Posts in category All News
GDP growth estimates: Grappling with new complexities (30-08-2015)
Newsmaker: M Venkaiah Naidu (30-08-2015)
Labour laws row: To strike or not to strike (30-08-2015)
Dipping in, after the bath (30-08-2015)
The severe bout of global risk aversion, triggered by the yuan’s devaluation a couple of weeks ago, has significantly affected global commodity prices, equities and EM (emerging market) currencies, and India has not been an exception. The fall in markets has been rather indiscriminate across sectors. We look at stocks which have corrected enough to become fundamentally attractive, and have earnings upside were current macro conditions to stay. The key variables used for earnings sensitivities are currency and commodity prices.
The correction that has happened across the board means that even companies that are potential beneficiaries of lower commodity prices and currency have seen price corrections. While it is difficult to predict a stable level of commodity prices, currency and other macro variables, current levels of these variables can be used to judge potential upsides to earnings. We note that India tends to benefit from cheaper commodity prices which improve balance of payments and lead to lower inflation. Earnings may not react symmetrically depending on whether a company is a consumer or producer of commodities.
We come up with a list of five stocks: Asian Paints, Hindustan Unilever (HUL), HCL Tech, Mahindra & Mahindra, and Ultratech Cement.
Following the recent price correction, the Sensex P/E (price-to-earnings) multiple has corrected to 14.8x (times) one-year forward earnings, which is at a 10% discount to its five-year average.
Asian Paints—Margins to see a sharp upswing: We believe Asian Paints remains a solid ‘buy’ for long-term investors.
The company should be one of the foremost beneficiaries of the fall in global commodity prices, especially given that almost 70-75% of the company’s input cost basket is linked directly to crude prices. If we were to build in the current crude price of $45 per barrel into our earnings model, the earnings for Asian Paints would be higher by 7%, thus pegging the FY17F EPS (earnings per share) at Rs 30.5.
As GDP growth picks up, we expect volume growth to also improve, which will help drive higher top-line growth over the next two years. We are currently building in steady double-digit volume growth for the company over the next couple of years. At current rates, the stock trades at 29.9x on FY17F(forecast) EPS of R28.5. The company’s top-line growth is strongly linked to GDP growth. In FY13/14, Asian Paints delivered average revenue growth of 14.5%, versus a long-term average of 20%.
HUL-Strong margin expansion likely: We believe the current commodity price decline will be a big positive for the consumer sector in general, and HUL in particular. A large part of the input cost basket for the company like packaging materials and palm oil is directly or indirectly linked to crude prices. This essentially means that if current prices were to be built into our estimates, there would be an upside risk to our earnings forecasts. We are building in 19% earnings growth for FY16F and FY17F, and believe that there would be upside risk of 5% to both at crude estimates of $45 per barrel.
On the business front, we are seeing some signs of demand revival in the urban sector, which augurs well for HUL. In the current cycle, this coincides with the company’s efforts to focus on the premium segment. A major chunk of HUL’s innovation pipeline focuses on the premium segment, along with higher spend on the category. At current rates, the stock trades at a P/E multiple of 35x FY17F EPS of R24.12, which is largely in line with the sector average. Given HUL’s strong earnings growth and business transformation, the risk-reward seems favourable. We maintain our ‘buy’ rating.
HCL Technologies-Reiterate top pick status: IMS (infrastructure management services), BPO and Engineering Services would continue to drive growth for Tier-1 IT, and HCL Technologies (HCL) benefits from having the best skew versus peers with 60% of revenues coming from these segments. In IMS and Engineering Services, HCL is among the largest players, while it is growing the fastest among Tier-1 IT in BPO. So we expect better-than-peer group dollar revenue CAGR of 14% for HCL over FY15-17F. We expect Ebit margins to improve towards the middle of the guided range of 21-22% over FY15-17F on (i) reallocation or rationalisation of rebadged employees; (ii) the large engineering services deals signed last year reaching steady-state margins (after initial dilutive impacts), and (iii) increased off-shoring.
We believe HCL’s investments in SG&A (selling, general and administrative expenses)—12.8% in Q4FY15, up 100 bps y-o-y—should provide opportunity for G&A rationalisation. Current USD-INR rates provide increased comfort to our Ebit margin expectations. At 14x FY17F EPS of Rs65, we find valuations reasonable. We retain our Buy rating and top pick status. Our target price of R1,110 is based on 17x FY17F EPS of Rs 65.
M&M-Falling material costs further positive: The recent fall in commodity prices will benefit auto companies’ Ebitda margins in the coming quarter. By our calculations, the cost of car index is down 100 bps since March-15. Not all of this benefit has been reflected in the Q1FY16 results as it takes at least one quarter for material cost benefits to flow through fully. We factor in Ebitda margins at 13.6% for FY16F and 14.1% for FY 17F, vs 14.3% reported in Q1 FY16.
M&M may retain this benefit in the farm equipment segment, given the lower competitive intensity. If we build in 50 bps higher Ebitda margins for M&M plus MVML (Mahindra Vehicle Manufacturers Ltd), our EPS estimates would move up by 4%. The fall in diesel prices is also positive for auto sector. With new SUV launches planned from September 2015 and a likely farm segment revival post the normal monsoons, we believe the worst is behind for M&M. At current prices the core auto business M&M + MVML trades at 10.7x FY17F EPS, which is very attractive. We value M&M on SOTP to arrive at our target of Rs 1,618.
UltraTech Cements remains our top pick: Since the June quarter, prices of coal and crude oil, which are key inputs for cement, have softened further. Prices of imported coal (Richards Bay as the benchmark), retail diesel, and polypropylene have declined 9%, 6%, and 13% sequentially from the June 2015 quarter (average prices in rupee terms). If we price in the current prices of these inputs into our estimates (assuming they remain at these levels for the next two years), our full-year FY16F and FY17F Ebitda estimates will see an increase by 6% and 10%, respectively. The fall in input costs and benefits from efficiency-improving initiatives should provide tailwind to our earnings estimates for UltraTech over FY16F-FY18F. We are positive on UltraTech as we believe the management’s focus remains on delivering superior growth. We expect UltraTech to deliver strong earnings growth over FY15-17F. Our target price of R3,416 offers implied upside of 18%.
Connecting better (30-08-2015)
Companies should be careful about not getting people to choose between culture and results: Ashok Soota (30-08-2015)
Mobile banking, arriving with a bang (30-08-2015)
Incumbent banks have cautiously reacted to new payments bank licences. Payments banks will compete on savings and payments; we believe access to better customer data could also help them milk some income from lenders’ assets business. The key opportunity for new banks is to identify and offer highly relevant products/services to unmet needs in underserved customer segments.
A recent analysis by BCG highlights that a combination of existing financial suppression, expansion of mobile connectivity, financial autonomy and supportive regulatory framework has led to a rapid expansion of digital finance in China. This has forced Chinese banks to react by specialising vertically and/or entering into the turf of e-commerce companies.
In India, the RBI will continue to raise competitive intensity in the banking industry, thereby raising risks for the incumbent banks’ profitability. It is too early to call winners, but a differentiated niche will provide some safety.
Since the RBI, for the first time, laid out its vision in May 2014 on the coming competitive landscape in the banking sector, it has consistently attacked two grand bargains in the banking system by pushing for: (i) PSU bank reforms and (ii) making deposit financing more competitive. Issuance of payments bank licences has hastened the process, with small finance bank licences to be announced soon.
Whilst the extent, timelines and sources (cost of deposits, yields, cost of operations) of pressure on profitability are yet uncertain, we believe these new players would raise competitive intensity in the segment.
In the last two years, the number of transactions through mobile wallets has expanded at a CAGR of 179% to 255m in FY15. The growth in mobile wallet transactions indicates the potential of growth that digital channels can facilitate if the unmet needs of customers are met through targeted products/ services. Payments banks, in our view, would also focus on specific customer needs that are currently underserved by banks.
In the context of issuance of 11 new payments bank licences, we met a few FinTech companies and visited the recently-held Ficci/ IBA conference. Whilst trends in technological innovations are quickly evolving, some widely expected trends are forcing incumbent banks to take note.
Cautious response to new payments bank licences: At the Ficci/IBA event. SBI was the most vocal on the challenges that new payments banks will pose to existing banks; these challenges are: (i) Uncertainty around the unknown disruptive practices of new banks; (ii) Strategy to acquire customers at any cost, facilitated by the large investors willing to ‘burn’ significant amount of capital initially; (iii) Lack of legacy issues at new banks, unlike, for example, existing banks’ asset quality challenges; and (iv) New banks’ agility to use a range of systems and delivery modes.
Origin of m-wallet industry: The origin of the mobile wallet industry in India lies in the prepaid mobile re-charging industry, where B2B and B2C mobile apps replaced the old paper-based prepaid mobile scratch cards. This drastically lowered the cost of distribution. Mobile wallets further evolved into DTH recharging, utilities payment and e-commerce payments. Yet, mobile recharging (estimated to be a $25 bn industry) likely accounts for 50% of mobile wallet transaction in India.
China—According to BCG, in the last 18 months, 18 digital-only banks have been launched in China. Existing banks also face fierce competition from a host of internet companies in all aspects of banking . The drivers of the digital channel for financial services are: (i) pervasive presence of digital channels in all aspects of life (e.g. shopping, eating, communication, entertainment and education); (ii) extent of current financial suppression; (iii) expansion of mobile connectivity to “anywhere and anytime”; (iv) spread of cloud computing and ‘big data’ as facilitators; (v) financial autonomy; and (vi) supportive regulatory framework. The banks have begun to respond by identifying and strengthening their niche in the banking value chain. The Big-4 banks have also entered into online marketplaces.
M-wallets not popular in the West: The Western world’s experience with mobile wallets has not been as successful as has been the case in India. In the West, plastic money was pervasive as a mode of payment due to the penetration of credit cards and point-of-sales (POS) terminals. In India, lack of velocity of transactions has not allowed a wide POS roll-out. Thus, in India, a section of cash economy (used for mobile recharging) moved to mobile wallets, but there was no such opportunity in the West. In that sense, mobile wallets seem to be leap-frogging plastic money and POS network, as mobile telephony earlier did for fixed-line in India.