In this briefing:
- India Consumption: More Signs of a Widening Slowdown
- Cupid Ltd: Attractive Valuation Post Significant Correction
- U.S. Equity Strategy: Bullish Outlook Intact
- US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC
- Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump
1. India Consumption: More Signs of a Widening Slowdown
- Bank lending to NBFCs has been flat since Oct-18 after rising by ~ Rs 1 tn in the previous 5-month period. Debt mutual fund holdings in NBFCs have declined 20% over Sep-18 to Feb-19. CP issuances by NBFCs have also fallen to a fraction of the size before IL&FS defaulted.
- This is percolating through the economy slowing down the flow of overall credit.
- 2-W channel inventories are nearly twice the normal level for some players
- M&HCV production has been cut 20-25% YoY in 4QFY19
- Tractor volume growth is likely to be in single digits in FY20
- Air conditioner and refrigerators are seeing steep discounting owing to large inventory build-up on delayed summer
- FMCG players indicate both rural and urban demand weakness including in the modern retail segment
2. Cupid Ltd: Attractive Valuation Post Significant Correction
Cupid Ltd one of the largest manufacturers of condoms in India 9MFY19 revenue was largely as per our expectations, as there was some order slippages. As forecasted in our initiation report Cupid Ltd: Protecting the Needy, the company reported a 20% decline in revenue at Rs 505mn, which also resulted in lower profitability both at the operating as well as net level. EBITDA stood at INR 161.6 mn declining by 32.53% with EBITDA margin at 31.95%. PAT was INR 108.5 mn declining by 24.58% with PAT margin at 21.46%.
Despite this below-par performance in the 9MFY19, we are fairly positive on the future growth prospects of the company. As of March 2019, it has a healthy order book of INR 1300 m with Book to Bill ratio of 1.99 times on its TTM sales. We expect revenues to grow at 15% over FY18-19 and margins to improve in medium to long term horizon.
Having corrected by 67% from its peak, the stock currently trades at 10.20x its FY19 EPS and 8.34x its FY20 EPS; we believe that this provides a good entry point for this niche high margin healthcare company with attractive long term growth possibilities.
3. U.S. Equity Strategy: Bullish Outlook Intact
Market activity, both bonds and stocks, has been all about realigning expectations. Wednesday’s Fed announcement was more dovish than expected, and the market is now pricing in roughly 25bps of cuts by the end of 2019. Stocks reacted positively on Thursday, but then reversed (and then some) on Friday as global growth concerns became a little more serious. We continue to maintain our positive outlook. In today’s report we recap our bullish investment thesis and highlight attractive Groups and stocks within Consumer Staples, Materials, and Services.
4. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC
Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.
5. Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump
- The broad decline in global bond yields and curve flattening suggest that the market has become more concerned about weak global economic growth.
- The fall in yields is at odds with the rise in equity and commodity prices this year, but the later may have lost upward momentum.
- Safe haven currencies, gold and JPY, have strengthened this week and are likely to perform well if yields remain low.
- US real yields have fallen more than nominal yields this year, with a partial recovery in inflation expectations from their fall in Q4 last year. Lower real yields point to weaker fundamental support for the USD, and further support safe havens like gold.
- Canadian real long term yields have fallen more abruptly than in the USA, into negative territory, suggesting the outlook for the Canadian economy has deteriorated more than most. This may relate to concern over a peaking in the Canadian housing market. The fall in real yields suggests further downside risk for the CAD.
- Long term inflation breakevens have fallen in Australia sharply since September last year to now well below the RBA’s 2.5% inflation target.
- Australian leading indicators of the labour market have turned lower, albeit from solid levels, and may be enough, combined with broader evidence of weaker growth, for the RBA to announce an easing bias as soon as April.
- Asian trade data and flash PMI data for major countries point to ongoing and significant weakness in global trade.
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