Brief Equities Bottom-Up: Dabur IN and more

In this briefing:

1. Dabur IN
2. Dabur IN
3. Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?
4. SIS: 4Q18 Result Broke the Record
5. OCBC – Difficult to Square

1. Dabur IN

Either Dabur India Ltd (DABUR IN) should change the crystal ball or those responsible for gazing at it. Going by its trajectory of strategies in the recent past, the narrative that emerges is that of confusion. Confusion has been a constant about whom Dabur perceived its competitors, its perception of the market while the disruptors reigned and what is and what should be its core strengths.

In this summary insight, we find Dabur heading to hibernation in summers. We believe this confused state of mind at Dabur will lead to lower than expected growth rates and an impact on margins. Our arguments are based on in-depth analysis of over 3 years of conference calls, past 5 year financial statements, competitors balance sheets and primary research covering different parts of the country. Our base case FY 21 EPS is 21% lower than consensus estimates and a potential aggressive case EPS is 26% lower than consensus. We argue for a 35x forward multiple giving us a target price of INR 322 for the base case and an aggressive case target price of INR 305 indicating a potential 26% & 30% downside from the latest close price of INR 437.

A Detailed Insight that includes our detailed arguments and financial forecasts can be found elsewhere here on Smartkarma using the company’s ticker.

2. Dabur IN

Either Dabur India Ltd (DABUR IN) should change the crystal ball or those responsible for gazing at it. Going by its trajectory of strategies in the recent past, the narrative that emerges is that of confusion. Confusion has been a constant about whom Dabur perceived its competitors, its perception of the market while the disruptors reigned and what is and what should be its core strengths.

In this insight, we find Dabur heading to hibernation in summers. We believe this confused state of mind at Dabur will lead to lower than expected growth rates and an impact on margins. Our arguments are based on in-depth analysis of over 3 years of conference calls, past 5 year financial statements, competitors balance sheets and primary research covering different parts of the country. Our base case FY 21 EPS is 21% lower than consensus estimates and a potential aggressive case EPS is 26% lower than consensus. We argue for a 35x forward multiple giving us a target price of INR 322 for the base case and an aggressive case target price of INR 305 indicating a potential 26% & 30% downside from the latest close price of INR 437.

3. Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?

• Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid foundations for GDP growth, lowering fiscal account and inflationary pressures and lead to sustainably lower benchmark rates
• A no or very limited reform scenario would leave Brazil stuck in the GDP growth slow lane, which would imply a growing fiscal deficit and rising public sector debt burden, with a need for higher benchmark rates. We believe that meaningful pension reform will be approved in 2019; but the possibility of a heavily diluted version of reforms is still a potential risk
• The BCB’s January bank sector data indicates a solid start to 2019, especially in seasonally adjusted new loan grantings driven by corporates, and in better yoy comparisons in NPL ratio and NPL coverage
• We believe that successful pension reform should be positive for the bank sector, driving loan growth potential, as well as structural improvement in credit quality and sustainable lower benchmark interest rates. In conjunction, we see these factors as supportive for bank sector returns, with, over the medium term, the negative effect of lower credit spreads more than offset by the positive, structurally lower cost of risk from lower NPL ratios
• The successful pension reform scenario implies further bank stock re-ratings, driven by multiple expansion. Our top pick in large cap banks is Banco Do Brasil Sa (BBAS3 BZ), where the PBV discount to the private sector remains excessive; versus Itau Unibanco Holding Sa (ITUB4 BZ), the PBV discount is 42% and versus Banco Bradesco Sa (BBDC4 BZ) the PBV discount is 39%

4. SIS: 4Q18 Result Broke the Record

SIS’s 4Q18 net profit was Bt149m (+77%YoY, +16%QoQ), a record high level. The impressive 2018 result was much better than our forecast and accounts for 131% of our full-year forecast.

• A YoY and QoQ earnings growth were backed by an all-time high level of gross margin at 6.7% mainly driven by higher sales contribution from data center related products and others (security and surveillance) segments. 2018 net profit was at Bt468 (+58%YoY), buoyed by a record high sales and margin
• We maintain a positive outlook toward its 2019-20E earnings driven by 1) solid growth for high margin segments: enterprise, security and surveillance on the back of strong outlook for IT investment by private sector along the mega-trend of digitalization.
• Announced Bt0.55 of dividend payment or equivalent to 4.7% yield (XD on 3th May 2019

We maintain a BUY rating for SIS with our new target price of Bt15.0 derived from 10xPE’19E, its average trading range in the past five years or a 30% discount to the Thai Info Tech sector.

5. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this.