With the enhanced profitability of the corporates, companies can either pay higher dividends or use their retained earnings for the business expansion.
Thus, the capital expenditure and investments by the corporates can lead to a big growth in coming quarters. So, we can clearly get the how important is this structural reform done by Government of India.
BSE Sensex rallied almost 3300 points in just 2 days (1900 points on Friday + 1200 points on Monday) and closed at 39,090.03 on Monday, 23rd September.
Among the 30-pack Sensex, 16 stocks ended in the green and 14 in the red. In terms of index contribution, HDFC Bank, HDFC Ltd, ICICI Bank and ITC Ltd. were the top stocks.
Lets discuss the impact of corporate tax rate cut on ITC Ltd stock valuation in detail.
ITC Ltd Valuation Analysis
ITC is one of India’s foremost private sector companies with a market capitalisation of Rs. 3.13 Lakh Crore.
ITC has a diversified presence in FMCG, Hotels, Packaging, Paperboards & Specialty Papers and Agri-Business.
We are doing the valuation analysis of the stock on the basis of following valuation factors : Revenue Growth, Profit Before Tax (PBT) Growth, PE Ratio, Market Capitalisation, etc.
CAGR Growth of Revenue & Profit Before Tax (PBT)
Here, we have calculated the CAGR growth of revenue and Profit Before Tax (PBT) of ITC Ltd.
For FY2018-19 :
Revenue = Rs.44,983 Cr
PBT = Rs.18,444 Cr
After calculating the CAGR growth, the lowest growth rate (Here, 6.24%) is taken for further calculations of PBT projections for FY2019-20.
(For the detailed calculations, please refer above table.)
ITC Ltd Market Capitalization Projections by considering Historical Average PE Ratios
The historical average PE ratios for 3, 5 and 10 years are 30.49, 31.26 and 30.90 respectively.
So we have calculated the future market cap projections of ITC Ltd by considering those PE ratios also.
However, by considering the realistic expectations from the market, we have to consider the current PE Ratio of ITC Ltd for calculating its market cap projection.
Thus, Current PE = 24.69 and PAT FY2019-20 projection = Rs.14,663 Cr
Market Cap Projection of ITC Ltd stock = 24.69 * Rs.14,663 Cr = Rs.3,62,029 Cr
While, the current market cap = Rs.3,15,000 Cr
So, % Growth in the market cap would be = 14.92%
Thus, ITC Ltd’s market cap can reach up to Rs.3,62,029 Cr by the end of current financial year 2019-20.
Also, with the active participation of institutional investors for buying ITC stock would suggest the re-rating of the stock. Since, Both the Indices (Sensex as well as NIFTY) have considerable weightage for the stock.
As far as the equity oriented mutual funds are concerned (funds having equity allocation), the total AUM as on August 2019 is around Rs.10.31 Lakh Crore.
This AUM of Rs.10.31 Lakh Crore is contributed by :
Pure Equity Funds
Hybrid Oriented Funds (with Equity allocation)
It means the above all type of funds have made investments in stocks worth of Rs.10.31 Lakh Crore in stocks.
Indian Mutual Fund industry’s Average Assets Under Management (AAUM) stood at Rs.25.64 Lakh Crore in August 2019. So we can see, around 40% of the total AUM of the entire mutual fund industry is contributed from investments in stocks.
Which are the top 10 stocks contributing to this 10.31 lakh Crore AUM?
Not surprisingly, out of these 10 stocks, 6 stocks belongs to banking and financial services sector (3 corporate banks, 2 retail banks and 1 housing finance company). Out of the rest 4 stocks, one company each from IT, construction and Engineering, FMCG and diversified conglomerate.
1. HDFC Bank
HDFC Bank is the stock having highest allocation in total mutual funds portfolios with equity allocation.
Around Rs.71,142.1 Cr is invested in HDFC bank by all mutual funds. So, if we consider the total AUM of Rs.10.31 Lakh Crore, HDFC bank alone is holding almost 6.9% of total equity AUM of all the mutual funds. It shows the confidence all the mutual fund houses is having for HDFC Bank.
HDFC Bank is a Retail-oriented bank. It has given the profit growth of almost 20-25% y-o-y since last 10 years, having a great consistency in profit growth numbers. For the same reason, HDFC Bank has been enjoying a premium valuation in the market.
2. ICICI Bank
ICICI Bank is the second highest stock in terms of allocation by mutual funds in their portfolios.
Mutual funds have made a investment of around Rs.59,465.4 Cr in ICICI Bank out of total Rs.10.31 Lakh Cr equity investment. Thus, ICICI Bank is holding 5.7% share in total equity mutual fund AUM.
ICICI bank is a corporate bank. The NPA pressure of corporate banks from last 2-3 years is now fading down slowly. The profits of corporate banks are going to be promising in coming quarters. And with the improved earnings, Earnings per share of corporate banks and overall Sensex and Nifty Indices can go up in future. Thus, with these improved EPS numbers, price-to-earnings ratio can be rationalized in course of time.
3. Infosys Ltd.
Infosys is the only one IT stock in 10 most favourite stocks held by mutual funds.
It might be because of the higher percentage of promoter holdings (72.05%) in case of TCS. The free float market capitalization of TCS is very small. As a result, there is very little scope for the domestic institutional investors (DIIs) like mutual funds to buy the stock (TCS) and include it in their portfolios.
On the other hand, in case of Infosys, promoter holding is only 13.15%. So there is very good scope for mutual funds to buy the healthy growth delivering IT stocks like Infosys. The total investment in Infosys is almost Rs.44,960 Cr with 4.3% allocation in total equity oriented funds AUM.
4. Reliance Industries Ltd.
Reliance Industries Ltd (RIL) is a diversified conglomerate company. Equity mutual funds are having a consistent allocation in RIL.
Since last 2-3 years, allocations in RIL have seen a decent growth with the current holding of Rs.40,312.3 Cr by equity oriented funds. This allocation in RIL contributes around 3.9% of total AUM.
Reliance Industries stock is trading at a PE 19.31, which is higher than its 3 years, 5 years, 10 years average PE ratio. With the improved earnings visibility from Reliance Jio and Reliance Retail, RIL is enjoying a premium valuation. Jio and Retail both the businesses are going at fast pace and both can come with IPOs in coming years.
So, due to the very high free float of RIL and higher earnings visibility in future by the stock, equity funds are buying RIL and trying to increase the allocation of the stock in their portfolios.
5. Larsen & Toubro Ltd.
L&T is a construction and engineering conglomerate player. Mutual funds are invested around Rs.33,281.3 Cr in L&T stock. While the % allocation of L&T is around 3.2% of entire equity AUM.
L&T is a very good stock in terms of corporate governance, consolidated businesses growth(Financial Services, IT). L&T is delivering a consistent growth in its profits over the years. And therefore, it can be a good bet for the investors to hold the stock for their long-term portfolios.
6. State Bank of India
SBI is the biggest bank of India not by market capitalization but from business point of view in term of credit/loans given in the market. The investment in SBI is around Rs.33,066.2 Cr by mutual funds with 3.2% allocation in the stock out of total equity exposure by mutual funds.
Just like ICICI bank, SBI is one of the corporate banks with high earnings visibility. With the decrease in the provisioning (kept aside for NPAs from operating profits earlier), the profitability of the bank is increasing and will improve even more in coming quarters. So we can say that SBI is coming out and relieving from NPA pressure slowly.
The current profitability of all corporate banks, which is around Rs.4,000 Cr will grow to almost Rs.80,000 Cr by FY2020-21. So we can clearly get the growth trend for the stock in future and this is the
7. HDFC Ltd.
HDFC Ltd. is focusing on the housing demand in ‘Affordable Housing’ segment. It has a great opportunity in housing finance after the merger of Gruh Finance and Bandhan Bank.
The company is having a consistent growth potential to deliver the profit growth in coming years. So, Domestic Institutional Investors like mutual funds are very positive about HDFC Ltd. The current holding in HDFC Ltd is around Rs.31,521.9 Cr, with almost 3% allocation in the total equity AUM of mutual funds.
8. Axis Bank
Axis Bank comes under the corporate bank segment. Equity oriented mutual funds have invested around Rs.30,326.5 Cr in Axis Bank. The stock is having 2.9% allocation in entire equity AUM of mutual funds.
Just like other corporate banks ICICI Bank and SBI Bank, the earnings visibility of Axis Bank is improving in near future due to the reduced NPA pressure. And in the revival phase of corporate banks, we believe Axis bank is running ahead of ICICI Bank and SBI Bank. So it is a very good opportunity for mutual fund houses.
9. ITC Ltd.
ITC Ltd is a FMCG conglomerate company. The current holding of ITC Ltd is almost Rs.28,105.7 Cr, with the % allocation of 2.7% by the mutual funds of equity orientation.
The major contributors are the Index funds and Index ETFs in this allocation of 2.7% for the stock. Because of high free float of the stock, it is mandatory for the Index funds and Index ETFs to have the allocation for ITC Ltd. Moreover, ITC Ltd is having a good weightage in the Sensex and Nifty indices which is beneficial for the stock to increase its holdings by the index funds.
10. Kotak Mahindra Bank
Kotak Mahindra Bank is the one of the best banks in retail banking. It is a well-managed bank, with a great vision for future growths.
Mutual funds have made a investment of around Rs.59,465.4 Cr in Kotak Mahindra Bank. Thus, the bank is holding 2.3% share in total AUM of equity-oriented mutual funds. And this allocation have seen a consistent growth by the mutual funds.
As we all know, the promoters are required to reduce their holding as per the RBI’s regulations. So in this scenario, DIIs like mutual funds are very positive to increase their holding in Kotak bank once the free float will be available in the market.
HDFC Mutual Fund is one of the largest mutual funds and well-established fund house in the country with focus on delivering consistent fund performance across categories since the launch of the first scheme(s) in July 2000.
The detailed analysis of HDFC AMC is covered in our stock subscription. However, here we are trying to let you know how the business is changing over time.
It will be more rewarding as a shareholder of HDFC AMC stock than merely as an unit holder. Unit holders are the investors who buys the units of particular fund of the respective mutual fund.
Mutual funds can be one of the best investment strategy in long-term investments for the retail investors. Direct stock investment is suggested particularly for aggressive investors.
Let us discuss how the business dynamics is changing in mutual fund industry.
Share Price Movement of HDFC AMC Stock
The Share price rise from Rs.1500 to Rs.2650 is seen from 1st Jan’ 2019 to 5th Sept’ 2019. Why the stock is rising so much?
Rise in Expense Ratio of HDFC Mutual Funds Will Add Value to HDFC AMC Q2 Results
A. Rise in Expense Ratio of HDFC Equity Mutual Funds
HDFC Mutual fund has been increasing the expense ratio of its top performing schemes year-on-year. That too more specifically, direct schemes’ expense ratio is increased by HDFC AMC.
Retail investors invest in direct funds directly through AMC and not through any intermediary distributors or financial advisors. The primary objective of direct funds is the cost saving for such investors.
But as per above chart, we can see the y-o-y growth in expense ratio of top performing equity funds of HDFC.
HDFC Mid-Cap Opportunities Fund : 27.37%
HDFC Small Cap Fund : 73.47%
HDFC Capital Builder Value Fund : 70.59%
Asset under Management (AUM) of Direct funds are increasing y-o-y as well as m-o-m, due to the increased awareness among the investors in India. Investors are thinking that they can direct invest in direct fund by approaching to fund houses directly and not via any financial advisors. Here, the investors’ behavior management also plays an important role.
B. Rise in Expense Ratio of HDFC Liquid Fund
HDFC Liquid fund is the largest fund of HDFC AMC in terms of Asset under Management (AUM). The AUM has increased to Rs.86,000 Cr in July-2019 from Rs.41,000 Cr in July-2018.
The % increase in Expense Ratio (y-o-y) for both Direct as well as Regular fund :
HDFC Liquid Fund – Direct : 33.33%
HDFC Liquid Fund – Regular : 20%
Due to the higher expense ratio, it will hamper your returns as an unit holder of HDFC mutual funds. However, the hike in the expense ratio will add to the earnings of the share and its increased profit margin number. Therefore, it will be rewarding for you as a shareholder of HDFC AMC due to the profit margin growth in Q2 FY2019-20 results.
When the investors invest in stocks, they should check and analyse the earnings visibility and growth potential of the respective company.
Mutual Funds industry in India is having penetration of just 4-5%. So, there is a high scope of growth of mutual fund industry. Thus, the market can grow faster in coming years.
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.
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.
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.
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.
Promoters group is having a significant stake in the company almost 67.5% as on June 2019.
S&P Global Asian Holdings Pte. Ltd. = 15.95%
S AND P INTERNATIONAL LLC = 8.30%
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
Reliance Industries’ Road Map towards a Zero Net-Debt Company by 31st March, 2021
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 :
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.
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.
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.
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:
Internet of Things all over India
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 31st 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.