In this briefing:
- Yes Bank’s New CEO Should Not Be a Yes Man
- Chalet Hotels IPO Review – Backed up into a Corner
- 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables
- Delhi International Airport: INR90 Billion Investment Planned
- Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship
1. Yes Bank’s New CEO Should Not Be a Yes Man
Yes Bank has appointed Ravneet Gill as the bank’s CEO, effective latest from March 1, 2019, for a 3-year term. The announcement led to a spurt in the bank’s share price, as the leadership issue was finally resolved. While investors rejoiced, it remains to be seen whether the new CEO will be influenced by Rana Kapoor, who will step down as founder-CEO on January 31, 2019. Normally, in India, founders are reluctant to cede managerial control, and in banks, their influence often disrupts operational management even when the regulator has compelled founders to step down from the board. It is therefore imperative that once Rana Kapoor steps down as CEO his role should only be restricted to a founder shareholder without any operational involvement even as an advisor. Gill’s actions as Yes Bank CEO will need to be closely monitored as some board appointees have already been made prior to his taking charge. In particular, we need to closely watch how he manages the close associates of Rana Kapoor, one of whom has been elevated to the board, subject to the regulator’s approval. If Gill starts inducting experienced bankers from outside in senior positions in Yes Bank, it will demonstrate to the public that he is not under the yoke of the founder, but if he continues with the existing team of senior executive management or permits an advisory role for the departed founder-CEO it will indicate the continued strong influence of Rana Kapoor on the bank he co-founded.
2. Chalet Hotels IPO Review – Backed up into a Corner
Chalet Hotels Limited (CHALET IN) is looking to raise up to US$234m in its upcoming IPO.
Chalet Hotels (Chalet) is an owner, developer, and asset manager of luxury hotels. The company has grown its revenue and EBITDA at 15.8% and 22.8% CAGR from FY2016 to FY2018. The growth has been driven by the consistent improvement of its average occupancy rate which in turn drove RevPAR higher.
However, the company is embroiled in litigation with Hindustan Aeronautics (HNAL IN) which could result in the company incurring significant costs. Along with the impending renewal of the licensing agreement in 2020 and 2021, there is much to be worried about the company’s near-term outlook and its highly leveraged balance sheet may leave the company backed up into a corner.
In this insight, we will look at the company financial and operating performance, compare hotels’ operating metrics to the industry average, and compare its valuation to other Indian hotel peers. We will also run the deal through our IPO framework.
3. 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables
We run through our views on the main themes that will impact the oil and gas market in 2019 and the stocks to play these through. We outline the 10 key themes including oil demand, US oil supply growth, OPEC+ policy, base production decline rates, exploration potential and the outlook for new project final investment decisions. We also look at the refining market, LNG supply and demand, the M&A prospects and the impact of the energy transition. We outline 12 stocks (7 bullish and 5 bearish calls) that we think you can play the themes through.
We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates – overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.
The main stocks that we come out positive on are Hess Corp (HES US), Valero Energy (VLO US), TechnipFMC PLC (FTI FP), Kosmos Energy (KOS US), Transocean Ltd (RIG US), Golar Lng Ltd (GLNG US) and Galp Energia Sgps Sa (GALP PL).
We are more negative on Cenovus Energy Inc (CVE CN) , Royal Dutch Shell (RDSA LN) , Cheniere Energy (LNG US); Eog Resources (EOG US) and Ecopetrol SA (ECOPETL CB) .
4. Delhi International Airport: INR90 Billion Investment Planned
Delhi International Airport Limited (0180331D IN) has announced that it will be investing INR90 bn in the busiest aerodrome in India over the next three and a half years. This investment is aimed at boosting the passenger handling capacity up to 100 million passengers per year and is expected to be funded using bank loans and new debt instruments. The investment will affect the bond spreads for the company. Nevertheless, a change in regulations means that new baggage charges can be levied on every flight, putting the company in a better position to generate more cash in the future. We maintain our NEUTRAL recommendation.
5. Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship
In our base case, we do not expect the trade war between the US and China to end soon. The next bilateral meeting between Liu He and US Trade Representative Robert Lighthizer is scheduled at the end of this month. If the Chinese side is hoping to placate the US with promises to purchase US commodities, this is unlikely to be sufficient to achieve a lasting improvement in the relationship. We are sceptical that the Chinese leadership will agree to launch structural reforms under pressure from the US.
Elsewhere, we are concerned with growing geopolitical and security risks in Nigeria where both presidential and parliamentary elections are scheduled in February. The relations between Turkey and the US have also soured ahead of the Turkish local elections. In Poland, the assassination of the Gdansk mayor put the polarisation of the society into the spotlight ahead of the parliamentary elections due this autumn. There are signs that the US is about to ramp up pressure on Russia after newly elected Democratic House members filled their seats earlier this month.
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