This is the third post in our quarterly update series for Q4 FY20.
In this post, we’re sharing the latest updates of the stocks from our watchlist. Please don’t treat this as a buy recommendation. We find these businesses interesting and we may build position (or buy more of those that are already in our portfolio) in them in the future. The purpose of this post is to bring clarity to our understanding of the businesses we are tracking. We make our notes on the quarterly results and conference calls. Putting it up here makes it easier for us to refer them at a future date.
You can see the earlier updates here.
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Please click on the read more button for more details on each stock.
HDFC AMC is the leading mutual fund house in India. It is the market leader in actively managed equity funds space and a trusted mutual fund provider for individual investors which is evident in their high individual account numbers and AUM. The company had a muted quarter due to an acute fall in the market. Moreover, the company had to take an MTM hit on the P/L due to their exposure to the Essel group. The company is planning to contain cost by controlling discretionary expenses to tide over the uncertain period ahead in the stock market. Given the high exposure in equity funds and more so in the case of midcap and small-cap funds, HDFC AMC may have to face a temporary hit in the revenues. It remains to be seen how the COVID-19 situation will unravel and how it will continue to affect the investment sentiments in India. However, given the company’s strong past track record and its leadership position in the industry, the medium and long term outlook for HDFC AMC remains intact.
MHRIL is the leading vacation ownership company in India. It has a unique business model where the company funds its Capex from customer’s advance money. Because of this model, they are in a much better position against other hotels in terms of Balance Sheet strength. The cash of around 800 Cr on the books gives them the comfort to tide the storm of COVID. However, member additions and occupancy will take a hit in the current scenario. But, unlike other travel and hotel companies, survival is not a problem for them. However, if they can be a little aggressive and use this cash in buying out good properties at bargain prices in the current COVID pandemic, it would give them a sustainable advantage. Even though travel and tourism is a sector which seems to take a long time to recover and come back to normalcy, MHRIL has the firepower (read Balance Sheet strength) to make some interesting moves. Let’s see if the management is bold enough to take some aggressive stance or wait for things to normalize before making any move. Meanwhile, the stock is trading at a very attractive valuation compared to its replacement value.
Piramal Enterprises is facing the heat of the challenging economic environment and downturn in the real estate sector. Even though the pharma business is doing well, the problems of financial business are dragging their overall performance. The company is constantly working on improving the liquidity condition of its Balance Sheet. They are in advance talks of selling a stake in the pharma business which can be partly used to retire debt in the pharma business and partly to improve the liquidity of the financial business. In this period of the pandemic, how the company adapts to the new environment remains critical. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out, particularly in the real-estate lending space. But looking at the valuations, it seems like near term worries are outweighing the long term prospects for the company in investor’s minds.
SBI Life Insurance
SBI Life is one of the front runners in the life insurance industry in India. The company has done well to establish itself as the biggest private insurance company in India in terms of AUM. The company has seen a big drop in investment income due to the fall in the investment portfolio from the fall in Indian equity markets. The focus of the management remains to maintain the company’s excellent cost structure during the upcoming economic down period. It remains to be seen whether the situation ahead unfolds within the company’s expectations or whether we may see more uncertainty arising from COVID-19. Nonetheless, given the company’s market positioning, its emphasis on cautious capital allocation, and the rapid proliferation of the company’s products through digital channels, SBI Life remains one of the most preferred life-insurance companies in the country.
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