India Morning Report: Market correction sows signs of split down the middle?

English: Human Capital Investment Model!!
English: Human Capital Investment Model!! (Photo credit: Wikipedia)

The correction from yesterday’s opening highs continued into Tuesday, as markets have opened with Banknifty below 12000.

What has transpired is that the correction and the realisation of the individual mixed fortunes of investment sector favorites like L&T and BHEL have combined with a strain of distraction from the recovery as investments into the real economy continue to lag and the same has seeped into the other Capital investment beneficiaries including drilling and project engineering stocks like ABAN and others, forcing the markets into a rumination on whether markets will resume any bullish candles in the remaining days of the week settling in at 6350 levels for most of the interest additions till mid series. Pressure on markets will however ease as Put Call Ratios trundle up on every such small reaction and saturated markets will only unwind shorts. Thermax is definitely on a stronger wicket compare to other Capex companies

The FII portfolios had added $5 bln of flows in the market rally since September, all being attributed to a BJP vote and change in government since Sunday but the production data coming towards the end of the week and the RBI rate hike designs may likely be sullying the recovery for the markets. The Fixed Income yields are down again to 8.88% after showing the strong surprise in splitting from a strong rupee back into the historic strong Currency /Bond markets stream at 8.88% yields after Rupee also lost most of the gains at 61.25 in the morning’s trade.

The RBI’s cause to not live with Inflation seems surprising as also the increased likelihood to get the MSF higher to 9% in next week’s announcement with a corresponding 25 bp hike. However as Rajat Monga points out in CNBC TV18 snippets, the banks are quite comfortable with the current liquidity given the policy rates and the bond markets at 9%

NTPC struck 10% lower after CERC guidelines announced take Power Reform to a new level. NTPC has been utilising the gap period making up for unavailable guidelines by showing tax activism towards consumers which has been hit b the regulator primarily as it also moves towards Generation based incentives

CERC reforms have hit ancient contract ridden NTPC which continued to charge differential tax rates to customers while paying lower rates at a much later time , an arbitrage blocked by new CERC guidelnes. Distcos will not be impacted as much with Hydro projects enjoying a 35 year useful life along with the Distcos and Powergrid will be connecting the South grid adding Power to shortage marred Andhra and TN

Comment period lasts till Mid Jan for these guidelines whence other clauses impacting the Power companies will be clarified but do not impact the ROE assured by CERC for 12% on older PPAs and up to 16% on newer pricing including PPAs

English: Image depicting Central Electricity R...


India Morning Report: Unfolding Political Drama alienates Capital investment opportunities

English: Map of the British Indian Empire from...
English: Map of the British Indian Empire from Imperial Gazetteer of India (Photo credit: Wikipedia)


The surprising and unfortunate saga of the returning bout of political stability that landed last week has caused India inc some serious heartburn as market mirrors waning confidence levels of corporate India which was looking at raising cheaper money and deploying into new industry and infrastructure this year. Though observers still stand on the sidelines trying to peg Economic forecasts to the agri output as monsoon season also prepares to make its pronouncement and the comeback in core metal and mining sectors will be long lasting and is already underway.



The consumption cuts after a brief comeback in December January are almost inconsequential as global equities will correct and even out only some of the withdrawing Emerging market ETFs with India being a safe haven yet for equities, valuations at 5600 pointing to an almost extreme low on current profitability set to improve in the last quarter of the fiscal. But the 10 year  yield is already nose up after having forced the RBI’s hand and is likely to land near 8.1% another 14 bips in the next month or more. Japanese capital investment flows are probably striking Asia again with Myanmar starting Rice exports to Japan after a good 40 years and that is good news to the region strapped solely by Chinese FDI. Though unrelated, the India story will also depend on these FDI flows as its own Corporates battle the post rate cut bad scenario.



Further relaxation on FII investment limits in bonds are only likely to bring in more investments in the 3-5 year horizon as precious MTN products become a possibility to increase available choices for those evaluating Indian company CDS’ in the Asian trades. Indian ratings could improve in the next 5-7 years if such depth is indeed possible as another batch of QIPs though distinctly less than the volumes from Indian ECB in 2009 and 10, remain likely in 13 and 14 banks and infracos being the hitherto winners. The steepening curve in the meantime as India’s long term yields falter and demand comes to shorter maturities could infact be a boon to low lying infra SPVs as their structures shift to quasi one year rolled over paper and trap sub 5% short term pricing of debt. Their overhang of 30 year debt continues to be a big rating concern and government is likely to be unable to backstop more of it.



The political uncertainty in the meantime will only bring Nitish’s Bihar to the fore in the governance camp and DMK itself will be softer after the change in Foreign policy stance. Our own UNHCR confrontation on Kashmir, long hidden might still get political ambitions strewn but on the whole Capital investments will withdraw to a wait and watch mode in India 8 months before due election unevenness could have otherwise been expected to strike India inc’s investment habit. In the meantime, markets offer attractive valuation opportunities with most identified sectoral leaders including YES BANK, IDFC and ITC holding on to new levels. Jet has struck another wet lease deal with Etihad to channelise its quantum of investment adding the Brussels routes to the Heathrow parking spots already in the sale and lease back with Etihad.



Stanchart’s prognostications for the Rupee may have hit a rough patch in their own term forecasts but JP Morgan and Deutsche Bank sell side units continue to invest in timing the Indian recovery with other foreign brokerages from UBS and CIMB to CS itself still holding local expertise in sectoral mid caps and even banks. Helion and Samir Arora ofcourse stand a little more guarded in light of their closeness to these political forecasts on the nation but they and other India bulls remain exclusive specialists, a breed strange enough for its loyalty as is India’s own secular growth rate still nose upward from 5% last year.




India Morning Report (June 13, 2012 – Pre market Open) Already discounting the rate cut (Incl. Fixed Income Report)

indian equities started off a rally yesterday to upturn its nose to ratings agency S&P for daring to suggest India was closer to a downgreade two days before IIP announcements and a week before  RBI policy is expected to be announced.

Surprisingly, even naysayers, including us in this cycle who thought RBI need not cut rates now have been silenced by the intervention from S&P. While fortunately there have been India Bulls that have defended India saying this is the bottom of the barrel for India’s raft of bad economic data in the last six months there has been a precocious turning down of yields in the fixed income markets pointing to a massacre on Monday if rates are not cut by the RBI.

India 10 Y yields are trading at 8.06% having started the week at a low 8.14% from before the S&P announcement, thumbing the nose at Cassandras of doom. Again though not unsinged even in fully hedged trades, I recommend staying away for this entire rally in terms of ne positional trades and let your existing holdings and positions enjoy the sunlght till the RBI policy hour as expectations become clear.

Though it has not been opportune to say that Indian Capital Markets are thumbing a nose at short-term flows from India oriented FII investors at these high levels (FII also took positions in January to INR 450 B) it is foolhardy to stop the market to its 5400 levels as the underlying fundamnetals have not changed for India despite the statistics.

Yields are likely to stay below 8% and the standoff ith the RBI trying to absorb more on the existing 10 Y bonds turned out to be till only an absorption of INR 900 B on the 10 Y bond released in November, now having gone for the new 10 Y paper with a coupon of 8.15% Traded vbolumes in the G-Sec market doubled according to a DNA report

Also seemingly RBI is still conducting OMOs to enhance liquidity and the new Government borrowing programme is as much a challenge as ever despite the liquidity conditions being better. That hoever means the Rupee will start trending up firmly after Monday again keeping the impending correction in equities away but this week may trade weaker esp today’s continuation from yesterday’s Dollar rally as the Euro gets extinguished again overnight.

The miss India missed to nail down again

Rather to the detriment of the Indian purse strings which are a little stretched as always, we were unable to even attract real portfolio FDI in this current run on Equities, with $7 bln hardly enough for the kind of momentum we talk to. China definitely has the edge on infrastructure but more so and back on the same drawing board, it is our spin control and inability to adopt a senior group of such investors and give them what they want that is the problem why we at our best our no more than a 5-7% in the MSCI Asia index.

Indra Nooyi
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We need to cultivate mroe than the process and more than our seldom far out daspora like Sameer Arora and indra Nooyi / Vikram Pandit but more so, we need to sit with just one group of a dozen FDI and FII investor advisors ( just the latter is required with a commitment to bat for both FDI and FII) and not just feed them the public press but go all out to make them commit at least one fifth if not one third of their global investments to this new #2 in 2050 as reports mark our future growth. It is what the ASEAN and more importantly the Chinese have done right.

English: Vikram Pandit, Chief Executive Office...
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The mandates, and they are not banana republics or banana billtons any of them, just the mandates hwne given have been complete and thus the investors were able to roll bigger cash into the Taiwans, the Turkeys and even China, poor at $10 blna month in FDi and considerably much more in Portfolio investments at the low end of the cycle with local governments, fund management companies and despite pecuniary duties on imported auto which does not stop th others from brining int he big investment to China

Foreign Banks in India: India a good FDI destination in 2011

As HSBC , Citi and SCB continue to target large private banking accounts in India they are unlikely to step up

Citigroup Centre, Sydney
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price wars in retail as all 3 are struggling to break-even. Others hardly have retail operations at all, Deutsche Bank also having sold its cards division to Indusind. Savings bank rates in the meantime have been upped at the new premier competitors, the  crop of private banks given licenses earlier this decade and last, with Kotak and Yes offering 6% on the daily savings balance computation alongwith Indusind esp on deposits above $2000 (Rs 1 lakh would translate to $20k in PPP terms)

SCB’s 100 and HSBC’s 46 branches (incl any RBS branches allowed in 2012) as well as Citi’s 15 branches are about to break even in retail after the 2008 purge. Corporate and Transaction Banking continues to bely hopes in the September and December quarters as the falling rupee makes syndications in ECB/ FCCB impossible to justify for most India corporates hurting from the forex risk already on board With Barclays and

HSBC global locations
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BofA non serious contenders to expand in India and corporate and advisory squeezed, Foreign retail banks wll grow in the depleted ‘supply’ scenarios outside the cosmopolitan centers where there is enough extra “premium ascribed to banking with MNC banks” esp as they offer integrated MF investments and competitive online accounts/ salary accoun tpackages but without disturbng their fee streams from balance charges, debit fees and lower savings bank rates.

As FDI investments exceed $20 bln in 7-8 months, FII interest is already returning to India and as and when it does, larger global businesses will come through these foreign banks only, while the competition is with the growing Yuan and Dollar business in China and Hongkong

However growth in personal loans and other unsecured lending in the festive season as also the jump in debit card spends is likely to sustain With structured transactions their coup de detat in the Indian market their retail CASA ratios and “real lending” remains a lower priority with a CASA of nearly 45% in all 3 cases

SCB also lost minute amounts being bullish on the rupee in September 2011. Dealmakers have been shifting  mandates and jobs at foreign investment bank units with revenues down 40% for the year and the Indian market fee reduced to less than $500 mln in 2011-12

However, the talent is likely to stay with India / Asia given the new FDi regulations in retail and expected soon in aviation. the interest from foreign PE firms also remains only temporarily suspended as FDI operational concerns and issues with standard safety clauses / control clauses awaited for resolution ( nomination of independent directors and ROFR could trigger requirements for 26% open offer)

Setting up the NBFC Banking Corporation – Comprehending India’s new Banks policy

Reserve Bank of India Lucknow
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india’s new Banks are likely to have 25% branches in the rural regions, 40% promoter holding, a listing within 2 years and a FII cap of 49% for the first five years before being granted the freedom to sell the excess promoter stake that will no doubt hinder capitalisation for the first few years, and tak eon the interested FIIs to the extent of 74% as for other banks. Not a roster of choices the NBFCs wanting to be banks would have chosen.

So why is it that LIC Housing, L&T finance and M&M and Shriram Transport are interested in seriously becoming a bank holding company as per the new regulations. Apart from sacrificing their interests in broking and real estate that are more than 10% of revenues ruling out Religare and Indiabulls, the new banks will hold higher capital at 12% and hold all their interests tied together in Financial Services in a single holding cvompany, apparently from the point of view of preserving Capital. Of course, Real estate exposure will finally be allowed indirectly as and when LIC Housing and Infra Cos are permitted to egt abanking license but then even L&T Finance is hoping forr a nod for inorganic growth to kickstart its banking foray and that in itself may turn out to be a pipe dream despite its stakes in City Union Bank and Federal Bank.

However, the cases for Auto finance companies of Shriram and M&M may seem t be the most germaine and with substantial global bank interest in India, there may yet be a JV of interest with the 49% holding model allowing FIIs to explore the Indian territory rather than jump in with 100% WOS models with unlimited branch licences and retail expansion for banks holding more than 0.25% of banking assets of the country.

Then again, that is an exploration the right dealmaker in the right place can just about broach to a prospect. more likely would be a staid NOHC set up by these corprations and by LIC HSG to tie up their current Auto/Home finance companies and then set up aberand new bank limited to a NW of Rs 5 bn or more translating to a RWA of Rs 200 bln or $5bln in its first 5 years for every multple of 500 crores it brings in along with its FII partners ( at a debt equity of 5:1, and presumably with a higher tier I weightage in the first 5 years)

This will then serve a s a base for expansion and transfer of existing profitability from the NBFC portfolios may again have to be navigated with the regulator handholding them every step of the way. The ROE targets of global banks are just 12-13% now and these banks being an emerging market proponent with M&M having even an international presence int he more interesting EMs and planning for more would be under pressure to deliver much more

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