March 14, 2022

Metal Sector (Weekly Update): Steel prices rise amid cost push and supply disruption from Russia/Ukraine

• Indian HRC prices are now quoting at all time high as March witnessed cumulative price hike of Rs 6,000/t, taking domestic price to c.Rs 74,000/t surpassing last peak of Rs 72,000/t achieved last year.
• India ferro silicon prices inching up (+Maithon Alloy, Sarda Energy): Current ferro silicon prices jumped to Rs 197,500/t vs Rs 145,000/t a month ago. Cost push was the major reason.
• EU to impose ban on Russian steel and related products: EC said it will ban imports of key iron and steel products from Russia.  The move will be positive for Indian mills as it ensures long term export options. Most of the EU players have already stopped buying from Russia.
• Russian material can be resold as Chinese: fastmarket reported that some traders expect, Russian HRC may move by train across the border into China, to be re-sold as China-origin materials to the Asian markets.
• Guinea new Govt halts Rio Tinto’s Simandou iron ore project: Simandou is one of the best grade iron ore (66-68%) and supposed to supply 30mn tpa initially (expected next year) and further has potential to reach 100mn tonnes.
• Update on China steel market: Market sentiments remain positive. Chinese HRC export prices jumped 10% in the previous week, compelling some players to increase exports. Iron ore prices have fallen marginally to US$ 153/t.
• Australian premium HCC coking coal staged highest ever weekly gains of 32% to US$ 666/t.
• Indian steel HRC prices now at 6% discount to China and 2% to Korea/Japan.
• Non-Ferrous – Prices softened: Aluminium/Zinc/Lead/Copper prices fell 10%/4%/3%/3% to US$ 3,472/US$ 3,841/ US$ 2,373/ US$ 10,166 as thermal coal started to soften and some positive signals from Russia-Ukraine talks. Alumina prices were flattish at US$ 450/t.

HDFC Bank: RBI lifts all curbs on HDFC bank, including new digital launches; limited downside risks from current levels, in our view

In the exchange filing during the weekend, HDFC bank has informed that RBI has lifted restrictions on the new digital business-generating activities under its Digital 2.0 program. RBI had already lifted the ban on credit cards earlier which implies that the restriction on loan origination is complete. This is likely to significantly improve the ability to compete in the market. However, the improvement in likely to be gradual as competition has significantly increased in recent quarters.
We don’t see any major concerns on the asset quality front, given the superior underwriting track record and relatively premium customer segment. Note that the bank has been relatively slower in reporting growth in the retail portfolio. The new cohorts originated in recent quarters or post Covid is likely to be significantly better than pre-Covid which implies that the risk on credit cost should be lower than a normalized environment for the bank. The only potential risk could be from an adverse impact from crude price movements on the CV portfolio. The bank holds ~70 bps of contingent provisions, which should help it address any potential asset quality issues.
The recent relative underperformance of HDFC bank vis-à-vis its peers can be explained by – a) Valuation premium had expanded sharply post 2016 as several banks were struggling through their corporate NPL cycle and those banks are seeing a greater preference due to relatively undervaluation, b) These banks have also cleaned their balance sheet and have demonstrated similar asset quality performance post Covid, c) Recovery in growth and path to normalization in RoEs is visible for other private banks as well, d) HDFC Bank’s choice of loan growth towards corporate loans has partly impacted revenue growth. Fee income has slowed as well, e) A fresh look of the current management leading to investors having a wait-and-watch strategy, f) Challenges around tech infrastructure, g) Performance of HDB Finance is a lot weaker than anticipated.
HDFC Bank is one of the most expensive stocks in Indian listed space. The premium valuation is still well justified as it has demonstrated its superior underwriting since inception giving comfort to investors who want to build a strong long term view of this franchise. However, the recent underperformance has caught investors by surprise which should be viewed in the context of the financial cycle that we have seen in the past decade. At CMP, stock trades at ~2.6x book value & ~18x FY24 earnings with likely RoE at 15-16% on consensus estimates. The downside risks appear limited for the bank especially post the recent correction which appears to be largely driven by macro events.

MGL: Proposed VAT reduction on CNG in Maharashtra positive for the stock

In his budget speech, Maharashtra Finance Minister Ajit Pawar has proposed a steep reduction in value-added tax (VAT) levied on compressed natural gas (CNG) in the state. The minister has proposed to slash the existing 13.5 percent VAT on CNG to 3 percent, in an attempt to significantly reduce the CNG retail prices, which are currently at Rs 66 per kilogram in Mumbai. The move will benefit motorists as well as households equipped with piped natural gas connections.
CNG prices in the state have witnessed a marked increase over the last 18 months with the latest price revision coming on January 9, when it was hiked by Rs 2.50 per kilogram. Between February and November 2021, CNG prices in Maharashtra moved from Rs 49.40 to Rs 61.50 per kilogram, registering a 24.50 percent increase in just 10 months. However, despite the proposed reduction in VAT, prices of CNG will vary slightly within Mumbai and outside. This is largely due to the difference in the logistics cost borne by Mahanagar Gas Limited which supplies CNG to Mumbai and its adjoining areas, and retails it from its 278 outlets in the state.
We believe this is a positive move as CNG is a cleaner fuel and is also more cost-efficient. While EVs are a threat to the IC engine based automobiles, Maruti believes that there is medium-term potential in hybrid/CNG vehicles. The beneficiaries of the proposed VAT cut will be MGL and Everest Kanto. The MGL stock has underperformed in past twelve months on account of the sharp rise in gas prices and upcoming revision in APM gas prices in April. In Q3FY22, the company reported sharp plunge in margins, lower-than-anticipated volumes and a provision for trade discount to the OMCs on CNG sales. We remain only moderately positive on MGL as stock valuations are inexpensive at PE of 9x FY23 consensus estimates. Dividend yield is also good at 3%. The company is debt-free and cash rich.

Paytm: RBI directs Paytm Payments Bank to halt onboarding of customers

The Reserve Bank of India (“RBI”) has directed Paytm Payment Bank (PPBL) to temporarily halt onboarding of new customers, via a letter dated March 11, 2022. RBI has observed certain material supervisory concerns at PPBL. Media reports suggest that the ban on PPB has come due to violation of KYC norms. Earlier, a few months back, the RBI had penalized PPB for submitting false information regarding its Bharat Pay bill payment system. The Company has informed that this does not impact any existing customers of PPBL, who can continue to use all banking and payment services without interruption. All existing users of Paytm UPI, Paytm Wallet, Paytm FASTag, and bank accounts can continue to use these instruments, including debit cards and net banking, for payments.
On the business side, Paytm expects the robust revenue growth traction to continue in Q4 and beyond, as it is witnessing significant demand for its offering across business segments and use cases. Monthly transacting users (MTU) have grown to ~69 million up 52% over FY21 and gross merchandise value/monthly transacting users is up by 64% over FY21 levels. Other than the general traction it expect much sharper growth in commerce segment driven by improved flights and train bookings (already above pre-pandemic level), strong backlog of movies to drive recovery in ticketing (allowed 100% occupancy in some markets), and recovery of the inter-city bus travel which has not happened yet.
Paytm is expected to be in red in the foreseeable future. The company is a distant third in UPI transactions after PhonePay and Gpay.  Recent observations and penalties by RBI also doesn’t reflect well on the company’s governance. The stock performance has been the weakest amongst the lot of new-age tech listings. Considering these factors, we would remain cautious on the stock.