Why Crisil Stock is Falling?

Introduction

CRISIL Ltd is a globally diversified analytical company having Ratings, Research and Advisory services under its fold. In this article, we will do a detailed 4 point stock analysis of CRISIL Ltd.

Crisil Ltd – 4 Point Stock Analysis

1.Company Overview – Business Segments

• CRISIL (formerly Credit Rating Information Services of India Limited)  is India’s leading credit rating, research, risk & policy advisory company having pioneered the concept of credit rating in India in 1987. S&P, the world’s leading credit rating agency by market share, is its major shareholder (67.5% stake).
• CRISIL is a globally diversified analytical company having ratings, research and advisory services under its fold.

A. Rating

• CRISIL is having market leadership in corporate bonds, bank loan ratings and SME ratings etc. It is strongly poised to gain from cyclical and structural uptick in domestic ratings segment.
• The Company rates all kind of organisation such as industrial companies, banks, SMEs, non-banking financial institutions, insurance providers, mutual funds, infrastructure entities, state governments, and urban local bodies.
• Issuers and borrowers leverage CRISIL’s ratings for enhancing their access to funding, widening range of funding alternatives, and optimising cost of funds. 
• Investors and lenders use our ratings to supplement their internal evaluation process and benchmark credit quality across investment options. 
• CRISIL’s ratings act as benchmarks for pricing and trading of debt instruments for markets at large.

B. Research

• CRISIL is a global research analytics company providing off shoring services to several large global clients like global investment banks, consulting groups, insurance companies and 37 Fortune 500 companies.
• It is India’s largest independent integrated research house which offers an in-depth research on the Indian Economy – Industry – Capital Market and Company spectrum.
• CRISIL is the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the country. Thus the company plays a key role in India’s fixed income markets, . It is the sole provider of debt and hybrid indices to India’s mutual fund and life insurance industries.
• Currently, CRISIL caters research needs of over 1000 Global as well as Indian clients which includes more than 90% of India’s Banking Industry by asset base, 15 out top 25 Indian companies by market capitalization, entire mutual fund industry, entire life insurance industry in India.
• Irevna a division of the company provides an offshore investment research to world’s leading investment banks and financial institutions.
• CRISIL Fund Services, another division of company provides fund research, rankings, and ratings to India’s mutual funds industry. Thus, the company is expected to continue its strong momentum in research revenues.

C. Advisory Services

• Company provides advisory services on risk, policy, infrastructure and energy through its subsidiary CRISIL Risk and Infrastructure Solutions (CRIS).
• CRISIL is the leading advisor to governments and regulators, multilateral agencies, investors and large corporates. It works in the areas of policy and regulatory, project advisory, public private partnership frameworks, infrastructure financing mechanisms, and implementation support to large infrastructure programmes.
• The company is operating in 22 emerging economies in Asia, Africa, and the Middle East.

Segment-wise Performance

• Reserach is the main revenue contributing segment of CRISIL, contributing almost 65% of the company’s total revenue in Q2 calendar year 2019 ie. from April-19 to June-19. But the EBIT % margin in Q2 is decreased to 19% from 29% in Q2 previous year.
• Ratings vertical is having 29% revenue contribution to the company, with consistent rise in EBIT % margin from 35% to 36% in Q2 CY2019. Though the % revenue contribution is lower than research vertical, improvement in EBIT margin indicates the demand and the future business growth of ratings vertical which is becoming a very popular.
• Advisory Services offer contribution of merely 6% to the total revenue of the company. Since this vertical is launched recently and will require a time to attain the desirable margins. But the improvement in the EBIT % margins from -0.8% to 3.8% is a positive sign for the segment. Negative EBIT margins means investments were going on in the Advisory services vertical.

2.Shareholding Pattern

• Promoters group is having a significant stake in the company almost 67.5% as on June 2019.
  1. S&P Global Asian Holdings Pte. Ltd. = 15.95%
  2. S AND P INTERNATIONAL LLC = 8.30%
  3. S AND P INDIA LLC = 43.19%
• Mutual fund is holding 1.1% as on June-19. While Insurance companies hold around 10.5%
• General Public is holding around 15% stake in CRISIL Ltd

3. SWOT Analysis

4.Valuation

• Current PE Ratio = 26.05
  • 3-year AVerage PE Ratio = 47+
  • 5-year Average PE Ratio = 51+
  • 10-year Average PE Ratio = 39+
• So as compared to earlier premium valuation, CRISIL Ltd stock is currently trading at fair discount at PE of 26.05.
• Historical high PE ratios were on account of no alternative credible credit rating agency to CRISIL. But since last 1 year, company has seen credibility loss after IL&FS defualts.
• CRISIL’s Profitability is at CAGR of 8-10%. The company has delivered a poor growth of 9.50% over past five years.
• The stock has fallen almost 40-50% because of trust deficit, re-rating and muted profit growth compared with its earlier premium valuation.
• So the stock has corrected over a period of time due to muted/negative growth of the financials.

Indian Retail Sector Analysis

Introduction

In this article, we are going to do a detailed analysis of retail sector in India. Indian Retail sector has gone through a considerable change in size, scope and complexity of retailing over the last two decades.

Analysis of Retail Sector in India

1.Current Outlook

• Key Growth Drivers : Indian Retail sector has emerged as one of the most dynamic and fast-growing sectors due to entry of several new players in the recent times along with rising income levels, growing aspirations, favourable demographics and easy credit availability.
• GDP Contribution : Retail sector contributes almost 10% of the India’s Gross Domestic Product (GDP). According to the latest numbers, current GDP of India is around $2.5 Trillion. So, its 10% contribution means, almost $250 Billion are contributed from this sector per annum.
• Employment Contribution : As far as total emplyment in the country is considered, around 8% of the total employment is contributed by retail sector. So, we can clearly have an idea that this sector is very important for Indian economy in current scenario.
• Valuation : The current total valuation of the retail sector is almost $900 Billion, which includes unorganised, organised and E-Tail. Still very few retail players are listed.
• Globally, India is fourth-largest global destination in the retail space after US, China and Japan.

Contribution of 3 heads to Total Retail Market in India

1. Unorganised Retail : Currently, the Indian retail market continues to be dominated by the unorganised retail (traditional kirana stores) accounting for about 88% of the total retail market.
2. Organised Retail : On the otherhand, organised retail like Big Bazar, D’Mart, Malls, Showrooms etc, is contributing only about 9% of the total retail market.
3. E-Tail : E-Tail like Flipcart, Amazon, Big Basket etc, accounts for only 3% of the total retail market in India.

2.Segment-wise Revenue Mix in Organised Retail

• Within organized retail, food & beverage holds around 65% of the revenue.
• While apparel and footwear contributions is 10%. We have covered detailed analysis of Bata and Relaxo in our stock analysis for stock subscribers.
• Consumer Durables and Jewellery & accessories are contributing 9% and 7% respectively.
• Health & Entertainment, Home Décor & Furnishings, Beauty & Personal Care contribute around 4%, 3% and 2% respectiely to the otal organised retail market.

3.Future Growth

• India’s organised retail penetration is much lower compared with other countries, such as the United States which has organised retail sector penetration of 85%. This can indicate the scope of the future growth of the organised retail in India.
• Also, according to the government’s expectation, overall indian retail sector is expected to grow around 9-10% every year for the next 5 years. The valuation of Indian Retail sector is estimated to reach up to $1.15 Trillion in next 2 years, according to the Ministry of Commerce.
• The Indian retail sector will be able to achieve the above mentioned growth of 9-10% per annum, through the expansion of organised retail only. That is the reason why big retail players like Avenue Supermarts, Reliance retail is expected to be at a much premium valuation.
• With the improvement in the market share of total organised and E-Tail, the overall retail sector can attain the 9-10% growth and thus, reach to the projected numbers in next 2-3 years.
• Organised Retail’s contribution to the overall Indian retail is expected to improve to 12-15% from 9% currently.
• The proprietors (unorganised retail) tend have the inertia to resist for the changes like implementation of GST Law etc. While the businessman (organised retail) try to adopt the changes as early as possible so as to take the first mover advantage. Also, with the availabilty of advanced technology, talent pool etc the operational efficiency in the organised retail players can be improved considerably. Thus, higher double digit numbers can be achieved by organised players for their overall profitability and net profits growth.
• So, for the same reason, organised retail players like Avenue Supertmarts, Reliance Retail through Reliance Industries, Future Retail are the stocks with a very positive growth path in future.

Conclusion

• Thus, with the expansion in the market share of organised retail, Indian Retail sector will achieve the estimated projections in next 2-3 years.
• Improving economy, changing demographic profile, increasing disposable incomes in hands of the middle class, brand awareness and growing urbanization along with rising discretionary spends are the main growth drivers in the organized retail market in India.

Reliance Industries’ Road Map towards a Zero Net-Debt Company by 31st March, 2021

Introduction

Reliance Industries Ltd’s 42nd AGM held today. Lets discuss the key highlights of the AGM 2019 and the company’s road map towards a zero-net debt company by 31st March, 2021.

Reliance Industries Ltd AGM 2019 Key Highlights

Reliance Industries Ltd (RIL) is the only diversified Indian enterprise with 3 major growth engines in one single corporate entity :

1. Oil-to-chemicals division
2. Reliance Jio
3. Reliance Retail

All 3 have done exceedingly well in the past years.

Lets see the key highlights of Reliance Industries AGM 2019 announced by the Chairman and Managing director of Reliance Industries Ltd Mr.Mukesh Ambani.

1.Reliance Oil-to-Chemical

• RIL is having most comprehensive and integrated oil-to-chemicals (OTC) business.
• Saudi Aramco and RIL have agreed to form partnership will invest in RIL for 20% stake in oil-to-chemical business with an enterprise value of $75 billion or over 5.3 lakh crore. Saudi Aramco will supply 500,000 barrels of oil to Jamnagar refinery. It is one of the largest Foreign investment in India.
• JV with BP will invest Rs 35,000 crore in KG-D6. Focusing on augmenting production of methane; partnership with BP will help here. Reliance to get Rs 7,000 Cr by selling 49% stake in its Fuel-Retail business to BP.
• Oil to chemicals business achieved revenue of Rs 5.7 lakh crore, exports of Rs 2.2 lakh crore.

2.Reliance Jio

• Reliance Jio Crossed 340 Million Subscriber Mark  Jio become the world’s fastest growing digital player; it is larger than all other major retail business put together.
• Jio fibre plans will be priced between Rs 700 to Rs 10,000 per month. 
• Voice calls from home to any network will be free. International pack for calls to US/Canada at Rs 500 per month. 
• Jio first day first show will be launched in middle of 2020 
• Reliance Jio fibre customers who opt for annual lifetime plans will get an LED 4k HD TV and set top box free.
• Jio will install a blockchain network across India 
• Jio announces partnership with Microsoft to accelerate digital transformation of India 
• IoT services to be available from Jan 1, 2020 
• Jio fibre roll out within next 12 months 
• Jio launches Jio set top box 
• Reliance Jio’s customer base crossed 340 Mn and more than 10 Mn new customers every month are being added. 
• Jio has invested 3.5 lakh crore in digital infrastructure.  Because of early adoption to LTE tech, our wireless is 4G ready and can upgrade it to 5G.

3.Reliance Retail

• Reliance Retail crossed turnover Rs 1.3 lakh crore to be largest retail company.
• Reliance’s Consumer business – Jio and Retail verticals bring in 34% of consolidated EBITDA from 2% in last 5 years.
• Reliance Jio and Reliance Retail are proposed to be get listed in next 5 years.

4.Reliance Industries’ 4 New Revenue Engines

Reliance is to start 4 more engines to generate revenues: 

1. Internet of Things all over India
2. Home Broadband
3. Enterprise broadband
4. Broadband for small and medium businesses

5.Road Map towards zero net-debt company

• Reliance Industries aims to become zero net-debt company in next 18 months, by 31^st March 2021.
• Reliance’s Consumer business – Jio and Retail verticals bring in 34% of consolidated EBITDA from 2% in last 5 years.
• Reliance Industries’ Rs. 5.4 Lakh crore investments over the last 5 years will generate EBITDA in excess of $ 1 billion annually for over a decade.
• Thus, based on the new and existing growth engines, Reliance Industries can grow EBITDA by 15% annually over the next 5 years.
• According to this growth rate, consumer business’s share soon will be 50% of Reliance Industries’ consolidated EBITDA.
• Company will reward shareholders abundantly with bonus issues and higher dividends, once the company is debt-free.

Key Highlights of HDFC Ltd Q1 FY20 Financials

Introduction

HDFC Ltd, India’s premier financier in mortgage lending, has reported 46% Y-o-Y growth in the net profits for Q1 FY20. Lets see the key highlights of HDFC Ltd Q1 FY20 results in this article.

HDFC Ltd Q1 FY20 Results Update

Q1 FY2019-20 Results

1. Net Interest Income :
   • NII for the quarter ended June 30, 2019 stood at Rs.3,042 Cr as compared with Rs.2,743 Cr in Q1 FY19, with a growth of 11%. It is the core income for the company.
2. Operating Profit :
   • 58% Y-o-Y growth was seen in the operating profits of the company to Rs.4,875 Cr in Q1 FY20 from Rs.3,090 Cr in last june ending quarter.
   • While, if we consider the sequencial quarterly growth, it is improved by 19% from Rs.4,089 Cr in Q4 FY19. Thus, we can say that the
3. Net Profit :
   • HDFC Ltd has reported a 46% Y-o-Y growth in standalone net profit at Rs.3,203 Cr for the June quarter. While, the housing finance firm had posted Rs.2,190 Cr profit in the corresponding quarter last year ie. in Q1 FY19.
   • This is inclusive of the profit on sale of investments on part stake sale of GRUH Finance of Rs.1,894 Cr during the Q1 FY20, quarter ended June 30, 2019.

Q1 FY20 Balance sheet summary and Key Ratios

• As at June 30, 2019, the gross loan book stood at Rs.4,16,597 Cr as against Rs.3,74,575 Cr in the previous year, that is grown by 11.2% Y-o-Y.
• The borrowings in Q1 FY20 is Rs.3,73,629 Cr increased at 12.5% Y-o-Y from Rs.3,32,078 Cr in Q1 FY19. While, if we consider the quarterly growth, borrowings are increased at 2.3% from Rs.3,65,266 Cr.
• HDFC’s Capital adequacy ratio (CAR) was seen to be 18.8% in Q1 FY20 from 19.2% in Q4 FY19 and increased from 16.3% last year Q1 FY19. Thus, it is eroded on Q-o-Q basis but improved on Y-o-Y basis.
• Net Interest Margin (NIM) remained flat Q-o-Q as well as Y-o-Y at 3.3%.

Asset Quality

• In Q1 FY20, HDFC Ltd has seen a slight deterioration in asset quality as a result of macroeconomic slowdown.
• Gross NPA at 1.29% stood higher compared on Q-o-Q as well as Y-o-Y basis. Gross NPA was 1.19% in Q4 FY19 and 1.18% in Q1 FY19. So we can see the erosion in the asset quality.
• Both Individual NPA and Non-individual NPA have seen a considerable growth in Q1 FY20 compared to Q1 FY19 and Q4 FY19. Increase in the Gross NPA was attributable to Jet Airways being recognized as an NPA in the corporate book.
• Expected Credit Loss (ECL) provisioning climbed to 1.55% from 1.44% in Q4FY19. However, the provision coverage ratio for stage-3 expected credit loss is still reduced to 40% from 44% in Q4 FY14. Here, stage-3 expected credit loss means the loans outstanding for greater than 90 days.

Advances & Borrowings Mix for q1 FY20

advances Mix

• As we have seen above, the gross loan book of HDFC Ltd has seen a growth of 11.2% Y-o-Y and 2.4% Q-o-Q.
• About 75% of its loan book comprises individual ie. retail loans and the remaining is corporate loans which includes commercial real estate loans, lease rental
  discounting, etc.
• The major share in the gross loan book is of individual loans and it is increasing consistently year-on-year as well as quarter-on-quarter basis. Individual loans are contributing around 68.9%, 71% and 71.4% of the total gross loan book for the quarters Q1 FY19, Q4 FY19 and Q1 FY20 respectively.
• On the other hand, corporate loans contribute around 26.9% of gross loan book in Q1 FY20, with a consistent decrease in its share in gross loan book, ie from 29.5% in Q1 FY19 and 27.3% in Q4 FY19.
• Given the uncertainty and risk averseness in the lending environment for corporate or non-individual loans, the company opted to be prudent by imposing the restrictions on the segment. The slackened corporate loan growth is in-line with company’s stance of scaling down riskier portfolio.
• 3/4th of the loan book composition is tilted in favor of individual segment on which we can expect significant increase in competition in the housing loan space from banks. Thus, there will be increased competitiveness in the individual loans segment. As a result, the overall gross loan book growth will get impacted with continuous reduction in the corporate loan growth.

Borrowings Mix

• HDFC’s total Borrowings are comprised of :
  1. Term Loans
  2. Bonds/Debentures/Commercial Papers and
  3. Deposits
• As we can see from the above graph, there is a gradual increase in the share of Term Loans from 16% to 21% to 23% in the quarters Q1 FY19, Q4 FY19 and Q1 FY20 respectively.
• On the contrary, a consistent negative growth is seen in the share of bonds, debentures and commercial papers from 54% to 50% to 47% in the quarters Q1 FY19, Q4 FY19 and Q1 FY20 respectively.
• While the growth of deposits share was flat, share was changed from 30% to 29% to 29% in the quarters Q1 FY19, Q4 FY19 and Q1 FY20 respectively.

Plan to raise Rs.45,000 Cr

HDFC Ltd has received its board’s approval for raising Rs.45,000 Cr via secured redeemable non-convertible debentures, in one or more tranches, on a private placement basis. 

Conclusion

• After reporting Q1 results, the market capitalisation of HDFC is increased from Rs.3.66 Lakh Cr to Rs.3.77 Lakh Cr in two sessions.
• Despite increasing competition, HDFC’s market leadership and profitability have remained intact, endorsing its strong competitive position.
• HDFC’s conservative underwriting practices and the stance of scaling down riskier portfolio, reflect in the comparatively lower NPAs and credit losses.

Analysis of ITC Ltd Q1 FY2019-20 Results

Introduction

ITC Ltd Q1 FY20 results were released on 2nd August, 2019. The company has seen a rise of 12.6 percent Y-o-Y in net profits. Lets review the Q1 results in detail in this article.

ITC Ltd Q1 FY20 Results Update

Q1 FY20 Standalone Results Update

• Revenue from opearations during the quarter Q1 FY20 grew 5.8% YoY to Rs.11,502.82 Cr from Rs.10,874.59 Cr. On Q-o-Q basis, the operational revenue fell 5.8% from Rs.12,206 Cr.
• Company’s other income shot up 53.6% to Rs 620.2 Cr compared to corresponding period last year Q1 FY19 from Rs.404 Cr. But this other income has reduced by 16.2% from 740 Cr in Q4 FY19.
• Total expenses increased by 4.8% to Rs.7,311 Cr versus Rs.6,978 Cr in Q1 FY19. But on Q-o-Q basis total expenses are reduced by 8.5% from Rs.7,992 Cr.
• Operating profits are increased by 8.65% Y-o-Y to Rs.4,566 Cr from Rs.4,202 Cr, while growth was flat for Q-o-Q. Operating margin expanded 110 basis points (bps) at 39.7% on a yearly basis.
• Net Profits are increased by 12.6% Y-o-Y to Rs.3,173.94 Cr in Q1 FY20 from Rs.2,818.7 Cr in Q1 FY19. As far as quarterly growth is concerned, net profit has seen a fall of 8.8%.

ITC Ltd Q1 FY20 revenue mix

The Company’s corporate strategy aims at creating multiple drivers of growth anchored on its core competencies. The Company is currently focused on four business groups : FMCG, Hotels, Paperboards, Paper & Packaging and Agri Business.

• FMCG segment revenue increased 6.19% to Rs 8,493 crore.
  • The conglomerate’s flagship cigarette business Revenue rose 6% to Rs 5,433.40 crore, which contributes almost 64% of total FMCG revenue. The performance during the quarter was impacted by weakness in overall demand apart from the challenges to the legal cigarette industry due to high taxation and regulatory regime. 
  • The non-cigarette FMCG business which comprises of packaged food, personal care and stationary, reported 6.6% growth in gross revenue at Rs 3060.05 Cr.
  • FMCG EBIT margin expansion was driven by enhanced scale, product mix enrichment and cost management initiatives notwithstanding higher investments in brand building and gestation costs of new categories.
• Agri-business revenue rose 14.6% to Rs 3,611.23 crore. The muted growth was due to subdued demand for leaf tobacco in international markets, steeper depreciation in currencies, limited trading opportunities in oilseeds and pulses.
• ITC operates the country’s second largest hotel chain. Hotel business segment’s revenue up 15% at Rs 392.6 crore.
• Paperboards, paper and packaging segment posted 12.6% jump in revenue at Rs 1527.53 crore driven by strong growth in value-added paperboards segment and product mix enrichment. However, the packaging and printing business was impacted by slowdown in the FMCG industry and exports. 

Effect of Q1 FY20 Results on Market Cap

Before the declaration of the Q1 result, the market cap of ITC Ltd was Rs.3.24 Lakh Cr on 2nd August. While after releasing the Q1 FY20 results, market cap has reduced to Rs.3.18 Lakh Cr.

Conclusion

• The growth of India’s FMCG industry, is declined for the second straight quarter in the Q1 FY20 (April-June) period according to Nielsen India.
• ITC’s FMCG revenue growth was in-line versus its FMCG peers such as HUL, Dabur, Marico etc.
• Slowing rural spends were a drag on domestic consumer goods makers. As the rural growth is moderated, the volume sold for last few quarters is rising at the slowest pace.
• Apart from weakened demand, challenges to the legal cigarette industry due to high taxation and regulatory regime also impacted ITC’s flagship cigarettes business.
• The legitimate cigarette industry is declining steadily since last few years. Also high tax rates on cigarettes provide attractive tax arbitrage opportunities for unethical players which triggers the growth of illegal cigarette trade in the country. It is also impacting the ITCs business growth from its key segment.