Interesting Reads 01-04-2019

Companies with  Market cap of over 1 trillion Rs has reached 30 at present

Source : Business Standard

 

Price to Book Valuation of Nifty and Nifty Bank index – Discount is reducing

Source : Business Standard

 

Large cap funds outperformed Mid and Small cap fund in last one year. However over a 5 year period, Small and Midcap funds have outperformed Large cap funds

Source : Business Standard

 

Indian Economy Snapshot (Last 5 years)

Source : Business Standard

 

Aviation traffic growth Feb 2019 –  Lowest in 57 months

Source : Financial Express

 

Energy Demand Growth in 5 years  vs Net Income of Discoms.

Source : Business Standard

 

Metal companies operating profit contribution from each commodities

Source : Hindu Business Line

Interesting Charts from Brokerage Reports

Expectation of strong earnings recovery in midcaps

(Source : Elara Securities)

 

FII and DII proportion to Free Float

(Source : Motilal Oswal)

 

% of BSE 200 stocks trading above 200 DMA

(Source : Goldman Sachs)

 

India’s allocation in EM and AEJ Mutual Funds

(Source : Goldman Sachs)

 

Gap between 200 DMA and 50 DMA | Realized inter day volatility

(Source : Morgan Stanley)

 

Difference of Nifty 50 and Midcap 100 rolling returns (%)

(Source : Motilal Oswal)

 

There has been no two consecutive years of negative returns in midcaps

(Source : Elara Securities)

 

In past 5 out of 6 elections, nifty has averaged 13% returns in 3 months before election results

(Source : Goldman Sachs)

 

Nifty and Nifty midcap 100 – Ownership structure

(Source : Motilal Oswal)

 

Nifty Midcap 100 Total market cap at five year low

(Source : Motilal Oswal)

Interesting Charts from Brokerage Reports

 

Valuation of small caps after steep correction

(Source : B&K Securities)

What led to the Nifty Rally

(Source : Yes Securities)

Breakeven Analysis between diesel and petrol cars have come down significantly

(Source : Kotak Institutional Equities)

 

DRAWDOWNS

(Source : Morgan Stanley Research)

Midcap Drawdown since 2005  

Smallcap Drawdown since 2005

Sensex Drawdown since 2005

Sensex Drawdown since 2009

 

FLOWS 

(Source : Morgan Stanley Research)

FPI vs Domestic MF

 

FUNDAMENTALS

(Source : Morgan Stanley Research)

Corporate Profit to GDP : India vs US

Corporate Profit to GDP

Large Companies share in Total Profits – At highest levels

Breadth of Corporate Performance – Revenue and Net Profit Growth

Broad Market Revenue Growth

YoY Revenue and Profit Growth

Trend in RoE and Asset Turnover

Bank Credit Growth

 

MARKET BREADTH

(Source : Morgan Stanley Research)

Market Breadth – % of stocks above 200 DMA (Daily)

Market Breadth – % of stocks above 200 DMA (Weekly)

 

VALUATIONS

(Source : Morgan Stanley Research)

Cyclically adjusted P/E (CAPE)

MSCI India P/E relative to MSCI US

Market cap to GDP Ratio

 

VOLATILITY

(Source : Morgan Stanley Research)

Inter day volatility at historical lows

 

 

Interesting Insider Trades – 2018

One way to source for ideas to research is to look for promoters increasing stake in their companies.

Insider Trading Disclosures – You can download the historical disclosures from the following link. ( Select the dates and click on the download button in the corner )

https://www.bseindia.com/corporates/Insider_Trading_new.aspx#

We have just highlighted the interesting insider trades in the last 1 year.  ( have only focused on entries where promoters have done a direct market purchase.)

Interesting Insider Trades 2018

No recommendations.

 

Disconnect between price and value in many growth and value stocks

Some snapshots from a Kotak Report

 

The re-rating of ‘growth’/‘quality’ stocks (see Exhibit 14) and de-rating of ‘value’ stocks (see Exhibit 15) has continued for a long time and we are at a loss to explain the continued mismatch in the price-value equation for the two sets of stocks for such a long period of time. Our previous thesis regarding high correlation between global bond yields and
earnings yields of ‘quality’ stocks has been deflated by the continued fall in earnings yields of ‘quality’ stocks even at the time of rising global bond yields. Anyway, the argument about a potential de-rating in multiples of ‘quality’ stocks on the back of higher global bond yields
may no longer be valid as global bond yields will likely stay subdued due to a synchronized global economic slowdown.

Lastly, certain so-called ‘value’ companies have found new ways to disappoint investors on corporate governance, thereby
making the valuation argument largely redundant for such stocks.
It seems to us that the market has simply taken a ‘permanent’ view on the future of most companies, thereby effectively segregating companies into (1) long-term winners; these are companies with superior business models, trustworthy managements/promoters and good corporate governance practices where no price or valuation may be too high to own the
stocks and (2) long-term losers; companies with inferior business models and poor governance practices where no price or valuation may be too low to avoid the stocks.

Quick Management Insights – Hindustan Unilever, Prataap Snacks, Tech Mahindra, Muthoot Capital, Shree Cement, Reliance Nippon AMC

Sanjiv Mehta of HUL

On Growth – We have grown our delta (incremental) turnover in the last six years by ₹12,400 crore. If it was a separate company, with ₹12,400 crore, it could perhaps be the largest FMCG company. If you look at our profits or Ebitda, we have more than doubled in the last six years. And these last six years, you have seen two consecutive years of drought, demonetization and introduction of GST (goods and services tax).

On Market Development – Market development is a science. What we call seed, accelerate and explode. Where the penetration is less than 10%, we seed it… once the penetration moves from 10% to 20%, we accelerate the development, and once it crosses 20%, then we press the pedal hard and explode it. So, it is a very clear science that we have built.

On Health Foods Drinks – If you look at our country, four out of 10 children are malnourished. Nine out of 10 children do not get the micro-nutrients that’s required and still the penetration of HFD in the country is about 25%. GSK Consumer Health have built a great category. This is a category of nearly ₹8,000 crore and, in that, they are by far the market leaders with great brands—Horlicks, Boost, Maltova, Viva—and when you look at them from any lens in terms of most trusted brands in the country

Source : https://www.livemint.com/companies/news/combined-business-of-hul-gsk-will-be-rs-45-000-crore-hul-chairman-sanjiv-mehta-1548006247197.html

 

Amit Kumat of Prataap Snacks

On Distribution – Our retail outlet reach has increased considerably from 0.5 million to 1.7 million currently and we hope to expand aggressively in next few years also. We would be present in 60% of the country right now. Big markets where we are very weak are Punjab, UP, Southern India, Himachal Pradesh and J&K. It will take another two years for us to have a pan-India presence.  We have acquired Avadh Snacks to take control of the Gujarat market. We would be needing another Rs 100-150 crore in next two to three years time for that expansion

On New Launches – Planning to take Avadh outside Gujarat to Maharashtra. We plan to start one plant in Mumbai. There is a sweet snack category where we are planning to launch three-four products in near future. Compared to savoury snacks, sweet snacks is a 50% to 60% higher margin product. Currently it counts for 3% to 4% of the revenue and we target this to be 10% of the revenue in next three years’ time.

On Growth Guidance – We hope to grow by 20% to 22% in next three-four years time.

Source : https://economictimes.indiatimes.com/markets/expert-view/we-hope-to-grow-20-22-in-next-three-four-years-amit-kumat-prataap-snacks/articleshow/67656045.cms

CP Gurnani of Tech Mahindra

On Impact of US Govt Shutdown and Brexit – I would not immediately react to this because I have seen that IT is a lag industry. It is not like change in food or oil prices changing your behaviour overnight. The impact, if any, is two to three quarters away. I would wait and watch and do my scenario modelling but many a times, it works out as an opportunity. Ultimately where is IT budget going? It is going to run the operations, to change the operations or to grow new businesses.

On Price Aggression – With discord computing or ARVR or data to AI kind of a solution, you are in a good position and more often than not, you are putting in the tail-end which is premium, which is not so easily available and you are also solving some of the customer challenges that the customer is willing to pay for.

On Digital Investments – After a certain point, digital will become hygiene. But for the next 18 months. we are still talking digital and after 18 months when 5G becomes centrestage, we will talk digital plus 5G.

Source : https://economictimes.indiatimes.com/markets/expert-view/after-18-months-5g-will-take-centrestage-in-tech-world-cp-gurnani-tech-mahindra/articleshow/67651467.cms

Madhu Alexiouse of Muthoot Capital

On Digitisation and Business Model – One of the driving force is spreading across the geography, we are now present in 20 states. Processes are digitally driven which have helped in reducing Opex. Opex to NII has come down by 10%. We have a unique business model where our flagship company Muthoot Fincorp which has 3600 branches cross sells two wheelers and contribute business to us at low cost

On New Products  – Muthoot Capital focus is on small ticket loans, we focus mainly on 2 wheeler loans and intend to expand to used cars and consumer durables. We have no plans to expand into SME and MSME lending

Source : https://www.youtube.com/watch?v=hjKC8zFdRYg

H.M. Bangur of Shree Cement

On Demand and PricingPrices are more or less stable. For last 4 years the profitability of the company is not increasing at all. Impression is cement prices go up only. Even if we see price rise of 3-4% annually, inflation is little more so profitability is impacted continously. Demand is good. Country is growing at 7.5% GDP. All India Cement demand is also growing at 7-8%

Source : https://www.youtube.com/watch?v=oM7Dk_LLIrA

Sundeep Sikka of Reliance Nippon AMC

On Opputunity Size and Consolidation in Industry – We believe that the opportunity is humongous. We have about 45 AMC’s. Even today only 2-3% of population is investing. As India moves from 2tn$ economy to 5tn$ economy the per capita income goes up. India does not have a very high social security system, so people will be using Mututal Funds for their retirement planning and other goal based. We believe the No. of investor in industry to be increased by 5 times in next 10 years. More than 50% of AMC’s are still in losses. The share of Top 10 AMC’s in overall AUM’s went up from 75% to 81%. So there is a lot of scope of consolidation happening in the industry.

Source : https://www.youtube.com/watch?v=SsAs_W2YEw8

Quick Management Comments – Vedanta, Bajaj Auto, Bajaj Finserv, Wipro

Anil Agarwal of Vedanta Plc –

On India’s Mining Resources Minerals are next only to oil on imports bill. India is richly endowed with natural resources, yet is not recognised or leveraged the way Australia, Brazil and China are. I wish India to quadruple share of mining industry, from 2.5% to 10% of GDP

Source : https://economictimes.indiatimes.com/news/economy/policy/view-address-the-mineral-imports-malady-in-resource-rich-india/articleshow/67635050.cms

 

Rajiv Bajaj of Bajaj Auto –

On Domestic business – We would have liked to be a little more successful in the domestic motorcycle market than we did. Every third motorcycle in Africa is a Bajaj. In India, our market share is now 21%…The time has now come after doing a good job overseas to do more here.

On Electric mobility – We believe strongly in electric mobility. It is a new technology and, therefore, there may be some shifts here and there. But our objective is to bring electric vehicles by 2020

On Current slowdown – There is a cycle in every business. But we are fortunate to be in a country which is the largest two wheeler market in the world. Our job now is to adjust the sails and ride out the wind. India is too big a market to fail.

Source : https://economictimes.indiatimes.com/news/economy/policy/no-wishlist-watching-budget-waste-of-time-rajiv-bajaj/articleshow/67627499.cms

https://auto.economictimes.indiatimes.com/news/industry/bajaj-set-for-foray-into-electric-vehicles-next-year-e-quadricycle-3-wheeler-on-anvil/67629312

 

Sanjiv Bajaj of Bajaj Finserv –

On ALMThere were a bunch of HFCs that were mismatched on funds and they got caught at the wrong end. They had short- term liabilities but did not have the assets. Clearly, if you have to grow, you have to match your assets to your liabilities. That is one of the first things you learn whether you are an NBFC or a bank. This is something that requires correction and RBI has taken some steps towards that.

On NBFC Crisis – Why did all NBFCs, HFCs fall in value by between 20 and 40% in a matter of a few days? This is systemic risk. Today. the top 10 NBFCs in the country each have AUMs of over Rs 10,000 crore and they are responsible for 30% of incremental credit going into the system. Consumer and SME growth in this economy has been helped by NBFCs. We u need to find a way to ring-fence them. It does not mean that you are going to create the wrong incentives but why did not banks fall because everybody knows that a bank license is a secure license under RBI. RBI will open up a window for liquidity. Why don’t you do that for big NBFCs?

On Banks vs NBFC’s – What is an NBFC? It is a license to lend with some limitations. A bank is the same but there are some differences. Why should NBFCs be associated with shadow banking? It is real banking. This is where some fundamental thinking and rethinking is required.

On Life Insurance – Life insurance clearly has evolved into pure protection of life but fare more importantly into both an investment product and a protection product. We are very bullish. We have transformed our business about three years ago and from there, we are showing steady growth in the overall top line, in the product mix as well as in the productivity across the different channels. That is growing well.

Source : https://economictimes.indiatimes.com/markets/expert-view/india-needs-to-have-a-decisive-government-that-is-also-inclusive-sanjiv-bajaj/articleshow/67628984.cms

 

Abidali Z Neemuchwala of Wipro –

On Achievements in Last Three Years – Our digital revenues are almost now one-third of our overall company revenues. We restructured some parts of our business which do not belong to the future, like we divested our data centre business. We combined our Middle East business with the global business — all these steps started delivering results and good growth rate. We have the capability through the acquisitions and we are internally building things like Design, Cloud, Cyber Security, some of the new age services like Appirio in sales force and others.

On Improving the Quality of Revenues – The quality of revenue looks at balance sheet items like un-built revenues, collectables, how we address clients who may have credit rating challenges and stuff like that to make sure that on a sustainable basis we do not surprise markets with volatility or unpredictability. We have come quite far.

Just to give you one data point, about seven or eight quarters back, more than 27% of our quarterly revenues were un-built revenues. This quarter that has come down to about 13%. Our operating cash flows are ahead of our revenues and billing.

On Healthcare Vertical – Over the last two years. revenue dropped almost $270 million to about $100-110 million. It is a very significant amount of revenue hit and then there are some of the amortisation acceleration etc that we have taken. In the next couple of quarters, we will at least hit the bottom

On Efforts to Localise Talent in the US – When we started on this, we did take a little bit of a margin hit because this needs investments and we are kind of done with those investments. Now it has become a part of our operating structure, our cost models and we are able to deliver margin expansion because it has become a way of life. Now mid-level talent is still short especially in our large markets whether you look at US and UK and Australia, but by building talent and cadre locally in the markets and having established employer brand ahead of our competition, we do well over there.

Source : https://economictimes.indiatimes.com/markets/expert-view/leading-both-wipro-specific-and-industry-transformation-greatest-achievement-abidali-z-neemuchwala/articleshow/67642101.cms

Interesting Snapshots from Research Reports/Annual Notes of AMCs

Our comments in brackets.

Primary Market Issuances in 2018.    ( Issuances peaked out in 2017 )

Nifty Valuations – Using P-E for Non-Financial and P/B for Financial Companies.  ( Interesting take on valuing Nifty.)

Indian Equities strongly correlated to S&P 500 !!   ( More co-related to US than Asia)

Indias Contribution to World Market Cap – Higher than Average but lower than the highs.

Nifty EPS estimates – Motilal Oswal    ( Estimates have been wrong through 2014-2018 for all brokers. Will it be finally right ? )

Emerging Market ETF Flows    ( Is the tide finally turning for Inflows to India)

Market Cap Wise Performance in CY 18 – ( Huge divergence in large caps to broader market – Can it reverse in CY 19 )

The Power of Retail Investors    ( 2019 will be the real test for Retail Behavior in MFs)

(Midcaps Premium to large caps finally reducing but still higher. )

Hotel Valuations around the World – Kotak