Daily India: India: Unimpressive Data on Organised Sector Job Creation and more

In this briefing:

1. India: Unimpressive Data on Organised Sector Job Creation
2. Prataap Snacks Ltd – Q2 Results; Will Acquisition of Avadh Snacks Be a Game Changer for Prataap
3. EM Active Fund Performance:  Difficult 2018, but Long-Term Outperformance Remains
4. India Banks – NPL Growth Higher at HDFC than Most Others
5. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader

1. India: Unimpressive Data on Organised Sector Job Creation

One of the important ongoing debates in the country has been on the topic of Job creation. In the absence of a official household survey, the government has been releasing data on new retirement accounts with EPFO as a proxy for formal sector job creation. That data though is subject to significant limitations and is most likely over-stating job creation currently due to the ongoing tax incentives. That said, even taken at face value, the EPFO data by itself is not suggestive of strong job creation in the economy. The EPFO data at best suggests a total of 8 million jobs being created in the organised sector when the total number of jobs required to be created outside Agriculture is probably 2x of that. Thus, unless a clear assessment of the performance of the unorganised sector can be made, any rigorous assessment of the labour market cannot be made. There is a urgent need for a formal, household survey to assess the labour market. And there is no reason why a country like India cannot commission and successfully execute a survey once a quarter.

2. Prataap Snacks Ltd – Q2 Results; Will Acquisition of Avadh Snacks Be a Game Changer for Prataap

In Q2 of FY19, the company has grown at 10.15% with revenue of INR 2.92 bn. EBITDA was INR 0.24 bn and EBITDA margin stood at 8.4%  down by 167 bps, Net profit stood at 0.113 bn with margins at 3.87% down by 102 bps. Raw materials cost has increased in the first half of the year leading to lower margins. 

The company has acquired 80% in Avadh Snacks, a Gujarat based snacks company for INR1.48 bn, we have discussed the implications in the report.

The stock is currently tradings at its 54x its FY18 EPS (Pre-acquisition) and 42x its FY19 EPS (post-acquisition), we believe the stock is currently overvalued but are positive on the long term prospects of the firm.

3. EM Active Fund Performance:  Difficult 2018, but Long-Term Outperformance Remains

2018 was a year to forget for many active GEM managers. Absolute returns were the worst since 2011 and, relative to the I-Shares MSCI Emerging Markets ETF, active funds registered their first average underperformance since 2008.  Here we share some of the key data points on active fund performance for 2018 and over the longer term.

4. India Banks – NPL Growth Higher at HDFC than Most Others

As new data from India’s banks are released, we look to Pillar 3 disclosure and bad loan distribution, in particular. It is also interesting to see with new 3Q19 data, where bad loans are rising the most. Of the India banks that have announced their latest results, HDFC Bank (HDFCB IN) shows some of the highest bad loan growth. Of the five banks with results out thus far, HDFC Bank shows the 2^nd highest rate of growth in non-performing loans (NPLs) YoY at 32%. Peers with growth rates below are at 12-26%. We continue to believe that HDFC Bank is at higher risk than most believe, at least due to its far higher loan growth in recent years – years marked by economic malaise in India.

5. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader

• Thyrocare Technologies (THYROCAR IN) is the fourth largest pathology chain in India and derives 54% of revenues from the wellness/preventive segment (Rs60bn market growing at 20% Cagr). Margins in wellness are ~2x that of illness segment.
• It is positioned as the lowest price provider in the market with some of its tests priced at 50-70% discount to peers.
• It enjoys the highest operating margin in the industry with excellent control of reagent and manpower costs.
• However, hyper competition in the wellness segment is pushing down pricing. Pullback in adspends is leading to loss of market share over FY18-1HFY19.
• Two-thirds of its capital is invested in the radiology business that does not have economies of scale. Business is loss-making and a drag on return ratios.
• We expect Revenue and PAT Cagr of 15% and 12% respectively over FY18-21 in the face of intensified competition against 24% and 19% respectively delivered over FY14-18.
• Softer growth coupled with utilization of free-cash from the clinical pathology business into the capital intensive and loss-making radiology business will weigh on stock performance. We value the stock at 22.5x FY20 EPS- at 25% discount to the industry leader Dr Lal Pathlabs (DLPL IN) . Our target price is Rs 494 implying 10% downside.