Daily India: Aarti Industries-Q2FY19 Results Update and more

In this briefing:

1. Aarti Industries-Q2FY19 Results Update
2. Wonderla- Q2FY19 Results Update
3. Shemaroo Q2 FY 18 Results Update
4. Failure to Use the Relevant Section of the Banking Regulation Act Against Kotak Mahindra Bank
5. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained

1. Aarti Industries-Q2FY19 Results Update

Aarti Industries (ARTO IN) Q2 FY19 results were beyond our expectations, as the revenues grew by 46% YoY and net profit increased by 57% YoY against our expectation of 15% and 20% YoY growth in sales and PAT. This robust result was due to improving capacity utilization, rupee depreciation and expanding contribution of higher value products.

Based on the recent developments we have revised our estimates wherein we expect sales and PAT CAGR of 18% and 22% from FY18-20e.

We analyze the results.

2. Wonderla- Q2FY19 Results Update

Wonderla Holidays (WONH IN) Q2 FY19 results were below our expectations. While revenues declined by 16% YoY, EBITDA decreased by 18% YoY in Q2 FY19. The impact was primarily from its Kerala based amusement park that got affected by the devastating flood that the state has witnessed after a gap of near 100 years. We analyze the result.

3. Shemaroo Q2 FY 18 Results Update

Shemaroo Entertainment (SHEM IN) Q2 FY19 results were in line with our expectations. While the revenues grew by 21% YoY due to a strong growth from the digital business along with a strong recovery in the traditional business post demonetization and GST impact, PAT also grew by 22% YoY in Q2 FY19. We analyze the result.

4. Failure to Use the Relevant Section of the Banking Regulation Act Against Kotak Mahindra Bank

The deadline (December 31, 2018) for Uday Kotak, the founder-CEO of Kotak Mahindra Bank (KMB), to dilute his stake to 20% has come and gone, and shareholders await the wrath of the banking regulator.

The regulator had already given an extended time line for the founders to reduce their stake, a relaxation not provided to other similar individual founders of private sector banks. When KMB realised that the regulator was no longer going to give another extension, the rebellious bank, in an unprecedented and reckless decision, took the regulator to court. The non-founder shareholders, who are in the majority, had been deprived of handsome gains which accrued to the founders by the share price increase and the extended time frame given to reduce founder shareholding, and now the bank is likely to be penalised for the founders’ not complying with the regulatory stipulation. In a benevolent gesture, the banking regulator instead of invoking the relevant section specifically dealing with wilful non-disclosure to the regulator where the punishment can be imprisonment for senior management has instead invoked a far less stringent provision where the penalties can be monetary or non-monetary on the bank.

The business media and the sell-side do not appear concerned that the majority of KMB shareholders are being negatively impacted on account of actions of the founder. But such is the corporate governance practiced in KMB. (Ironically, Uday Kotak chaired the capital market regulator committee on corporate governance; today no one is ready to criticise Kotak’s governance of his own bank.) The secular uptrend in the bank’s share price to date may now hit a regulatory headwind, and investors need to exercise caution.

5. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained

Tax revenues in India are running sharply lower than budget estimate. At current run rate, tax revenues would miss the budget estimate by almost US$19bn or 0.7% of GDP. This short-fall is almost entirely due to weaker GST revenues. Direct tax revenues are running broadly inline with the estimate suggesting the economy is doing fine. This short-fall however will not result in a material widening of the fiscal deficit. The government has been remarkably conservative in spending so far with expenditure growth running well below budget estimate. Non-tax revenues are also running ahead of full year estimate. This coupled with higher small savings collections will mean that Government borrowings will be lower than budget estimate even if the fiscal deficit is modestly higher and that will be a relief to the bond market. However, the quality of deficit is worsening with the government resorting to even more questionable routes (the PFC-REC transaction is a case in point) to achieve its disinvestment target. Additionally, it has started to resort to off-balance sheet financing with the loan to the ailing Air India from the NSSF. The numerical focus on fiscal deficit is resulting in wrong precedents being set and government finances becoming more opaque.