Brief India: Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish and more

In this briefing:

1. Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish
2. How HDFC Recovered Most of Its IL&FS Investment – At the Cost of Other Lenders
3. Semiconductor Sales Dive A Record 7% MoM In December. 2019 Will Be A Low-To-No Growth Year.
4. Capital Flows Return To Asia and India

1. Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish

Embassy Office Parks REIT (EOP IN) plans to raise around US$1bn in its India IPO. EOP will primarily hold office assets in Bengaluru, Pune and Noida with a total portfolio size of US$4.2bn. The REIT is sponsored by two reputed real estate firms/investors and will be the only one of its kind in India.

The company expects all the assets to report positive rental reversion and higher occupancy over the next few years. However, this hasn’t been the case over the past few years when the industry backdrop was as supportive. In addition, the inclusion of solar assets in the portfolio doesn’t seem to be add much to the allure of the REIT but it adds more to the yield.

2. How HDFC Recovered Most of Its IL&FS Investment – At the Cost of Other Lenders

The ‘Interim Report of IL&FS and Its Subsidiaries’ dated November 30, 2018  by the Serious Fraud Investigation Office (SFIO), which was submitted by the Ministry of Corporate Affairs (MCA) to the National Company Law Tribunal (NCLT), not only reveals the shenanigans of IL&FS’s senior management but also puts the spotlight on how the perpetual market favourite, HDFC, India’s premier mortgage financier and co-founder of IL&FS, managed to reduce its loss on its equity investment in IL&FS  through financial engineering. The reduced loss, though, was at the cost of the other institutional lenders of IL&FS, who in effect compensated HDFC. While the SFIO is likely to question senior HDFC officials, possibly including current CEO Keki Mistry, for this transaction, HDFC shareholders may have a lower financial loss than originally estimated, thanks precisely to the transaction under investigation.

3. Semiconductor Sales Dive A Record 7% MoM In December. 2019 Will Be A Low-To-No Growth Year.

Global Semiconductor Sales for December 2018 amounted to $38.2 billion, down a record 7.0% MoM, according to the latest data published by the Semiconductor Industry Association (SIA). The December data reflects a sharp acceleration of a downward trend which began in November and comes as little surprise following an earnings season characterised by profit warnings led by industry giants such as Apple, Samsung and Nvidia. 

The December decline amounted to ~$3 billion in absolute terms, far less than the roughly $15 billion that failed to materialise in fourth quarter sector revenues and implying that substantial amounts of inventory still remain to be consumed from within the supply chain. 

As such we anticipate monthly semiconductor sales continuing to decline through April-May timeframe before stabilizing and returning to growth thereafter. We now anticipate growth to moderate significantly from the 13.7% experienced in 2018 to just 1% in 2019. 

4. Capital Flows Return To Asia and India

• Latest January ‘flash’ data show cross-border capital returning to Asia
• Asian EM and India favoured
• Reinforces similar evidence in December and helps reverse big outflows a year ago
• Adds support to our view that Asia is leading the Global cycle higher