Daily India: Bleak Future for Indusind Bank and more

In this briefing:

1. Bleak Future for Indusind Bank
2. Are Chip Oligopolies Real?
3. Global Banks: Some New Year Pointers
4. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy
5. Visit Note

1. Bleak Future for Indusind Bank

Indusind Bank’s reckless decision to provide a Rs 20 bn (8% of the bank’s capital) unsecured bridge loan to IL&FS, an insolvent infrastructure company has led to a significant de-rating of its valuation multiple. In the 3QFY2019 results call, Ramesh Sobti, the bank’s CEO believes that the bank will eventually need to provide only 40-50% of this exposure and the bank has currently provided only 26.5%. The bank’s guidance on this appears to be as optimistic as its initial appraisal when it disbursed the loan, without any apparent scrutiny of the company’s financials. Shareholders in the bank need to be more realistic and factor a 100% write-off on the unsecured IL&FS exposure and need to examine all the bank’s loans more carefully for similar high-risk lending. The glory days of this once fancied stock are over and a bleak future beckons.

2. Are Chip Oligopolies Real?

In the semiconductor industry, particularly in the DRAM sector, there has been significant consolidation leading some to hypothesize that there’s now an oligopoly that will cause prices to normalize and thus end the business’ notorious revenue cycles.  Here we will take a critical look at this argument to explain its fallacy.

3. Global Banks: Some New Year Pointers

Here is a look at how regions fare regarding key indicators.

• PH Score = value-quality (10 variables)
• FV=Franchise Valuation
• RSI
• TRR= Dividend-adjusted PEG factor
• ROE
• EY=Earnings Yield

We have created a model that incorporates these components into a system that covers>1500 banks.

4. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy

In their public presentations, central banks seem to be contemplating the use of neutral interest rates (r*) in addition to unemployment/inflation theories. R* has the advantage of appearing to be subject to mathematical precision, yet it’s unobservable, and so unfalsifiable. Thus, it permits central banks to present any policy conclusion they want without fear of verifiable contradiction. R* is the policy rate that would equate the future supply of and demand for loans. It rises and falls as an economy strengthens and weakens. Long-term observation during the non-inflationary gold standard, period indicated that r* in an average economy was 2% plus, which would become 4% plus with today’s 2% inflation target. The Fed may soon end this tightening cycle with the fed funds rate at or near 2¾%, which would be r* if the rate of lending and borrowing in America remained stable thereafter. Rising (falling) lending would indicate a higher (lower) r*. 

5. Visit Note

We recently visited Prataap Snacks (DIAMOND IN) in Indore, Madhya Pradesh. Our objective of interaction was to get some clarifications on standalone financials of the company. As of FY 2018, standalone revenue was at 10,309 mn vs 10,377 mn for consolidated entity. Contrary to management’s suggestion to look at consolidated financials, we prefer to look at standalone financials, since the parent company contributes to 99% of Sales as 100% of the assets.  Some of the issues that warrant attention are highlighted in this insight. Consensus financial data indicate an expectation of 44% growth in EPS for FY 2020. Our checks indicate an increasing competitive environment where both regional and national (MNC brands) are fighting for market share. The company is entering new product categories like sweet snacks. However, looking at growth expectations and cost structures discussed in this insight, investors would be better off looking for an alternative which is leaner.