In this briefing:
- India: Modi’s Charisma Set to Overcome the Headwinds of Incumbency and Electoral Pacts
- Indian Mobile – ARPUs Inflect as the Worst May Be over for Bharti, Although Not for Vodafone IDEA
- Jain Irrigation: From Up Close The Crop Doesn’t Look Healthy
- RBI Says Kotak Tried to “Take It for a Ride”: Shareholders Should Expect the Consequences
- Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
1. India: Modi’s Charisma Set to Overcome the Headwinds of Incumbency and Electoral Pacts
If the election were to be held at the end of last week, we estimate that the BJP would have won just 213 seats, and the NDA it leads 265 — falling 7 seats short of a majority. Electoral alliances — particularly the fact that the BJP faces a less-fragmented opposition this time than in 2014 in UP, Karnataka, Bihar and Jharkhand — would ensure that. But the quality of party campaigns, and the performance of an incumbent government, also have major impacts on India’s electoral outcomes.
With the election campaign underway, there have already been a stream of defections from other parties to the BJP, indicating that the “wind” is blowing the BJP’s way, and this is likely to be another “wave” election (like those in 1977, 1980, 1984 and 2014). The Modi government has not only made India the fastest-growing economy in the G20, CPI inflation has averaged 4.5% in the past 5 years (versus over 10% in the previous 5), the poor have near-universal access to cooking-gas, bank accounts and toilets (3 crucial necessities that were denied to more than half of Indians until 2014!) and the rupee is stronger now than 5 years ago (having suffered two currency crises during the UPA2 regime). Plus India has made significant gains on national security and the fight against terrorism. We expect that the NDA will gain another 50-60 seats (over our baseline scenario) in UP, Madhya Pradesh, West Bengal, Odisha and Rajasthan during the election campaign, ensuring a very comfortable majority of 315-325 seats for the ruling alliance.
When combined with the fact that the NDA will also have a working majority in the Rajya Sabha, we expect the next one year to be characterized by very substantive legislation, including a thorough liberalisation of the labour market — ensuring greater flexibility for the organized sector, but substantially better protections for workers in the unorganized sector. This should transform India’s economic prospects over the next five years, ensuring a manufacturing revolution that takes real GDP to a 10% annual growth handle over the next 5 years. Both the Indian rupee and equity markets have begun to price in such an outcome this week. We would Buy India despite the challenging valuations!
2. Indian Mobile – ARPUs Inflect as the Worst May Be over for Bharti, Although Not for Vodafone IDEA
Chris Hoare sees increasing signs that the worst is over, at least for Bharti Airtel (BHARTI IN). ARPUs and therefore revenues are bottoming. The 3Q numbers were the first quarter where the market as a whole grew sequentially (+2.5% QoQ) since Jio launched. We expect profits to follow. Signs of stabilization are much clearer for Bharti, as the performance gap vs Vodafone Idea (IDEA IN) remains wide. Both Bharti and IDEA are raising around $3.5bn of new equity. However, as we wrote previously, we do not think this is enough for Vodafone IDEA and expect the company to continue to lose market share. By contrast, Bharti’s capital increase puts the company in a strong position going forward and allows investors to fully discount extreme stress scenarios.
3. 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.
4. 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.
5. 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.
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