Daily INDIA: REPCO Home – 2QFY19 – Focus on LAP to Maintain the NIMs and Spread and more

In this briefing:

1. REPCO Home – 2QFY19 – Focus on LAP to Maintain the NIMs and Spread
2. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow
3. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much
4. India On Ground: Local Fund Managers Still Debate Valuations,OK with News Flow but Expect Volatility
5. India Banks – The Roadmap Ahead

1. REPCO Home – 2QFY19 – Focus on LAP to Maintain the NIMs and Spread

Repco Home Finance (REPCO IN) 2QFY19 results were in line with our estimates. The outstanding loan book portfolio reflected 11% YoY growth (v/s our expectation of 12%) at Rs 103,820 mn. The Net Interest Income (NII) was Rs 1,154 mn (v/s our estimates of Rs 1,230 mn), reflecting a YoY decline of 5%. The PAT was Rs 670 (v/s our estimates of Rs 618 mn), reflecting a YoY decline of 4%.

The management stated that the sand mining issue in Tamil Nadu (TN) (58.4% of outstanding loan book as of 1HFY19) lasted longer than expected. This has led to lower construction activity and demand for housing loans in Tamil Nadu. The company has guided for an improvement in 2HFY19 with the target of 15-16% loan growth.  They are focusing more on the other markets like Maharashtra, Gujarat, Karnataka to grow the loan book.

We have revised our NII estimates by -5.3%/-5.2%/ -1.5%, PPOP by -7.3%/-7.2%/-5.1% and PAT by -3.5%/ -3.5%/-1.9% for FY19E/FY20E/FY21E respectively.  We have revised our P/ABV multiple from 2.3x to 1.9x. Applying it to the adjusted book value for September-20E of Rs 306 per share, we arrive at the fair value of Rs 570 (earlier Rs 630)  for the next 12 months.

2. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow

• Mahindra & Mahindra (MM IN) reported 2QFY19 PAT of Rs 17,788 mn vs our estimate of Rs 15,240 mn. The revenues were 2.5% lower than estimated. EBITDA was Rs 18,493 mn as against our estimate of Rs 20,721 mn. EBITDA margins were  14.5% against our estimate of 15.8%.  Overall the performance was lower than our expectation.
• EBITDA margins were impacted due to higher raw material cost and higher launch cost related to Marazzo (7/8 seater utility vehicle). We expect the margins to remain under pressure for the 2HFY19E as the Company has lined up more new model launches.
• The shift in the festive season from 2Q to 3Q impacted the tractor sales volume in this quarter. M&M management expects the tractor industry to growth in the range of 12-14% YoY in FY19E where M&M is expected to grow at 12.5% YoY in FY19E.
• We have lowered EPS estimates for FY20E by 8%. Over FY18-21E, we expect revenue and PAT to grow at CAGR 14% and 13% respectively. We expect EBITDA margin to expand from 14.8% in FY18 to 15.5% in FY21E.
• Our EPS estimates for FY20E & 21E stand at Rs 47.3/- & Rs 53.7/- respectively. We have maintained the PE multiple of 17x with an EPS of Rs 47.2/- for the year ending September- 20E and valued its share in the subsidiaries at Rs 315/- to arrive at the fair value estimate of Rs 1,115/- for the next 12 months.

3. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much

Bharat Heavy Electricals (BHEL IN) had announced a sizeable share buyback a couple of weeks ago. This buyback amounting to total Rs16.3 bn has opened yesterday, but we think that it is unlikely to help much. In the coming years, the Indian power distribution companies (DISCOMs) are likely to buy more power from renewable sources and the proposed changes in regulation will expedite the shift. In addition, resolution of power assets in distress continues to remain slow and new orders for Bharat Heavy Electricals (BHEL IN) which is already struggling with slow moving orders, remain sluggish. Another interesting development is shift in interest from company’s key customers. For example, NTPC Ltd (NTPC IN) is exploring acquisition opportunities much more than greenfield expansion. All of this is certainly bad news for the Bharat Heavy Electricals (BHEL IN) stock. While the PAT nos. are small in absolute terms and even a slight positive change will make valuations look attractive for the stock, this will not have a meaningful impact unless things improve structurally for the company.

4. India On Ground: Local Fund Managers Still Debate Valuations,OK with News Flow but Expect Volatility

Last few months have been stressful for domestic fund managers and more than the sudden market movement, much increased volatility even in large caps has led to more anxiety for them. When we speak with some of the local fund managers, we get the sense that, a) the earnings season was mixed though revenue expectations were largely met for most companies and the worry was miss on profitability for some, b) there is still not high level of comfort on valuations and though correction came as a relief, the cash levels were not sufficient to take advantage of the situation, c) melt down in mid/small caps affect them less than big correction in large caps and that is why sharp movement in names like Tata Consultancy Svcs (TCS IN) , Infosys Ltd (INFO IN) and Maruti Suzuki India (MSIL IN) had hurt them much more, not to mention the volatility in Yes Bank Ltd (YES IN) and Sun Pharmaceutical Indus (SUNP IN) which had different kind of issues.

Most of them also think that some of the recent controversies such as RBI vs. Govt were completely avoidable and reflect political mismanagement than anything else. BJP’s loss in recent assembly elections is also negative but this was not completely unexpected because the margin is really small and things could have gone either way. In fact, some of them also say that the main Opposition party, Congress has not been able to completely exploit the failures of BJP Govt politically and appointment of RBI Governor is just like any other Govt official and media was unnecessarily and excessively focused on it, much more than what is warranted fundamentally speaking. However, silver lining for them is that some other market heavyweights such as Reliance Industries (RIL IN) and Hindustan Unilever (HUVR IN) have been steady.

While there is not much clarity on direction for the markets in next six months, the expectation is that volatility in local markets is likely to continue in 1H CY19 for three primary reasons, a) both crude and INR will continue to play a key role in market movement and expectation is that they will remain volatile, b) how the global macro factors such as trade war and relative attractiveness of EMs will play their role is not clear, c) the political factors and related news flow will drive the markets and though people still expect BJP may return next year (albeit in a coalition and with reduced mandate post 2019 Lok Sabha elections), the comfort levels have dwindled compared to how people were looking at it six to eight months ago. Among the specific sectors for the market, the interest levels are higher in FMCG and BFSI. People don’t expect IT to do badly but optimism has come down and Autos have also been a disappointment over last few months.

5. India Banks – The Roadmap Ahead

With the Reserve Bank of India (RBI) now effectively run by the government, there are likely to be discernable red flags ahead. We must expect that banks like State Bank Of India (SBIN IN) and others will overtly act as providers of liquidity. This will be both to struggling companies but also cash-strapped non-banking finance companies (NBFCs). In quarterly data this should show up in bank-specific figures, monetary numbers but also in corporate debt levels. It will be interesting to see if debt levels rise more for fragile indebted companies than others. Defaults should rise as well. This is because companies now realize that the government is running credit creation to support debtors, and will find it unjust to service a loan when others are not being penalized for default; at the margin they will choose not to pay. This goes to the well-known situation that occurred in Thailand after the 1997 crisis where the term was coined ‘can pay, won’t pay’ for these types of debtors.