Godrej Agrovet is a large conglomerate operating in various business verticals in the agriculture sector. It is looking to merge with Astec LifeSciences which is a pure agro-chemical company that focusses on Chemical molecule production and formulation for domestic and export markets. In this report, we analyze the implications of the merger as well as the impact on minority shareholders in both companies.
Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.
Indusind Bank’s reckless decision to provide a Rs 20 bn (8% of the bank’s capital) unsecured bridge loan to IL&FS, an insolvent infrastructure company has led to a significant de-rating of its valuation multiple. In the 3QFY2019 results call, Ramesh Sobti, the bank’s CEO believes that the bank will eventually need to provide only 40-50% of this exposure and the bank has currently provided only 26.5%. The bank’s guidance on this appears to be as optimistic as its initial appraisal when it disbursed the loan, without any apparent scrutiny of the company’s financials. Shareholders in the bank need to be more realistic and factor a 100% write-off on the unsecured IL&FS exposure and need to examine all the bank’s loans more carefully for similar high-risk lending. The glory days of this once fancied stock are over and a bleak future beckons.
In the semiconductor industry, particularly in the DRAM sector, there has been significant consolidation leading some to hypothesize that there’s now an oligopoly that will cause prices to normalize and thus end the business’ notorious revenue cycles. Here we will take a critical look at this argument to explain its fallacy.
Here is a look at how regions fare regarding key indicators.
PH Score = value-quality (10 variables)
FV=Franchise Valuation
RSI
TRR= Dividend-adjusted PEG factor
ROE
EY=Earnings Yield
We have created a model that incorporates these components into a system that covers>1500 banks.
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Predictions for Indian mobile in 2019 are likely to be as much about what won’t happen as what will! In summary, we do not expect Jio to lift prices and ease pressure on the incumbents. Nor do we expect significant relief from the government towards the private telcos. The environment is likely to remain tough. With this outlook, by the end of 2019, we expect concerns that Vodafone Idea (IDEA IN) will require more capital to resurface. Bharti Airtel (BHARTI IN) is closer to an inflection point in returns and we are confident that unless prices fall again (which we don’t expect), revenues bottomed for Bharti in 2QFY19. The bottom line is that Bharti can live with current pricing while we don’t believe Vodafone IDEA can.
We noted in Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017. Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.
Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November.
The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.
The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.
Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.
Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.
Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.
Metropolis Health Services Limited (MHL IN) is the 3rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.
Shaily Engineering Plastics (SHEP IN) Q2 FY19 results were below our expectations. While revenue increased by 10% YoY, PAT declined by 9% YoY in Q2 FY19. This muted performance was primarily due higher raw material prices and a shortage of labour as well as power outage that resulted in low machine utilization. We analyze the results.
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Global and Asia headwinds still rattle the gaming sector, but these three companies remain undervalued despite market sentiment.
Macau’s solid year end performance continues to defy projections, producing a 14% y/y GGR increase.
Galaxy will benefit disproportionately from the HKMB bridge traffic growth, MGM’s single digit market share will ramp up to double digits and Nagacorp may be the single most siloed gaming operator in all of Asia.
You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.
If we had to make a base observation for Asia credit markets over 2018, it was certainly caught “wrong-footed” like most of its other risky asset counterparts. The combination of a more hawkish Fed in 2018, global quantitative tightening, late-cycle economic conditions, volatility and a strong USD have all served to impact almost all the asset classes negatively. According to some asset allocators, the only asset class which returned positive in 2018 was cash, every other traditional asset class saw losses.
USD direction will further dictate the impact on overall Asian risk, in our view, with many undervalued Asian currencies following their sharp declines in 2018. One of our scenarios includes a range-bound USD in 1H19, followed by a possible reversal in 2H19 on any dovish Fed policy/US economic weakness. In this case, it has the potential to attract incremental portfolio inflows back into Asian risk. We expect a slightly tighter bias in monetary policy in most Asia ex-Japan nations which is supportive for their respective currencies.
In 2019, risk-reward dynamics have improved particularly for Asian investment grade (“IG”) where we see more limited MTM pressure. We expect a more defensive market at least in 1H19 which supports our heavier IG bias. We suspect larger investors would continue to reallocate depending on the outcomes of the China-US trade dispute and their view on US risk (arguably near its last late-cycle expansion legs). We continue to be extremely selective in Asian high yield (“HY”) which have been impacted by idiosyncratic situations including credit deterioration and rising defaults. Exogenous factors such as the potential for “fallen angel” risk (i.e. a migration from issuers on the cusp of IG, “BBB-” into HY) as well as net portfolio outflows from HY, EM and leveraged loan funds are ongoing concerns. Despite cheaper valuations in Asian HY, we still see skewed risk-reward (with larger potential risks).
In the US, our base case expects the Fed to hike 1-2 times (quarter point each) for 2019, premised on still below-trend inflation and external factors. We think it is near the tail-end of its current tightening cycle, but we would continue to monitor the US supply-side (labour markets, employment gaps, prices) for further clues. A sustained upshot to the previous factors may have the potential to prolong the Fed’s tightening cycle.
On China’s side, we have seen a critical reversal in policy towards selective expansion/accommodation again as economic reforms instituted 3 years ago have been reprioritized. China’s difficult task to balance growth targets and restructure its economy is a perennial issue. We would also expect defaults to remain elevated domestically/internationally as a new paradigm of credit investing takes root in China.
Finally, we would like to wish our readers luck in investing and trading in the year ahead.
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Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November.
The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.
The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.
Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.
Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.
Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.
Metropolis Health Services Limited (MHL IN) is the 3rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.
Shaily Engineering Plastics (SHEP IN) Q2 FY19 results were below our expectations. While revenue increased by 10% YoY, PAT declined by 9% YoY in Q2 FY19. This muted performance was primarily due higher raw material prices and a shortage of labour as well as power outage that resulted in low machine utilization. We analyze the results.
Godrej Agrovet is a large conglomerate operating in various business verticals in the agriculture sector. It is looking to merge with Astec LifeSciences which is a pure agro-chemical company that focusses on Chemical molecule production and formulation for domestic and export markets. In this report, we analyze the implications of the merger as well as the impact on minority shareholders in both companies.
Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.
We analyze the results.
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Aarti Industries (ARTO IN) Q2 FY19 results were beyond our expectations, as the revenues grew by 46% YoY and net profit increased by 57% YoY against our expectation of 15% and 20% YoY growth in sales and PAT. This robust result was due to improving capacity utilization, rupee depreciation and expanding contribution of higher value products.
Based on the recent developments we have revised our estimates wherein we expect sales and PAT CAGR of 18% and 22% from FY18-20e.
Wonderla Holidays (WONH IN) Q2 FY19 results were below our expectations. While revenues declined by 16% YoY, EBITDA decreased by 18% YoY in Q2 FY19. The impact was primarily from its Kerala based amusement park that got affected by the devastating flood that the state has witnessed after a gap of near 100 years. We analyze the result.
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Bandhan Bank (BANDHAN IN) (“BBL”) and Gruh Finance (GRHF IN) (“GRUH”) announced together on January 7th that their respective boards have considered and approved a Scheme of Amalgamation where Bandhan Bank will be the acquiring entity and GRUH Finance will become the acquired entity. All media sources suggest it was something of a surprise to GRUH personnel and management.
The exchange ratio has been set at 568 Bandhan Bank shares per 1000 GRUH Finance shares.
Following the announcement, the shares of Bandhan Bank and GRUH Finance have declined by 4.8% and 16.4% respectively. The deal is trading at a gross/annualised spread of 10%/13+% assuming a deal completion date in late September as of Tuesday’s close (but not assuming any dividends).
The deal is conditional on receiving approvals from the Reserve Bank of India (RBI), Competition Commission India (CCI), National Company Law Tribunal (NCLT) and other relevant regulatory authorities.
Data Point
Data in the Data Point
The Deal
Scheme of Amalgamation
Acquiring Entity
Bandhan Bank Ltd
Acquired Entity
GRUH Finance Ltd
Terms
Exchange ratio of 568 Bandhan Bank shares for every 1000 GRUH Finance shares
Conditions
Receipt of Approvals from the Reserve Bank of India (RBI), Competition Commision India (CCI), National Company Law Tribunal (NCLT), Ahmedabad Bench and Kolkata Bench, Securities and Exchange Board of India BSE Limited, the National Stock Exchange of India Limited and other regulatory authorities as may be necessary.
75% Shareholder approval by each company’s shareholders will be required as well. Bandhan’s result is a foregone conclusion. GRUH’s is not.
Dividends?
Not mentioned.
Source: Company Announcements
Indicative Timeline
Date
Event
7 Jan 2019
Announcement Date
30 Apr 2019
RBI Approval
8 May 2019
CCI Approval
30 Sep 2019
Possible Close Date
Note that Indian Schemes of Amalgamation also require 75% shareholder approval from all combining parties. The vote for Bandhan shareholders is a foregone conclusion as the promoter Bandhan Financial Holdings has 82.3%. The GRUH vote is not certain but HDFC has 57.8% of the 75% required.
This deal is really pricey, and some shareholders of Bandhan Bank who will get diluted have voted with their feet. It is a pretty great exit from GRUH for HDFC. While the prima facie evidence suggests that the deal was done to appease the RBI and get closer to the promoter shareholder limit required in October last year, the shareholder structure and CEO Ghosh’s own personal history suggests that neither the 40% rule nor the salary freeze are real hurdles (though the branch opening freeze may be something BBL wants to lift).
Primary/secondary Uranium supplies currently 112% of 2017 demand
Uranium supply deficits extremely unlikely before 2022
Global Uranium demand to fall 25-40% by 2050
Primary Uranium sector LT SELL
We have independently audited global nuclear construction statistics in order to determine future Uranium demand. Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies. Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.
Since plateauing and despite strong Chinese growth, nuclear power generation has fallen <2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.
The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.
As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations. In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases. Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.
In our third report in the Belt and Road Initiative (BRI) or One Belt One Road (OBOR) series, we examine a brand-new US strategic initiative to finance emerging markets economies, including OBOR, African, and Latin American countries.
The on-going trade war between China and the US makes the issue very political. Rightfully so, we believe the creation of the International Development Finance Corporation (“IDFC”) could be politically-motivated, but IDFC is no competition to the BRI as the latter deploys much greater funding (about USD40bn a year).
However, we see the merits of IDFC and the positive effects on Emerging Asia. After all, more competition for influence and more fund flow will help fund projects, and, perhaps, help reduce poverty (if good governance is observed). We also expect IDFC’s USD60bn fund to create more investable projects for institutional investors and lower funding cost for countries that need large infrastructure funding and countries that have been suspicious of the BRI such as India, Indonesia, the Philippines, Vietnam, and Sri Lanka.
Would Wal Mart Stores (WMT US) have paid USD16 bn last year for Flipkart, a leading online Indian retailer, if the recent clarification on India’s policy on FDI in e-commerce were in place back then? Foreign owned online retailers in India ( Amazon.com Inc (AMZN US) , Wal Mart Stores (WMT US) and Alibaba Group Holding (BABA US) ) will need to rejig their operating models and may face prospects of slower growth and even more distant breakeven targets, if the Indian Government is indeed determined to enforce its policy that e-commerce ‘Marketplaces’ operate only as platforms for third party vendors. Unsurprisingly, Amazon.com Inc (AMZN US) and Wal Mart Stores (WMT US) have reportedly teamed up to lobby the government on these regulations.
The Indian Government had posted a one-page circular on Dec 26th giving further clarifications to its existing policy on foreign owned e-commerce entities. The detailing of policy specifics seems to be an attempt to enforce the existing policy restrictions on foreign owned online retailers; compliance has so far been sketchy. India do not allow majority foreign ownership in multi brand retail stores and online retailers are allowed to operate only as ‘Marketplaces’ and not as B2C entities. With national elections due in next few months, the Government cannot ignore demands from domestic lobby groups to reign in free play by deep pocketed foreign operators that have been hurting local retailers.
In the detailed note below, we present (1) an overview of the regulatory framework and restrictions under which online retailers operate in India (2) the updated policy and its impact on operating models of Amazon and Walmart in India (3) expectations for India’s e-commerce players. Also, there is a likely gainer from all these – a listed Indian player aspiring to trump global majors in India’s online retail turf.
The Indian economy is in a sweet spot currently. On one hand economic growth is strong and on the other hand, some of the risks have abated due to the sharp fall in Oil prices. Economic growth will thus be strong in 2019 with macro stability. However, given that 2019 is an election year, the risks of a policy mistake are high due to the divergence in economic growth between rural India and the rest of the country. It is very likely that the next few months will see some monetary easing on one hand due to the relatively benign outlook for headline inflation and fiscal stimulus on the other to prop up the rural economy. This given the backdrop of already strong overall growth and stubbornly high core inflation risks over stimulating the economy and consequent build-up of inflationary pressures – something akin to what happened in 2009 but on a smaller scale. However, that is a problem for 2020 or perhaps beyond. In the interim, 2019 promises to be a reasonably strong year with 7% plus growth, lower interest rates and strong growth in corporate earnings.
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Metropolis Health Services Limited (MHL IN) is the 3rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.
Shaily Engineering Plastics (SHEP IN) Q2 FY19 results were below our expectations. While revenue increased by 10% YoY, PAT declined by 9% YoY in Q2 FY19. This muted performance was primarily due higher raw material prices and a shortage of labour as well as power outage that resulted in low machine utilization. We analyze the results.
Godrej Agrovet is a large conglomerate operating in various business verticals in the agriculture sector. It is looking to merge with Astec LifeSciences which is a pure agro-chemical company that focusses on Chemical molecule production and formulation for domestic and export markets. In this report, we analyze the implications of the merger as well as the impact on minority shareholders in both companies.
Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.
Indusind Bank’s reckless decision to provide a Rs 20 bn (8% of the bank’s capital) unsecured bridge loan to IL&FS, an insolvent infrastructure company has led to a significant de-rating of its valuation multiple. In the 3QFY2019 results call, Ramesh Sobti, the bank’s CEO believes that the bank will eventually need to provide only 40-50% of this exposure and the bank has currently provided only 26.5%. The bank’s guidance on this appears to be as optimistic as its initial appraisal when it disbursed the loan, without any apparent scrutiny of the company’s financials. Shareholders in the bank need to be more realistic and factor a 100% write-off on the unsecured IL&FS exposure and need to examine all the bank’s loans more carefully for similar high-risk lending. The glory days of this once fancied stock are over and a bleak future beckons.
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In the semiconductor industry, particularly in the DRAM sector, there has been significant consolidation leading some to hypothesize that there’s now an oligopoly that will cause prices to normalize and thus end the business’ notorious revenue cycles. Here we will take a critical look at this argument to explain its fallacy.
In their public presentations, central banks seem to be contemplating the use of neutral interest rates (r*) in addition to unemployment/inflation theories. R* has the advantage of appearing to be subject to mathematical precision, yet it’s unobservable, and so unfalsifiable. Thus, it permits central banks to present any policy conclusion they want without fear of verifiable contradiction. R* is the policy rate that would equate the future supply of and demand for loans. It rises and falls as an economy strengthens and weakens. Long-term observation during the non-inflationary gold standard, period indicated that r* in an average economy was 2% plus, which would become 4% plus with today’s 2% inflation target. The Fed may soon end this tightening cycle with the fed funds rate at or near 2¾%, which would be r* if the rate of lending and borrowing in America remained stable thereafter. Rising (falling) lending would indicate a higher (lower) r*.
We recently visited Prataap Snacks (DIAMOND IN) in Indore, Madhya Pradesh. Our objective of interaction was to get some clarifications on standalone financials of the company. As of FY 2018, standalone revenue was at 10,309 mn vs 10,377 mn for consolidated entity. Contrary to management’s suggestion to look at consolidated financials, we prefer to look at standalone financials, since the parent company contributes to 99% of Sales as 100% of the assets. Some of the issues that warrant attention are highlighted in this insight. Consensus financial data indicate an expectation of 44% growth in EPS for FY 2020. Our checks indicate an increasing competitive environment where both regional and national (MNC brands) are fighting for market share. The company is entering new product categories like sweet snacks. However, looking at growth expectations and cost structures discussed in this insight, investors would be better off looking for an alternative which is leaner.
The ability to have stable prices has great value.
According to Edward Gibbon, the decaying Roman Empire exhibited five hallmarks: 1) concern with displaying affluence instead of building wealth; 2) obsession with sex; 3) freakish and sensationalistic art; 4) widening disparity between the rich and the poor; and 5) increased demand to live off the state. Most DMs and many EMs display similar symptoms today because fiscal and monetary policies, the foundation of both ancient and modern societies, are identical: increasing welfare outlays by artificially inflating the money supply. The Roman Empire took more than four centuries to destroy what the Republic had built in the previous five centuries because clipping and debasing coins inflated currency supplies slowly. Entering debits and credits in the books of commercial and central banks is much more efficient.
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The year 2018 was not the brightest for cryptocurrencies; Bitcoin (XBTUSD CURNCY) fell around 70% during 2018 and top altcoins like Ethereum (ETH BGN CURNCY), Ripple and Bitcoin Cash were also down around 80%, 85% and 95% respectively during last year. While it is difficult to pinpoint a single reason for this, a number of factors including, rising security concerns, increased scrutiny, failed institutional support and Bitcoin Cash hash wars have collectively contributed to this bearish sentiment in the cryptocurrency markets last year.
In this note we take a look at several top cryptocurrency and blockchain developments from last year, to see how they would fare going into 2019.
This is a collaborative report between Douglas Kim and myself.
A surging loan-to-deposit ratio (LDR) for India’s banks is a concern. It suggests liquidity conditions are worsening for banks; there may be considerable supportive lending; and should deposit flight ensue, there are increased knock-on credit risks. The fact that LDRs are rising concurrently with sharply higher NPLs is especially worrisome.
Global and Asia headwinds still rattle the gaming sector, but these three companies remain undervalued despite market sentiment.
Macau’s solid year end performance continues to defy projections, producing a 14% y/y GGR increase.
Galaxy will benefit disproportionately from the HKMB bridge traffic growth, MGM’s single digit market share will ramp up to double digits and Nagacorp may be the single most siloed gaming operator in all of Asia.
You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.
If we had to make a base observation for Asia credit markets over 2018, it was certainly caught “wrong-footed” like most of its other risky asset counterparts. The combination of a more hawkish Fed in 2018, global quantitative tightening, late-cycle economic conditions, volatility and a strong USD have all served to impact almost all the asset classes negatively. According to some asset allocators, the only asset class which returned positive in 2018 was cash, every other traditional asset class saw losses.
USD direction will further dictate the impact on overall Asian risk, in our view, with many undervalued Asian currencies following their sharp declines in 2018. One of our scenarios includes a range-bound USD in 1H19, followed by a possible reversal in 2H19 on any dovish Fed policy/US economic weakness. In this case, it has the potential to attract incremental portfolio inflows back into Asian risk. We expect a slightly tighter bias in monetary policy in most Asia ex-Japan nations which is supportive for their respective currencies.
In 2019, risk-reward dynamics have improved particularly for Asian investment grade (“IG”) where we see more limited MTM pressure. We expect a more defensive market at least in 1H19 which supports our heavier IG bias. We suspect larger investors would continue to reallocate depending on the outcomes of the China-US trade dispute and their view on US risk (arguably near its last late-cycle expansion legs). We continue to be extremely selective in Asian high yield (“HY”) which have been impacted by idiosyncratic situations including credit deterioration and rising defaults. Exogenous factors such as the potential for “fallen angel” risk (i.e. a migration from issuers on the cusp of IG, “BBB-” into HY) as well as net portfolio outflows from HY, EM and leveraged loan funds are ongoing concerns. Despite cheaper valuations in Asian HY, we still see skewed risk-reward (with larger potential risks).
In the US, our base case expects the Fed to hike 1-2 times (quarter point each) for 2019, premised on still below-trend inflation and external factors. We think it is near the tail-end of its current tightening cycle, but we would continue to monitor the US supply-side (labour markets, employment gaps, prices) for further clues. A sustained upshot to the previous factors may have the potential to prolong the Fed’s tightening cycle.
On China’s side, we have seen a critical reversal in policy towards selective expansion/accommodation again as economic reforms instituted 3 years ago have been reprioritized. China’s difficult task to balance growth targets and restructure its economy is a perennial issue. We would also expect defaults to remain elevated domestically/internationally as a new paradigm of credit investing takes root in China.
Finally, we would like to wish our readers luck in investing and trading in the year ahead.
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Wonderla Holidays (WONH IN) Q2 FY19 results were below our expectations. While revenues declined by 16% YoY, EBITDA decreased by 18% YoY in Q2 FY19. The impact was primarily from its Kerala based amusement park that got affected by the devastating flood that the state has witnessed after a gap of near 100 years. We analyze the result.
Shemaroo Entertainment (SHEM IN) Q2 FY19 results were in line with our expectations. While the revenues grew by 21% YoY due to a strong growth from the digital business along with a strong recovery in the traditional business post demonetization and GST impact, PAT also grew by 22% YoY in Q2 FY19. We analyze the result.
The deadline (December 31, 2018) for Uday Kotak, the founder-CEO of Kotak Mahindra Bank (KMB), to dilute his stake to 20% has come and gone, and shareholders await the wrath of the banking regulator.
The regulator had already given an extended time line for the founders to reduce their stake, a relaxation not provided to other similar individual founders of private sector banks. When KMB realised that the regulator was no longer going to give another extension, the rebellious bank, in an unprecedented and reckless decision, took the regulator to court. The non-founder shareholders, who are in the majority, had been deprived of handsome gains which accrued to the founders by the share price increase and the extended time frame given to reduce founder shareholding, and now the bank is likely to be penalised for the founders’ not complying with the regulatory stipulation. In a benevolent gesture, the banking regulator instead of invoking the relevant section specifically dealing with wilful non-disclosure to the regulator where the punishment can be imprisonment for senior management has instead invoked a far less stringent provision where the penalties can be monetary or non-monetary on the bank.
The business media and the sell-side do not appear concerned that the majority of KMB shareholders are being negatively impacted on account of actions of the founder. But such is the corporate governance practiced in KMB. (Ironically, Uday Kotak chaired the capital market regulator committee on corporate governance; today no one is ready to criticise Kotak’s governance of his own bank.) The secular uptrend in the bank’s share price to date may now hit a regulatory headwind, and investors need to exercise caution.
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