Daily India: Are US Stocks Still Expensive? and more

In this briefing:

1. Are US Stocks Still Expensive?
2. India: Coal Availability Improves at Power Plants, but Utilizations Yet to Pick Up on Lower Demand
3. Maruti Suzuki- Q2FY19 Results Update
4. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
5. LIC Housing Finance Ltd. – Builder Loans and LAP to Drive Growth in Loan Book

1. Are US Stocks Still Expensive?

There are striking parallels between 1929 and 2018.  

The 1929 crash put a halt to a nine-year bull run on the market.

Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.

As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.

Are we in a similar situation right now? 

2. India: Coal Availability Improves at Power Plants, but Utilizations Yet to Pick Up on Lower Demand

In the first half of FY19, there has been a serious shortage of coal in several thermal power plants in India which was affecting as much as 25% of total capacity of power plants in India. However, it has improved considerably now. As per latest Ministry of Power data as on 23rd December 2018 for 124 plants, coal shortage has become zero in pit head plants and there are only 12 plants in non pit-head category with coal shortages. This change is a significant improvement in coal availability situation for power generation sector in India.

However, the utilizations have not gone up that much for power plants on a cumulative basis across the country. The average utilizations (Plant Load Factor or PLF) for overall India generation capacity was 62.6% for April to November 2018 period and this was 62.7% in November indicating no significant improvement. This virtually no improvement in power plants’ utilization could be linked to lesser demand for electricity because of change in weather conditions and also indicates that coal supply situation may not have improved that much.

Nevertheless, this will reduce the pressure from Power Plants and the sector on Coal India Ltd (COAL IN) for more supplies. However, we many not see much change in production and volumes for Coal India Ltd (COAL IN) which has seen a significant decline in recent months. Another implication is that when the overall demand for electricity comes down, the demand in spot market will also be lower accordingly. It is directly relevant for the merchant power companies and Indian Energy Exchange (IEX IN).

3. Maruti Suzuki- Q2FY19 Results Update

Maruti Suzuki’s Q2FY19 results were below our expectations. Sales grew by only 2% YoY in Q2FY19 led by a 3.7% increase in realization per unit. But the volumes declined by 1.5% YoY in the same period. We analyze the results.

4. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018

Highlights of significant recent happenings include:

5. LIC Housing Finance Ltd. – Builder Loans and LAP to Drive Growth in Loan Book

Lic Housing Finance (LICHF IN), founded by Life Insurance Corporation of India, is the 2^nd largest Housing Finance Company (HFC) in India with a total outstanding loan book portfolio of Rs 1,759 bn as of 2QFY19. 94% of the company’s loans were to retail customers as home loans & Loan Against Properties (LAP) and the balance 6% were to project developers as of 2QFY19.

We like the business of LICHF for following reasons:

• LICHF focuses on the salaried segment. 86% of the customers as of 2QFY19 were from the salaried class. This provides the company with stability in earnings and better asset quality. We expect the NIMs & Spreads to be stable at 2.4% & 1.2% respectively for the period of FY18-21E.
• We expect LICHF’s total loan book to grow at a CAGR of 16% over the period of FY18-21E. This growth will be supported by LAP and Developer loans. We expect the retail home loan portfolio to grow at a CAGR of 11% over the same period.
• As the company focuses on LAP & developer segment to grow the total loan book, we expect this to affect the asset quality adversely. We expect the Gross Non-Performing Assets (GNPA) & Net Non-Performing Assets (NNPA) to increase to 1.3% (from 1.2% as of Sept-18) & 0.5% (from 0.4% as of Sept-18) respectively.

We initiate coverage on LICHF with a fair value estimate of Rs 570/- over the next 12 months. This implies a potential upside of 19% from the closing market price of Rs 481 as on 20^th December 2018.  This is arrived by applying P/ABV (Price to Adjusted Book Value) multiple of 1.7X to our Adjusted Book Value Estimate of Rs 337 per share for the period ending Sept-20E.