In this briefing:
- India: Thermal Coal Imports Are Rising, What Does It Mean For End User Industries and the Economy?
- India Banks – HDFC Bank Subsidiary Stalled Profit
- Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion
- Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids
- India: Divergence in State Level Inflation Data and Its Political Impact, The Devil Is in Details
1. India: Thermal Coal Imports Are Rising, What Does It Mean For End User Industries and the Economy?
India’s coal imports have risen 10% in the first eight months of FY19 and this year is likely to be the repeat of previous financial year when after falling for two years, India’s coal import had grown 8.1% yoy. After the NDA took over in May 2014, Indian Govt has spoken about eliminating coal imports altogether. However, there are serious problems with domestic production, logistics issues and poor track record of coal sector PSUs. Coal India Ltd (COAL IN) contributes more than 80% of India’s domestic coal output and FY19 has been a little better in comparison of previous years so far for the company. But, its performance has dipped over previous few months and it is very likely that coal imports will grow significantly again in FY19.
The higher coal imports is relevant for several sectors and many companies. The major implications are, 1) This is bad news for Coal India Ltd (COAL IN) and the company’s ability to increase supplies in the more profitable e-auction segment, 2) Increase in cost of power generation affects specific GENCOs and later, the entire power sector because cost of power procurement goes up for DISCOMs, 3) with increase in electricity prices, inflation may also increase and there is negative impact on balance between imports and exports, 4) it is also good news for renewables as they get more competitive on cost which makes them more attractive, 5) this is bad for entire value chain of coal based power plants which includes companies such as Bharat Heavy Electricals (BHEL IN).
2. India Banks – HDFC Bank Subsidiary Stalled Profit
When most analyze HDFC Bank (HDFCB IN), there is little emphasis on its non-banking finance company (NBFC) subsidiary, HDB Financial Services (HDBFS). Perhaps in the current environment, this is more important than ever. At the same time, where HDFC Bank’s subsidiary has had significant growth in recent periods, where this begins to change, it has important implications. Most do not believe HDFC Bank can ever show poor earnings growth, let alone high bad loans and credit costs. We disagree. As India’s second largest bank, it is beholden to the macro economic overlay; even if delayed or not clearly visible. We wonder if HDBFS’s latest figures showing just 1% gross profit growth, is one sign of this?
3. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion
Metropolis Health Services Limited (MHL IN) (MHL) plans to raise US$100m+ in its Indian IPO. MHL is one of the largest diagnostic chains in the country. Carlyle invested in the company in 2015.
MHL has registered steady growth and margins over the past few years. It has also aggressively expanded its network over the past few years, although revenue growth hasn’t matched the network expansion.
MHL’s recent financial performance has been in-line with its listed peers, Dr Lal Pathlabs (DLPL IN) and Thyrocare Technologies (THYROCAR IN), while the company continues to lead its two listed peers in terms of revenue generated per test.
4. Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids
Hitachi Ltd (6501 JP) announced the acquisition of an 80.1% stake in ABB Ltd (ABBN VX)’s power grids business for $6.4 billion. ABB will retain the remaining stake in the divested unit, which is valued at an EV of $11 billion. ABB’s power grids is a global #1 player and makes transformers, long distance electricity-transmission systems and energy storage units.
Setting aside the huge cultural and integration challenges, we believe that Hitachi’s acquisition of ABB’s power grids is a bold but a risky move.
5. India: Divergence in State Level Inflation Data and Its Political Impact, The Devil Is in Details
It is universally acceptable that a significant and uncontrolled price rise especially for essential commodities is politically harmful for the incumbent Govt in a developing country like India. However, less than optimal price rise could also lead to justifiable anger in segment of population for which the livelihood is linked to it. While achieving this fine balance may not be an easy task for political establishment, we think these assumptions are just too simplistic. The political fortunes for the leaders and political parties are much more dependent on local, state specific factors and granular inflation data is a good measure of the price rise impact.
At the national level, the gap between rural and urban inflation is significant and in the latest data, inflation in urban areas is almost double of price rise in the rural areas. The consumer price inflation data says that there are regions which have negative increase in prices and there are many others which has inflation more than double of national average. In some extreme cases, the inflation gap between rural and urban areas in the same state is as much as 8%, higher than 3x of reported national average. Also from inter-state comparison, it is clear that this divergence becomes even more significant.
After the recent assembly elections, several explanations focused on rural distress and blamed agrarian crisis for BJP’s defeat. However, we can certainly draw more meaningful inferences from state level inflation data of these states. In Chhattisgarh, the difference between rural and urban inflation was huge (more than 6.5%) and this is more important in how the rural and urban population will be looking at the price rise. There are several other important data points from other states as well. But, it is clear that low inflation reflect poor prices the farmers may be receiving for their produce and in all these states where elections have taken place recently, inflation was less than average indicating higher distress levels. The differential between rural and urban inflation also implies inefficiency in the entire system and that affects political choices of masses.
