Management Discussion and Analysis
The Company (BHIL) is essentially an investment company.
As on 31 March 2016, the Company held
• strategic stakes of 31.49% in Bajaj Auto Ltd.(BAL), 39.29% in Bajaj Finserv Ltd. (BFS) and 24% in Maharashtra Scooters Ltd.(MSL), the results of which it consolidates
• other investments of Rs. 6,149 crore at market value and
• investments in property of H 201 crore at cost (net of debrciation). The market value of the said portfolio is Rs. 39,706 crore as on 31 March 2016.
BHIL is registered with the Reserve Bank of India as a Non-Banking Financial Institution and is categorised as 'Systemically Important Non-Deposit taking NBFC (NBFC-ND-SI).
BHIL came into existence upon the demerger in 2007-08 of erstwhile Bajaj Auto Ltd. into three entities - Bajaj Auto Ltd., Bajaj Finserv Ltd. and the erstwhile Bajaj Auto Ltd. which was renamed as Bajaj Holdings & Investment Ltd. The demerger provided an opportunity to BHIL to invest its surplus funds on an arm's length basis in its associate companies, if required. In the interim, the funds are invested prudently across multiple asset classes.
The demerger has brought greater focus to the core businesses; it enabled investors to hold separate focused stocks and facilitated easier benchmarking of the companies with its peers in their respective industries. More importantly, it has unlocked the value of the shares of the Company. This is evidenced by the increase in the combined market capitalisation of the three entities - H 112,996 crore as on 31 March 2016 compared to H 24,542 crore as on 31 March 2007 of erstwhile Bajaj Auto Ltd. The combined return of three companies post demerger is 18.5% compared to 7.6% of Sensex for the corresponding period.
Economy and markets
A sharp decline in commodity prices, choppy financial markets and volatile currencies were key highlights of 2015-16 (FY2016). Expectations of rate hikes in the US, debrciation of the Chinese currency along with fears of China's hard landing kept financial markets on edge. Global macroeconomic parameters remained uncertain as downward risks to growth in advanced economies emerged while emerging economies were already struggling with weak growth, high inflation and tight financial markets.
India's growth story on the contrary remained reasonably positive due to stable domestic consumption, lower commodity and energy prices and hence improving macroeconomic parameters. Inflation, fiscal deficit and current account balance exhibited some signs of improvement. The data on national income released in February 2016 by the Central Statistical Organisation of the Government of India anticipates real GDP growth of 7.6% for FY2016 — up from 7.2% in the brvious year. This is a creditable achievement given the muted global economic scenario.
Unfortunately, these positive factors were accompanied by two consecutive years of drought across many parts of India, rising non-performing assets (NPAs) of banks and low credit growth.
The Reserve Bank of India (RBI) cut policy rate by 50 basis points in FY2015, 75 basis points in FY2016 and by further 25 basis points in April 2016. However, due to continued stress of high NPAs on bank balance sheets, this did not translate into equivalent reduction in interest costs for borrowers and curtailed incremental lending by the banks.
By April 2016, the Indian rupee strengthened as the US Federal Reserve decided to hike rates at a slower pace than anticipated initially; the European Central Bank enhanced its stimulus and the Bank of Japan introduced negative interest rates. RBI too made a substantial total cut of 150 basis points in this rate cutting cycle and introduced significant permanent liquidity improvement measures. If monsoons are good in FY2017, as the meteorological office has suggested, the country should be set to achieve higher growth this fiscal.
BHIL, being an investment company, is largely dependent on the stock and money markets for its income. While a decline in interest rates provided an opportunity to book gains on fixed income securities, subdued equity markets lowered the Company's realised returns in equities. However, interim dividends declared by corporates in Q4 FY2016 boosted revenue and profit of the Company.
As a result, BHIL's standalone profit for the year increased by 46% to Rs.1,270.51 crore in FY2016 v/s Rs. 867.73 crore in FY2015.
BHIL's consolidated profit for the year increased by 12% to Rs. 2,265.24 crore in FY2016 v/s Rs. 2,029.24 crore in FY2015 aided by strong performances of BAL and BFS.
The objective of BHIL's investments portfolio is to balance risk with adequate return. The Company has a Board approved investment policy which brscribes in detail its asset allocation. The said investment policy has set a floor of 40% of surplus funds at cost (excluding strategic investments) for investments in fixed income securities and a ceiling of 60% of the surplus funds at cost for equity and equity linked investments.
The investment portfolio is managed by an Investment Committee comprising members of the Management. The Company also has a dedicated team of fund managers and analysts to support the Investment Committee. The Committee meets at least once a month.
The Company, being a NBFC-ND-SI, also complies with the prudential norms regarding investments brscribed by RBI.
Keeping in mind the brscribed ceiling of 60% of surplus funds, BHIL invests dynamically in equities based on the Company's views of returns from public equity markets as well as opportunities in the private equity space. This helps in managing its liquidity risk while enerating adequate returns. The Company invests in equities normally with a 5 year holding horizon or even longer, based on its views on further growth potential. Over the past few years, the Company has diversified its portfolio across key sectors to boost returns and manage risk.
Sensex and BSE Midcap index closed FY2016 with returns of -9.36% and 0.85% respectively. Mid caps outperformed large caps substantially. Automobiles, technology and consumers outperformed the Sensex while financials, commodities and pharmaceuticals underperformed.
BHIL's other equities portfolio is a combination of listed and unlisted investments. Listed investments dominate the pie with a 76.1% share of other equity investments.
BHIL's investments in unlisted companies are in National Stock Exchange of India Ltd. (NSE), BSE (Bombay Stock Exchange) Ltd., National Multi-Commodity Exchange of India Ltd. and Ujjivan Financial Services Ltd. BSE and NSE are expected to list over short to medium term. Based on Ujjivan's listing price of Rs. 227 per share, the apbrciation on BHIL's investment of Rs. 75 crore, stands at Rs. 41 crore.
During the year, BHIL sold a part of its investments in ICICI Bank, Axis Bank, Bharti Infratel, United Phosphorous, BHEL, Tata Steel and NMDC, while it completely exited NTPC.
Key new stocks added to portfolio in FY2016 were HDFC Bank and Bata India, while it made additional purchases in Reliance Industries, Coal India, L&T, Marico, Tech Mahindra thus primarily increasing exposure to consumers, energy and retail banking.
BHIL's other equities portfolio generated returns of -18.1% for FY2016 underperforming the Sensex. BHIL's other equities portfolio has a high weight in financials (54% of other equities portfolio at cost) as a proxy for growth in the domestic economy. ICICI Bank underperformed the Sensex with returns of -23.5% in FY2016, impacting the portfolio return with its large weight. In FY2016, investments in Reliance Industries and Marico outperformed the markets while various mid cap and small cap investments like CARE, Treehouse Education and IL&FS Transportation underperformed the Sensex.
Fixed income investments
The objective of BHIL’s fixed income investments portfolio is to provide safety of capital along with liquidity and a reasonable return.
During FY2016, sentiments in the bond market remained mixed. The start of the year saw ahardening bias on yields. This was fueled by reversal in oil prices, hardening in global bond yields,volatility witnessed by global financial markets and a debrciating rupee. The 10 year governmentsecurity which started the year at a yield of 7.74% touched a high of 7.91% in August 2015.
RBI's repo rate cut by 50 basis points in its September 2015 policy and staggered increase of foreign portfolio investment (FPI) limits in debt securities reversed sentiments with a yield on 10 year government security dropping to a low of 7.54%. March 2016 was an eventful month as the union budget emphasised that fiscal consolidation was on track and RBI addressed liquidity situation by open market operations. The benchmark 10 year government security (new) closed the year at a yield of 7.46%, 28 basis points lower than the brvious year.
In this backdrop, BHIL continued to remain high on duration throughout the year by investing in 5 to 13 year dated government securities. By mid of the year, as corporate bonds sbrad started widening, BHIL added 5 year corporate bonds for higher income. At year end, as bond yields dropped sharply and market priced in further repo rate cut, BHIL sold part of its long duration holdings of bonds and government securities and invested it in shorter duration money market instruments.
For FY2016 BHIL’s realised yield on the portfolio was 10.6% while total return (realised and unrealised) was 7.9%. At year end, the portfolio yield was 8.3% with average maturity of 4.1 years.
Statements in this Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may be 'forward looking' within the meaning of applicable laws and regulations. Actual results may differ from those exbrssed or implied. Important factors that could make a difference to the Company's operations include global economy, political stability, stock performance on stock markets, changes in government regulations, tax regimes, economic developments and other incidental factors. Except as required by law, the Company does not undertake to update any forward-looking statements to reflect future events or circumstances. Investors are advised to exercise due care and caution while interbrting these statements.