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QUICK TAKE: NEWSCREENS TO BOOST PVR GROWTH

Despite weakness in the PVR share post Q3results, the stock is expected tooutperform. Analysts believe new screenadditions post acquisitions, strong moviepipeline and higher margins are expectedto drive revenue and profitabilty

The SmartInvestorCHENNAI |

TUESDAY, 29 JANUARY 2019

TSI P2

DEBT OFFERS: LOWISSUE SIZE, HIGHGREENSHOE OPTIONS

THE COMPASS

HAMSINI KARTHIK

A weak day of trade, clubbedwith subpar results publishedon Friday after market hours,dragged the stock ofMahindra & MahindraFinancial Services (M&M Fin)by over 3 per cent on Monday.Despite assets under man-agement (AUM) and loan dis-bursements growing by ahealthy 31 per cent and 24 percent, respectively, year-on-year (YoY) in the Decemberquarter (Q3), the Street wasn'ttoo pleased with the headlinenumbers that lagged esti-mates.

Net interest income (NII)grew by 20 per cent YoY to~1,204 crore, while net profit,at ~319 crore, took a 20 percent hit, compared to the pre-vious year. Operating expens-es, up 37 per cent YoY,because of elevated employeecosts dented the show.However, analysts at IDFCSecurities noted that evenexcluding these one-offs,operating expenses remainedsteep. Timing difference inrecognition of operatingexpenses and AUM growth

coupled with six-12 monthsof break-even period for newbranches could keep costshigh for a while.

This apart, despite aninterest rate hike of about 25basis points (bps) in Q3, yielddeclined by 72 bps to 14.51 percent YoY, though marginallybetter than Q2 (14.24 percent). Consequently, prof-itability or net interest margin(NIM) took a 54 bps knockYoY to 7.86 per cent, and wasseen slightly lower than Q2show (7.9 per cent). Analystsat HDFC Securities expectNIMs to hover at 7.7 per centin FY19-FY21.

A finer reading of num-bers highlights that while

asset quality may be con-trolled at 7.7 per cent grossnon-performing assets ratioas against 11.6 per cent ayear-ago, provisioning andwrite-off costs, in absoluteterms, remained elevated at~225 crore in Q3, up 83 percent YoY.

Analysts at KotakInstitutional Equities noted adeterioration in Q3's provi-sion coverage ratio to 26.9 percent. This is much lower thanthe 35 per cent-plus markmaintained in the recenttimes. It needs to be seen ifQ3's relief on asset quality isonly temporary.

Likewise, a dissection ofloan book indicates a sharpercontribution from commer-cial vehicles, AUMs of whichgrew by 70 per cent YoY. Seenagainst the underlying indus-try trend which isn't very sup-portive, M&MFin's perform-ance on the front needsmonitoring.

Consequently, brokeragessuch as IDFC Securities andKotak Institutional Equitieshave tweaked their earningsestimates downwards by 7-11per cent for FY19.

Profitability dipped by 54 bps YoY in the third quarter

Sectoral issues plague M&M Finance

UJJVAL JAUHARI

Last week, India's top cementcompanies by market valueShree Cement and UltraTechreported strong volumegrowth, led by revenues forthe December 2018 quarter(Q3). As robust demandremains supportive, ShreeCement's total volume(cement plus clinker) growthof 11 per cent year-on-year(YoY) (5 per cent sequentially)was driven by strong sales ineastern India. UltraTech, too,saw volumes surge by 14 percent YoY (15 per cent sequen-tially) led by buoyant dem-and, and high capacity utili-sation of the cement plantsacquired from JP group.

While both companiesreported strong volumes,softer than expected realisa-tion and input cost pressureaffected UltraTech's operat-ing performance.

Consequently, it reportedan Ebidta per tonne of ~772,compared to ~801 in the year-ago quarter and ~824 in theprevious quarter. Ebitda isearnings before interests, tax-es, depreciation and amorti-sation. While Shree Cement,

too, continued to witness costpressure, better than expect-ed realisation helped itachieve ebitda per tonne(cement division) of ~1,067 inQ3 versus ~995 in the year-ago quarter, and ~1,000 in theprevious quarter.

With improving per tonneprofitability, Shree Cementscored over UltraTech. Howe-ver, unlike UltraTech, a pan-India player, Shree is largelypresent in north and east,and, of late, in south India.

Going ahead, the volumeoutlook remains strong forboth the companies, led byrising capacities. ShreeCement saw full commis-sioning of its Karnataka-based integrated cement

plant, with three milliontonnes per annum (MTPA)clinker capacity coming on-stream (grinding units oper-ational since June 2018).UltraTech, too, completed theacquisition of Binani Cem-ent's assets. Both companiesare expected to benefit as thenew capacities come at anappropriate time. However,for UltraTech, acquisitionsare adding to near-term prof-itability concerns, observedanalysts.

Binod Modi at RelianceSecurities believes that ambi-guity pertaining to profitabili-ty of Binani's assets, absence ofpricing recovery, skewedreturn ratios, and pricey valu-ations may be a key drag forUltraTech's stock performancein the near-to-medium term.

Analysts at Elara Capitaltoo, after factoring in BinaniCement and Century Textiles'acquisitions, have loweredtheir FY20 EPS estimates forUltraTech by 23 per cent giv-en higher depreciation andinterest costs. For ShreeCement, analysts are positive,given improving margins andgains from turnaround in itspower business.

Input cost pressure hits latter’s operating performance

Shree Cement scores over UltraTech in Q3

SAMIE MODAK & HAMSINI KARTHIK

Mumbai, 28 January

Sharp rebound in shares of ZeeEntertainment Enterprises andDishTV India, despite weak-ness in the overall market,helped soothe nerves ofinvestors, whose thousands ofcrores are riding on the group'sdebt and equity.

Shares of ZeeEntertainment rose 16 per centon Monday, after dropping over30 per cent in the previous ses-sion. This happened after thecompany reached an agree-ment with lenders to refrainfrom invoking the pledgedshares.

Shares of Dish TV gainednearly 6 per cent on Mondayafter crashing 33 per cent onFriday.

A fresh round of sell-off inthe troubled group stockswould have triggered invoking

of pledged shares, which couldhave compounded the woes forboth Zee and lenders, such asmutual funds (MFs), who haveextended loans worth Rs 8,000crore against shares to promot-er group entities.

As part of the agreement, 97per cent of the lenders haveoffered three months to ZeeEntertainment to find a strate-gic partner. In the interim, theyhave decided not to invoke orsell shares of the company.

The sharp fall on Friday,coupled with the financial trou-ble at the Zee group, had raisedconcerns that lenders would beforced to liquidate their hold-ings.

"If not for the agreement,there could have been anotherround of heavy selling in theZee group shares. Given thecircumstances, the arrange-ment is a win-win for both. Weare hopeful that Zee holds on toits end of the bargain, and soonfinds a buyer to ease the liq-uidity concerns," said a fundmanager.

If the lenders would haverevoked or sold the shares in

the open market, it could haveresulted in a haircut. By doinga strategic sale, there is a highpossibility that the companymight find a buyer at a muchhigher rate, the fund managerexplained.

Shares of flagship firm Zee

Entertainment closed at ~373on Monday, 20 per cent belowits six-month average price.

The confidence fund man-agers and analysts have in Zee'sintrinsic value has helpedimprove sentiment towards thestock.

"Zee operations remain ona strong growth trajectory… seethe stock delivering 19 per centearnings compound annualgrowth rate (CAGR) over FY19-21. With a sharp fall in stockprice, Zee's valuations are com-pelling," said a note by CLSA.

"We revise to 'buy' from'accumulate' citing inexpen-sive valuations, with a new tar-get price of ~490 (down from~535) on 23 times (down from25 times) FY20 estimated earn-ings - a slightly lower multipleafter factoring in the uncer-tainty," said another note byElara.

However, some investorscontinue to be watchful.

"Zee is not entirely out ofthe woods yet. We didn'texpect so much diversion offunds to unrelated businessessuch as infrastructure. MFscan only help to a certainextent. In case there are highredemptions by investors or ifthere is rating downgrade,some fund houses will beforced to act. The whole saga isfar from over," said anotherfund manager.

Rebound in Zee shares helps soothe nervesFirm’s shares rise16%, after a 30%crash on Friday

SHREEPAD S AUTE

Mumbai, 28 January

K Raheja Corporation-pro-moted hospitality chainChalet Hotels is raising moneyat a time when the cycle of lowpricing, led by higher supplyamid muted demand, is turn-ing. The company, which has aportfolio of premium brand-ed hotels operated by globalhospitality brands such as JWMarriott Hotel, is looking tocash in on higher occupancyrates for the sector. The sec-tor, which had witnessed an 8per cent decline in revenue peravailable room over the FY08-15 period on higher supply, isexpected to see higher occu-pancies, a rise in room ratesas well as margins.

Rating agency ICRA, in areport, indicated that whiledemand had ramped up, sup-ply addition had slowed downconsiderably leading to strongrecovery in occupancies inalmost all key markets in the

country. Return of pricingpower across key markets isexpected to be more evidentfrom the next up-cycle fromthe start of 2019, observed ana-lysts at the rating agency.

What distinguishes thecompany from its peers is itsstrong operational perform-ance. Chalet's total incomeincreased by 25 per cent annu-ally over the FY16-18 period. A22 per cent annual rise in hos-pitality revenue pushed up thecompany's top line. The com-pany earned around 92 percent of income from hospital-ity in FY18.

In addition to the revenuegrowth led by favourable loca-tions, strong brand name andpricing, the company has alsobeen keeping its costs both atconstruction as well opera-tional levels low. It is not sur-prising that Chalet's has thehighest operating profit mar-gins among its peers at 38 percent in the last financial year.However, given ongoing

expansion, exchange fluctua-tion, and higher interest costs,net profit has been inconsis-tent across the last three finan-cial years, with losses in FY16and profits in FY17, which con-tinued though much lower inFY18.

Even for the first half ofFY19, Chalet reported losses of~43.7 crore, due to a notionalforeign exchange loss as thecompany also has an exposureto foreign currency borrow-ings (20 per cent of total bor-rowings). The managementindicated the notional losswould get recovered in subse-quent quarters.

Going forward, the expect-ed upswing in room rates androom occupancy, and lowerdebt after IPO should help thecompany. The company seeksto use ~720 crore of the IPOproceeds to reduce its debt pileof ~2,348 crore. This wouldimprove net debt to Ebitdaratio by over 200 basis pointsfrom FY18 level after the IPO.

Now, investors can safelycheck into Chalet HotelsHEALTHY MARGINS For April-September 2018 (~crore)

Ebitda Net Net debt EV to

Revenue margin (%) profit to Ebitda* Ebitda*

Indian Hotels 1,944.2 12.2 3.5 3.3 27EIH 668.4 16.7 36.7 0.9 29Lemon Tree Hotels 255.6 31.1 8.8 7.2 54Chalet Hotels 469.9 27.0 -43.7 8.5 25**Consolidated financials; EV: enterprise value; Ebitda: earnings before interest, tax,depreciation and amortisation; *For FY18 in times; **Post IPO Source: Companies,Capitaline and brokerage reports

ISSUE DETAILSIssue opens Jan 29

Issue closes Jan 31

Issue size (~crore)

950.0 691.2

Fresh issue Offer for sale

Price band (~/share) 275-280

Source: Company

WHAT THE FIGURES SUGGEST One-day % change

Jan 25, 2019 Jan 28, 2019

ZZeeee EEnntteerrttaaiinnmmeenntt -26.43

16.64

Essel Propack -16.08

9.43

DDiisshh TTVV IInnddiiaa -32.74

5.53

ZZeeee LLeeaarrnn -18.49

-7.8

Shirpur Gold Refinery -8.39

-17.54

Siti Networks -5.95

-18.97

ZZeeee MMeeddiiaa CCoorrppoorraattiioonn -9.05

-19.68

Compiled by BS Research Bureau

JASH KRIPLANI

Mumbai, 28 January

The meltdown in Essel group shares on Fridayraised concerns over the loan-against-shares(LAS) model where mutual funds (MFs) are

estimated to have an exposure of ~23,000 crore.According to industry sources, fund houses, in

some cases, have taken exposure to entities with lessthan two times the share cover.

This is lower than what the Reserve Bank of India(RBI) stipulates for non-banking financial compa-nies (NBFCs) that lend against shares.

The RBI stipulates that all NBFCs with more thanRs 100 crore asset size need to maintain a loan-to-val-ue (LTV) of 50 per cent where listed shares are placedas collateral.

An LTV of 50 per cent means that for a Rs 50,000loan, the market value of the collateral shares need tobe Rs 1 lakh. This translates into two times the sharecover.

Experts say that instances of lower share cover canbackfire for fund houses as markets remain in a bear-ish phase. According to sources, the Securities andExchange Board of India (Sebi) may look at the recentepisode more closely and also develop a more robustrisk-management framework, if warranted. Sourcesadded that Sebi asked fund houses to share details oftheir debt exposure to Essel group companies.

If fund houses have higher share cover, theywould have little reason to be worried after the recentcorrection in shares of Essel group companies,

according to experts. “A share cover of 2.5 timeswould have fallen to 1.5 times after a correction of 30per cent. This would still give a higher margin ofsafety to fund houses,” said the head of fixed incomeof a fund house, requesting anonymity.

The reports of Essel group’s alleged link withNityank Infrapower had caused the initial selloff inthe group’s shares on Friday. Shares of Essel groupcompanies fell between 10 per cent and 33 per centduring Friday’s trade. Fears of promoters’ pledgedshares getting invoked led to more selling.

Experts added that the loan-against-shares mod-el has its own set of risks as promoter entity pledgingthe shares doesn’t have any operational cash flows.

“The cash flows come from dividend income orsome upside in equity. If there is no re-financing orroll over, the consequences can be quite severe,” said

another fund manager.According to industry sources, most of the large-

sized fund houses have exposure to the LAS market.For now, concern over fund houses’ exposure to

Essel group through LAS seems mitigated with groupcompanies’ shares seeing a sharp bounce back onMonday.

Shares of Zee Entertainment rose 16 per cent onMonday after the company reached an agreementwith lenders to not invoke the pledged shares. Sharesof Dish TV gained nearly six per cent. Essel group hasalso denied links with Nityank Infrapower.

The lenders have also taken comfort from thepromoters’ call for a speedy resolution through astrategic sale in Zee Entertainment. The lenders havegiven Zee Entertainment three months to find astrategic buyer.

UNDER SCANNERLower share cover can

hit MFs exposed to LASmarket if stock pricessee sharp correction

RBI stipulates loan-to-value at 50 per centor 2-times share cover

Sharp correction inprices of collateralshares can make recovery of dues challenging

Sebi has soughtdetails from MFs ontheir debt exposure toEssel group companies

Zee stock crash casts shadow onMFs’ loan-against-shares modelExperts say instances of lower share cover can backfirefor fund houses as marketsremain in a bearish phase