Trade Talk | JPMorgan To Add Indian Government Bonds To Its EM Index
Transcript
00:00 Good morning and thanks so much for tuning in. You're watching Trade Talk. My name is
00:03 Alex Matthew and this is BQ Prime. It's the end of the trading week. It's been a curtailed
00:08 trading week and we've seen heavy selling across the board in the Indian equity markets
00:12 so far this week. We'll have to see if that continues. For the nifty 50, you've seen cuts
00:17 of over 400 points so far this week and cuts across the board, particularly in the banking
00:24 index. Now, all of that is the setup, of course, but there's a bigger story to talk about and
00:31 that has emerged overnight and that has to do with the inclusion of Indian government
00:36 bonds in the JP Morgan index, the emerging markets index. And this will take place in
00:42 June next year. There are several implications in terms of capital flows into the country.
00:48 Let's start with that story because that could well have a sentimental impact for the Indian
00:53 equity markets. Of course, it's expected to have a bearing on the government bond yields
00:57 right at the start in trade today. But Vishwanath Nair is joining in to give us some perspective
01:02 on why this took so long and what it implies now that it has come to pass. Vishy, morning.
01:09 What can you tell us about the context and the way forward?
01:11 Morning, Alex. So, yes, it's been a long time waiting. I heard some analysts talking about
01:19 2020 is when this discussion had originally started. And since then, this debate has been
01:26 going on of including India in the emerging market index, especially JP Morgan, which
01:31 is one of the more popular names out there. Already, we have some of our neighbors, you
01:38 know, got China, Indonesia, Malaysia, people within the Southeast Asian economies. Some
01:43 of the larger economies here have already been part of this index. And now, of course,
01:47 JP Morgan has said that Indian government bonds will also be included. This announcement
01:53 says that this inclusion is going to be spread over 10 months between June of 2024 and March
02:00 of 2025. So, over time, the expectation is that up to 10 percent, that's the maximum
02:05 weight that India will carry. Analysts are already predicting about 20 to 30 billion.
02:11 It's a wide range, but that's the kind of inflows that people are anticipating because
02:16 of this inclusion. Remember that, you know, investors or managers of investment portfolios
02:23 so far did not have a reason to buy the Indian government bonds as they were buying, as far
02:29 as they were buying the other Southeast Asian economies. So now, because of this inclusion,
02:33 it becomes part of this broader index, and that spurs investment potential as far as
02:38 the Indian government bond is concerned. You know, in the past, there have been discussions
02:43 about the Indian government sort of tinkering with the tax structure for the foreign investors.
02:48 So far, the Indian government has not done any of that. But still, this inclusion is
02:54 definitely a big one for the bond markets for sure.
02:57 Okay. All right. So, immediately, you could see a bit of a pop in. Of course, Lakshmi
03:02 was speaking to us, Lakshmi Iyer of Kotak was speaking to us a short while back, and
03:06 she said there could be an immediate sentimental impact on the yields today. But this is something
03:11 that will pan out from June next year, as you pointed out. And we are going to touch
03:16 base with a few more experts on this issue over the course of the day. But just to understand,
03:21 as things stand, one would assume that this inflow will start when the inclusion happens
03:25 in June next year. It would obviously have a bearing or factor in into the government's
03:31 borrowing program as well because of this kind of demand that will flow in.
03:36 Yeah, you're right. So, there will be definitely an impact within the government's borrowing
03:41 plan. That surely helps. But as far as the broader markets are concerned, there's something
03:46 that Lakshmi mentioned, as well as some of the other experts that I've had a chance to
03:49 speak with briefly because it's still early in the morning. But what they were saying
03:53 is that, you know, you will still see a lot more movement within the bond market being
03:58 spurred because of macro conditions within the country as well as from a global context.
04:05 We've had the US Fed this week mentioned that we're still going higher for longer. So, their
04:10 expectation of a rate cut is getting pushed back further into 2025. And that's, FY25 I
04:16 mean, and that's, of course, going to play a significant role as far as the bond movement
04:24 is concerned, yield movement is concerned. Yes, there is definitely going to pop, as
04:29 you said, a short-term sort of movement within the yield. But then you will see, you know,
04:36 inflation domestic as well as international crude oil prices specifically playing a more
04:42 significant role as to what the long-term movement within the indices, within the bond
04:47 yields are concerned. Absolutely. Thanks so much, Vishy, for summing
04:50 all of that up for us. And viewers, reminder, this is just the initial setup and we will
04:56 be visiting this over the course of the day to tell you more about the implications for
05:01 the Indian bond markets as well as for the government's finances and everything else
05:06 that you need to know about this issue. For now, let's turn to another big story. And
05:10 this is news from Deal Street. There's a large deal that has just been announced in the pharmaceutical
05:17 space, Denmark Pharma selling a 75% stake in its life sciences subsidiary to Nirma.
05:25 We'll get you all of the contours of that and we'll also help you understand what it
05:29 means for all of the parties involved. We're going to be joined by an analyst as well on
05:33 the show. But first, let's go to Varsha. Varsha is joining in to give us the key contours
05:38 of the deal. Varsha, good morning. What can you tell us about this deal that has been
05:42 announced? As you rightly said, Denmark Pharmaceuticals
05:44 has agreed to sell 75% stake in its life science subsidiary to Nirma Limited for Rs. 5,651
05:51 crore. Now, Denmark Life Science report a revenue of Rs. 2,161 crore and a net profit
05:57 of Rs. 4,67 crore in FY23. The company is valued at Rs. 7,684 crore as of Thursday's
06:04 closing price. Now, the pharma company will sell shares of Denmark Life Sciences at Rs.
06:10 615 apiece, a 1.8% discount to the unit's close of Rs. 626 on Thursday. Now, Denmark
06:17 Pharma will own 7.84% after the transaction. The deal is subject to customary approvals
06:23 and is expected to close in FY24. Now, Nirma will make the mandatory open offer
06:29 to the public shareholders of Denmark Life Sciences at Rs. 631.20 apiece for an additional
06:35 of 17.33% stake. Now, that's close to Thursday's closing price of Rs. 627.10 apiece. Now, total
06:43 consideration for acquiring company stands at Rs. 1,343 crore. Now, Glenmark, its subsidiary
06:49 and Nirma have agreed to certain non-compete and non-solicit agreements for a specified
06:54 period. Now, Kotak Investment Banking acted as the exclusive financial advisor to Glenmark
07:00 Pharma and its subsidiary, while S&R Associates Trilegal acted as legal advisors. And Khaitaan
07:06 & Company, KPMG and DAM Capital advised Nirma Group on the deal. Now, why is the sale happening?
07:12 So, company looks to sharpen its focus on its key dermatology, oncology and respiratory
07:16 therapies and seeks to unlock value for repaying the debt. Now, transaction helps company to
07:22 achieve long-term goals, enhance shareholder value and the stake sale will improve overall
07:26 return ratio profile. Also, there is no plan to deploy capital and the goal is to stay
07:31 net cash positive. And as mentioned, the company's total debt will get extinguished after the
07:36 deal. Now, Glenmark Pharma has a gross debt of Rs. 4,600 crore against net profits of
07:42 Rs. 5,000 crore from the sale. Now, Glenmark Life Sciences is in the business of developing
07:48 and manufacturing APIs in the therapeutic areas. Also, there are, so normally when two
07:55 companies does business, so there are strategic advantages involved in this. So, will this
07:59 transaction affect Glenmark Pharma in a negative way? So, Glenmark buys less than 15% of its
08:04 API from Life Sciences subsidiary and plans to become a major API manufacturer itself.
08:10 So, the sale will, however, affect revenue in the short term, but company expects double
08:15 digit growth within 4 to 6 quarters. As part of the deal, Glenmark Pharma has agreed to
08:21 procure API from Glenmark Life Sciences for a period of 5 financial years with effect
08:28 from April 1, 2024. Also, what are the long-term goals of Glenmark Pharma if we consider, so
08:34 they target high double digit CAGR in Europe and rest of the world markets. Also, they
08:41 want to generate two-third of consolidated revenues from branded products and company
08:45 is expecting EBITDA margins improvement on account of lower R&D expenditure also.
08:51 Alright. Alright. So, quite a lot to take into account here. Varsha, thanks for bringing
08:56 us those updates. In fact, let's take this ahead with the expert that's joining in, Abdul
09:02 Kadar Puranwala, who's joining in from ICICI Securities. Abdul, thank you so much for taking
09:08 the time and we've hopefully set the context for this conversation with you. Three entities
09:13 at play, the seller, of course, the entity that is being transferred and the buyer, all
09:19 three listed and all three with investors very keen to understand what the implications
09:24 are. What is your first reading of this deal? Yeah, hi. Good morning. So, yeah, clearly
09:31 from a Glenmark Pharma perspective, it is definitely going to help them to retire the
09:36 debt which as on FY23 fiscal ending was close to 4,347 crores. So, part of this transaction,
09:48 they will be receiving slightly over 5,600 crores from the 75% stake divestment. Additionally,
09:55 there is Glenmark Life Sciences also planning to declare an interim dividend of close to
10:02 22.5 rupees. So, net net, I believe, slightly over 5,800 crores will be the gross inflow
10:11 to Glenmark Pharma, which would entirely go towards the repayment of the debt and they
10:16 would turn net cash positive in FY25. So, yeah, quite positive on the Pharma side. On
10:25 the Life Sciences end, again, they are pretty much safeguarded because the supply agreement
10:30 with Glenmark Pharma largely remains intact for five years. So, Glenmark Life Sciences
10:37 as of now gets close to 30 to 33% of their API revenue from Glenmark Pharma and that
10:44 remains intact. Also, the Pharma entity will help the Life Sciences entity to scale up
10:51 their existing business, which predominantly was delivered through the platform of Glenmark
11:00 Pharmaceutical historically. So, that kind of an agreement in place, I don't see an immediate
11:06 impact to the Life Sciences business as well because of the change in the peritage. Talking
11:12 about Nirma as a group, I mean, quite diversified firstly, but in terms of pharmaceuticals,
11:21 they have also acquired a couple of entities in the past. The magnitude of this one is
11:26 going to be quite large as a whole. But the promoter itself being a chemist, I think this
11:33 transition could be a little smooth. On the Life Sciences unit, again, it's quite professionally
11:39 managed. So, the transition should be quite smooth.
11:42 Okay. The question then is, with this development, of course, and this is something that is expected
11:48 to be completed in the current financial year itself, Abdul. Now, for Pharma, as my research
11:54 analyst was pointing out, there is expected to be an implication in the revenue growth,
12:00 at least for the short term, which could get figured out in four quarters' time. All of
12:05 these developments taken into account, would you change the rating on any one of these
12:11 counters? Is Glenmark Pharma a better buy at this juncture considering that it will
12:16 retire all that debt? We have Glenmark Pharma under our active coverage
12:25 already. On the Pharma side, yes, the debt retirement will happen and that will be because
12:36 of the divestment of what they are doing. So, the impact on the top line would be close
12:40 to 10% cut in what we are building for FY25 on the revenues. At the EBITDA level, the
12:48 Life Sciences unit had a slightly better EBITDA margin. If we check fiscal '23, they had
12:54 EBITDA margins of close to 30% as compared to 17.5% what the Pharma entity had reported
13:01 on a consolidated basis. So, due to that, the EBITDA implication, the EBITDA cut would
13:07 be between 17% to 18%. Though, there would be some cost savings in terms of the interest
13:14 in the depreciation cost, which would be because of the low debt and the assets which move
13:20 out gradually. So, due to that, the implication on the profits may not be that severe. There
13:26 is some portion of the minority interest also, what Glenmark has been reporting in their
13:32 report. So, net net, at a profit level, maybe the impact should be less than 3% to 5%.
13:41 So your final rating on the three counters, do you have coverage on Nirma, for example?
13:46 And what are your ratings? What are your target prices?
13:51 So I covered Nirma Pharmaceutical. We have a sell rating with a target of 63 rupees.
13:57 So, if we have a post-debt divestment, what will happen? We believe the broader trigger
14:04 for re-rating to happen here in terms of our estimates and rating change, it will be largely
14:12 dependent on the way the R&D costs have been managed. And certain news flows earlier were
14:19 related to the divestment of Econos. So, if that happens, that would be quite EPA secretive
14:27 as well as can lead to a potential upgrade in our ratings as well.
14:32 Thank you so much, Abdul, for joining in, for giving us that perspective. Certainly
14:36 has been an insightful conversation. All right, now, let's turn attention slightly away from
14:42 the stock specific action and indeed the inclusion of India in that bond index and talk about
14:48 geopolitics, because the back and forth between Canada and India has been going on for some
14:55 time. There have been developments overnight, which seemingly has complicated the matter
15:00 even further. To put all of that into perspective and talk about the possible ramifications
15:05 for the Indian equity markets, Tamannaah Inamdar is joining in. Tamannaah, good morning and
15:12 welcome to the show. What can you tell us about the context, the current context and
15:17 the way forward possibly? First of all, great to be on the show with
15:19 you, Alex. And hello to all of the BQ Prime viewers. Great to be back in these studios
15:26 and on a big day for the Indian markets. And of course, the big story overnight has been
15:32 India-Canada once again, because Justin Trudeau, the Canadian Prime Minister, has doubled down
15:36 on his allegations that there was an Indian involvement in the killing of Sikh separatist
15:41 Nijjar in Canada on Canadian soil, something that India has denied and said, show us the
15:47 proof. But he's reiterated these allegations. There have been some noises from the White
15:52 House as well, saying that, you know, we see you, but let's go ahead with the investigations.
15:58 Meanwhile, the big question on everyone's mind from the last couple of days and actually
16:02 the start of this week has been, is this going to have an impact on Indian markets? The broad
16:08 answer is no. In fact, there was a quote on wires from an Indian official saying that
16:13 they see no reason for Canadian pension funds to back out of India. It's a better return.
16:18 It's a long-term investment. And that really is the crux. Everything depends on how Canadian
16:23 pension funds respond. Now, data shows there's about 1.7 lakh crore rupees of Canadian money
16:29 per se invested in Indian equities. And that doesn't seem to be going anywhere right now.
16:35 Broad picture, very quickly, Canada accounts for about 0.5 percent of Indian FDI. So it's
16:42 not going to move the needle too much at any point. Stock-specific, if you have to look
16:46 at something, then perhaps stocks like Zomato, NICA, Paytm, companies in which there is a
16:54 fair amount of investment of Canadian funds. And that's pretty much it. But obviously,
16:59 bigger fish to fry in the markets this morning before trade, Alex, and maybe the Canada story
17:04 is subdued. But you never know. We'll have to see if there's retaliation over the next
17:09 24 hours, if at all, to India suspending visas for Canadian citizens.
17:14 No, certainly. And in fact, conversations that you had with market veterans, one in
17:18 fact, I believe Nirmal Jain pointed out the fact that investors are savvy. Investors know
17:23 the difference between business and politics. And that has fanned out as of now. We'll have
17:28 to see if that continues. Thank you so much, Tamanna, for giving us that perspective. All
17:31 right. There you have it. Another big story, but may not be the biggest headline, as Tamanna
17:37 pointed out this morning. Let's talk about stock-specific action then. And we've got,
17:43 as usual, a lot of stocks to talk about, a lot of stocks in the news. Himansh is joining
17:48 in with the first list of stocks. And Himansh, what do you have on your list today?
17:52 Hi. So, from the broader market as well as from the VFSI pocket, VFSI pocket, mainly
17:57 the headlines are investment-related. So, ICICI Bank, the private lender, will buy 9.99%.
18:04 So just about 10%, which is where the regulatory announcements or the SEBI has to be informed
18:10 here at, is going to be taking up 9.99% stake in Quantum Corp Health Private for a stake
18:17 acquisition of almost 5 crores. The acquisition is expected to be completed by October end.
18:23 Now, Quantum Corp Health is a healthcare services platform aggregator with services like pre-employment
18:30 health checks, annual health checks, occupational health centers, and ancillary services for
18:35 enterprises. The company had a revenue of about 15-16 odd crores in FY23 and reported
18:40 a profit of 64 lakhs. Then moving on to LIC, the company decreased its shareholding in
18:45 oil India from 11.73% to a little less than 10%. And this gradual decrease of over 2%
18:54 has been over a period of over 5.5 years. And transaction value is based on an average
18:59 cost per share of close to Rs. 260. The company also increased its shareholding in Gujarat
19:04 Gas from 4.98 to 5.01, which is very marginal. The acquisition of shares was done on an average
19:11 cost of about Rs. 447. Then we have Canfin Homes, where the board of directors are scheduled
19:17 to meet on Wednesday, September 27 to consider the issuance of non-convertible debentures
19:23 for up to Rs. 4,000 crores. So this is big and if it passes through, then it will be
19:28 a big move for the company. HDFC Bank has informed that the erstwhile HDFC Limited sold
19:36 almost 0.18% stake in Hindustan Oil Exploration and HDFC Bank also post-merger sold a little
19:43 over 2%, so collectively 2.22% stake sale that we are seeing there. Vidanta, the board
19:48 has approved raising of Rs. 2,500 crores worth of non-convertible debentures. So, 1 lakh
19:54 each and 2.5 lakh debentures that are being issued. Lastly, we have Suntec Realty, where
19:58 IFC and Suntec Realty. So, the World Bank arm is joining Suntec Realty, the real estate
20:04 developer to invest up to Rs. 750 crores to develop over 12,000 housing units in Mumbai.
20:10 These are expected to be more sustainable and more green compared to other houses taking
20:14 20% less. So, it's a great move for the company and we'll see how these projects materialise
20:18 in the coming time.
20:19 Certainly. Alright. Thanks so much, Himansh, for bringing us those updates. A lot to take
20:23 into account. But we've also got Saloni joining us with her list of stocks. Saloni, good morning.
20:28 What's on your list today?
20:29 Good morning. So, first, we've got two cement companies. So, Ultratec and India Cement.
20:34 So, Ultratec acquired 74 odd acres of land in Andhra Pradesh from India Cement for a
20:39 concentration of Rs. 70 crores. Then we've got SJVN. So, the government will exercise
20:45 its green shoe option of 2.46% stake or 9.66 crore shares for the offer for sale given the
20:51 over-subscription in the issue. So, this is in addition to the base issue size of 9.66
20:56 crore shares. So, accordingly, the total offer size will be up to 19.33 crore equity shares
21:02 representing 4.92% of the total paid-up equity. Then we've got IdeaForge that received an
21:08 order to supply 400 surveillance copters with accessories to strategic marketing for a broad
21:13 concentration of Rs. 58 crores and the time period by which the order is to be executed
21:18 is 12 months. And lastly, we've got RVNL. So, the company has formed a joint venture
21:24 with Tractors and Towers Infratec to construct a 6-lane Greenfield-Varanasi-Ranchi-Kolkata
21:30 highway in the state of Jharkhand. So, on a hybrid annuity mode and RVNL's stake in
21:35 the joint venture is 49% and the total project cost stands at roughly about Rs. 1,270 odd
21:42 crores.
21:43 There you have it. So, thanks so much, Saloni, for bringing us those updates. Let's quickly
21:46 take you through the next and the last part of this show, which is a check on the primary
21:52 markets. There is a new issue to talk about and we've got Vaibhav Jewelers that is in
21:57 focus and Mika is joining in to tell you more about that. Mika, what do you have for us?
22:01 Good morning. So, Manoj Vaibhav Gems and Jewelers will launch its Rs. 270.2 crore initial public
22:08 offering today. The South Indian jewellery brand will raise the funds via a Rs. 210 crore
22:13 fresh issue and a Rs. 60.2 crore offer for sale, which will offload around 28 lakh shares.
22:19 The fixed price band for the issue is set between Rs. 204 to Rs. 215 per share. In the
22:24 OFS segment of the IPO, only one promoter, namely, Gandhi Bharata Malika Ratnakumari
22:29 HEO, will be the sole participant, selling all the shares. The proceeds will be used
22:34 for the CAPEX and inventory cost for setting up eight new proposed showrooms. About Rs.
22:39 40 crores are estimated to be deployed in FY24 and Rs. 129 crore in FY25. The remainder
22:45 funds will be used for general corporate purposes. A little bit about the business, also known
22:49 as Vaibhav Jewelers. The company is a regional jewellery brand that offers gold, silver,
22:53 diamond jewellery and precious gemstones. In FY23, gold jewellery constituted 89% of
22:58 its total revenue. The company operates through retail showrooms and through the website and
23:02 serves the economic segments of two main states, Andhra Pradesh and Telangana. It has 13 showrooms,
23:09 including two franchises and are spread across eight towns and two cities. And one of the
23:14 main aims of the company is to focus on the rural market because it identifies that as
23:19 a substantial contribution for the retail segment. In terms of financials, the company
23:23 has witnessed a 41% growth from FY21 to FY23. And its EBITDA has almost doubled in this
23:28 time period with its EBITDA margins at 7% in FY23 versus 4% in FY21. And furthermore,
23:35 the company's net profit has also tripled from Rs. 20.74 crore in FY21 to Rs. 71 crore
23:41 in FY23. Alright, so another jeweller hitting the market. Thank you so much for bringing
23:45 us those updates, Mehika. And that brings us to the end of this edition of Trade Talk.
23:50 It's been a pleasure bringing it to you. Lots more coming up in just a bit. Most importantly,
23:54 there's another chat lined up on the inclusion of the Indian government bonds in the JP Morgan
24:00 index. Watch out for the implications not just for the equity markets but also the bond
24:05 markets today. Stay tuned. This is BQ Prime.
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