In this briefing:
- India: Coal Availability Improves at Power Plants, but Utilizations Yet to Pick Up on Lower Demand
- Maruti Suzuki- Q2FY19 Results Update
- Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
- LIC Housing Finance Ltd. – Builder Loans and LAP to Drive Growth in Loan Book
- India Politics: Bihar Seat Sharing Sign of Flexible BJP Leadership, Reformed Stance Positive for NDA
1. 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).
2. 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.
3. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
Highlights of significant recent happenings include:
- Feeding the Dragon – Sumitomo Corp (8053 JP) buying into massive Chile copper project; Mitsui & Co Ltd (8031 JP) and Tokyo Gas (9531 JP) announced plans to be long-term buyers of Mexican LNG.
- Local News on Global Companies – Huawei Technology (40978Z CH)‘s to do “whatever is required” to meet Canada’s 5G security standards; Ant Financial (1051260D CH)’s Sesame Credit be used to apply for Canadian visas; Facebook Inc A (FB US) offered data to Netflix Inc (NFLX US) and Royal Bank Of Canada (RY CN); BlackBerry Ltd (BB CN)‘s high-security reputation increasingly valuable; Fedex Corp (FDX US) and United Parcel Service Cl B (UPS US) deny negative impact from Amazon.com Inc (AMZN US)‘s Amazon Air operations; and Anheuser Busch Inbev Sa (Adr) (BUD US) and Tilray Inc (TLRY US) are doing “joint” product development.
- Trade Deals & No Deals – Bosideng Intl Hldgs (3998 HK) got an unexpected boost, while Canada Goose Holdings (GOOS CN) took an unexpected hit as a consequence of the U.S.A. Government’s problems with Huawei Technology (40978Z CH) .
- Outliers – Another “silver lining” to global warming? The Warming Arctic Opens the Northwest Passage as a Potential Maritime Superhighway
4. 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 2nd 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 20th 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.
Particulars | FY18 | FY19E | FY20E | FY21E |
P/ABV (X) | 2.1 | 1.7 | 1.5 | 1.3 |
ROE (%) | 17.3 | 15.5 | 14.5 | 15.1 |
ROA (%) | 1.3 | 1.2 | 1.2 | 1.2 |
5. India Politics: Bihar Seat Sharing Sign of Flexible BJP Leadership, Reformed Stance Positive for NDA
The seat sharing formula announced over the weekend by BJP and its partners in Bihar is a clear sign of a more flexible and accommodating BJP leadership (Prime Minister and party president). There are total 40 Lok Sabha seats in Bihar and 17 seats each for two parties (JDU and BJP) which had won 2 (JDU) and 22 (BJP) in the 2014 elections from Bihar is a sign of BJP’s great pragmatism and willingness to concede more space to allies. This is not only required for BJP to deal with a more formidable challenge from Opposition, it is also very important to assuage concerns of allies which are getting more demanding.
This decision of BJP also has larger implications, for pre-elections approach of BJP on contentious issues with its existing and potential allies and also for its ability to attract more parties to NDA post elections. Realizing they are dealing with a more difficult political challenge in 2019, the BJP leadership of Narendra Modi and Amit Shah is now willing to change its previously aggressive operating model. It is both good and bad. Because while this might impact the pace of decision making and make it slower, it will also to a large extent eliminate the risk of policy misadventures such as demonetization.
The silver lining is that previous experience of Atal Bihari Vajpayee era (when in 1998-2004, the BJP was leading the Central Govt with only 182 seats in Lok Sabha) suggests that even coalition Govt can work effectively. The process at the Govt will be more consultation based and robust because BJP will be less combative when weaker, which might help. Some of the recent examples like departure of ex-RBI Governor Urjit Patel have proven that these issues could have disastrous consequences and are extremely damaging for markets and the image of Govt. If that changes and is reformed at the top, it will be positive for building up the right investment climate in the country.
