India Morning Report: banks weaker in the new week. Market affirms Capped below 5500

 

Fortune (magazine)
Fortune (magazine) (Photo credit: Wikipedia)

 

As we digressed from networked opinion on Tursday / Friday, there is no such thing as the 5500 mark for the market as leaching gets underway. Barings PE in the mean time made a play for a 135 per share valuation for Hexaware, the only Fortune 500 roster which has never operationalized a growth strategy meaningfully. Apparently growth is already underway at Hexaware and this is not a play at capping India’s further Dollar erosion led woes in the future or a transparent play at India’s notorious inefficiency stability motive. A Hexaware and a KPIT do gain disproportionately from the Dollar’s move against the Rupee as they price transparently and Hexaware also has untamed T&M contracts that price at competitive levels onsite and thus remained Dollar heavy, unhedged at least n the nineties. Most others have lost the Mid Cap IT space from investing in product and premium services and/or Indian Rupee/Output based pricing still capped in the$50 mln realised deal values after years of wooing.

 

Banks got cut mercilessly waiting for the HTM circular (SBI, is waiting as always) and saliently otherwise:

 

The Bifty(BankNifty)’s ‘stuck-up-pance’ at 9400 saved the straddles on the Nifty which you should have sold if you were in the market after the first hour in the morning.

 

The rupee is starting the new climb again as the Rbi loses room to intervene and stays away after this week.

 

No, these are not conventional range bound trades.

 

Yes, we did not anticipate the market to wait so assiduously for Thursday expir which can now assumed to be the final plan.

 

No, being quiet is not a bad strategy.

 

Yes, the big roller from the Fed as they leave Jackson Hole is on target and I am trying to figure out why $10 Bln is a good start apart from that everyone knows that number.

 

It is that $12 Bln would be too fast and $20 Bln a virtual unending panic, $8 Bln an equally good vote of confidence and any number below $5 Bln not enough to redact(the literary device for fabricated on paper) the surfeit of liquidity let loose on everyone. But then thats just because we started with $10 Bln. That just means the Fed would be buying $75Bln worth , and that should be a good start for equities to break into a done and bring back confidence in EM economy investments only at the end of one such full cycle of investments which may be as short as 2 months in US markets but for another sell down in bonds(domestically)

 

Held to Maturity classification clears the grounds for banks to carry bonds while double digit rates reign. !0 year yields are still rising in India and policy rates stand at risk of being increased too after the liquidity crisis is hung

 

 

 

India Morning Report: Sun Pharma finally breaks stride (ha! Stride Arcolabs wins)

Sun Pharma is snared into the last leg of mega short trades with Axis Bank an easy six pick this week and next. ICICI Bank has stabilised at 870 and after the Consumer stocks (a couple of hours before Pharma) the Pharma crowd gives up its measures of price vaulted in the continuing over-ownership by 2 or 3 ‘undeserved’ bubble notches by FIIs as they certify to their limited export potential and would be pruned as well. Chennai express could find some financial implications is probably what you would think as we continue to provide a 1005 demystified almost paperless review of the trends both in fundamentals and technicals. However, as far a s we are concerned this is just how the cow will be seen by the robot and we will continue this one off everyday before or after we turn to our day’s work probably in the same business with other banks and academia.

REC (and other infra (Power) NBFCs ) has ticked closer to its 13 levels that should also hold. You can probably safely short that one still from 150(wednesday morning) to 133 levels. 2009 they had established new coasting at these levels for the market and thus they could retain their primacy in leading the market trend horizontally or North deciding the times in between till the next rally

LNG/LPG companies again remain hot commodities with Gas prices signed up to move up by 100-150% by 2015 and following them energy companies, the OMCs could well settle down if WTI balances out new price pressures from OPEC as it increases export volumes

Banks would have no difficulty increasing spreads but may be hidden gems before the broader Economy realises that but nothing to beat bank stocks on a fundamental basis at this point. Outsourcing stocks start the unstemming bleeding today as they are also not contributing to the CAD deficit reduction as the first few investors had ensured in the 2004-2009 phase of its heady growth.

We dealmakers have also noted with interest that despite the hoopla around IPL

This diagram illustrates the Private Equity J-...
This diagram illustrates the Private Equity J-curve in which net cash outlays in early years are outstripped by cash inflows in the later years (Photo credit: Wikipedia)

dying down more corporate owned sports businesses are in the fray than ever before and may attempt India’s unique public financing iPO model even as Private Equity adjusts to the new view of the Economy, once again showing its inflexibility and habituated method of creating big, wide potholes with transplanted models and outlooks that have again failed in e Commerce and any remaining brick and mortar models. Private equity may however, finally be able to make the transformation and invest in local analysts not just for salary expenses but for more akin modeling of the unique parameters. It is a long uphill struggle

Not many private banks were timed to and tuned into HTM portfolios despite the threats to rupee and thus ill be blamed for the losses that happen on their investment folios this quarter. China’s increasing trade surplus similarly does not match its eigenvalues of resuscitating domestic consumption for those waiting for the first early signs from the same since 2008 ut consumer demand there seems more robust than India esp for engendering larger investments

I was also hoping Hero Moto would return to more realistic levels as any motivation for it to be the star of india should be also seen as continuing over-ownership by 2 or 3 ‘undeserved’ bubble notches . Hero tracing below 1700 could very well be the last of the vertical shorts in this market when that move is played out hopefully over next week itself

India Morning Report: The future path to robust corporate governance was lined with crises

Holcim and Jet Airways continue to test India’s commitment to robust corporate governance even as the Rupee’s shallow provenance means that the Central Bank is still per force holding Indian finance sector to ransom and channelising Gold Trade to exports. Talking just about India further , the Holcim deal ‘s 7.4 /6.6(after funding Holcim into Ambuja) share exchange ratio shows also the potential exits for Foreign investors not looking to be good governance leaders that cannot be covered by loophole based laws from a nearly dozen regulators, instead of a full investment into India”s new priorities much like relayering a road than taking each pothole out with a “minimum valid quantity” of tar and a pass through roller every time it rains

Infrastructure investment aside there are other parallels with the missing wholesomeness in India’s corporate governance story here its policy leadership and a crisis less 2008 fail to cover the basic lack of provisioning for Good business practices, Good Employment Practices and Good Investor practices that remain yet valid shareholder criteria in India to find out stories head and shoulders above the others who will thus sustain better growth and power. Ideas that are good on all three eigenvalues are probably not overvalued but some (Havells , Heromotocorp ) have been disproved for sustenance from their consumers in their expectations much like Jubliant Foods that could grow higher than 50% for a year or so only and one round of Capex subdued the tiger in it unlike previous examples at Bharti and HUL in the eighties

India’s triage of these Business practices, investor practices and Employment practices  is unique despite there being global movements in the three areas as in india there are barely a Dozen from which the Top 10 lists of employers, investments or businesses to corner among the variegated field (motley crowd) of unlisted, unlisted MNC, Globally owned, Indian Globally owned, outward investing (Bharti, ONGC) Indian Global , Private, Private-Public (ICICI, SBI), Public (Coal), internet only ( ecommerce) , Private Equity, Cooperative , social or other holding structures  that dot India’s Business landscapes. Some sectors like india’s Higher Ed defy any such categorisation as well and have no link to the Corporate ends of the trail to synaptically make the neurons work together.

Hardly 10% of our “interest sample” is even listed or accessible to investors precluding complete sectors like Advertising, Information etc instead of the global sample of a few mutual or private businesses which are nevertheless well-defined with market pricing control policing them much more effectively than any government However shorting private banks like Axis and ICICI Bank in today’s conditions is a n unforgivable error brought on my such extraneous pressure  in the Economy as such banks losses on short funding squeezes are eminently reworkable into their secular 20%+ topline and sequential bottomline growths except for the immediate quarter ICICI Bank esp seems at a bottom at 930 levels and the trader short interest is basically an overwrought hedge for knowing that their is no lower mark than 5980

CNBC’s The Firm ( Menaka Doshi) and citizen denizens like Anil and others defending minority shareholders are a new breed and barely survive in the noise on promoter manipulation, Sahara and Jet’s revenue headquarters migration to Abu Dhabi. We wish all of them the best

All said, Bank Nift’s holding at its bottom, there are no ears to speak of an if you still think the above scenario should somehow affect India’s valuation further negatively, give me a call and I’ll try again.

ITC results will be an eye-opener as Yogi leaves and ITC indeed transitions back to  Tobacco led Consumer behemoth, making profits at Ashirwad and Sunfeast( I hope! for my noodles’ sake)

Wockhardt is still in a bigger soup for its digressions barely days after investors returned to the stock and Bajaj Auto is the only one among auto majors whose Export story has worked throughout from 2006 onwards without a break despite the challenges

India Morning Report: How wealth now hates equities for keeps..

stock market
stock market (Photo credit: 401(K) 2013)

 

Globally emerging Markets have become a unique asset class and the first month of 2013 was as sunny as the latter part of 2012 in terms of asset flows. US enters a period of so-so uncertainity in equities a stronger currency on the anvil to stew the growth equation for the largest democracy, and not mirrorred in the Yen’s ever increasing appetite hitting a weak 94 /95 against the Dollar last week enroute to par economics.

 

However predominantly from investor behaviour on MCX’ new segment highlighted in launch yesterday with volumes of just 1.1 bln it is obvious that wealth that favors Oil speculation, Fixed income, Currency and Commodities is wary of this simple growth paradigm advocated by equities and even when it invests in growth it by passes the “stock market” dream with much more muscle than any lip services its banks pay to the segment. Though at Goldman Sachs and European houses, equities trading for clients till forms a substantive segment of business, back int he country and in real markets Equities are failing to entice banks, institutions and retail wealth equally miserably.  (Nifty bottom is capped at 5800 at its worst intraday moment and can be bought)

 

It is possible that ironing out execution flaws and goading institutions to trade the segment in due course will bring volumes to India’s newest stock exchange, but it is unlikely that equities get any more weightage in this large wealth market already lening on just that precious drop of gold more than anything else and addedly missing its calling in the global markets with shallow and reefy fixed income, currency and even commodities markets though courtesy of MCS we have volume leadership in key contracts.

 

Structured Term investing probably brought the equity paradigm to oratory finery professed by the rich and the nouveau rich, giving them cleaner mirrors into what they wanted and perhaps their disregarding risk is what made them pliable which would be a pity as that market is unlikely to be permitted to grow that size again as Derivatives would go into regulatory scrutiny in more regime than those like Singapore and China willing to publish new regulatory regimes with large chinks int he armor, but that in turn just crimps the prospects of banks rOE and those seeking employment predominantly in Finance in Banks and other fund investors (

 

The original Private Equity Council logo in us...
The original Private Equity Council logo in use from the formation of the organization through September 2010 (Photo credit: Wikipedia)

 

shadow banking). All classes of non bank investors including Private Equity though Hedge funds still trade in equity at almost negative returns, have shunned Equity markets underlining the need to perhapds reinvent the paradigm, which iss till more understandable and germaine to capital flows than even the post Bretton woods world and its currency wars

 

The Stride Arcolabs deal with Pfizzer at 8X Sales at under $2 bln highlights the efficiency of Dealmaking and Secondary equities esegments are but a highlight of the equity charaacter that allows such Capital flows to underwrite the growth in both G10, G20 and the emerging economies

 

 

Bank Results Season: Kotak does operate in a saturated market segment of its own

Kotak again proved with today’s results that its ins on not bothering to reinvent themselves have been playing to the old Goldman Sachs gallery and not really going anywhere on the business learning curve. Couple that with another likely two year holiday till it starts to wind down promoter stakes and it is ripe for an Ingovern/Veritas hit which its strong fundamentals can resist easily. Private Equity must be thinking of the prospects of buying this 50% promoter stake daily but seem to have no partnership basis with Uday Kotak

A true smaller range was never ever found again!

Net Interest Income is reaching a degree of scale at INR 7.20 B and the Net NPAs are as suspected rising as it akes out of its existing customer set and splashes a little likely to recede again. One wonders if someone can really revamp that governing structure in place, each manager at his island of incompetence with the HCL GPS device in hand

NIMs are its strength at 4.7% Gross Lending income (only Interest) is up to INR 24.7 B (DJ wires)

Back to the banks then, Kotak having totted up Gross NPAs to 1.4% and NIMs saddening to 4.7% now at 33% higher than the Industry highs of 3.5% among Private and Public sector banks. Anyone who can get a more than 20% credit growth in their conservative forward statements is a shoo in into any decently managed portfolio as the midday correction on sales growth to INR7.2 B definitely brings in Kotak to a short list. Net Profits of the group were INR 2824 M and I would like them to scale a mark of a 1 B in  profits every quarter so the growth in advances and the 7% campaign’s impact on CASA are welcome. CASA is now 22% Advances and Depsits grew more than 30%

India FDI: India superpower in application development (E&Y)

China

Even as FDI growth in China continued to grow Services at 15% and manufacturing at less than 5% , its inland provinces will soon get to be the majority FDI destination with the Eastern seaboard share falling below 50% this year.

This year despite teh statistics from the E&Y report the erstwhile no. 4 sector with 33 infra FDI projects is likely to become a major recipient of FDI in value terms thru dedicated Infra Funds incl the ADB-HSBC – IIFCL one

India no. 4 FDI Destination : E&Y

In India however, 146 Tech projects outbid the no. 2 industry in Retail and consumer as the single biggest contributor to FDI. For some strange reason India’s middle class/ consumer for the E&Y team stays stuck at the 2001 figure of 250 million even as it discuesses the Top 5 FDI destinations as those favored by Indian IT

The top five FDI destinations in India are Bangalore, Mumbai, Chennai, New Delhi and Pune. They attract 43 per cent of the investment projects, 34 per cent of the jobs created and 26 per cent of the value of FDI in India.(BS report)

Auto and Healthcare were also pointed out as key destinations in the E&Y survey released by india head Rajeev Memani


The survey also points that private equity (PE) in India has significantly evolved over the last decade. It mentions that 2,000 Indian companies were funded by PE in the last five years and $50 billion was invested from 2007 to 2011. “Despite the ups and downs over the past decade, PE has emerged as a very important investor in India Inc and with the long term India growth story still intact, PE funds continue to look eagerly at investing in India, ” says the report.

Lesser Deals but good PE Deals and Exits

2011 was as much about making business happen as any other year despite deal business going down by 30% to $460 mln in the year in India and as usual we had a consultant reporting on growth from the India corneer of the world in Investment Banking as global focus shifts to fee adviisory business. India’s share is a less than 8% of the Asia pie which itself yields a 4 1 mln lower than each corresponding deal in the US on average. US leads in investment banking deals this season as well

The largest component of the deal business in India continued to be Private Equity with VCC listing the Top 5 deals and the Top 5 exits in the big ticket deals that went down.

Earning nearly $500 mln from fees may be still much lower for investment bankers to satisfy staffing for growth 5 years out esp as the region’s deal yields depend on Pe which is currently fighting funding and legal wars in their global franchises as regulations circles around to make it tougher for them to ensure profitability on deals following numerous failures in high fashion and early / blocked exits in existing deals.

It was especially happy for the bankers and the PE teams for gettin gthrough these deals in 2011

India Infrastructure: Indian Banking and Infra / construction NPAs

Infrastructure projects typically financed by 80-20 debt equity ratio are suffering as government equity is

NPA
Image by Desazkundea via Flickr

scarce and private financing on equity markets and bank funding made to suffer for private equity lock ins lasting more than the 5 yr desired and/or beating on the bourses

NPA marking after 6 months, apart from its long tenure and thus unsuitability for bank books, none of which have stopped banks and infra projects from announcing financial completion and consequent delays in land acquisition, escalation of project costs and delays in project execution, even after operationalisation, ground results and financial projections are yet divergent as adoption of pay as you go by retail consumers is slow at best, some challenges that dog india’s epic yet comical $2.5 tln infra financing story.

Of the $1 Tln expected from the 12th yr plan in spending on infrastructure, 50% is expected from private players. Already markets have been punishing operationally efficient players like Reliance Infrastructure, GMR and GVK for the large scale perception of a bad debt industry pampered conveniently by banks. Of the incremental $4 bln lending by banks this year to real estate companies, two thirds is made to unlisted real estate companies for new projects as listed companies battle with public debates on their untenable debt and costs of servicing ECB and financial sell offs by DLF and others to get the balance sheet good for inspection. Whether listed or unlisted, project delays and NPA qualification is the same and more than 10% of this new $4 bln or $1.6 tln till date(2011) are likely to become NPAs soon on real estate projects waiting for better climes in consumer spending on the housing and durables segments

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
Image via Wikipedia

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
Image via Wikipedia

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)

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