Myanmar faces wider biz fallout after Kirin retreat
The index closed with EPS of ~361, down from the recent high of around ~378
Myanmar’s political upheaval is prompting global firms from Japan to Thailand to dial back operations in the country, spurring concern about a widening business fallout.
From beer maker Kirin Holdings to an early backer of gaming firm Razer, companies and investors are weighing the impact of a military coup that’s thrust the once- thriving nation into a state of emergency. The turmoil is prompting multinationals like Thailand’s biggest industrial developer to delay investment plans, a harbinger of things to come should the chaos deepen.
Western nations are applying pressure on the newly installed military government of the Southeast Asian country, once regarded as greenfield territory for everything from oil and gas to leisure resorts. With the US reiterating plans to renew sanctions, it could cause a rippling effect among businesses, threatening $5.5 billion in foreign investment in a country that just a few years ago was on the path to democracy.
Bordering the massive markets of India and China, Myanmar has abundant natural resources, including oil and gas, gold, silver and precious stones. The population
of about 57 million people is greater than South Korea’s, and not far off Italy’s. Among recent foreign deals, CVC Capital Partners reached an agreement in December to buy Myanmar’s biggest telecommunications tower company for close to $700 million. The deal for Irrawaddy Green Towers is the second-biggest for the country, trailing only the acquisition of the Myanmar Distillery group by a unit of Thai Beverage PCL.
Nations with the most at stake from the instability include Singapore, Myanmar’s largest foreign investor, accounting for almost 34 per cent of approved investment by dollar value, according to a World Bank report in December. Kirin ended its JV partnership with the nation’s largest brewer Myanma Economic Holdings, which has ties to the military.
After a bump-up in the first half of the thirdquarter earnings season, the Nifty50 index earnings per share is once again on a downward trajectory after a clutch of index companies reported a YOY decline in earnings this week.
The Nifty50 index closed Wednesday with trailing earnings per share (EPS) of ~361.3 down from its recent high of around ~378 early this month. The index on Wednesday closed at 15,106.50, down 2.80 points or 0.019 per cent.
The index had started the current earnings season with EPS of around ~364.
State Bank of India, Mahindra & Mahindra, Bajaj Finance, Axis Bank, and Indusind Bank reported a YOY decline in their earnings, pulling down the index’s EPS.
The recent decline in index EPS, coupled with the post-budget rally, has led to a spike in the index valuation. The index trailing price-toearnings multiple touched a new high of 42x on Monday; it closed on Wednesday with a P/E multiple of 41.8x.
Last month, the market had peaked at a P/E ratio of 40x and the valuation subsequently declined to a twomonth low of 36.6x on the eve the Union Budget.
As many as 39 Nifty companies have declared their results for the December 2020 quarter (Q3FY21). Together, these companies reported a record net profit of ~1.07 trillion in the third quarter, up 32.8 per cent YOY. The combined revenue of these companies was up 1.7 per cent YOY to around ~10.7 trillion. It was the first YOY rise in index companies’ quarterly revenues, after a decline for three consecutive quarters.
The surge in corporate earnings in the past two quarters is, however, yet to fully compensate for the decline in earnings during the March and June quarters of 2020.
As a result, the index companies trailing 12-months (TTM) earnings are still down on a YOY basis. The index companies in the sample reported TTM earnings of around ~2.74 trillion in the December 2020 quarter, down around 5 per cent from all-time high TTM earnings of ~2.88 trillion in December 2019.
This is important as stock valuation ratios, such as P/E multiple, are calculated on the basis of TTM earnings and EPS. However, there is no straight conversion into the combined earnings of index companies and index underlying EPS due to a large variation in the index weighting of various companies.
Among the index firms, the biggest jump in net profit has been reported by companies in the metals & mining sector, oil & gas firms (ex-reliance Industries), cement firms, and public sector banks.
For example, Tata Steel is the single biggest contributor to the YOY increase in index earnings during the quarter, so far, followed by Indian Oil, JSW Steel, Bharti Airtel, and Bharat Petroleum. Together, these 5 companies account for half of the incremental rise in index earnings during Q3.
These companies, however, have a lower weighting in the index, limiting their overall impact on index overall earnings and EPS.
The index earnings are dominated by RIL, IT companies, private sector retail lenders, and FMCG companies. Bulls, however, expect Nifty earnings and EPS to a touch a fresh high by the end of the March 2021 quarter.
“The Q3FY21 earnings season has maintained the momentum of the Q2FY21 results season with continued big beats and upgrades. The corporate commentaries have been encouraging across sectors and companies. We are now building in Nifty EPS growth of 15 per cent for FY21E,” write analysts at Motilal Oswal Financial Services. Nifty companies had ended March 2020 with EPS of around ~391. A 15 per cent increase in EPS in FY21 will take it to around ~450 — similar to the level at the end of Q3FY20 earnings season.
This, however, will require around 25 per cent jump in the index earnings from the current level.
Some analysts find this target to be too stiff, given the likely end of the pent-up demand across the manufacturing sector and growing margins pressure due to a sharp rise in metal and energy prices.
“A recovery in corporate earnings are expected to be far slower and may take longer than what many analysts believe,” says G Chokkalingam, founder & MD Equinomics Research & Advisory Services.