is approaching his role at Chola, Chola seems to be gearing up for a transformational...

Ankit Agrawal, CFA

Home First Finance IPO Trading - Hot Space but Limited Discount

Home First Finance, an affordable housing finance company targeting first time home buyers in low and middle-income groups, raised around US$160m...

Sumeet Singh

Emerging Market Overweights Series. Part 1: Indian Financials

Emerging Market Overweights Series. Part 1: Indian Financials. Analysing the make-up of the overweight in Indian Financial stocks.

Steven Holden

Kotak Mahindra Bank – Credit Falling Off Of A Cliff

KOTAK MAHINDRA BANK: KMB reported FY 3Q21 linked quarter results decline of 15.2%, driven primarily by a 62.5% increase in provisions which still...

Thomas J. Monaco

State Bank of India – On The Hook

STATE BANK OF INDIA: Yes Bank reported FY 3Q21 core operating losses INR 3.8 mn. Net new problem loan annualized growth rate of 99.5% and reserve...

Thomas J. Monaco

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