In this briefing:
- Indian Housing Finance Companies-Series 1 – Sector Outlook and Companies Profile
- Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
- Semiconductor WFE Outlook. Things Just Got Really Ugly
- India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) and Power Grid (PWGR IN)
- India – NPL Sale Is Not a Panacea
1. Indian Housing Finance Companies-Series 1 – Sector Outlook and Companies Profile
The Indian housing sector is arguably one of the most important contributors to the country’s GDP with 9% contribution in FY17 and is expected to improve to 13% GDP by FY25. We believe that if any investor intends to participate in the Indian growth story, they simply can’t overlook the housing sector and the companies those are going to be the direct beneficiaries.
We intend to cover the Housing finance sector and address key issues and companies in the sector through a series of articles over the next few weeks. We will highlight and identify sustainable business models in the Housing finance Sector that have not only created long-term shareholder wealth but have also maintained high levels of asset quality and prudence. These are the companies that have consistently maintained the highest credit rating through the entire cycle, by credible names like Crisil and ICRA.
The stock prices of many of these companies have corrected by 30-50% in the past few months due to liquidity concerns in the financial system post the ILFS default, which affected the NBFC sector including HFCs.
We believe the concern is overrated as many of these HFCs have a parentage with strong balance sheets. Moreover, reforms in recent times have helped to diversify the borrowing profile of these HFCs who in the past largely relied on the banks, thereby reducing the liquidity risk to a large extent.
This article, the first in the series, delves into the outlook of the housing finance sector that has got a significant boost due to several reforms from the government. It also provides a glimpse into the profile of key HFCs that cumulatively enjoys near 85% market share. Through some key indicators, we would understand their growth history and whether it has come at the cost of low asset quality.
2. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.
Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise.
3. Semiconductor WFE Outlook. Things Just Got Really Ugly
SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.
Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year.
These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season.
There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.
4. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) and Power Grid (PWGR IN)
This is something you really don’t see often, a sharp and positive stock price movement in Govt owned Indian power utilities. But after the latest draft regulation on the tariff norms for 2019-24 from CERC (the Central Electricity Regulatory Commission, which is the highest regulatory body for power sector in India) was released on 14th of December, both NTPC Ltd (NTPC IN) and Power Grid Corporation Of India (PWGR IN) have done well in absolute terms and also outperformed the broader markets. After CERC suggested continuation of the 15.5% regulated return on equity (RoE) for the power generation and transmission companies, this was seen as a positive regulatory development and helped these stocks.
However, investors should also look at the risks before getting too optimistic on Govt owned Regulated Power Utilities, a) these are not final norms and CERC has invited comments from the stakeholders and Regulator may still tweak the tariff norms for period starting 1st April 2019 depending on feedback and inputs from DISCOMs and consumer groups, b) Usually, the political rivalry between Centre and States doesn’t affect the PSUs but as some of recent developments such as Odisha where the state blamed Centre for increased tariff burden suggest, this is changing and could be damaging for future long term contracts of NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN).
There are question marks on future growth for both these companies. While NTPC Ltd (NTPC IN) will have to compete with renewable sources, there is a risk that capex growth will slow down for Power Grid Corporation Of India Limited (PWGR IN) as well. While latest draft regulation has come as positive, we don’t expect sustained stock price outperformance from NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN) as there are structural challenges for them and a Govt ownership and its impact on strategic decision making continues to remain an overhang.
5. India – NPL Sale Is Not a Panacea
Selling bad loans to the government, and asset management company or to a distressed loan buyer is not necessarily a remedy to the crisis for India’s banks. This is because their non-performing loan (NPL) levels are high compared with their buffer to absorb losses, e.g loan loss reserves and capital. Where it is rare to know about the selling price of NPLs in any market, there is news out today of a large NPL sale at 24 cents on the dollar. The market is not India, rather Indonesia, but this only raises concerns further: it is more likely that an NPL divestiture in India yields a worse price than in Indonesia. This is due to wildly different NPL trends and NPL levels in each country.
