India Morning Report: A tough hand dealt in the Financial Stability Report

Loan
Loan (Photo credit: LendingMemo)

The Interconnectedness of the Indian Banking system, might have become prioritised for a global caveat emptor learnt but the Indian system has much more downside from our desi PSU style profligacy in SME lending as haircuts on even 50% of that stressed portfolio would take the government out for a long walk in the woods. Delving a little more indepth into our favorite subject, most of the stressed portfolios in India Inc’s first stress tests were found to be in Infra, Mining and Cap goods sectors or our core Infrastructure series components and those would anyway need to be treated differently than Ordinary term loans . Such loans constitue 54% of the Stressed assets identified in the FSR.

However as the Financial Stability Report remarks, there is a fundamental risk to about 60% of the credit stock in the Banking system collapsing banks even as they have primarily not created a laconic lee side for the Ghat monsoons in interbank lending primarily one supposes thru traded CDLOs and real lending on larger accounts  than derivatives without a defined underlying as in the global case. The risk as highlighted in the FSR come from defaults in lending portfolios of Banks skewed to single corporates apparently among other details one has to study from the disregard of concentration risk by lenders with the 20% to single corporate and 25% i think for group key limits to be tightened and enforced duly.

India on the other hand has to grow the Securitisation pie  from here and where the Central Bank would be trying to control INR 1.7 Tln in repayments due till 2017-18 from the next fiscal onwards (FY15->2014-15) , India would indeed face an uphill task the markets would do well to ensure they have factored in. HDFC Bank too never got that approval for added FII investments even as Axis Bank application was cleared last week(to 62%).

Back to the mundane diary of the Indian markets for the day, Markets trade leaving the upside intact as shallow trades characterise the last trading session to 2014, much like last week’s record low of INR 740 Bln in the full day of equities and derivatives trading on the NSE and BSE and Cash volumes are likely to stay below INR 30 Bln (the last week low was INR 50 Bln) probably. US and European Markets are closed on New Years Day including Fixed income markets (at least in the USA) The other thing to highlight from the watchful Fiscal Stability Report is RBI’s worries on the Growth – Inflation dynamics not working out as WPI continues above 7%  which we led with sometime in November.

Net foreign inflows continue to sweeten the deal for India inc into 2014 with a 1.5% CAD (FSR score 1.7% and a FY14 achievement score target of under 3%) and the Fisc even if the virtual spending shutdown (as in the last 4 years) from January will soon find another yawning gap even if FY 2014 indeed perks up reasonably. Hopes of a stable post election scenario have almost been crossed out in case you did not notice in the New Year’s eve  celebrations and the infra pack, high on investment hopes and leadership from IDFC, and a deleveraging trio incl GMR Infra and JP Associates with the Relinfra people facing their first AAM Party audit

Apparently new year’s eve also sees an uptick in Tata Power and Reliance , which one doubts will last esp as Tata Motors is receiving its recognition only for its minute share of the TESCO-Trent JV like in fact here was such when Starbucks burst onto the subcontinent scene. The Starbucks venture is well-defined however, and the ware tastes well, drawing in big crowds in now 3(Three) cities in India

Redesigned logo used from 2011-present.
Redesigned logo used from 2011-present. (Photo credit: Wikipedia)

What probably did not get highlighted but was tried earlier by RBI, also needs to be monitored for results as Foreign Banks continue to skirt the Living Wills issues at Global HQ and continue to rethink their strategy with regard to entering India. Apparently Gross NPAs will start trickling down as we long suggested but Fitch and a few others are still hoping the PSU disaster will play out to bigger stakes and at a faster rate to make a return virtually impossible ( especially if larger Government injections are requird to keep them floating – KV Kamath). However, I would just depend on the investment recovery and the credit growth performance by Private Banks and probably PNB as Deposits finally outpace credit in the last bi monthly reports on the Banking sector in Calendar 2013 and the ICDR hopefully comes back to respectable levels without Banks having to constrain such new lending in India’s recovery phase

Also don’t take me to be a cynic but Torrent and Lupin’s timed leaks about Pharma’s assault on a generic version opportunity for Cymbalta may be better timed but is still probably a few months away from translating into Dollars and one fervently hope ( and cannot claim to otherwise yet concretise) that the generic provides an opportunity to us more than the cookie cutter $200-500 mln with or without first mover advantage.

India Morning Report: Here comes 6000? and what the banks will do in 8.6% yield scenarios

Yes Bank
Yes Bank (Photo credit: magnusvk)

Apart from the unremediated concerns in the Fixed Income market, yesterday’s rally created an awareness of the potential inflow obvious to insiders earlier this year. i.e. Around the Globe, India remains the most attractive investment destination after being clamped on with the rest of the globe in recovery awaiting elections to be over here in policy action and growth parameters and local consumption and investment makes this story unique.

Infosys is also likely to deliver significant outperformance at the Q2 announcements a week later and interestinly, the markets are correcting Infy’s recent run up already to 3000 levels and that could mean one rally is due in October and even September saw 6148 based on the return of inflows.

Banks of course in the meanwhile are looking askance and a standoff with the Central Bank is in the works while Markets continue to worry about Banks other than PNB, BOI and the private Sector banks. Banks probably still look for opportunities with the currency not stabilised and may have to worry about increase in Deposit rates. The Bank Nifty churn would have been isolated easier if they had concentrated on shorting SBI which despite its distribution continues to spring a growing NPA basket every quarter instead of delivering on the retail growth and profitability they continue to tom-tom to any analyst who would spare time for management commentary

Considering that this 8.6% yield on the 10  year comes after banks got a whole Trillion and Half from non penal overnights at the Central Bank and NIMs are protected and increasing, it is quite likely a matter of concern es in the light of the Rupee strength that yields are wary of coming down

Penal rates and those new effective rates on the MSF may however still be withdrawn another inch or more on the October policy to bring the channel back to 100 bp. ( For details flip thru previous issues or ask us) PSU banks received another large Capital infusion yesterday to keep lending rates in check(SBI is funded separately)

Bajaj Auto and ITC probably continue their northward rally till the mid results change of weights while those looking for a correction in Tata Steel are likely to have given up now, while Tata Global investments may take off only after the company itself stakes out a minimum of 200 Starbucks stores ven as wholesale auctions improved pricing for India exports but output and hence export takeoff was lower

Pending infra projects are not going to take off in a hurry but 5900 levels should see both DIIs and FIIs buying and F&O interest has definitely moved up the range from 5900 to 100 &6300 than yesterday’s 5900 Call OI that signified markets ranged to 5900 levels on the upside. Gold and Silver are still negative. India and US in the meantime, the two strongest markets and recoveries continues to once again falter in Services PMI and thence composite PMI because of spending cuts

 

India Morning Report: The new series gets no welcome!

English: The Local Head Office of State Bank o...
English: The Local Head Office of State Bank of India, Mumbai Circle. (Photo credit: Wikipedia)

 

US equities are holding up as global corporations despite the mixed economy, find leaders finally surging ahead in Sales and growth at Ford, Starbucks and eve Amazon. The net result of this might be bearing on India too as weights might shift back in favor of the big rush in US equities to counter the initial down impact to growing interest rates. India’s results already destroyed by Dollar moves even as exporters fail to catalyze on the new opportunity with current goods, the markets that have been and continue to support higher values on the eigenvalues of growth seem to want to give in to pressure to develop the fangs required for a big equity move north more than bearing south.

The Banknifty corrected fast to below 10500 after Thursday and thus is spirited for a north move but has probably squeezed the wrong bull or two which remain the important bearers of Options liquidity across global markets, writers “capitalizing’ on the lack of buyers with prices quite out of subsumable range factoring in their safety in higher prices, that refuse to let markets and VIX become an enabler to trends.

Apart from these silent trend breakers, that usually provide no barrier to any defined move, markets are getting bearish just from the wait. The policy announcements today by being in the continual mode will further drive the north move in the Banknifty and ICICI Bank, probably HDFC Bank better than most, and even SBI and PNB whose results were no disillusionment of its backers, SBI and other PSU banks continue to shock most headline followers through 2014 and 2015 as they continue the long drawn process of declaring their backed up system NPAs holding out media hope of starting the up cycle all the time thru at least December 2013. Forex reserves are down slightly at $279 bln and China order activity is the slowest as Asia starts the week in deep red territory. The Rupee could not hold north of 59 levels and still holds negative risks south with trade deficits now proving to be crucial data points for every dollar north or south counting in days of plus and minus moves of significant size(30-40 Nifty points) or in flash corrections on either side, worrying economically intelligent traders even more into a flat dropping market zone.

The Jet move up takes Indian aviation firmly to Air india – Kingfisher axis of south south on governance as the FDI proposal cannot be corrected enough for the desperation to sell out to etihad. Investments from the comfort zone is probably non existent and new FDI will come with too many strings of control the situation of Telecom and now aviation sharply negative portends for any robust escalation of FDI inflows

Credit growth has turned positive and 14% is a good start

India Morning Report: Markets regain 5900 levels, short trade not on

English: Implied Vol. Surface
English: Implied Vol. Surface (Photo credit: Wikipedia)

 

Aftera small skirmish/face off in the morning trades as was likely on expiry day, the volatility smile of the May series was intact with high ranges for out of the money calls and puts and shorts bowed out of remaining scrips before noon possibly. Markets are stable at around 5900 and are celebrating the Jet deal, Tata Global beverages also getting neww found attention as it consolidates thee first year of results of Starbucks and probablyocased the kind of innovation and looks for global scale forced by its jv partners and global coffee markets. P&G global results yesterday showed the importance of innovation and BRIC growth in consumption stocks and India remains an important global destination for consumption industries FDI not just in travel and financial services.

 

FDI, Media and infrastructure expansion and perhaps a stable polity make guessing capital market priorities an almost daily habit for the multitudes but investing funds and managers fail to expand the footprint of the profession while retail investors get knocked out for scale, leaving pronooters speculating on margin an important riceboll weevil infestation in the Indian wealth crop, clearing of which is still dependent on monsoon dusting of crops, That is where similes end up when coffee conversations about the market try to replace in depth research. M&M Financial however seems to have cottoned on to the diversified growth tenets of a NBFC and bajaj finance firms too are pretty surefooted led by their last insurance investments.

 

Jet is likely to cross a near 100% retunr at these levels to four figures but that time frame could be six months or even six years whence it will cycle thru another multiquarter negative round of profits based on the cost of oil. Rupee trade is stong ont he upside and the banks being pilloried for having reached levels at which further investment is foolhardy are still purveyors of both value and more than 30% growth and as long as exit targets are available in IT and defensive sector stocks should continue to be staple of portfolios

 

Rollovers are likely to be subdued and if that happens there could be an entry opportunity in this market around 5800 levels after the new series trades in earnest next week. (ofcourse if these ‘scheme’ is indeed adopted along with the 24% stake approval for Jet, Friday trading could still have already set base levels for the May series before markets start the new trend direction next week but as of now, Friday would be dull and rollovers sparse

 

 

A reality check that augurs well for those willing to stop and take a breather | Earnings Insight

Earnings Mid Terms crash on All nighters..in India and US

Mid Cap IT and Infy looking for avenging the transfromation space with Indian business providers were again usurped by larger BPO deals and a good showing from unhedged HCL Technologies and one hopes also TCS leaving one critical movement in currency which is good for the larger economy as the ones hanging for dear life.

Similarly consumer plays like Coke paid 11% in Currency headwinds against a  strengthening dollar in the first two months of the quarter as global corporations report the halting recovery in the US. Intel is down and the world as we know it unchanged thrashing ahead for those not playing in such currency movements , not necessarily wanting to be shackled with Nationalist interest. However even as IBM looks at an inevitable yet steeper falling hardware sales and the ones that missed the housing recovery at Citi look at a continuing salvage operation, the world has moved on whether it desired to or not. The gap between the peers that have performed in this quarter and the rest is likely to keep growing and one must recognise those that have failed in this perfectly competitive quarter as having strategically misaligned themselves and needing a relook at their global and domestic business strategy. Globally this will soon include BofA by today evening when they report before US markets open but the winners may not necessarily include McDonalds’ , Starbucks and the resurgent Wells Fargo. What has probably happened is that those running with a perfectly operational strategy and anticipated free fall in this quarter have been singled out by us and we stand by our observation as we see the various forces of human endeavour trying to come out of the ever elongating crisis and note that no one has caught the envisioning of this new normal whether those still prognosticating a recession or those just hoping to ride on more growth allowances to make a comeback.

The changes at macroeconomic level mean that older ties between economies in critical businesses including banking and auto have probably been running on the saame tenets as the nineties yet and that they have changed only no as have been expected since 2008/9. Investors thus would have more hiccups ahead and would likely need to pull back from equities and reassess the situation and a second round of deleveraging will now likely hit global economies only later as European banks re-enter the arena.

However, this article does not have the answers we need to ‘move on” productively, except that even without regulators’ forcing it banks and global companies would do well to be more careful and are likely to be weaker to future economic crises or as observers noted, black swans could be a more often occurring event in the coming days. The growth of consumption as variously noted by Intel, Fedex, Starbucks, McDonalds’, Coke ( incl New York’s ban on supersized drinks) GM, Facebook, Dominos and Pizza Hut is not the same as it was a decade ago into which you added a health fad and a mobile. The Euro will survive but European corporates are still not ready to come out with performances worthy of a standing ovation including growing Healthcare plays like Roche, Novo Nordisk and US based Sanofi and JNJ

The going is going to be tough and the tough better get going!

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