Expectations and Thoughts on a New India – Post Elections Note

Date: 1st June 2019

Recent Events – Elections

  • Last week we had an election result day and the 2019 central election came to a dramatic end. We welcome the second term of BJP and the National Democratic Alliance at the center.
  • The 6 week long 7 phase election was an emotional, high decibel multimedia war among the parties and participants. I am so glad we fight this way. People argue, they criticize, they pull up history, they express themselves, and they get angry. They decide whom to vote for. Then they stand peacefully in a line to vote, and accept the outcome.
  • This is far better than a civil war or an agitation or a set of bandhs and protests. Thank you India. :-)

THE Economic Environment

  • Growth is slowing in the Indian economy to 7% and below. This is weak as we have a low per capita GDP. To absorb the population growth in jobs, we have to target 8% plus growth.
  • The slowdown is a culmination of multiple events – high interest rates relative to inflation; weakness in sectors like real estate, automobiles, consumption and low rural demand. BFSI sector has issues like a liquidity challenge affecting NBFCs, NPA issues in PSBs and the IL&FS crisis. Exports have slowed down as global demand is down due to weak growth and a tariff war between USA and China. The private sector is not investing.
  • Even though the above laundry list of issues is depressing, the economy also has a number of positives. Our IT and ITES sector continues to bloom. Sectors like pharma, automobiles, telecom and retail have achieved impressive scale. The large corporates have in general improved balance sheets and are low on debt. Private sector does have investment firepower in place if they see good opportunities. We are past several difficult structural reforms like GST, RERA, demonetization, shell company crackdown and Bank NPAs, and with this election result market uncertainties are much lower. We have rich human resources and need to tap this well.
  • Corporate India has to grip the large opportunities up for grabs – housing, infrastructure push from govt. including roads, railway, airlines and airports, gas distribution and water supply, mobile and telecom based opportunities, consumption by a large population, eCommerce, digital and Aadhar validation based business models.

A Wish List for Modi 2.0

As an investor, I have many hopes and expectations from this new government. Extending from governance to education to the corporate sector, this is my list:

  • How can justice be delivered faster? The numbers of pending cases in lower courts to SC are scary. The main issues are – slow resolution, and cases in lower court routinely reopened in higher courts. Our suggestion is to – have no vacancies for judges, courts open all year long, push for mediated solution rather than court battle, time bound cases (no tareek pe tareek) and low acceptance in higher courts. Digital solutions can speed access and enable common judgements for similar cases. The NCLT driven IBC code has also proven its usefulness. However this needs to be tightened based on the experience so far, to be faster and with higher success rates.
  • Do we have the right education systems today? The problems extend from low penetration and presence of schools, high dropout rates, poor learning and skill building outcomes, overlaps between state and central boards, many languages and high study load for students. Our suggestions are – more and better govt. schools, coordination between central and state boards on content and timetables, free and compulsory (penalty parents punishable) govt. education till 10th, digital tracking of schools, teachers and students, better curriculum of less rote and more experiential, discovery and project based learning, emphasis on sports with good facilities, and zero homework. Competition is always good, so all education should be freed from govt. license shackles. The best universities will naturally thrive.
  • Is the right way Garibi Hatao or Amiri Badhao? Both are important. On the former side, the excellent work on toilets, housing for all, LPG, ration card based subsidies, farmer schemes, cooperatives, good supply chain to agriculture needs to continue. Electricity for all, better quality electricity, lower leakages, pension for 60+ age, unemployment measurement and schemes (MGNREGA) needs to be bolstered. All subsidies and subsidized product distribution needs to go through Aadhar verification to plug leakages. On the latter side, corporates need to be encouraged as they generate employment, good salaries and taxable profits. Real Estate and Textiles need revival. Exports and a good startup environment is important.
  • Need for Infrastructure: This is obvious, and a crying need. While some progress has been made on Roads and Electricity, much more needs to be done here; and in Railways, Airways, Ports, Water supply, Healthcare and Education, Municipal reforms and Town planning, local transportation and Police reforms.
    1. Suggestions – funding is as important here as detailed planning. Pension and Insurance funds should be allowed and enabled to invest in Infra.
    2. Projects have to be reasonably profitable for private sector operators, with lower risks and permit challenges.
    3. Development of 1-2 new metros in every state. The current 6-7 metros are overcrowded and infra is stretched. The next 20-30 cities need to develop systematically to take pressure off these metros. The Smart Cities Mission needs to be accelerated.
  • Public Sector Enterprises: The Govt. should not be in any operational firm that has no national Interests. Firms like SAIL, NTPC, HPCL, BPCL, many parts of Indian Railways, BSNL, MTNL, Coal India, etc. should be freed from the chains of PSU restrictions, allowed to operate freely and generate reasonable returns. The PSUs and govt. ministries have assets worth lakhs of crores that are generating low single digit returns. GoI should monetize firms, assets and lands and sell to investors – foreign, Indian or even their own employees, through IPOs, auctions and management takeovers. And fund Infrastructure, Education and social needs.
  • The role of Regulators: The right way to encourage growth in a sector is to have a Regulatory authority that ensures a level playing field and meet national and business objectives to develop the sector. It has to include a think tank and sector experts. Regulators for every sector should be much more dynamic, open to discussion and forward looking, with minimum regulatory and legal overlaps. They must enable minimum ROI for new sector entrants. The success of SEBI, IRDAI, TRAI, etc. has to be extended to Hospitals, Education, Pharma, automobiles, chemicals, etc. to roll out required standards & compliance, and encourage growth and penetration.
  • Taxes, Interest Rates and more on Corporate Sector: The laundry list of urgent needs is
    1. Corporate taxes need to be lowered. This was a Modi 1.0 promise – lower taxes and fewer tax concessions.
    2. The current interest rates in India are very high in the global context, as well as given the low domestic inflation. Rates need to lowered – through RBI intervention and easing up of foreign borrowing.
    3. Simplification of GST to 2-3 levels. Inclusion of liquor, petro products and cigarettes
    4. SEZ model revival and encouragement of exports
    5. Labor reforms. Firms should be able to hire (and fire) more easily and with lower overheads.
    6. We need to officially and robustly measure & track Unemployment. This is a key economic measure.
    7. Auditors have an important role in prevention of financial crimes. Perhaps a regulator is needed for Statutory Auditors to keep up standards and prevent problems early.
  • Do we need to export more or import less? Both. Many high tech products like auto steels, specialty chemicals, commodities, oil, gold, machinery, chocolates and consumer products are imported for factories and consumers here. Local manufacturing needs to step up to fill these needs. Also exports is still not happening on a good scale. We are running a trade deficit. This has to be filled up by IT & ITES, pharma, automobiles, engineered products, steel, aluminum, petro products, gem & jewellery, tourism, airport /aviation and seaports /shipping.
  • Environmental protection: As the globe gets hotter, the oceans dirtier and forests thinner, it’s sad to see USA dropping environmental concerns and reneging on commitments. In the war on air, water and plastic pollution, India has a secret weapon – low cost of operations. It’s possible to recycle old ships (Alang), electronics /ewaste, newspaper and most dry waste, and generate a wage for workers and a profit for the business. However we need to protect our borders from waste dumping. And the Ministry of Environment, Forest and Climate Change needs to proactively reach out to industry, municipal corporations and volunteers to enable and scale these activities.
  • Thoughts on Ministerial Changes:
    1. In Singapore, the minister appointed for an Industry is often a very respected senior business executive from the sector, who transitions from a CEO role, to developing the sector for the nation. Knowledge of individuals gets institutionalized. This has allowed Singapore to progress very fast, it is now a Developed economy. India must adopt this model as in many ministries leadership requires a lot of industry knowledge.
    2. In India, we saw the Railways and Coal ministries work together innovatively due to a common Minister. Such strong coordination is needed to solve challenges such as Kashmir (Home and Defense), Transportation (Ports, Road, Rail, Air) and Energy (Electricity, Petroleum, Solar, Wind, Coal, Hydro,) etc.

Conclusion

  • Execution, administrative reform and good governance have been key observations in Modi 1.0. National pride, Industrial progress and social capital are coming together well.
  • We need to do even better in this new regime to take Indian GDP to 8-10% growth range and lift standards of 130 crore / 1.3 billion Indians.
  • Also see A Vision for the Indian Economy‘ 

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Market Outlook – Jan 2019

JainMatrix Investments takes a long hard look at 2018 and then builds the 2019 Outlook. 

What happened in 2018 – making sense of it 

  • CY2018 was a challenging year for investors. Many global equity indices gave negative returns, see Table 1.

jainmatrix investments, outlookTable 1 – Global Equity Indices (click to enlarge)

  • The Indian markets in 2018 were affected by various domestic and international factors.
    • The introduction of LTCG tax in Jan 2018 started the negativity after a very positive 2017.
    • Mutual Fund schemes were reclassified as mandated by SEBI, which led to MFs shifting the funds to LC stocks from Mid, Small and Micro caps and a sharp correction in MSM share prices. This was unexpected.
    • There were corporate scams (Punjab National Bank and Gitanjali Gems), auditor resignations and a new surveillance system (ASM framework) put in place by the exchanges to curb excessive trading.
    • The unfolding of the IL&FS crisis and the liquidity stress affected the NBFC sector.
    • Brent crude prices rose to $84/barrel creating worries over India’s deficit. The INR also weakened to Rs. 75/USD. Crude rose from May-Sept 2018 only to plunge sharply after that.
  • However it wasn’t all bad news in 2018. On the positive side,
    1. GDP rose sharply, as did govt. spending in Infra space. Inflation fell, giving debt investors better real returns. Domestic investors moved into equity even as FIIs withdrew from debt & equity markets.
    2. Broader corporate earnings improved after a weak 2017 due to Demon and GST. Exports sectors like IT and gems & jewellery did well due to USD strengthening against INR.
  • See Fig 2. It can be seen that Nifty fell after Sept then recovered to stay positive by year end. Mid-caps and Small caps did badly in 2018. This was a Risk-Off year after Risk-On years of 2016 and 2017.

jainmatrix investments, outlookFig 2 – Benchmark Indian Indices

  • In USA Trump reduced taxes, which gave a boost to the markets. However he soon imposed tariffs on China and broke international agreements. Interest rates were raised by the Fed. after 8-10 years of quantitative easing and low rates. The govt. has shutdown following Trump’s order for a demand to build a wall between USA and Mexico.
  • A look at Dow Jones Industrial Average (USA) and Sensex, see Fig 3, indicates that over the longer term there is a similar pattern. However in the shorter duration the movements could be more influenced by domestic factors playing out.
  • Fig 4 shows the year wise performance of these Indices.

jainmatrix investments, outlookFig 3 – Sensex and DJIA 5 year movement and Fig 4 – Year Wise Performance of Indices

the 2019 OUTLOOK

  • The 2019 outlook has key factors:
    1. On Interest rates there should be a reduction by RBI as inflation is in check and growth will be encouraged.
    2. Elections: The Rajasthan, MP and Telangana election results were BJP losses but the market was not affected. Our feeling is that coming elections will be hard fought. However the worst case scenario is not very bad for the markets and India is on a growth and reforms path that should continue.
    3. Currently the BFSI sector is recovering from the IL&FS and liquidity crisis. The central govt. and RBI have taken measures to resolve these. Interest rates have hardened. The NCLT lead NPA resolution process is bringing confidence back to markets and strengthening Banks.
    4. Auto sector is slowing in Q3, partly due to credit issues. Cement is seeing good volumes but weaker margins. Capital goods, construction and infra are positive. Power sector looks steady. Consumption sector remains strong.
    5. Real estate is weak due to RERA, GST and crackdown on black money. Demand for new housing will remain weak until prices correct, except in affordable segment. Rentals demand will be robust.
    6. We do have a situation where GoI will increase public spending. In the private sector, growth is pushing capacity utilizations, profitability is increasing and there is some reduction in overall corporate debt levels.
    7. Given weakness in USA, Europe, China and Japan, India may become a favorite again among Emerging Markets for FII flows into equity and debt.
  • The outlook on USA equities is bearish on fears of slowing growth, govt. uncertainty and rising interest rates. The tariff war is more harmful to American business, and the Trump brand is causing uncertainty.
  • In Fig 4 India on average has seen 12% growth in 4 years, lower than the long term Sensex average of 13-14%. We expect a mean reversion to higher levels.
  • This market needs patience 
  • Post elections, we project a return to Risk-On for Indian stock markets. Long term investors can expect markets to be weak in H1 CY2019 and a recovery post elections.

We wish our readers a happy and prosperous new year!

Disclaimers

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Punit Jain has no shareholding in any listed firm mentioned in this article. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

The NBFC sector selloff – is it overdone?

In the last few weeks, shares of some NBFC/BFSI stocks have fallen between 15-60%. Here we try to find out the key causes, possible timelines and suggest next steps for investors. 

The recent developments in Indian Banking Financial Services and Insurance (BFSI) sector have created a fear of systemic risks – causing stocks in general, specifically NBFCs, to correct sharply.

The IL&FS Default

  • IL&FS is a core investment firm and the holding company of the Group with firms in infra, finance, social and environmental services. IL&FS is a “systemically important” NBFC firm as per RBI.
  • In Sep2018 IL&FS Financial Services, a group firm, defaulted in payment obligations of bank loans, term and short-term deposits. It failed to meet the commercial paper (CP) redemption due on Sept 14, 2018. After this ICRA downgraded the ratings of its short-term & long-term borrowing programs.
  • The short-term paper of IL&FS saw a credit rating fall to a rating of D on 17 Sept (indicating default), down from a rating of A4 (as on 8 Sept) and A1+ (as on 6 Aug). Similarly, ILFS Financial Services short-term paper credit rating fell to ‘D’ on 17 Sept, down from A4 (as on 8 Sept) and A1+ (19 Feb).
  • Infra sector in India does face challenges like long gestation periods, low returns, and funding issues. Investments in infra should be financed by long gestation sources like insurance and pension funds.

Spill over effect on equity market

  • IL&FS has total debt of Rs. 91,000 cr. at the group level from 350+ direct and indirect subsidiaries, JV’s and associate companies. Of this debt, 61% is in the form of loans from financial institutions, indicating its woes could spread to other shadow banks.
  • Fresh inflows into MFs, especially into debt funds, slowed, and debt fund managers began to adopt a “wait and watch” policy on deploying fresh funds. A few MFs started selling short term debt instruments issued by NBFC companies including those funding the housing sector. There are concerns over short-term liquidity in the market for CPs raised by NBFCs. Further, there is also an uncertainty about the ability of certain NBFCs to raise capital.
  • Fresh bond issuances by NBFCs declined and the costs of borrowing rose. Post the default, there was a sharp decline in bond prices for HFCs which brought funding/liquidity situation of NBFCs into fresh scrutiny. This resulted in a sharp sell-offs in anticipation of rising borrowing costs, tightening liquidity situation which could impact growth sharply in turn also. Hence there was a double blow to stock price targets from earnings downgrade as well as valuation multiples downgrade (faltering growth).

What added fuel to fire?

The macro is also seeing headwinds such as:

  1. The NPA issues around Public Sector Banks (already under resolution)
  2. High Crude Oil Prices and Depreciating Rupee against USD
  3. Consistent selloff by FIIs of debt & equity; and Trade War fears
  4. Regulatory Whip on private banks – Yes Bank, Kotak Mah. Bank, Axis Bank and Bandhan Bank
  5. The merger of 3 PSBs
  6. Upcoming State and General Elections
  7. Market Rumors causing volatility
  8. Mid-year cash flow issues due to advance tax and bank repayments

Regulatory Rescue and other Positives  

  • The RBI, Finance Ministry and MCA have stepped in quickly to avert a crisis. They  took control of IL&FS, and with NCLT approval, reconstituted the board and it is now headed by Uday Kotak as chairman. The new board is focused on turning around the operations of IL&FS soon.
  • The RBI will infuse Rs. 36,000 crores through open market purchase of bonds to ease liquidity concerns.
  • A reduction in excise duty was announced to reduce petrol & diesel costs.
  • The RBI MPC kept interests rates unchanged, indicating that inflation is under control and giving a thrust to economic growth.
  • Domestic liquidity and growth of MFs was strong recently and should continue.
  • India’s GDP grew at 8.2% cent in Q1 of FY19. This is an outstanding number,the highest growth in two years. Surely the growth will also reflect in the BFSI sector, as this sector addresses both consumer and industrial credit.

Which stocks got affected the most?

  • A lot of private sector banks and many of the HFCs from the NBFC space were affected. Here is how the share prices have moved in the last 1 year.

jainmatrix investments, nbfcFig 1 – One year Normalized Price Graph / Fig 2 – In Percentages jainmatrix investments, nbfcNote: The share prices in Fig 1 have been scaled for a better representation of relative movement of all the stocks over 1 year, which may not reflect the actual share price. The 9 stocks chosen above are an incomplete but sufficient representation of the sector. 

The Outlook

  • After a few weeks of uncertainty and liquidity dry-up, the financial system will surely rebound. Short term interest rates are firming up too.
  • IL&FS may undergo a restructuring; a fresh infusion of funds – maybe a rights issue and a sale of assets will help the firm meet its debt obligations. Some strategic announcements should happen in 1-2 months.
  • The developments around IL&FS and the macro economy do call for a correction in stock prices. However the correction has been overdone in BFSI/NBFC stocks.
  • Long term investors should look at selectively accumulating the beaten down quality stocks when some signs of recovery are in place.

Appendix / Legend – Sorry we keep using shortforms

  • BFSI – Banking Financial Services and Insurance
  • NBFC – Non banking Financial Services company
  • CP – Commercial Paper
  • HFCs – Housing Finance companies, a type of NBFC
  • RBI – Reserve Bank of India – India’s Central Bank and regulator for banking sector
  • MPC – Monetary Policy Committee, a group from RBI
  • FIIs – Foreign Institutional Investors
  • MF – Mutual Fund Industry
  • NPA – Non Performing Assets
  • NCLT – National Company Law Tribunal, is a quasi-judicial body in India that adjudicates issues relating to Indian companies.

Disclaimer 

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has positions in some of the firms mentioned in this report. JM objective is to draw attention to the sector rather than any specific stock. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

This market needs Patience

Dear investor,

You got into an amusement park. And decided to take a peaceful ride, say a merry go round. You sat down, and found to your surprise that you are actually on a High Thrill Ride, buckled in, and you cant get off.

The market today is a little bit like this ride – it can be described as a Bull market undergoing a correction.

I would like you to see this 20 minute YouTube video. Its an interview with a great Indian investor, Mr Raamdeo Agrawal. The video in Hindi describes his own journey and has important lessons for the long term investor.

(Credits – thanks to Mr. Raamdeo Agrawal and CNBC Awaaz for this content).

Think of this market correction as an opportunity. Your already invested portfolio will recover soon. In fact it is time for you to confidently continue your investing in a market looking more reasonable. 

JainMatrix Investments provides 3 Model portfolios – Large Cap, Mid & Small Cap and Satellite portfolio. These solid research backed portfolios are all you need for your long term investments.

You just need to stay calm and ride out this high thrill ride. To meet your goals. 

Here’s to your Happy and profitable investing.

Punit Jain
JainMatrix InvestmentsBangalore

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DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Here’s a Great Construction Achievement

Every once in a while, I come across an event or achievement that worth appreciating. Here is one such incident. It is terrific of Indian Railways to be able to do this.

Indian Railways sets record, builds subway at a busy track in 5 hrs; watch video

See LINK

Regards, Punit Jain

Do comment or share forward if you like the post.

Indian Hotels Sector – Time to check in?

Shares of many hotel companies have rallied in recent months. What are the reasons for this? Can investors find good investment ideas in this sector?  

  • Related Research: We had published a report on Mahindra Holidays in Mar 2013. The share is up 109% in 5 years, or 22% annualized. To read the report, click on LINK
  • The Sector can be tracked on moneycontrol on LINK

Introduction:

  • Tourism in India accounts for 9.6% of GDP and is the 3rd largest forex earner. It is a high potential, sunrise sector with a multiplier effect on transportation, hotels and exports.

jainmatrix investments, hotel sector

Sector Trends:

  • Over the last decade, India’s hotel industry witnessed excess supply of hotel rooms which led to low occupancies, flat/falling Average Room Rates (ARR) and average financial performance of hotels operating across different business segments. See Fig 1 and 2.
  • The hotel sector in India experienced flat to negative growth in occupancies over FY08-13 primarily due to a substantial growth in supply and a decline in demand. During FY12-15, as many as 43,800 rooms were added creating nearly 70% new capacity; and simultaneously the economy and hotel demand grew so occupancy growth was flat. Several hotel firms were loss making in this period.

jainmatrix investments, hotels reportFig 1 – Average Room Rates of Indian Hotels  and Fig 2 – Occupancy Rates. Source: HVS 2017 Hotels report

  • The chart below (Fig 3) reflects the occupancy scenario over the years and the growth projections. We can see that the demand growth is rising, while supply growth has slowed. Improved occupancies are expected to create a base for higher room rates. The higher occupancy and higher ARR’s will improve the earnings of firms from the industry.
  • Fig 3 Sources are 1) Lemon Tree Hotels RHP 2) HVS 2017 report 3) STR and Horwath HTL India Reports

jainmatrix investments, hotels reportFig 3 – Hotel Industry Demand-Supply and Occupancy

Benchmarking:

We have done this exercise of key players to better understand their performance.

  • From the exhibit, we can see that a lot of the companies trade at high P/E ratios. This is generally due to depressed earnings earlier and a recent move from loss to profits. However, a few companies are even now loss making.
  • The 3 year sales and PAT growth for most of the companies was dismal. Returns too are low.
  • The industry was also affected due to liquor ban on operators near highways. This has however been sorted out and is applicable for non-urban locations.
  • The implementation of GST was neutral for the industry. However tax rates may fall now.

jainmatrix investments, hotel reportExhibit 4 – Benchmarking

Conclusion

The hotel industry is clearly witnessing a revival. The hotels witnessing higher occupancy rates and improved pricing power with conservative management will be profitable investments.

Disclaimer:

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has no positions in any firm mentioned in the report. JM also has no known financial interests in these firms. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

Indian Roads Sector – A Delightful Drive Ahead?

  • Date 26th April  
  • Industry – Roads Construction 

Summary

Here is a snapshot of the interesting Roads Sector. We sense a revival, and a number of players are active here.

Additional Roads Sector Reports from JainMatrix Investments

  • Please read our Feb 2018 report on HG Infra IPO by clicking on LINK.
  • And our July 2017 report – IRB Infra Developers – In Invit We Trust – LINK
  • Additionally do read our Aug 2016 report on Dilip Buildcon IPO by clicking on LINK.
  • We share a Nov 2015 Roads sector report – LINK

Introduction

  • The development of any nation depends on transportation networks, and this is applicable to India with its varied terrain ranging from mountains to plains to coast. Transportation includes Roads, Railways, Airlines and Shipping, however in this note we will focus on Roads.
  • India has the 2nd largest road network in the world, aggregating to 61 lakh kms. Roads are the most common mode of transportation and account for 86% of passenger traffic and 65% of freight traffic. In India, NHs with length of 1.04 lakh km are just 1.7% of the road network, but carry about 40% of the total road traffic. On the other hand, state roads and major district roads at the next level carry another 60% of traffic and account for 98% of road length.
  • There are 2 Govt. bodies which award road projects at the central level, NHAI which is in charge of the National Highway Development Programme (NHDP) and the Ministry of Road Transport and Highways (MoRTH), which covers those highways not under NHDP. In addition, it also awards projects under Govt. schemes like Left Wing Extremism (LWE) scheme (road development in Naxalite areas), Special Accelerated Road Dev. Programme for North-East Region (SARDP-NE), NH Interconnectivity Improvement Project (NHIIP), etc.

jainmatrix investments

Road Projects Progress

  • From Fig 1 and 2, we can see that road projects awarded and completed flattened out during FY12-FY14. Delays in land acquisition & receipt of environment/forest clearances, economic slowdown and cash flow issues faced by developers had adversely impacted the sector. From the Fig 3 below we can see the transition of project awarding to new modes over the last few years.

jainmatrix investmentsFig 1 – MoRTH projects Awarded / Fig 2 – NHAI projects / Source: MoRTH / NHAI ARs 

  • In FY16, the NHAI introduced the Hybrid Annuity model (HAM) as the earlier BOT-Toll based awarding caused financial distress to the developers and the EPC model involved high upfront investment of funds. In HAM, 40% the Project Cost is to be provided by the Govt. as ‘Construction Support’ to the developer during the construction period and the balance 60% as annuity payments over the operations period along with interest on outstanding amount. This model has received good response from industry and investors.

jainmatrix investmentsFig 3 – NHAI project awarded

  • CRISIL Research expects investment in road projects to double to Rs. 10,70,000 cr. over 5 years.
  • Investment in state roads are expected to grow steadily, and rise at a faster pace in case of rural roads, on account of higher budgets for Pradhan Mantri Gram Sadak Yojana (PMGSY) since FY16.
  • The GoI approved the Bharatmala program under which 53,000 kms of national highways have been identified to bridge critical infra gaps. It will give the country 50 national corridors as opposed to 6 at present. Phase I will be implemented from FY18-22 with 24,800 kms of construction expected.

Key Players

  • In Q4 FY18, the MoRTH had aggressively awarded projects to further accelerate the pace of road infra development. See the order book position of a few listed road developers, Fig 4 and Fig 5.

jainmatrix investmentsFig 4 – Order Books of Roads players / Fig 5 – Order Book FY18 / Fig 6 – Benchmarking 

  • Note: FY18# is the order book basis 9M FY18 data and documents available on the exchange.
  • In Fig 6, we have done a benchmarking exercise to compare a few sector players.

Conclusion

  • The development of road infra in India is witnessing great momentum. Robust demand, higher investments, favourable policies and government’s willingness has changed the face of the road sector in the country. The construction of roads per day hit a new high of 27 kms/day for FY18, which is much higher than what was achieved earlier.
  • The momentum of building a stronger road network in India is likely to improve as it generates mass employment and leads to significant growth in contribution to the GDP. Given the current roads sector scenario, investors should definitely not miss this exciting opportunity.

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has positions in IRB Infra since Feb 2008 and H G Infra post listing. Other than this, JM has no known financial interests in IRB Infra or any other firm mentioned in the article. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.