Category: Investing Strategy

These Posts are about industry and sector trends, current events analysis and commentary.

IPOs of Subsidiaries of Listed firms – are Safer and Create Value

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20th July 2025

Summary

This article investigates a trend in Indian markets — listing of subsidiaries by Corporates that are large conglomerates and sector leaders. Who really benefits from these listings? Are they a source of genuine value creation? To understand this, we map the data on subsidiary IPOs by reputed Indian Corporates between Jul’23 and Jul’25. Building on our earlier analysis, which focused on a few prominent examples, we now expand the scope to 10 IPOs across diverse industries. This deeper dive presents more robust insights into the value creation effects of these IPOs for the Corporates, their shareholders, and IPO investors.

Subsidiary Listings over 2023-25

We identified 10 IPOs over the last 2 years, of subsidiaries of well known, listed, Corporates. We share the Market Capitalization data over this period (Jul’23 – Jul’25) at three key timelines – See Table 1:

  • Market Cap of the firm prior to listing of Subsidiary (5 days before IPO listing)
  • Post-listing of Subsidiary (30 calendar days after the listing day)
  • Current levels as on (15th July 2025) to uncover whether value is truly created so far.
Table 1 – Market Cap Data (click image to enlarge)

Some Findings:

Table 2 – Average Parameter Performance
  • The combined firms Market Cap one month Post Listing rose by 16%. In 9 of 10 cases, the combined firms market cap rose within 30 calendar days of the subsidiary IPO. See Table 2.
    • The highest post-listing rise was in Tata Motors + Tata Tech, with a combined gain of 33%.
    • Other notable increases include TVS Motor + TVS SCS: 26%
      • Federal Bank + Fed bank Financial: 20%
      • Bajaj Finance + Bajaj Housing Finance: 20%
    • This confirms a pattern: listing a subsidiary can unlock immediate shareholder value, especially when the market perceives the spinoff as a high-potential, distinct scalable business.
  • The average of gains & losses in the IPO subsidiary firms in the period from listing to today was 9%.
    • Only 4 out of 10 firms that IPO’d had positive gains as of today; remaining 6 had losses. Thus there are uncertain returns from IPOs, the firms appear to lose market cap after listing.
    • This is tough to generalize. It could be due to aggressive valuations. Or excess IPO demand.
  • The combined market caps of all the 10 firms (including subsidiaries) gained by an average of 34% in the period from Pre IPO to today. This is a very high number. Even benchmarked against the average Sensex gain of 16% in this period, the combined market caps gain is excellent.

Observations and Patterns

  • Value creation is visible in most Subsidiary listings, for the combined firms.
  • The Corporates often benefit despite initial volatility in market cap.
  • Combined value generally grows faster than Nifty or Sensex.

So, Who Really Gains from a Subsidiary Listing?

  • Corporates: The Parent company benefits from improved market visibility and simplification of the business. Valuation of the subsidiary is easier, and due to value unlocking, the Post-listing combined valuation has risen. Only in 2 of 10 cases, the combined valuation was flat Post listing of subsidiary.
  • Existing Shareholders of Corporates: Shareholders of Corporates don’t automatically benefit from the subsidiary IPO. To get gains, they have to invest additional capital in the subsidiary IPO. There is an IPO quota that helps parent company shareholders to get good allotment.
  • For Subsidiary IPO Investors: The reputation of the parent, coupled with listing of a firm with simpler business, sometimes from high potential sectors, has seen some of these IPOs do well. But with just 9% average gains as of today since listing, and with only 40% of the IPO firms positive today, investing in IPOs must be done carefully.

Conclusion: Value Unlocking, Risks and final thoughts

  • Subsidiary listings unlock value — the data supports this. For Corporates, it’s a clean move that sharpens focus and delivers a mkt. cap. growth. For investors, gains may depend on taking some action. Passive investors in the Corporate may experience short-term stagnation or dips. Active investors in the Corporate, and IPO participants, however may see faster capital appreciation.
  • The best strategy for Corporate shareholders is to actively invest in subsidiary IPOs in good offerings.
    • IPO investing in general is High Risk, but investing in the IPO of a listed company’s subsidiary is a much safer bet, due to past listed history, transparency and better available information.
    • The subsidiary being listed often has a simpler structure & business model, so is easier to value. 
  • As India’s capital markets mature, we observe that legacy structures of complex conglomerates morph and simplify by way of subsidiary IPOs. These may evolve into a strategic norm — not just for restructuring, but as a deliberate value creation mechanism. The IPO of a subsidiary may also be a regulatory requirement (eg. Bajaj Housing Finance, perhaps a few more) so its a compliance activity, not driven by market cap objectives.
  • Excess demand has returned to the IPO market, and so IPO investors need to expect over-subscription and high IPO valuations while evaluating IPO opportunities.
  • These are 10 recent IPOs, from widely different industries, offered at different valuations, we cannot generalize results with high confidence, every new IPO case could be a different situation.
  • Several cases have emerged of firms preferring to raise funds by QIP rather than debt – an aggressive move. This also may result in several equity dilutions in a short time period. Conservative and well run firms prefer to not dilute their Equity Share Capital for years, giving better ROE.

Disclaimer

  • Punit Jain discloses that he has no shareholding in any of the firms mentioned in this article except Bajaj Finance (since April 2003, ownership <1%) and Bajaj Housing Finance (since Sept’24 IPO, ownership <1%), and these have been mentioned here only as one of the 10 samples/ examples chosen. He is also a telecom consumer with services from Bharti Airtel and Reliance Jio. Other than these, he has no financial interest or transactions, with any firms mentioned here or any group company. In addition, JMI and its promoters/ employees have no direct or financial interest in these companies, and no known material conflict of interest as on date of publication of this report, to the best of his knowledge.
  • This document has been prepared by JainMatrix Investments Bangalore (JMI), 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 JMI. This report 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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. Investment in the securities market are subject to market risks. Read all the related documents carefully before investing. 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 a SEBI RIA Registered Investment Advisor. JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered since 2016, under SEBI (Research Analysts) Regulations. Registration granted by SEBI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.
  • Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –

Thinking of selling your stocks? Read this first

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Feb 2025

Summary

Here are 8 reasons or situations when you should sell your equity shares. And a few reasons to hold on too. With the Indian markets in a correction over the last 5-6 months, its time to ask a loaded, important, yet difficult question. When should you SELL your stock?

I assume here that you are a long-term investor. You are growing your equity stocks from a 2-3 year perspective, and also want to see it meet your big financial goals.

The Indian equity markets peaked recently in Sept 2024, and we have seen a 10%+ correction, which has been sharper in mid & small cap shares. If you are considering a Sell decision on your stocks, this Note may help you frame the decision against the environment, your context and your longer goals. After all, it is very difficult to Time the Market. In stocks it is important to think contrarian. It makes more sense to decide for yourself on your sell decision, execute on it and be satisfied with it.

On a personal note, my favorite holding period for a stock is forever. This is a wisdom gained from the greats of investing. However there are some practical and real situations that we can face. The Indian market is more volatile than the ones the greats live in. These are the situations where you need to think of the Sell decision and take a call. Here they are:

1. You need the Cash urgently 

The best of well-laid-out plans can get interrupted. It could be a medical condition. Or education admissions time. Or it could be a desired real estate asset that has become available. Go ahead, and sell. You have earned the luxury of encashing your Demat balance. In fact the whole point of investing is to meet your financial goals. Just balance out this expense/ investment against your other financial goals, and decide.

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2. Maintain your asset allocation 

Asset classes are varied such as Direct Equity, equity MFs, debt/ bond MFs, Gold ETFs, real estate, FDs, insurance and cash. You may, in consultation with your ‘Investment Adviser’ have agreed to maintain your asset classes in a certain proportion. So when the time comes to re-allocate, its possible that selling of Equity is the call by the agreed formula. This is good, and can help you align your portfolio risk with your personal risk appetite and objectives.

3. Switch to a stronger share 

For a long-term Direct Equity investment portfolio, you start investments with a chosen set of stocks. Read up and track them. And always be on the lookout for a better investment idea. If one comes by and you are convinced, make a switch from a weaker stock to a stronger one. It could be from the same industry. Or even an industry change. Doing this, you now have a stronger stock portfolio.

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4. Tax considerations 

In India any listed stock investment when sold at a profit after holding for one year constitutes a Long Term Capital Gain (LTCG), which is taxed. The period of holding should be noted & considered before deciding to Sell. Investors may also consider the converse situation. A Short Term Capital (STC) Loss can be declared in case a loss is booked in an equity investment for a period less than one year. This can then be set off against a STC Gain, in the same year or (by carry forward) in the next few tax years.

Speak to your Chartered Accountant before using this strategy. This is in fact close to the financial year end for us in India, so do your Tax planning folks !!

5. Exceptional gains from a stock 

If you are invested for the long term in a number of stocks, you may be witness to a stock that has recorded massive recent gains, which are excessive, and difficult to justify on the basis of fundamentals. It may be time to book partial or even full gains in the stock. Things happen. Shares can appreciate suddenly and unexpectedly. This is a good problem to have. Greed may stop you from doing this. This is where good advice from your Equity Service can be useful.

(JainMatrix Investments is a Research Analyst firm that offers and tracks 3 investment strategies for its subscribers, 1) The Large Cap Stocks, 2) The Mid and Small Cap Stocks and 3) The Satellite Stocks.)

6. Business has deteriorated (but does not reflect yet in the price) 

You got some good equity research, assessed an opportunity and the risk, and decided that XYZ stock was a great investment. Six months later, something unexpected happened. Maybe one of your investment assumptions went wrong, or an industry specific regulation change, or such. And the future doesn’t look so good for XYZ now. Review the situation with inputs from your Equity Adviser. Bite the bullet. If justified, take the Sell call. Don’t get married to your stocks. You have to be solid yet nimble in your long-term investment decisions. Get out quickly to minimize your losses.

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7. The share price has fallen sharply 

Markets, and shares, by nature are volatile. If the share you hold has seen a sharp fall in price recently, this needs to be analysed. If the fall is due to temporary reasons, like some bad publicity over a minor issue, a temporary technical correction or such reason, then it can be ignored. It may even be a good point to accumulate more shares. But if the reason for the fall is found to be due to a ‘fundamental’ deterioration, then again it may be time to exit.

8. The market changes direction for the worse 

Sometimes the market reaches an inflection point and changes direction. If it is positive like last year’s General election results, then its good for your portfolio. But if it is negative then it may be time to exit, at least partially. This is a tough call to predict. Here again, you can review the situation with inputs from your Equity Service.

Having said all this, it is in the nature of stocks to see long periods of both under and over performance. The market is very very inefficient, and this gives Value and Growth investors in India lots of opportunities.

The Converse, a few reasons why you should NOT Sell your stocks in these times:

  1. You can get Ten-baggers only if you leave your high-potential appreciating stocks alone and let them fly.
  2. The budget 2025 is considered by many to be a dream budget, mixing lower personal income tax with fiscal discipline, while continuing to fund capex. If in this third term, the Modi government delivers on their potential, promise and visibly bold approach, the party for Indian investors should continue.
  3. For a long-term investor, a short-term correction of say 10-12% is not something to worry about. Markets move in a ripple or zig-zag fashion in the short term, and a healthy correction is the setup for the next phase of upmove.
  4. Valuations for the Indian indices are just above the average. If the investment cycle continues like the last 2-3 years, earnings will accelerate and valuations may stay above average for a long period.

Overall Opinion

  • Stay positive.
  • Book partial gains in some stocks.
  • Temper future expectations from Indian Indices after the run-up since covid.
  • Watch for cues from the 2025 budget.

But as usual there are no easy answers.

Happy Investing,

Punit Jain, JainMatrix Investments

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  • This note has been prepared by JMI, 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 JMI. This report 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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.
  • Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. 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 a financial planner or RIA Registered Investment Advisor.
  • JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered Research Analyst since 2016, under SEBI (Research Analysts) Regulations. Registration granted by SEBI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.
  • Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logos / brand name –

Indian Automobile Sector – A Solid Portfolio

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Here is an Industry report on the Indian Automobile sector. It’s a sector that suffered weak sales post covid, but has recovered quite sharply in the last few months. The growing confidence and global growth plans of Indian auto firms can see the rise of many Indian auto MNCs in the next few decades. We recommend investors buy an Auto portfolio of Escorts Ltd., Eicher Motors, Bajaj Auto, Hero Motocorp, and Maruti Suzuki.

We make our Dec2020 Auto sector report public for your investing pleasure and success.

Additional sector reports:   Eicher Motors – It’s Firing On Both Engines

Hero Motocorp – A Splendid Core Holding

jainmatrix investments, auto sector report

Introduction

  • The automobile industry of India is in the top 5 markets in the world. It is one of the driving forces of the Indian economy, contributing 49% to the mfg. GDP and 7.5% to overall GDP. The sector’s value chain employs about 3.2 crore people, directly or indirectly.
  • The auto sector can be divided into four sub-segments: Passenger cars, Two- Wheelers, Tractors and Commercial Vehicles (PC, 2W, TT and CV). The segment shares by volume is depicted in Fig. 1
Fig. 1 – Auto Sector Volumes Share
  • 2W and PC dominate the domestic Indian auto market. Passenger car sales are dominated by small and mid-sized cars. 2W and PCs together had a combined sale of over 2.01 crore vehicles in FY20.

Sector Market Shares

  • The brand which dominates in the 2W segment is Hero MotoCorp having 36% market share, as depicted by Fig. 2a. In the case of TT, it is (M&M) Mahindra and Mahindra (41.17%), see Fig 2b.

Fig 2a and 2b – Market share by firms – 2W and Tractors; Fig 2c and 2d – PC and CVs

  • In the PC Vehicles, it is Maruti Suzuki (51.30%), Fig 2c, and in case of CVs, it is M&M with a market share of 35.04%, Fig. 2d.
  • Electric Vehicles – In the year 2020 the electric vehicle market in India took off. The Auto Expo 2020 in Feb saw the introduction of many EVs of different sizes and prices from the automakers. The models that were soon commercially launched were Tata Nexon EV, Morris Garages ZS EV and Mahindra eVerito. M&M also launched the Mahindra eKUV100 at the Auto Expo 2020 and has priced the car from ₹8.25 lakhs making it the most affordable electric car in India.
  • The shift of industry towards electric vehicles has brought uncertainty in the sector. Govt. goal of 100% electrification in auto industry has open doors for the new products in India.
  • However, electrification is the initial phase in India. EVs may find it difficult to grow significant share without 1) Tax benefits from GoI 2) an EV make, charge and repair ecosystem 3) the entry of luxury EV products from Tesla, JLR (Tata Motor) and Audi, that can make the products attractive. 

Auto Industry Updates

  • Auto exports reached 47.7 lakh vehicles in FY20, growing at a CAGR of 6.94 % during FY16-FY20. 2W were 73.9% of vehicles exported, PCs were 14.2%, three wheelers at 10.5% and CVs at 1.3 %.
  • In Nov’20, FM announced the ₹2 lakh crore production-linked mfg. incentives (PLI) to encourage companies in 10 sectors to boost local mfg. and increase exports. The auto sector, including vehicle makers and parts suppliers, will receive the biggest share at ₹57,000 cr. The export-related revenue and localization of production are the two primary criteria for benefits.

Fig 3 – Sector Wise Sales

  • The Corona pandemic caused a 2020 slowdown of Auto Industry, which was already been performing poorly in FY20. In FY21 auto companies are expected to have weaker sales numbers. Trading tension between India and China, can also affect the Industry, as 27% of auto parts are and imported from China. Indian mfg firms are looking for alternative to Chinese imports.
  • Millennials don’t prefer owing a car due to high maintenance cost and availability of local taxi rides.
  • Fig 3 explains the sales pattern of four sub-sectors of automobile sector for the period of five financial years. Figure clearly depicts that Indians preferably choose two-wheelers. Every sub sector has seen a downfall in FY20 after the increase in the recent years.
  • Two Wheelers – India is the largest mfg. of 2W in the world. 2W market has grown rapidly for Indians because of convenience and low cost of ownership and is expected to grow at a CAGR of 7.33%. Recently, industry has seen a downturn due to rising fuel prices, safety concerns, BS-VI norms and covid uncertainties. Motorcycle consisted of around 65% of the total 2W sales in the FY20, followed by Scooters and Mopeds with contribution of 32% and 3% respectively.
  • 2W sales in India reached an all-time high in 2019, when they sold some 2.1 crore units. This figure is almost double the 2011 sales, when just 1.18 cr. two-wheeler units were sold in India.
  • Passenger Cars – In Nov’20, India’s domestic PV sales rose 12.73%, due to ease in lockdown restrictions & increase in demand due to festive season. Maruti Suzuki has been a dominant player in PV sector, owning a market share of more than combined of all the rivals. Motor vehicle sales in India have doubled between 2008 and 2018, but has been seeing downward trend recently. Various regulatory norms have impacted the automobile sector to change their production methods leading to increase in cost.
  • Commercial Vehicles – In 2018, India was the world’s 3rd largest CVs market and the fastest growing globally. Various factors affect the sales of CVs i.e., mfg. and agricultural output. India has faced the shift of emission standards from BS IV to BS VI from April 2020 leapfrogging BS V, a move that is aimed to curb threatening levels of air pollution in urban areas. Many CV mfg firms are looking to adopt EV tech, keeping the future developments in consideration. Majority of the CVs are Load Carrier Light CVs (LCVs) followed by Medium & Heavy CVs (M&HCVs).

Fig 4 – Tractor Market

  • Tractors – The tractors market is quite dependent on the seasonal rainfall, overall GoI MSP and pricing, and demand conditions. This year has been positive for agriculture sector with good rainfall (in fact floods in some areas), firm GoI pricing and otherwise healthy demand. The migration of workers from urban to rural in May-June this year also helped in labour availability. The rural economy was relatively unaffected by lockdowns and covid. See Fig 4 – Tractor Market.
  • The tractor market was impacted by closure of dealerships, but rebounded well by June itself.
  • The new trend is development and export of cutting edge new tractors from India.

Why is Auto sector doing well in India?

  • The sector has grown on account of traditional strengths in mfg., and cost advantages of abundant low-cost skilled labor, and significant foreign direct investment (FDI) inflows.
  • The GoI has allowed 100% FDI under the automatic route. The GoI aims to develop India as a global mfg. center and a R&D hub. Under NATRiP, the GoI is planning to set up R&D centers at a cost of US$ 388.5 m to enable the industry to be on par with global standards.
  • With a population of more than 130 cr. people, the addressable market for vehicle sales is large. A growing working population and expanding middle-class have been the demand drivers for auto in India. We have the second largest road network in the world at 4.7m km. The GoI policy to set aside substantial investment layout for infra development in every 5-year plan has included the focus on roads. This has given a fillip to the demand for cars and other vehicles.
  • The global auto industry has embraced digital. Revenues generated by online vehicle retail, after-sales, and services are likely to grow almost five times, from about $120 billion in 2018 to about $605 billion by 2025. Volkswagen launched the Digital Workplace initiative across its dealerships in India around two years ago.
  • There are various developments in Indian Auto sector which has triggered its growth. In Sept 2020, Toyota Kirloskar Motors announced investments of more than ₹2,000 cr. in India directed towards electric components and technology for domestic customers and exports. Also, M&M signed a MoU with Israel-based REE Automotive to collaborate and develop commercial EVs. In April 2020, TVS Motor Company bought UK’s iconic sporting motorcycle brand, Norton, for a sum of about ₹153 cr., making its entry into the top end (above 850cc) segment of the superbike market.
  • India has engineering and design centers for many global auto firms. Here maintenance and upgrade work of current models as well as planning & engineering work for new launches, and product development work is done by skilled engineers in an IT enabled environment in close coordination with teams in many countries. Thus an auto ecosystem has developed in India of skills, local manufacturing, OEMs, components, and global business centers.
  • India also has various cost advantages. Auto-firms save 10-25% on operations vis-à-vis Europe and Latin America. India has a well-developed, globally competitive Auto Ancillary Industry and established automobile testing and R&D centers.
  • India is a prominent auto exporter and this segment may grow in the near future.

Benchmarking of Key Players

We have done a benchmarking of selected Auto sector players. Fig. 5 depicts the comparison between the selected Indian companies on basis of key parameters.

Fig. 5 – Benchmarking

  • In this peer group, Bajaj Auto showed best returns (ROCE & ROE) & even dividend yield, and is the lowest in terms of debt as well as being undervalued. Eicher Motor and Escorts were not far behind.
  • Profitability was negative in FY20 for Tata Motors & Mahindra and 3 year cagr profit is negative for many firms. The leader on this parameter is Escorts.
  • Margins are the best for Eicher Motor and next for Bajaj Auto. Eicher Motor has operations in niche high margin segment while Bajaj clearly shows once again its efficiency in operations.
  • Among these auto companies, the best positive outcomes and Score are of Bajaj Auto and Eicher Motors in two-wheeler segment, Escorts in Tractors and Maruti Suzuki in Passenger Car segment. TVS Motors and Tata Motors appear weak from this group.

Relative Prices

Fig 6 – Relative Prices

  • Fig 6 – Relative Prices shows the stock returns given by major listed Indian auto firms by keeping the base of prices as 29th Oct 2018. On the right side we can see the share price performance by order.
  • The share prices fell sharply when the first lockdown started, but soon had a V-shaped recovery. We can see that 7 of the 10 firms have emerged in the positive by now, over a 2 year period.
  • Escorts Group is the #1 in this group and has posted high returns of 140% gains. The agriculture sector has done well even in lockdown times and there has been a good rainfall too. Escorts Group has been increasing its market share by launching new models recently.
  • In the group #2 is Bajaj Auto, #3 is Eicher Motors, #4 is Hero Motocorp, and #5 is Maruti Suzuki. Relative underperformers are Ashok Leyland, Tata Motors and TVS Motors.

Future of the Indian Auto Industry

  • A young population, rising GDP and growing middle class will drive domestic demand for automobiles in India. This will be aided by a healthy domestic industry that is innovative and producing at scale.
  • Several Indian automobile firms have global expansion plans for sales, mfg. and exports. These include Eicher Motors, Hero Motocorp and Bajaj Auto. Maruti, Hyundai and Escorts among others use India facilities for exports.
  • India is expected to emerge as the world’s third-largest PC market by 2021. In FY 2018-19, sale of PC has increased by 2.70%, 2W by 4.86% and 3W by 10.27% as compared to FY 2017-18.
  • From just small cars, India will grow as a hub for design, components and mfg. of all automobiles.
  • Auto companies like Kia Motors, MG have entered the Indian market with premium vehicles and are making a mark by selling in higher volumes. Many automotive companies are looking to enter the business in India which can result in cut-throat competition, and will push Indian companies to innovate and increase the quality of their product to retain their market share.

Conclusion

  • Automobile sector will continue to grow in India due to rising domestic demand, growing strengths in outsourcing of engineering services to India, and global growth plans of Indian OEMs. The supporting ecosystem of auto component manufacture too is developing in tandem.
  • The weak INR may help India to be a good base for manufacture and global exports.
  • In 2W India is already #1. In the PC and CV categories, India became the #4 largest market in 2019 displacing Germany with about 3.99 m units sold. India may displace Japan for #3 by 2021.
  • The growing confidence and global growth plans of Indian auto firms can see the rise of many Indian auto MNCs in the next few decades.
  • The key new auto sector trends of digitalization, software based auto controls and EVs can also be accelerated by India based R&D and developer firms.
  • We can see from Fig 5 – Benchmarking and Fig 6 – Relative Prices that 6-7 firms out of the selected 10 for this study are performing well on many parameters and should continue to lead.
  • We recommend investors buy an Auto portfolio of Escorts Ltd., Bajaj Auto, Eicher Motors, Hero Motocorp, and Maruti Suzuki in equi-weight mode.

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 stock ownership positions in Escorts Ltd. (since Feb 2017) and Eicher Motors (since June 2017) out of all firms mentioned in this report, and they are small (<1%). Other than this, JM has no known financial interests in any firm mentioned here. 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.

Equity Outlook, Nov’20: Rising like a Phoenix from the Ashes

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Introduction

In this note, we map the investment outlook, the impact of the Covid infection, some of the dramatic macro changes in India and other key factors. Many changes have aligned to make the India equity investment story compelling.

India Economy Updates – GDP, Stimulus and Unlock

  • The RBI’s nowcasting model suggests that India’s GDP contracted 8.6% in the July-Sept quarter after a fall of 23.9% in Q1. However H2 should see growth and recovery. RBI cut the repo rate by 75 bps, so the external benchmark-linked lending rate reduced to 7.05%, and repo rate-linked lending to 6.65%. A fall in interest rates will encourage credit, lowering borrowing costs for industry & retail and accelerate growth.
  • India is in an unlock phase from covid, where most economic activities are allowed with SOP to ensure safety. Trains, flights and buses run with restrictions. The worst affected sectors are travel, tourism, hotels, social businesses, restaurants, cinemas, etc.
  • However many industries used the lockdowns to improve efficiencies, rethink business, and reduce costs, fixed & variable. Many large firms became aggressive on M&A too.
  • The high frequency economic indicators like cement and auto indicate a rapid recovery.
  • The GoI has given relief/ stimulus in 3 phases, with a Covid-19 package of ₹ 29,88,000 crore or 15% of GDP. It is targeted at specific industries, and provides liquidity for spending. The RBI loan moratorium allowed loans to be rolled over for 6 months to tide over the period. The latest measures included funding for real estate developers and contractors, fertilizer subsidies, a new employment scheme and spending on rural jobs. MSME’s across 26 sectors get a credit-guarantee program, have a 1-year moratorium on loans and 4 more years to repay.

Covid Virus Infection Updates

  • India: In March India underwent a nationwide lockdown that was one the toughest in the world. Today it has the 2nd highest number of cases after USA of 89.6 Lakh cases, 1.32 L dead and 83.8L have recovered.
  • By Sept there was a peak in India infections, with daily new cases peaking at about 1 lakh. This has dropped to about 38,600 per day and is in decline. There can be a second and third wave, as is starting in Delhi, but with good precautions the infection appears under control.
  • The economy is emerging from the Apr-May deep freeze and indicators are a monthly improvement, with sectors like IT services, pharma, tractors & agro products, some chemicals and certain foods like biscuits, crossing pre-covid levels already.  
  • Global: The outbreak is a threat to the global economy, requiring containment measures like quarantines, curfews and precautions.
  • USA represents nearly 1/5th of the world’s known COVID-19 cases and deaths, and is the #1 on these.  President Trump declared a national emergency on Mar 13, but a weak follow up and lack of simple precautions saw a second and third wave, stronger than previous. The virus appears out of control here.
  • Europe and UK are seeing sharp rises in infections, perhaps aided by cold weather. South America has also done badly. Comparatively Asia has done better, with China almost free, and Taiwan, Japan, Malaysia, Indonesia, Thailand, Vietnam and Singapore faring well.
  • We expect the global economy to struggle in CY2020 and start recovering midway through CY21.
  • The discovery and announcement of vaccines, still under development, is a ray of hope.

Indian Sensex Updates

  • We can see in the graph that from Jan highs, the index crashed in March. By Nov, the Sensex crossed the pre-covid levels and moved to new highs.
  • The post March bets in the stock market basis low valuations and an expected full recovery have come true.  
  • The sharp economic recovery, the slow win over covid and a series of reforms bearing fruit finally for the Indian economy has investors in a positive frame of mind.

Indian Reforms and the Global Context

  • India has undertaken big reforms over the last 4-5 years such as GST, RERA, war on black money, reduction in corporate tax, improving Ease of Doing Business, IBC (Bankruptcy Code), Aadhar based subsidies and bank accounts for all. The GDP fell in 2017-20, but the benefits of reforms may start to bear fruit now, along with a covid recovery.
  • The political stability in India today is another plus.
  • The latest GoI move is Atmanirbhar or Make in India program to encourage Production Linked Incentives and mfg. in India for electronics, defense, pharma, chemicals, auto, white goods, etc. This can be a powerful booster for domestic growth.
  • The large Indian IT Services sector got an unexpected and big gain due to covid. Worldwide firms are asking employees to Work From Home, and IT services and solutions form the backbone for this model. IT spending is up, Indian IT and BPM firms delivered in this tough period, and are indispensable to corporate customers.
  • Covid is a challenge to Indian healthcare. One of the learnings of this crisis is that this sector needs better investments, from GoI, to improve the standards, with more doctors, better hospitals and facilities.
  • Meanwhile USA declared a trade war on China due to big trade deficits, IP protection issues and border tensions. Tariffs have been declared on many imports. Japan and many other countries have also followed suit, and they are developing a China+1 strategy to derisk. India can find a place here as an alternative high volume mfg. base.  
  • China has already got a per capita GDP that is close to 5X of India. Thus it is a high cost economy.
  • Apple Inc. is moving phones mfg. to India, as are a number of electronics firms and several other industries too.

Conclusion and Recommendation

  • The Indian economy is emerging from consolidation (FY18-20) and covid (FY21) with surprising strength.
  • The stock markets after a 37% fall in March, recovered and have moved to new highs. Its not just due to domestic investors. There is liquidity inflow to India from the overheated USA markets, political & economic uncertainty in USA, and opacity in China & Hong Kong.
  • Low interest rates, well targeted GOI stimulus programs and global interest will accelerate domestic capex & investments. We expect negative single digit GDP growth in FY21 and +7-11% GDP growth for the next 5 years.
  • Key risks are 1) any new large Indian bankruptcies or BFSI failures 2) War 3) USA and UK trade relations.
  • Longer term investors need to be fully invested and take advantage of the positive cycle over next 3-4 years.
  • Large caps will stay strong and lead the rally, and mid and small caps will follow.
  • Subscribe to the JainMatrix Investments Service to access the Model Portfolios and new research reports.

Related Articles

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 is not a medical or covid expert. 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.

The War on COVID-19 – An Indian Investor Perspective

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Hyper-Competition and its Effects

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Several sectors in India are in a hyper-competition phase. Some examples are Telecom Operators, Passenger Airlines and Mobile Phone Hardware sectors. Investors need to stay away from firms in this phase. 

What is Hyper-competition? Let’s see some examples.

  • Telecom: In Feb 2013, the Supreme Court cancelled 122 telecom licenses in India. By Sept 2018, 5.5 years later, only 4 of 14-15 players survived. Given the high volumes and growing demand, it was expected that these 4 players would do well. However one player had different ideas. With its entry in Oct 2016, Reliance Jio aggressively grew market share by providing free voice and data, and later priced these services very low. Massively funded by strong group divisions, they created large 4G capacities, and soon stabilized networks and interconnectivity. The result? While mobile users and usage grew and Jio gained 30% revenue market share (Sept 2019), customer prices fell sharply, other industry players lost subscribers, degrew revenues and saw drops in profits.
    • In today’s scenario, while consumers and govt. are benefiting with low prices and high tax revenues and levies resp., network operators are under pressure on costs and profits. The 4 player structure should survive, and market shares may stabilize for all players, once prices correct. However this may take at least a year.
  • Airlines: Airlines are a difficult business due to high airplane costs (a duopoly), fluctuating crude prices (around 30-45% of costs) and govt. funded national airlines hiding losses. In India however the market has changed in 10 years from full service airlines to Low Cost Carrier (LCC) domination with Indigo, SpiceJet, GoAir and AirAsia growing market shares. Meanwhile the GoI plan is to double the number of airports to 250 from 102 currently. The market demand has grown 10.9% a year of Revenue Passenger Kilometers (RPK) over the last 9 years, while capacity has grown by 8.3% of Available Seat Kilometers (ASK) – DGCA data. Also two airlines failed in this time, Kingfisher Airlines and Jet Airways. Air India continues to operate as a loss making airline with govt. funding. Adjusted for inflation, there are flat to falling average ticket prices in a high capacity growth scenario. The current fleet in Indian aviation is 566 commercial aircraft, and the carriers plan to increase their fleet to 1,300 in 1-2 years.
    • One possible outlet for the capacity adds are international flights, and several airlines have global ambitions.
    • If good infra is set up, India can have a few successful global airlines, a good domestic MRO industry and even a large Indian airport hub for global fliers.
    • Domestic connectivity is underserved by the alternatives of railways and roadways, so we can expect airline growth to continue for many years.
    • Consumers and govt. are benefited but in this industry only very efficient firms can stay profitable.
  • Mobile phone hardware: India is the world’s fastest growing smartphone market.
    • The value, mid-segment as well as premium segment continue to grow at high single digits QoQ. The Indian consumers are now spoilt for choice. However 41 smart phone brands exited India in 2018 while 15 entered owing to good growth prospects. TCL, Comio, Datawind and ACER are the well-known brands that exited in 2018. Lychee and Sony are likely to exit in 2019.

jainmatrix investments, hyper competitionFig 1 – Smartphone entry-exits/ Fig 2 – Marketshare of top 5. Source: ET, News 18

    • From Fig 1 it is clear that smartphone player exits over the last 3 years have been much more than new entrants. Now there are some signs of consolidation with this market becoming an oligopoly with the winners continuing to gain market share (See Fig 2). However the market share gains have come at the cost of pricing power. Xiaomi Corp reported a 43.2 bn. yuan loss in 2017 and now the company has rebounded to profits in 2018. Competition is such that the Xiaomi India head had to justify pricing of few product models to its fans while capping the margin at 5%.
    • The Make in India program for electronics has been successful in attracting mobile assembly and manufacture to India for this industry. This was set up to cater to domestic demand, but policymakers would do well to channel manufacturers to make this a base for mobile exports. If this succeeds it would benefit all three – consumers, govt. and manufacturers.
  • Hyper competition is caused by very aggressive player(s) in a free market.
  • In a hyper competition scenario, the situation develops in the following way:
    1. The high competition causes loss of pricing power, and weakening of returns or ROE of current players. The smaller or higher cost players may get squeezed out, and fail or merge.
    2. Consumers benefit in terms of choices and low prices. The govt. too may gain in terms of taxes and levies.
    3. The threat of new entrants diminishes as the sector becomes unattractive.
    4. Market shares of top 2-3 current players soon stabilize and improve but timelines are unpredictable.
    5. With time, competitive intensity reduces and pricing power returns to the surviving players.

Conclusion

  • Investors need to recognize and stay away from hyper competitive sectors as most of the players suffer in this phase, profits fall and returns reduce. It’s possible to play these sectors through other means such as suppliers or consumer firms but that needs further analysis.
  • Once hyper competition ebbs away, the situation can reverse and surviving firms may see a multi-year profit and ROE rise.

Agree ? Any thoughts here? Provide your comments below ……..

Read related reports:

  1. Indigo Airlines
  2. A Telecom sector report (2014) 

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. Several firms are mentioned in this report, listed and unlisted, but we have not presented any investment thesis or specific recommendation. 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.

Why Stocks and Investment Outlook Dec 2016

Hi Investors,

In this short video of 10 minutes, we share the simple concept of Compounding, showcase our services at JainMatrix Investments, and present the Investment outlook for the next quarter.

Please share forward if you Like it.

Happy Investing,

Punit Jain

JAINMATRIX KNOWLEDGE BASE 

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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. 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.