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Re-Categorization of Stocks in Indian Share Market based on Market Cap (Upgrade and Downgrade)

20 Stocks which have been Re-Categorized (Small Cap to Mid Cap & Mid Cap to Large Cap) in the Indian Stock Exchange in 2019 based on Market Cap

On 1st January 2019, SEBI re-categorized its stocks again. After that some promotions and some demotions have taken place in the large cap, mid cap and small cap companies.

Market Cap Classification

  • Large Cap – Top 100 Stocks based on Last Six Months Average Market Cap
  • Mid Cap – 101-250 Stocks based on Last Six Months Average Market Cap
  • Small Cap – Beyond 250 Stocks

Every six months SEBI releases a new list of this categorized companies, so that the mutual funds can invest according to their categories. That is large cap fund should invest 80% in large cap stocks, multi cap funds can invest across the categorization, mid cap funds should have minimum allocation of 65% in mid cap companies and small cap funds too similarly.

In this new list, some companies have been promoted and some have been demoted based on the average market cap from the period of 1st July 2018 to 31st December 2018.

Companies that got Promoted from Mid Cap to Large Cap

CompanyAvg. Market Cap (Rs. Crore)
Divis Lab34,975
United Breweries33,095
Page Industries32,702
Indiabulls Ventures Ltd31,823
L&T Infotech Ltd30,206
Berger Paints India Ltd29,939
GSK Consumer Healthcare Ltd29,660

The companies on this list used to be mid cap companies earlier which now are large cap companies. These are the average market cap of the companies from the period of 1st July 2018 to 31st December 2018. Though their market now maybe different but these are their average market caps for the above period.

L&T Infotech Ltd gained advantage because of the rupee depreciation rally that took place last year. And the run that IT companies experienced in the last year also benefited L&T Infotech Ltd.

The fluctuations in the crude oil prices has benefited Berger Paints India Ltd. The dollar has dropped from 85 dollars to almost 50 dollars which has helped Berger Paints India Ltd.

The merger of GSK Consumer Healthcare Ltd with Hindustan Unilever Ltd was a very positive news for GSK Consumer Healthcare Ltd.

Companies that got Promoted from Small Cap to Mid Cap

CompanyAvg. Market Cap (Rs. Crore)
Bata India Ltd12,550
Schaeffler India11,412
Alembic Pharma11,047
Aarti Industries10,818
Solar Industries9,834
Mahindra CIE Automotive Ltd9,826
Atul Ltd9,390
Ipca Lab9,312
Relaxo Footwears9,305
Phoenix Mills9,203
Gujarat Flurochemicals9,110
SKF India9,094
Thomas Cook8,856

The companies on this list used to be small cap companies earlier which now are mid cap companies. These are the average market cap of the companies from the period of 1st July 2018 to 31st December 2018. Though their market now maybe different but these are their average market caps for the above period.

Bata India & Relaxo Footwears, both of the huge footwear companies have been promoted. Both the companies have very good focus in India and these companies should be in the radar of any investor.

Now the companies in this list have been opened to up to new investments in them, which may be a very good sign for them as the allocations to these stocks can be increased.

Companies that got Demoted from Large Cap to Mid Cap

  1. Hindustan Aeronautics Ltd
  2. Bharat Forge Ltd
  3. Shriram Transport Finance Company Ltd
  4. Sun TV Network Ltd
  5. Aditya Birla Capital Ltd
  6. BHEL
  7. TVS Motors
  8. Bharat Electronics Ltd

Companies that got Demoted from Mid Cap to Small Cap

  1. Future Consumer Ltd
  2. Reliance Power
  3. Dilip Buildcon
  4. JM Financial Ltd
  5. Prestige Estates Projects
  6. Arvind Ltd
  7. Sun Pharma Advance Research Company
  8. Finolex Cables
  9. Reliance Capital
  10. KRBL
  11. Engineers India
  12. Symphony
  13. TV18 Broadcast
  14. Rain Industries
  15. Avanti Feeds Ltd
  16. Vakranjee Ltd
  17. PC Jeweller Ltd

Bandhan Bank & Gruh Finance Merger Analysis

The merger of Bandhan Bank and Gruh Finance has been announced, but it hasn’t been approved yet. They have given the merger application to the RBI. Will have to wait to see what happens ahead.

Reason behind the Merger

The promoters of the Bandhan bank have to reduce their stake (from 82.3% to 40%). And this is their first try in downsizing their stake. If this merger goes through, then their promoter holding will go down from 82.3% to 61% holding in the merged entity.

Conditions of the Merger

One will get 568 Bandhan bank shares for every 1000 Gruh Finance shares held.

Comparison Between the 2 Merging Entities

ParametersGruh FinanceBandhan Bank
No. of Branches200+938
No. of Employees700+30,000+
Total Loans given (crores)16,66333,373
Deposits (crores)1,51533,869
Capital Adequacy Ratio18.9%32.6%
Gross NPA0.881.3
Return on Assets (ROA)2.57%4.30%
  • Number of branches data is as per their September 2018 results. Bandhan bank will get presence in the west because of Gruh Finance branches, and Gruh Finance will get presence in the east because of Bandhan bank branches. This is a very good synergy between the two.
  • Gruh Finance is a NBFC that is why it has less employees. And Bandhan bank is a full-fledged bank which is why it has so many employees.
  • The advances of Bandhan bank are almost double than those of Gruh Finance. Gruh finance has more market in affordable loans. Plus, Gruh Finance has a very strong experience and a very good system of managing all the aspect regarding to loans. Thus, this will be very valuable to Bandhan bank.
  • As Gruh Finance is a NBFC it faces challenges to raise deposits as it has high cost of deposit. On the other hand, a bank has savings account, current account, etc., which is why their cost of deposit is very less compared to a NBFC. Here, being a bank, Bandhan bank gains advantage.
  • As being a bank, the Capital Adequacy ratio of Bandhan bank is 32.60%, which is very high and also above the limit of the RBI. So, when these entities get merged this ratio will come down.
  • Even after being a NBFC, Gruh Finance has kept its Gross NPA in a very good control. And we all know that NBFC’s faced some issues in the recent past. That time Gruh Finance did not face much issues as compared to other NBFC’s.
  • Assets here are the loans given out by the banks and the NBFC’s. Here, Bandhan bank scores well as cost of raising money is high for Gruh Finance.

Market Capitalization

ParametersGruh FinanceBandhan Bank
Market Cap (in Crore Rs.)19,50058,000
  • Promoter of Bandhan Bank is Ghosh family and their stake in the bank is 82.3%. So, their stake is worth Rs. 47,700 crores (82.3% of 58,000 crores)
  • Promoter of Gruh Finance is Housing Development Finance Corporation (HDFC Ltd.) and their stake in the NBFC is 57.3%. So, their stake is worth Rs. 11,276 crores (57.3% of 19,500 crores)
  • After the merger, the market cap will become 77,500 crore rupees.

Here, the stake of HDFC will be 14.96% in the merged entity, which will be 11,594 crore rupees. And that of Bandhan bank will be 61% which will be 47,275 crore rupees.

According to the new RBI rules, HDFC cannot hold more then 10% in Bandhan bank. But HDFC will have to get their stake down by at least 5%. Will have to see what the RBI approves and permits in this merger.

Final View on this Merger

According to the analysis done above, the ultimate winner in this merger is Housing Development Finance Corporation (HDFC Ltd.).

Why this is so? Because Bandhan bank promoters were directed to reduce their holding and no promoter likes to sell out their stake. If that is done it can also have negative impact. Gruh Finance was an over-valued entity. Its P/E ratio or P/B ratio are very high in comparison with their competitors.

Bandhan bank had to reduce their stake. So, to do so and to also avoid the negative impacts by selling their stake in the market, it decided to merger with Gruh Finance with such high valuations.

HDFC was always questioned as to why they were running 2 entities (HDFC Ltd & Gruh Finance) simultaneously. Because of this HDFC couldn’t enter the affordable housing loans aggressively. HDFC could not use the full potential of Gruh Finance because of restrictions.

In this merger, a lot of desperation can be seen from Bandhan bank as they have to reduce their stake and the deadline was nearing. They had also earlier tried to buy PNB Housing Finance similarly, but it didn’t go through. But here they have given proposal to Gruh Finance by giving them premium valuations. Now will have to wait and watch RBI’s reaction on this.

Therefore, the real winner in this deal is neither Bandhan bank nor Gruh Finance. It is HDFC Ltd.

So, our suggestion to investors will be to keep HDFC Ltd on their radar rather Bandhan bank or Gruh Finance.

HDFC Bank Stock vs Kotak Bank Stock

A comparison between these 2 banks has been presented here. The comparison is done in quantitative terms. This comparison is just to get a perspective on how these banks stand against each other.

Basic Information

ParametersHDFC BankKotak Bank
Market Cap (Rs. Crore)5,65,8332,36,224
Stock P/E29.735.8
ROCE7.32%7.93%
ROE17.87%13.87%
Total Capital Employed (Rs. Crore)1,17,63725,779
Total Assets (Rs. Crore)10,63,9883,37,720
Average ROCE – 3Years7.678.43
Interest Coverage Ratio1.641.7
D/E Ratio8.584.95
D/B Ratio5.324.68
Dividend Yield0.60.06
Promoter Holding21.43%30.02%
PEG Ratio1.411.55
Interest Coverage1.641.7
PAT Growth 5 Years21.05%23.05%
Sales Growth 5 Years18.01%18.32%
Gross NPA1.30%2.22%
Net NPA0.40%0.98%
  • In terms of PE, Kotak bank seems to be little over-priced in comparison with HDFC bank.
  • ROCE of both the banks is almost same.
  • ROE of HDFC bank looks better than the ROE of Kotak Bank.
  • Total Capital Employed of HDFC bank is almost 4 times that of Kotak bank.
  • Total Assets are the loans given in the market.
  • If the Interest Coverage ratio of a company falls below 2.5 then it can be an alarming sign. But this can be said in the case of banks, because their itself is of borrowing and lending. In case of banks, having interest coverage ratio above 1 is healthy. The banks have almost similar values, but Kotak has a little advantage.
  • Banks will always higher D/E ratio values as their business is of lending itself.
  • In terms of P/B ratio, HDFC bank looks a little over-priced.
  • Both the banks have dividend yield lower than the industry average. Lower the dividend yield the better it is for a bank. This means that promoter wants to still re-invest the money rather than taking a payout as a dividend.
  • The major promoter holder in HDFC bank is HDFC Ltd and the promoters of Kotak Bank are Mr. Uday Kotak family. RBI has instructed the promoters of Kotak Bank to reduce their holding in the bank up to 20% before 31st December 2018.
  • The PAT growth of Kotak bank is more.
  • Sales growth of the banks are almost same.
  • Gross NPA and Net NPA are two of the most important parameters here. HDFC bank scores very well here as their Gross NPA is very low in regards of their loans given in the market. In Net NPA too, HDFC bank has upper hand over Kotak bank.

Last 12 Quarter Results

HDFC vs Kotak Bank Quarterly Performance

These are the Quarter-on-Quarter results of the last 3 years.

  • Sales of HDFC bank has been increasing every quarter. Which is a very good sign.
  • Kotak bank too is growing on the same line. Only one quarter it has shown negative growth. But overall Kotak bank is also growing nicely.
  • In Net profit, there are only 3 quarters where HDFC bank has shown a little negative growth in quarter-on-quarter.
  • And in Kotak bank, there are only 2 negative growth quarters.
  • On these parameters, both the banks are growing only similarly.

Yearly Performance

HDFC vs Kotak Bank Yearly Performance

This is the yearly performance of the banks for the last 10 years.

  • Sales growth of HDFC bank in 10 years is 23.01%. And that of Kotak bank is 21.29%.
  • Net profit growth 10-Year CAGR of HDFC bank is 27.10%. And that of Kotak bank is 20.13%.

We have also shown sales & net profit growth on the base of 3-years rolling returns.

  • Here, one can see that in the last 3-year rolling returns of the last 3 years, the sales growth of Kotak bank is being beating those of HDFC bank.
  • And in profitability too, the 3-year rolling returns of last 2 years, the growth momentum can be seen shifting to the side of Kotak bank.

Share Price Movement

Comparison Chart HDFC vs Kotak shares

Source – Moneycontrol.com

  • The price movements of the stocks of both the companies is almost same.
  • Both the banks given around 700% returns in the last 10 years.
  • The returns of HDFC bank are a little higher as their dividend yield too has been a little higher as compared to Kotak bank.

Note: –

  • We are in no way telling anyone to go and invest in stocks immediately.
  • We are also not suggesting that these two are the best banks and to buy the stocks of these banks. Neither are we suggesting which one is better to buy.

HEG & Graphite India – Why Stock Prices have increased so much?

These 2 stocks have seen a significant increase over the period of last 2 years. HEG which had a price of around Rs. 150 is now being traded at close to Rs. 4,000. The growth seems to be around 25 times. HEG saw around 2,500% increase in its stock price. And Graphite India stock which was around Rs. 75 is now priced around Rs. 850. Here, the growth is almost 11 times and the percentage increase is close to 1,000%.

What happened that these companies saw such significant rises? What are the reason behind this increase?

Graphite and HEG

Steel Production – Changes in China

Whatever production of steel that takes place in China is done through old methods using coal plants and similar things. This results in excessive pollution. In 2016, China started taking pollution control measures aggressively. For this China claimed that the production that will happen using the ‘Electric Arc Furnace Technology’ will result in lower pollution. This Electric Arc Furnace Technology which uses graphite electrode for steel production result in almost 80% less pollution. All over the world, there are 5 major players in this technology production, and out of these 5, 2 are from India who are in this type of production. So, almost 20% of the global capacity to produce graphite electrode is present in India. This acted as a booster for these companies (HEG & Graphite India). This resulted in a multi-fold growth in the sales of these companies in the last 2 years.

In March 2017, HEG declared a loss of Rs 50 crores but the current trailing twelve-month profits of the company amount to around Rs. 2,600 crores. Once where this company was a loss making one, is now making huge profits in just 2 years. In the future too, they seem to have clear visibility in earnings with scope to grow more.

That is exactly why these stocks have increased so much.

PE Valuations

The Price-to-Earnings (PE) ratio of these companies ranges between 5 to 6. The Price-to-Earning Growth (PEG) Ratio (PE ÷ Growth) is also a very important factor.  Other companies have high PEG ranging between 5-9. But, the PEG of these companies ranges around 0.13. This is so because the growth they saw in the last 2 years was a phenomenal growth and that kind of (high) PE hasn’t been given to these companies. One would say that even with such clear visible growths, why haven’t these companies been given higher PE’s. The reason behind is that there were no global player focusing on graphite electrodes. But when this market starts to grow gradually, then this market would get open to all to enter. And Chinese companies particularly will definitely enter this market of graphite electrode production. Obviously, many things will also be dependent on the raw materials involved in this. But there are chance of China entering into this. This why the analyst are not ready to give these companies PE’s higher than this. They will only get higher valuations if they concentrate on their growth and profitability. If the companies maintain 20-25% growth, then maybe they may get expected valuations.

Lack of visibility of earnings and many uncertainties are the main reason behind these companies getting these rational PE values.

Future Outlook

The steel that was being imported from China, has now been charged with import duty by the government. That has led to increased production in Indian companies and the companies are seeing higher demands for them. Majority of steel production in India is done using the electric arc furnace technology. Thus, this is an advantage to the HEG and Graphite India (as they are the suppliers of graphite electrode which are required in electric arc furnace technology).

But there are claims that there many entry barriers in this business. But if China wants, it can easily enter this business and set up such companies of itself. And with their increasing focus on pollution control measures, it can definitely come up with alternative solutions.

HUL Acquires GSK Consumer Healthcare Ltd

There were many players involved in the race to acquire GSK, some were private equity players. Even Nestle was one of the front runners in the acquisitions race. But GSK thought the all-share deal with HUL will be beneficial.

It was an all-share acquisition. No money was paid. There will be direct share swap. GSK investors will get HUL shares. No need to take loans and create debt. Both the companies are virtually debt free and they are going to continue enjoying this.

First lets the compare the two companies on certain parameters

HUL

GSK

Rs. 3,91,000 croresMarket Cap (as on 5th December 2018)Rs. 31,700 crores
Rs. 36,408 croresTrailing Twelve Months (TTM) SalesRs. 4,600 crores
Rs. 5,700 croresTrailing Twelve Months Net ProfitRs. 851 crores
66.84P/E Ratio37.05

Summary: –

  • The market cap of HUL is almost 12 to 13 times that of GSK.
  • A significant difference can be noticed in the TTM Sales (revenue) as well of both the companies.
  • There is a noticeable difference in the Net profits (PAT) too of these companies.
  • According to the P/E ratio, the investors are giving less price to GSK as compared to HUL.

Now, let’s understand the P/E ratios of these companies: –

HUL

GSK

109%Return On Capital Employed32.53%
77.57%Return On Equity21.18%

Summary: –

  • ROCE
    • A company which has higher ROCE get higher valuations in the market. Thus, because of high ROCE of HUL it has high P/E ratio.
    • The vast difference between the companies’ ROCE is the reason behind the difference in their P/E ratios.
  • ROE
    • The huge difference in the ROE of both the companies too causes the difference in their P/E ratios

Share Details

After the acquisitions, every 1 share of GSK will attract 4.39 share of HUL. For example, if you have 100 shares of GSK, then you will get 439 shares of HUL.

Acquisitions Benefits to the Foods & Refreshment Business

Foods & Refreshment Business is worth Rs. 6,500 crores. Total sales of HUL is of Rs. 36,000 crores. Thus, 18% of the revenue of HUL comes from foods & refreshment business.

It should be noted that it is in this business sector only that all the products of GSK are going to be added up. So, if we add Rs, 4,600 crores of GSK, then the foods & refreshment business amounts to almost Rs. 11,000 crores.

Distribution Network Benefits

HUL currently reaches to 80 lakh outlets with a predicted number of 1 crore outlets in the next year. For GSK, Horlicks, their main product, alone has reach of around 25 lakh outlets.

Therefore, after the acquisition, HUL will experience double digit growths in their distribution network. The synergies of the companies will yield better reach.

Double digit growth, greater outreach, better synergies, increase in margins as both have same operating profit at 22% will be advantageous to HUL in every way. This will also lead to increase in HUL’s share price.

Products Acquired by HUL

  • By Indian entity of HUL
    • Boost
    • Maltova
    • Viva
  • By Unilever, parent company of HUL
    • Horlicks

Unilever acquired Horlicks because it plans on selling Horlicks globally. As a result, HUL will pay a certain royalty to Unilever on sale of Horlicks in India. (the royalty amount has not yet been disclosed)

Ownership Details

Previously, Unilever’s ownership in HUL was 67.2%. Post-acquisition, this ownership of Unilever in HUL will become 61.9%. This decreased ownership of 5.3% has gone to the investors of GSK.

All in all, this is a win-win deal for both the companies.


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