Daily India: Shemaroo Q2 FY 18 Results Update and more

In this briefing:

1. Shemaroo Q2 FY 18 Results Update
2. Failure to Use the Relevant Section of the Banking Regulation Act Against Kotak Mahindra Bank
3. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained
4. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.
5. India Generic Drugs: Antitrust Suit Could Cost Billions

1. Shemaroo Q2 FY 18 Results Update

Shemaroo Entertainment (SHEM IN) Q2 FY19 results were in line with our expectations. While the revenues grew by 21% YoY due to a strong growth from the digital business along with a strong recovery in the traditional business post demonetization and GST impact, PAT also grew by 22% YoY in Q2 FY19. We analyze the result.

2. Failure to Use the Relevant Section of the Banking Regulation Act Against Kotak Mahindra Bank

The deadline (December 31, 2018) for Uday Kotak, the founder-CEO of Kotak Mahindra Bank (KMB), to dilute his stake to 20% has come and gone, and shareholders await the wrath of the banking regulator.

The regulator had already given an extended time line for the founders to reduce their stake, a relaxation not provided to other similar individual founders of private sector banks. When KMB realised that the regulator was no longer going to give another extension, the rebellious bank, in an unprecedented and reckless decision, took the regulator to court. The non-founder shareholders, who are in the majority, had been deprived of handsome gains which accrued to the founders by the share price increase and the extended time frame given to reduce founder shareholding, and now the bank is likely to be penalised for the founders’ not complying with the regulatory stipulation. In a benevolent gesture, the banking regulator instead of invoking the relevant section specifically dealing with wilful non-disclosure to the regulator where the punishment can be imprisonment for senior management has instead invoked a far less stringent provision where the penalties can be monetary or non-monetary on the bank.

The business media and the sell-side do not appear concerned that the majority of KMB shareholders are being negatively impacted on account of actions of the founder. But such is the corporate governance practiced in KMB. (Ironically, Uday Kotak chaired the capital market regulator committee on corporate governance; today no one is ready to criticise Kotak’s governance of his own bank.) The secular uptrend in the bank’s share price to date may now hit a regulatory headwind, and investors need to exercise caution.

3. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained

Tax revenues in India are running sharply lower than budget estimate. At current run rate, tax revenues would miss the budget estimate by almost US$19bn or 0.7% of GDP. This short-fall is almost entirely due to weaker GST revenues. Direct tax revenues are running broadly inline with the estimate suggesting the economy is doing fine. This short-fall however will not result in a material widening of the fiscal deficit. The government has been remarkably conservative in spending so far with expenditure growth running well below budget estimate. Non-tax revenues are also running ahead of full year estimate. This coupled with higher small savings collections will mean that Government borrowings will be lower than budget estimate even if the fiscal deficit is modestly higher and that will be a relief to the bond market. However, the quality of deficit is worsening with the government resorting to even more questionable routes (the PFC-REC transaction is a case in point) to achieve its disinvestment target. Additionally, it has started to resort to off-balance sheet financing with the loan to the ailing Air India from the NSSF. The numerical focus on fiscal deficit is resulting in wrong precedents being set and government finances becoming more opaque.

4. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.

The Semiconductor Industry Association (SIA) just announced that worldwide sales of semiconductors reached $41.4 billion for the month of November 2018, an increase of 9.8% YoY, but down 1.1% MoM, the first such decline since February 2018. While the decline is modest and total 2018 total semiconductor sales are on track to reach ~$470 billion for a YoY increase of 15.7%, any decline in what should be peak holiday season is not a good sign. 

Semiconductor sales historically track Wafer Fab Equipment (WFE) sales with a roughly six month time lag. North American WFE sales have been declining each month for the past six months meaning that this latest semiconductor MoM sales decline is right on schedule.  

Leveraging a decade’s worth of historical data, we analyse two key questions that are likely on every investors mind. Firstly,for how long should we expect semiconductor sales to continue their decline. Secondly, how steep should we expect that decline to be?    

5. India Generic Drugs: Antitrust Suit Could Cost Billions

This Insight builds on our previous Insight, India Generic Drugs: US Antitrust Inquiry Widens by discussing estimated potential liabilities and details contained in court filings. Public comments by one of the plaintiffs (47 states) suggest the defendants’ aggregate liability could exceed US$6 billion, the largest previous settlement on record. There is not enough information to apportion potential liability by company, but some companies are better-positioned to bear the cost of a settlement than others. The process could drag on for an undetermined period of time (which helps the defendants). At the same time, the overhang will keep a lid on generic drug prices in the US market. 

Among Indian generic companies, Dr. Reddy’S Laboratories (DRRD IN), Aurobindo Pharma (ARBP IN),Cadila Healthcare (CDH IN), and Glenmark Pharmaceuticals (GNP IN) have the highest risk based on their market caps and exposure to the US market.