Brief Equities Bottom-Up: Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity and more

In this briefing:

1. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity
2. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
3. Havells India
4. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
5. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!

1. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity

• Negative press “noise” on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets
• This reflects the Bolsonaro administration’s limited engagement with the Legislature so far on pension reform
• Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies
• The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval
• We see the equity market and currency corrections as an opportunity, and we highlight our positive view on Banco Do Brasil Sa (BBAS3 BZ)

2. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014.  Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.  

3. Havells India

As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity.  Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters.  At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.

4. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year.  The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.

Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.

5. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!

This is the concluding part of our Housing Finance Companies (HFC) series where we elaborated the outlook of the mortgage industry in India along with initiating coverage on the best HFCs who we believe may continue to be the key beneficiaries of a long term secular growth in the Indian mortgage industry. (please click here, here and here ).

In this report we cover  Indiabulls Housing Finance (IHFL IN) , the third largest HFC in the country. The company is among the fastest growing HFCs whose loan portfolio has grown at a CAGR of 29% in the last 5 years ending FY18. And in spite of robust growth, the asset quality has remained steady.

Due to a strong track record of high capital adequacy, high liquidity coverage, high asset quality, improving operational efficiency and high return ratios, the company was recently awarded AAA rating by ICRA and CRISIL, the top 2 credit rating agencies in India.

From the parameters that are analyzed in detail in this report, we believe that the company in the long term has the potential to be in the league of HDFC Ltd., a benchmark in terms of corporate governance, robust asset management and wealth creation for shareholders.