MSCI India Index – Changes @ Nov 2019

Probable Entries & Exits From MSCI India Index November 2019 Review

Introduction

MSCI (Morgan Stanley Capital International) is going to announce today the results of its Semi-annual index review for November 2019. Lets discuss the expected changes in MSCI India Domestic Index, What are the probable entries & exits form the index?

MSCI India Index Review – Expected Changes| Probable Entries & Exits

• One of the most common acronyms that investors encounter as they begin to explore the world of international investing – MSCI Inc. is a leading provider of research-based indexes and analytics.
• MSCI indexes facilitate the construction and monitoring of portfolios in a cohesive and complete manner, avoiding benchmark misfit. They follow a modern index strategy which provides a consistent treatment across the global as well as domestic markets.
• Every quarter MSCI Index announces its index reviews highlighting addition of the potential quality stocks into the index and deletion of the poorly performing or highly debt-burdened stocks from the index.

Here is the probable entries and exits from the MSCI India Index.

Probable Entries / Addition

• In spite of the current economic slowdown and dampened demand as well as consumption, there are some companies which have a great earnings potential and business growth in coming years.
• These stocks have seen a big rally in stock market over the last 1 year. The stock return, TTM profit growth, high return on equity etc. have demonstrated their capability to deliver healthy returns in near future.

1. Muthoot Finance

• It is the largest gold-financing NBFC with an operating history of more than 70 years, operating under the brand name of The Muthoot Group.
• Return on Equity = 22.41
• 1 year stock performance = 56.51%
• Profit Growth TTM CAGR = 5%
• 5 years Profit Growth CAGR = 20.38%
• Muthoot has created a leadership position in lending against gold jewellery with AUM of around Rs.35800 Cr. Sharp rally in gold prices in the previous quarter along with improved gold loan demand outlook will aid AUM growth (10-15%).
• Strong business fundamentals with a steady earnings growth and stable funding cost will offer the high profits and healthy returns over a longer horizon.

2. Godrej Properties

• The company is engaged primarily in the business of real estate construction, development and other related activities.
• Return on Equity = 11.64
• 1 year stock performance = 61%
• 5 years Profit Growth CAGR = 12%
• Godrej properties has a strong brand value being associated with one of the most trustworthy brand name Godrej group.
• Amidst the current slowdown, the company is managing to cope up with the cash flows in flat growth of overall real estate sector by the new launches. Projects in pipeline that may improve the company’s profit growth.

3. ICICI Prudential Life Insurance

• The company carries on business of providing life insurance, pensions and health insurance products to individuals and groups.
• Return on Equity = 16.94
• 1 year stock performance = 45%
• 3 years Sales Growth CAGR = 25%
• In spite of the market volatility, the company has given strong financial results with robust growth in its business. The company is virtually debt-free. It is having a strong institutional holding – FII : 12%, DII :6%

4. Siemens

• The company is engaged in manufacturing of electric motors, generators, transformers and electricity distribution and control apparatus. It is a MNC stock with a strong promoter holding = 75%
• Return on Capital Employed = 17.81
• 1 year stock performance = 79%
• Profit Growth TTM CAGR = 22%
• During the last quarter, company’s new orders stood at Rs.3,023 Cr with 7% QoQ growth. There is a consistent rise in the revenue and operating profit of the company.
• In last November-2018, the stock was among the deletions from the MSCI India Index, but now it may be considered again due to its high returns and future earning potential.

5. Berger Paints India

• After Asian paints, the highest market share is with the Berger paints. Thus, the company is primarily engaged in the Manufacturing and selling of Paints.
• Return on Equity = 21
• 1 year stock performance = 67%
• Profit Growth TTM CAGR = 26%
• Strong Promoter Holding : 75%, Institutional Holding : 13%
• Along with the infrastructure development in coming years, paints industry in India is going to see a high growth with the new consumption patterns built across the target market.
• Due to the promoter pledging issue in Asian Paints, Berger Paints is a favourite stock among the institutional investors.

6. SBI Life Insurance

• As like ICICI Prudential Life Insurance, SBI Life Insurance is also one of the leading private life insurance companies. It offers a comprehensive range of savings and protection products through a strong distribution network.
• Return on Equity = 18.81
• 1 year stock performance = 67%
• 3 years Sales Growth CAGR = 32%
• Strong Institutional Holding – FII : 23.72%, DII : 7%
• The company is virtually debt-free. Maintaining solvency is a key to the robust and consistent sales & profit growth.

7. Info Edge India

• Info Edge India is primarily engaged in providing online & offline services primarily through its online portal Naukri.com, Jeevansathi.com, 99 acres.com, shiksha.com & offline portal Quadrangle.com.
• 1 year stock performance = 82%
• Sales Growth TTM CAGR = 16%
• Strong Institutional Holding – FII : 35%, DII : 14%

8. Apollo Hospitals

• The main business of Apollo Hospitals is to enhance the quality of life of patients by providing comprehensive, high-quality hospital services on a cost-effective basis. It is also engaged in providing / selling high quality pharma and wellness products through a network of pharmacies.
• Return on Equity = 8%
• 1 year stock performance = 25.62%
• Sales Growth TTM CAGR = 24.7%
• Strong Institutional Holding – FII : 48%, DII : 8%

Probable Exits / Deletions

• India’s debt-burdened companies could get kicked out of MSCI Inc.’s benchmark index in its November review. Highly indebted companies including Vodafone Idea Ltd., Indiabulls Housing Finance Ltd. and Glenmark Pharmaceuticals Ltd. are likely to be removed from the MSCI India Index.
• Most of these companies have seen a sharp erosion in their market values in the wake of the yearlong. Lets see 5 probable deletions from the index.

1. Glenmark Pharmaceuticals

• Glenmark Pharmaceuticals is a global pharmaceutical company. The Company is engaged in the development of new chemical entities and new biological entities.
• Debt to Equity Ratio = 0.79
• Interest Coverage ratio = 3.77
• 1 year stock performance = -52%
• Profit Growth TTM CAGR = -1%
• The company has delivered a poor growth over last 5 years. The stock fell almost by 52% in last 1 year.

2. Yes Bank

• Yes Bank is mostly engaged in corporate and institutional banking, financial markets, investment banking, corporate finance, branch banking, business and transaction banking, and wealth management.
• D/E ratio = 12.5
• Interest Coverage Ratio = 0.97
• 1 year stock performance = -68%
• Profit Growth TTM CAGR = -60%
• The corporate governance issues in the bank, promoter stake sale, high NPAs post NBFC crisis, high debt-burdened, low interest coverage ratio are the key negative factors impacting the stock performance.

3. Vodafone Idea

• Vodafone Idea is engaged in amongst the top three telecom service providers in India with pan India operations. It is engaged in the business of Mobility and Long Distance services.
• Return on Equity = -37.22%
• D/E Ratio = 2.11
• Interest Coverage Ratio = -0.90
• 1 year stock performance = -84%
• Profit Growth TTM CAGR = -168%
• Decline in the revenue, overall subscriber base have attributed to the losses incurred in last few quarters. Highly indebted with a incapability of paying even interests indicates the how bad is the liquidity condition of the company.
• The uncertainty around the successful integration and downgrade ratings the stock has given negative returns over last 1 year -84%.

4. Indiabulls Housing Finance

• The company is engaged in business of a Housing Finance Institution without accepting public deposits and its regulated by National Housing Bank.
• D/E Ratio = 6.42
• Interest Coverage Ratio = 1.54
• 1 year stock performance = -73%
• Profit Growth TTM CAGR = -7%
• The key negative elements are highly-leveraged, asset-liability mismatch, lower interest coverage ratio, decrease in promoter holding, degrowth in the profits.

5. Tata Power

• It is engaged in the business of the Company is generation, transmission and distribution of electricity.
• ROE = -1.44%
• D/E Ratio = 2.90
• Interest Coverage Ratio = 1.41
• 1 year stock performance = -22%
• Profit Growth TTM CAGR = -41%
• Negative ROE, high D/E ratio, poor growth over last 5 year attributed to the 22% fall in the stock performance of Tata Power.

Conclusion

• We expect SBI Life Insurance, ICICI Prudential Life Insurance and Siemens to be the probable additions, while Glenmark Pharmaceuticals, Indiabulls Housing Finance and Vodafone Idea to be the probable deletions in the coming MSCI India Domestic Index semi-annual review announcement.
• The changes to be announced in the index review will be effective from November 27, 2019.