India

In this briefing:

1. StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels
2. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data
3. Fortis Healthcare: OK Results and a Cost-Cutter CEO
4. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

1. StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels

This week in StubWorld …

• Can One Bhd (CAN MK)‘s gets shareholder approval to launch a Mandatory General Offer for 33%-held Kian Joo Can Factory (KJC MK). (note, both legs are illiquid)
• Curtis Lehnert sees Mahindra & Mahindra (MM IN)‘s discount to NAV at its widest since 2015.

Preceding my comments on Can One/Kian Joo, Mahindra and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

2. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data

3. Fortis Healthcare: OK Results and a Cost-Cutter CEO

Fortis Healthcare (FORH IN) ‘s hospital business continued to improve in FQ3 while the lab business remained stable. This Insight briefly focuses on the highlights of the results and their implications. The hiring of a CEO out of Narayana Hrudayalaya (NARH IN) signals continued (and likely intensified) focus on efficiency to improve profitability. 

We continue to think that Fortis is a promising turnaround story. Refer to the Insight Stream for the history of this situation.

4. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

The company that brought the off-road vehicle to post-war India in the 1940s has grown into a leading personal vehicle manufacturer covering land, air and sea. Merely making cars, planes and boats wasn’t ambitious enough for this company though, the conglomerate wouldn’t be complete without a financial services and tech consulting business under the corporate umbrella. 

Indian holding companies typically trade a wider discount to NAV than their East Asian counterparts, however the 42% discount to NAV that Mahindra & Mahindra (MM IN) currently trades at, is a trough level historically for the company. In the body of this insight I will present my case for a stub trade on the company, detailing the business structure, performance and the unlisted stub businesses.

In this insight I will cover:

I. The Trade

II. Group Overview and Stub Business Review

III. My Track Record with Stub Trades

In this briefing:

1. Jain Irrigation: From Up Close The Crop Doesn’t Look Healthy
2. RBI Says Kotak Tried to “Take It for a Ride”: Shareholders Should Expect the Consequences
3. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
4. RBI Credibility at Stake
5. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit

1. Jain Irrigation: From Up Close The Crop Doesn’t Look Healthy

Notwithstanding, the revenue growth Jain Irrigation Systems (JI IN) (JISL) seems to be lacking efficiency in utilization of fixed assets. The sale of stake in a subsidiary company raises eyebrow. Another bug that should bother JISL is the quality of its earnings. This impairs any positive forecast on operating profit. The situation becomes sticky when the issues of free cash flow, performance of subsidiaries and threat to goodwill are thrown in the matrix. 

2. RBI Says Kotak Tried to “Take It for a Ride”: Shareholders Should Expect the Consequences

The language used in the writ petition filed by Kotak Mahindra Bank (KMB) in Bombay High Court against the banking regulator should have alarmed shareholders. They would be even more apprehensive if they read the language used by the Reserve Bank of India (RBI) in its reply. That a bank should take the regulator to court and publicly challenge its authority in order to prevent a dilution in its founders’ shareholding is itself telling of the founder-CEO’s excessive influence on the board. The harsh, critical language used by the RBI in its court filing (“wilful misrepresentation”, “mala fide intent” taking the regulator “for a ride”) indicates its extreme displeasure with the bank, and the troubles that await the bank if the High Court rules in the regulator’s favour. In such an event, the RBI would probably demand a restructuring of the KMB’s board of directors, and may even force the removal of the founder as a CEO. 

3. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.

New York based activist investor firm Starboard Value has been intricately involved in shaping the  fortunes and futures of two high profile technology companies in recent years, Marvell and Mellanox. The firm first to prominence some five years ago when they were the first among their peers to accomplish the extraordinary feat of replacing the CEO and entire board of Fortune 500 restaurant group Darden, while holding less than 10% of the company’s shares.

In the wake of their Darden coup, the firm has gone from strength to strength. To date the firm has taken positions in a total of 105 publicly listed companies, replacing or adding some 211 directors on over 60 corporate boards.

On March 7’th 2019, Starboard Value announced the acquisition of a 4% stake in US comms infrastructure firm Zayo. In the intervening period, Zayo’s share price has risen by 14% as canny investors scramble to partake in the goodness that will surely be extracted by the activist firm that simply doesn’t take no for an answer. 

4. RBI Credibility at Stake

By Shumita Deveshwar, Director, India research

The Reserve Bank of India’s approval of an interim dividend to the government from its surplus reserves is yet another example of the central bank conforming to the government’s wishes under the leadership of Governor Shaktikanta Das. While investors cheered the RBI’s softer monetary policy stance earlier this month, former RBI heads continue to warn against the government’s short-term bias and emphasize the need for RBI independence.

• Most policies that led to the spat between the RBI and the government spat have now been reversed
• The growth focus has translated into easier banking and regulatory norms
• A softer monetary policy puts the RBI’s hard-fought credibility at stake
• Outflows due to political uncertainty and global headwinds will prove tough for a less credible RBI to counter
• Loose fiscal and monetary policies put long-term macroeconomic stability at risk

5. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit

Late Monday evening, Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector. L&T is seeking to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN) through a three-step transaction. Mindtree’s founders/promoters together have a 13.3% stake and staunchly oppose the takeover. L&T’s open offer presents an opportunity for longstanding large shareholders to partially or fully exit their stakes at a reasonable price.

In this briefing:

1. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data
2. Fortis Healthcare: OK Results and a Cost-Cutter CEO
3. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

1. Uzbekistan Is a Promising Latecomer, but Investors Need to Watch Out and Stay on Top of Data

2. Fortis Healthcare: OK Results and a Cost-Cutter CEO

Fortis Healthcare (FORH IN) ‘s hospital business continued to improve in FQ3 while the lab business remained stable. This Insight briefly focuses on the highlights of the results and their implications. The hiring of a CEO out of Narayana Hrudayalaya (NARH IN) signals continued (and likely intensified) focus on efficiency to improve profitability. 

We continue to think that Fortis is a promising turnaround story. Refer to the Insight Stream for the history of this situation.

3. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

The company that brought the off-road vehicle to post-war India in the 1940s has grown into a leading personal vehicle manufacturer covering land, air and sea. Merely making cars, planes and boats wasn’t ambitious enough for this company though, the conglomerate wouldn’t be complete without a financial services and tech consulting business under the corporate umbrella. 

Indian holding companies typically trade a wider discount to NAV than their East Asian counterparts, however the 42% discount to NAV that Mahindra & Mahindra (MM IN) currently trades at, is a trough level historically for the company. In the body of this insight I will present my case for a stub trade on the company, detailing the business structure, performance and the unlisted stub businesses.

In this insight I will cover:

I. The Trade

II. Group Overview and Stub Business Review

III. My Track Record with Stub Trades

In this briefing:

1. RBI Says Kotak Tried to “Take It for a Ride”: Shareholders Should Expect the Consequences
2. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
3. RBI Credibility at Stake
4. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit
5. Reliance Communications Ltd: A Complete Mess

1. RBI Says Kotak Tried to “Take It for a Ride”: Shareholders Should Expect the Consequences

The language used in the writ petition filed by Kotak Mahindra Bank (KMB) in Bombay High Court against the banking regulator should have alarmed shareholders. They would be even more apprehensive if they read the language used by the Reserve Bank of India (RBI) in its reply. That a bank should take the regulator to court and publicly challenge its authority in order to prevent a dilution in its founders’ shareholding is itself telling of the founder-CEO’s excessive influence on the board. The harsh, critical language used by the RBI in its court filing (“wilful misrepresentation”, “mala fide intent” taking the regulator “for a ride”) indicates its extreme displeasure with the bank, and the troubles that await the bank if the High Court rules in the regulator’s favour. In such an event, the RBI would probably demand a restructuring of the KMB’s board of directors, and may even force the removal of the founder as a CEO. 

2. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.

New York based activist investor firm Starboard Value has been intricately involved in shaping the  fortunes and futures of two high profile technology companies in recent years, Marvell and Mellanox. The firm first to prominence some five years ago when they were the first among their peers to accomplish the extraordinary feat of replacing the CEO and entire board of Fortune 500 restaurant group Darden, while holding less than 10% of the company’s shares.

In the wake of their Darden coup, the firm has gone from strength to strength. To date the firm has taken positions in a total of 105 publicly listed companies, replacing or adding some 211 directors on over 60 corporate boards.

On March 7’th 2019, Starboard Value announced the acquisition of a 4% stake in US comms infrastructure firm Zayo. In the intervening period, Zayo’s share price has risen by 14% as canny investors scramble to partake in the goodness that will surely be extracted by the activist firm that simply doesn’t take no for an answer. 

3. RBI Credibility at Stake

By Shumita Deveshwar, Director, India research

The Reserve Bank of India’s approval of an interim dividend to the government from its surplus reserves is yet another example of the central bank conforming to the government’s wishes under the leadership of Governor Shaktikanta Das. While investors cheered the RBI’s softer monetary policy stance earlier this month, former RBI heads continue to warn against the government’s short-term bias and emphasize the need for RBI independence.

• Most policies that led to the spat between the RBI and the government spat have now been reversed
• The growth focus has translated into easier banking and regulatory norms
• A softer monetary policy puts the RBI’s hard-fought credibility at stake
• Outflows due to political uncertainty and global headwinds will prove tough for a less credible RBI to counter
• Loose fiscal and monetary policies put long-term macroeconomic stability at risk

4. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit

Late Monday evening, Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector. L&T is seeking to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN) through a three-step transaction. Mindtree’s founders/promoters together have a 13.3% stake and staunchly oppose the takeover. L&T’s open offer presents an opportunity for longstanding large shareholders to partially or fully exit their stakes at a reasonable price.

5. Reliance Communications Ltd: A Complete Mess

The legal battle between Reliance Communications (RCOM IN) and its lender group has further intensified after the Supreme Court directed the company to submit INR4.53bn within four weeks. The Court ruled that Chairman Anil Ambani had wilfully not paid INR5.5 bn to Swedish Telecom equipment maker Ericsson (Lm) Tel-Sp Adr (ERIC US). In our view, the situation has become almost untenable for RCOM and Mr. Ambani as the company will struggle to sell off its spectrum and other assets in time. In addition, The spectrum sale is yet to be resolved and this means that raising funds quickly remains a challenge. We have revised our recommendation for RCOM 6.5% 20s from NEUTRAL to UNDERWEIGHT due to the on-going negative headlines which we believe is an asymmetric downside risk to the bonds. This is despite some positive developments we highlighted in our last report (Reliance Communications Ltd. •Too Few Steps Forward• dated 18-Oct-18) and our recovery calculation in our previous report (Reliance Communications: Waiting to Exhale  dated 07-Jul-18), which is proven wrong by the market.

In this briefing:

1. Fortis Healthcare: OK Results and a Cost-Cutter CEO
2. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

1. Fortis Healthcare: OK Results and a Cost-Cutter CEO

Fortis Healthcare (FORH IN) ‘s hospital business continued to improve in FQ3 while the lab business remained stable. This Insight briefly focuses on the highlights of the results and their implications. The hiring of a CEO out of Narayana Hrudayalaya (NARH IN) signals continued (and likely intensified) focus on efficiency to improve profitability. 

We continue to think that Fortis is a promising turnaround story. Refer to the Insight Stream for the history of this situation.

2. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

The company that brought the off-road vehicle to post-war India in the 1940s has grown into a leading personal vehicle manufacturer covering land, air and sea. Merely making cars, planes and boats wasn’t ambitious enough for this company though, the conglomerate wouldn’t be complete without a financial services and tech consulting business under the corporate umbrella. 

Indian holding companies typically trade a wider discount to NAV than their East Asian counterparts, however the 42% discount to NAV that Mahindra & Mahindra (MM IN) currently trades at, is a trough level historically for the company. In the body of this insight I will present my case for a stub trade on the company, detailing the business structure, performance and the unlisted stub businesses.

In this insight I will cover:

I. The Trade

II. Group Overview and Stub Business Review

III. My Track Record with Stub Trades

In this briefing:

1. Fortis Healthcare: OK Results and a Cost-Cutter CEO
2. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise
3. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply
4. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

1. Fortis Healthcare: OK Results and a Cost-Cutter CEO

Fortis Healthcare (FORH IN) ‘s hospital business continued to improve in FQ3 while the lab business remained stable. This Insight briefly focuses on the highlights of the results and their implications. The hiring of a CEO out of Narayana Hrudayalaya (NARH IN) signals continued (and likely intensified) focus on efficiency to improve profitability. 

We continue to think that Fortis is a promising turnaround story. Refer to the Insight Stream for the history of this situation.

2. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

The company that brought the off-road vehicle to post-war India in the 1940s has grown into a leading personal vehicle manufacturer covering land, air and sea. Merely making cars, planes and boats wasn’t ambitious enough for this company though, the conglomerate wouldn’t be complete without a financial services and tech consulting business under the corporate umbrella. 

Indian holding companies typically trade a wider discount to NAV than their East Asian counterparts, however the 42% discount to NAV that Mahindra & Mahindra (MM IN) currently trades at, is a trough level historically for the company. In the body of this insight I will present my case for a stub trade on the company, detailing the business structure, performance and the unlisted stub businesses.

In this insight I will cover:

I. The Trade

II. Group Overview and Stub Business Review

III. My Track Record with Stub Trades

3. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply

There was no deal out of Beijing on Friday, but the markets appeared overjoyed at the news that the US and China had decided to continue their talks this week, in Washington.

Clearly, the “structural” issues that the US has with China are proving hard to work through (government subsidies for Chinese state-owned enterprises was reportedly one of the major stumbling blocks in last week’s talks). But the markets took the continuation of talks as a positive sign that the two sides are determined to find a resolution.

Could crude, which has been moving in lockstep with the global equity markets since October, be starting to reconnect with its fundamentals and pricing in the supply restraints and risks that have piled up over the recent months? There were signs pointing in that direction last week, as the rally in Brent and WTI to a three-month high at Friday’s settle surpassed the bounce in the stock markets.

We have also created a ready reference sheet of the various crude supply chokeholds across the world that have stacked up over the past few months, while the oil market remained fixated on the demand question. These supply restraints and risks are waiting in the wings as a potential bullish snowball, if and when oil demand worries are firmly pushed aside.

4. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance

In this briefing:

1. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
2. RBI Credibility at Stake
3. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit
4. Reliance Communications Ltd: A Complete Mess
5. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress

1. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.

New York based activist investor firm Starboard Value has been intricately involved in shaping the  fortunes and futures of two high profile technology companies in recent years, Marvell and Mellanox. The firm first to prominence some five years ago when they were the first among their peers to accomplish the extraordinary feat of replacing the CEO and entire board of Fortune 500 restaurant group Darden, while holding less than 10% of the company’s shares.

In the wake of their Darden coup, the firm has gone from strength to strength. To date the firm has taken positions in a total of 105 publicly listed companies, replacing or adding some 211 directors on over 60 corporate boards.

On March 7’th 2019, Starboard Value announced the acquisition of a 4% stake in US comms infrastructure firm Zayo. In the intervening period, Zayo’s share price has risen by 14% as canny investors scramble to partake in the goodness that will surely be extracted by the activist firm that simply doesn’t take no for an answer. 

2. RBI Credibility at Stake

By Shumita Deveshwar, Director, India research

The Reserve Bank of India’s approval of an interim dividend to the government from its surplus reserves is yet another example of the central bank conforming to the government’s wishes under the leadership of Governor Shaktikanta Das. While investors cheered the RBI’s softer monetary policy stance earlier this month, former RBI heads continue to warn against the government’s short-term bias and emphasize the need for RBI independence.

• Most policies that led to the spat between the RBI and the government spat have now been reversed
• The growth focus has translated into easier banking and regulatory norms
• A softer monetary policy puts the RBI’s hard-fought credibility at stake
• Outflows due to political uncertainty and global headwinds will prove tough for a less credible RBI to counter
• Loose fiscal and monetary policies put long-term macroeconomic stability at risk

3. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit

Late Monday evening, Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector. L&T is seeking to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN) through a three-step transaction. Mindtree’s founders/promoters together have a 13.3% stake and staunchly oppose the takeover. L&T’s open offer presents an opportunity for longstanding large shareholders to partially or fully exit their stakes at a reasonable price.

4. Reliance Communications Ltd: A Complete Mess

The legal battle between Reliance Communications (RCOM IN) and its lender group has further intensified after the Supreme Court directed the company to submit INR4.53bn within four weeks. The Court ruled that Chairman Anil Ambani had wilfully not paid INR5.5 bn to Swedish Telecom equipment maker Ericsson (Lm) Tel-Sp Adr (ERIC US). In our view, the situation has become almost untenable for RCOM and Mr. Ambani as the company will struggle to sell off its spectrum and other assets in time. In addition, The spectrum sale is yet to be resolved and this means that raising funds quickly remains a challenge. We have revised our recommendation for RCOM 6.5% 20s from NEUTRAL to UNDERWEIGHT due to the on-going negative headlines which we believe is an asymmetric downside risk to the bonds. This is despite some positive developments we highlighted in our last report (Reliance Communications Ltd. •Too Few Steps Forward• dated 18-Oct-18) and our recovery calculation in our previous report (Reliance Communications: Waiting to Exhale  dated 07-Jul-18), which is proven wrong by the market.

5. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress

LNG prices have dropped to a seasonal low, as we flagged in our outlook piece for this year (2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables) but this hasn’t dampened enthusiasm to push new projects forward (see A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies). We continue to see this as positive for the LNG contractors and negative for the LNG developers. We discuss recent LNG prices, European LNG demand and the FID outlook including project updates from Venture Global, Alaska and Cyprus. 

In this briefing:

1. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise
2. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply
3. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

1. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

The company that brought the off-road vehicle to post-war India in the 1940s has grown into a leading personal vehicle manufacturer covering land, air and sea. Merely making cars, planes and boats wasn’t ambitious enough for this company though, the conglomerate wouldn’t be complete without a financial services and tech consulting business under the corporate umbrella. 

Indian holding companies typically trade a wider discount to NAV than their East Asian counterparts, however the 42% discount to NAV that Mahindra & Mahindra (MM IN) currently trades at, is a trough level historically for the company. In the body of this insight I will present my case for a stub trade on the company, detailing the business structure, performance and the unlisted stub businesses.

In this insight I will cover:

I. The Trade

II. Group Overview and Stub Business Review

III. My Track Record with Stub Trades

2. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply

There was no deal out of Beijing on Friday, but the markets appeared overjoyed at the news that the US and China had decided to continue their talks this week, in Washington.

Clearly, the “structural” issues that the US has with China are proving hard to work through (government subsidies for Chinese state-owned enterprises was reportedly one of the major stumbling blocks in last week’s talks). But the markets took the continuation of talks as a positive sign that the two sides are determined to find a resolution.

Could crude, which has been moving in lockstep with the global equity markets since October, be starting to reconnect with its fundamentals and pricing in the supply restraints and risks that have piled up over the recent months? There were signs pointing in that direction last week, as the rally in Brent and WTI to a three-month high at Friday’s settle surpassed the bounce in the stock markets.

We have also created a ready reference sheet of the various crude supply chokeholds across the world that have stacked up over the past few months, while the oil market remained fixated on the demand question. These supply restraints and risks are waiting in the wings as a potential bullish snowball, if and when oil demand worries are firmly pushed aside.

3. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance

In this briefing:

1. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise
2. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply
3. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates
4. Yes Bank: In the Cross Hairs of the Regulator

1. TRADE IDEA – Mahindra & Mahindra (MM IN) Stub: Rise

The company that brought the off-road vehicle to post-war India in the 1940s has grown into a leading personal vehicle manufacturer covering land, air and sea. Merely making cars, planes and boats wasn’t ambitious enough for this company though, the conglomerate wouldn’t be complete without a financial services and tech consulting business under the corporate umbrella. 

Indian holding companies typically trade a wider discount to NAV than their East Asian counterparts, however the 42% discount to NAV that Mahindra & Mahindra (MM IN) currently trades at, is a trough level historically for the company. In the body of this insight I will present my case for a stub trade on the company, detailing the business structure, performance and the unlisted stub businesses.

In this insight I will cover:

I. The Trade

II. Group Overview and Stub Business Review

III. My Track Record with Stub Trades

2. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply

There was no deal out of Beijing on Friday, but the markets appeared overjoyed at the news that the US and China had decided to continue their talks this week, in Washington.

Clearly, the “structural” issues that the US has with China are proving hard to work through (government subsidies for Chinese state-owned enterprises was reportedly one of the major stumbling blocks in last week’s talks). But the markets took the continuation of talks as a positive sign that the two sides are determined to find a resolution.

Could crude, which has been moving in lockstep with the global equity markets since October, be starting to reconnect with its fundamentals and pricing in the supply restraints and risks that have piled up over the recent months? There were signs pointing in that direction last week, as the rally in Brent and WTI to a three-month high at Friday’s settle surpassed the bounce in the stock markets.

We have also created a ready reference sheet of the various crude supply chokeholds across the world that have stacked up over the past few months, while the oil market remained fixated on the demand question. These supply restraints and risks are waiting in the wings as a potential bullish snowball, if and when oil demand worries are firmly pushed aside.

3. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance

4. Yes Bank: In the Cross Hairs of the Regulator

Yes Bank is in the cross hairs of the Reserve Bank of India (RBI), the banking regulator. On February 13, 2019, the bank issued a press release stating that the regulator’s risk assessment report (RAR) for the year ended March 31, 2018 revealed nil divergence, i.e. the bank’s net profits and asset quality were in conformity with the regulatory norms, unlike in FY2016 and FY2017. However, on February 15, 2019, the bank released a note stating that the RBI had pulled up the bank, as publicly disclosing a part of the RAR breaches regulatory confidentiality and is in violation of regulatory guidelines. While the RAR is indeed confidential, the RBI did not publicly admonish other banks like HDFC Bank, Axis Bank and Kotak Mahindra Bank (KMB) when they had publicly revealed nil divergence from their RARs. It is apparent that Yes Bank is the bad boy in the eyes of the regulator, and the bank will have to renew its efforts to change that perception. Shareholders have to therefore exercise caution and take the surge in the share price with a pinch of salt.

In this briefing:

1. RBI Credibility at Stake
2. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit
3. Reliance Communications Ltd: A Complete Mess
4. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress
5. ECM Weekly (16 March 2019) – Embassy Office REIT, Tiger Brokers, Dongzheng Auto, Koolearn, CanSino

1. RBI Credibility at Stake

By Shumita Deveshwar, Director, India research

The Reserve Bank of India’s approval of an interim dividend to the government from its surplus reserves is yet another example of the central bank conforming to the government’s wishes under the leadership of Governor Shaktikanta Das. While investors cheered the RBI’s softer monetary policy stance earlier this month, former RBI heads continue to warn against the government’s short-term bias and emphasize the need for RBI independence.

• Most policies that led to the spat between the RBI and the government spat have now been reversed
• The growth focus has translated into easier banking and regulatory norms
• A softer monetary policy puts the RBI’s hard-fought credibility at stake
• Outflows due to political uncertainty and global headwinds will prove tough for a less credible RBI to counter
• Loose fiscal and monetary policies put long-term macroeconomic stability at risk

2. Mindtree (MTCL IN): L&T’s Hostile Takeover Offer Is an Awkward Opening Gambit

Late Monday evening, Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector. L&T is seeking to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN) through a three-step transaction. Mindtree’s founders/promoters together have a 13.3% stake and staunchly oppose the takeover. L&T’s open offer presents an opportunity for longstanding large shareholders to partially or fully exit their stakes at a reasonable price.

3. Reliance Communications Ltd: A Complete Mess

The legal battle between Reliance Communications (RCOM IN) and its lender group has further intensified after the Supreme Court directed the company to submit INR4.53bn within four weeks. The Court ruled that Chairman Anil Ambani had wilfully not paid INR5.5 bn to Swedish Telecom equipment maker Ericsson (Lm) Tel-Sp Adr (ERIC US). In our view, the situation has become almost untenable for RCOM and Mr. Ambani as the company will struggle to sell off its spectrum and other assets in time. In addition, The spectrum sale is yet to be resolved and this means that raising funds quickly remains a challenge. We have revised our recommendation for RCOM 6.5% 20s from NEUTRAL to UNDERWEIGHT due to the on-going negative headlines which we believe is an asymmetric downside risk to the bonds. This is despite some positive developments we highlighted in our last report (Reliance Communications Ltd. •Too Few Steps Forward• dated 18-Oct-18) and our recovery calculation in our previous report (Reliance Communications: Waiting to Exhale  dated 07-Jul-18), which is proven wrong by the market.

4. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress

LNG prices have dropped to a seasonal low, as we flagged in our outlook piece for this year (2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables) but this hasn’t dampened enthusiasm to push new projects forward (see A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies). We continue to see this as positive for the LNG contractors and negative for the LNG developers. We discuss recent LNG prices, European LNG demand and the FID outlook including project updates from Venture Global, Alaska and Cyprus. 

5. ECM Weekly (16 March 2019) – Embassy Office REIT, Tiger Brokers, Dongzheng Auto, Koolearn, CanSino

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72.4% for IPOs and 63.7% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• FriendTimes Inc. (Hong Kong, >US$100m)
• Frontage (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• UBS and Rivals to Pay $100 Million to Settle Hong Kong IPO Cases
• Chinese Luxury Car Finance Firm Seeks $428 Million in Hong Kong IPO
• Online Educator Koolearn to Raise up to $233 Million in Hong Kong IPO
• Resurgence in Indian IPO market likely only after general elections
• Homeplus K-REIT Withdraws $1.5 Billion Korean IPO on Weak Demand
• Prospa may revive listing plan after beating prospectus forecasts
• Luckin Coffee chairman said to tap banks for $200m loan in exchange for IPO role

This week Analysis on Upcoming IPO

• Homeplus REIT IPO: A Key Landmark Deal in the History of the Korean REIT Market
• Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either
• Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond
• CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent
• Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending