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BIG NEWS – Oct 20th 2017

Posted on 20-Oct-2017 Comments  0

MPC Minutes

RBI is opting to error on the side of caution…

The minutes of the Monetary Policy Committee (MPC) clearly point towards a sense of caution among the six members of the MPC. While 5 of the members voted for a status quo on rates, only Dr. Dholakia hinted at the scope of rate cuts to the tune of 40 bps. Of course, the RBI chose to maintain status quo on rates in its October policy and this begs the question on what could be the MPC approach in the next December monetary policy.

Inflation will hold the key…

A seach of the members clearly highlighted in the MPC, it was the negative surprise from CPI inflation. After the MPC agreed to a 25 bps rate cut in the August policy, the inflation actually went up by 190 basis points over the next 2 months. The inflation remaining flat in the month of September also indicates that prices may be stickier than anticipated. The core inflation (excluding oil and food) has also gone up by 50 bps and that is an indication of manufacturing inflation setting in. Most MPC members believe that with the Kharif output coming lower for this year, the actual impact on prices of vegetables and pulses could be bigger than expected. That is likely to keep inflation closer to the 4% mark With the OPEC likely to extend its supply cuts till the end of 2018; one can expect downstream pressure from oil prices too. That will be the key input that could force a status quo on repo rates.

Grow this a bigger matrix…

While all the members of the MPC have expressed worry over the faltering growth in manufacturing and the overall GDP, there is almost a consensus that rate cuts may not be the answer. There have been implementation hurdles relating to demonetization and GST which have restricted growth. Secondly, regulations like the IBC and RERA have also been instrumental in keeping growth rates down. The view emerging is that unless these structural issues are addressed or resolved over the next few months, rate cuts may not really matter in the larger scheme things. Also, with the government not too keen on fiscal indiscipline ahead of key elections, the RBI may see no pointin cutting rates to spur growth in GDP.

What about December policy?

It may be too early but it appears that the MPC may choose to maintain status quo in the December policy. Global heating oil demand will pick up and that will keep oil inflation buoyant. Secondly, there is also the all-important Fed meet coming up in mid-December and there is still a big question mark over a rate hike. A lot will depend on who takes over the Fed Chair. With FPIs consistently selling inequities, the RBI will not want an encore of this selling in debt.That means that the RBI will prefer a status quo in December too.Markets need to be prepared! ©

D-Mart Valuations

It may appear to be steep, but it is hardly overpriced…

There were some real concerns when Avenue Super-marts (the company that operates the chain of D-Mart Stores) actually reported lower profit growth in the September quarter. The profit growth fell from above 35% in the previous quarter to a level of 26%. This sharp fall in profit growth led to concerns that the valuations may be a little too steep for comfort at 90-95X. While the concerns are justified,investors do not need to get overly worried about the same. Here is why!

It is the GST effect…

The real reason for the sharp fall in profit growth during the September quarter was a direct outcome of aggressive re-stocking that the company had done in the aftermath of the GST launch. The GST implementation impacts retail players in a big way. The restocking that we are seeing is in a way the reversal of the de-stocking that happened in the immediate aftermath of the GST launch. The company had already cautioned investors and analysts that the GST could have a lag effect in the form of re-stocking. For a retailer this creates problems of a larger gap between the cost of goods and the sale of goods. It is this time lag that has caused this problem and should rectify itself on its own in the months to come. Secondly, there is abase effect and the traction will now be more visible as the company embarks on its next phase of capacity expansion across India.

Growth and debt reduction…

The two big stories post the IPO are still intact for D-Mart. Firstly,the company has continued to expand its footprint in a big way. The primary focus of bringing sales outlets closer to the customer continues and that should continue to remain its forte. As D-Mart continues to churn out its salivating discounts, the retail business in India is likely to spur further. D-Mart combines two key aspects of the retail business. On the one hand it brings you the benefits of large-retail in the form of lower costs. On the other hand, D-Mart brings you the added advantage of accessibility that your Kiran a shop down the street offers. Secondly, the company will use the IPO proceeds to reduce its debt on the retail properties that it owns.That impact on EBIT margins should start showing up soon. In a nutshell it is a combination that is going to be extremely hard to beat.

What should investors do?

In the investment world; whenever you are doubt you should adopt a phased approach. Don’t get intimidated by the P/E ratio of D-Mart.It will eventually justify these valuations. The trick is to use any dips in the stock price to add on to the stock. Over the next few months, if you can reduce your holding cost of D-Mart, the job is half done. There really is no better proxy for the Indian consumer growth story! ©

Axis Bank NPAs

Do we still have the complete picture,probably not?

In a fairly scathing column, a Bloomberg Gadfly columnist used the rather weird term “Price to Truth Ratio” to explain where Axis Bank was getting it wrong. He may have sounded a bit harsh but he had hit the nail on the head. When Axis Bank announced its second quarter results, the profit growth and the top-line flatness really did not matter. What mattered was that the bank had once again disappointed its institutional and retail shareholders by being opaque about its bad assets problem.

Price crash any surprises?

The day after the results were announced, Axis Bank stock tanked by nearly 10% and showed no signs of any buying interest at lower levels. Profits were up by over 30% but that was a lot worse than expected on a smaller base. That was only one reason for the price crash. The bigger issue was the sharp rise in the NPAs. Consider the numbers! Gross NPAs were up sharply from 4.3% to 5.9% while the net NPAs were up by over 100 basis points during the same period. The NPA problem at Axis Bank is nothing new. In fact, in the 8 years since Ms. Sharma took over as the CEO of Axis Bank, the market value may have doubled but the NPAs were up nearly 16 times. Yes, you heard it right! The NPAS of Axis Bank went up from $250 million in 2009 to a whopping $4 billion in 2017. That surely says a lot about the quality of assets of Axis Bank and that is the crux of the problem!

Where is the transparency?

For Axis Bank, the issue was not just about the level of NPAs but the quality of disclosure. Recently, Axis conceded that 9 stressed corporate accounts that were being classified as good accounts will now be classified as NPAs. This includes some prominent steel and power companies and will hit the balance sheet to the tune of $750 million. Again, the issue was not about the number but the opacity of reporting of these numbers. In fact, in the past, RBI had already pulled up Axis Bank for huge divergences between the NPAs identified by RBI and the NPAs actually reported by Axis Bank in its quarterly results. This has again raised a question mark over the opacity of reporting by the bank, which explains why the stock has traded at a valuation discount compared to many of its banking peers.

It begs a larger question…

The bigger question is whether the problem of NPAs in private banks is much larger than it appears. The RBI, in the past, has already pulled up Axis Bank, ICICI Bank and Yes Bank for laxity in NPA reporting.From an investor’s point of view, the discrepancy between transparent banks and opaque banks could widen further from these levels. Private Banks with an NPA overhang need to get their house in order soon. Remember, the RBI and the GOI is already cracking the whip! ©

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