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BIG NEWS – Oct 27th 2017

Posted on 27-Oct-2017 Comments  0

Boost for PSU Banks

Finally, there seems to be the much needed credit boost…

When the government announced the unprecedented Rs.2.11 trillion bank rescue package this week, it did stir a sense of euphoria. A day after the announcement the PSU banks were up anywhere between 20% and 45%. The question is whether this package is actually a boost for PSU banks. More importantly, will this address the core reason for poor credit off-take, which is weak industrial demand for credit!

Nuances of the PSU package…

The package was a lot more liberal and larger than what was originally anticipated. While the government will contribute Rs.18,000 crore,the banks are expected to raise Rs.58,000 crore from the market. The balance of Rs.135,000 crore will come in the form of Recapitalization Bonds. Just to dwell on this concept for a minute, it is essentially an accounting adjustment. The capital will be provided by the GOI to the banks and in turn these very banks will subscribe to the bonds issued by the government for this purpose. That is understandable considering that the Indian banks are sitting on nearly Rs.500,000 crore of surplus liquidity in the aftermath of demonetization.Effectively, the money from the bank’s balance sheet goes to indirectly enhance its own capital. The only concern from the point of view of the government is that this issue of bonds will raise the fiscal deficit. That could create an issue on the sovereign ratings front!

Managing the fiscal deficit…

The immediate reaction from rating agencies like Fitch was that this move will increase the fiscal deficit of the government for the fiscal from 3.2% of GDP to 4.1%. That is likely to harden bond yields and raise questions over the much avowed fiscal responsibility. The other option is to issue these bonds through an intermediate agency, but that will still be a contingent liability for the government. Either ways it is likely to increase the effective fiscal deficit of the government for the coming fiscal.

What about credit growth?

The government is actually undertaking a big wager here. The bet is that a larger capital base will take away the constraints to lending and banks will see a sharp pick-up in credit. Remember, growth in bank credit is currently at a 60-year low; hardly a situation conducive to a growing economy like India. Over the last 1 year we have seen that demand for bank credit has dried up and that is due to a weak investment environment. However, the government has also sought to address this issue. This bank package is accompanied by an additional Rs.700,000 crore plan to invest in a massive road project. Like the Golden Quadrilateral in 2003, this is likely to spur downstream investments. To be fair, the government has done its bit. It is now for the banks and business to take the next step forward! ©

Tale of 2 Results

ICICI Bank disappoints; Hindustan Unilever flatters…

The results season is not yet over and there are still some of the key banking results to be announced. But with the major companies already having announced their results, there are 2 things that stand out.Firstly, there is a sense of disappointment over the quarterly results of ICICI Bank. On the other hand, Hindustan Unilever appears to be pointing towards a clear revival in consumer sentiments.

Why ICICI Bank disappoints…

The 33% fall in profits of ICICI Bank for the second quarter was actually worse than what the consensus estimates had put out. To a large extent, the fall in profit arose due to the presence of extraordinary income in the previous year from ICICI Bank’s stake sale in ICICI Prudential Life. In other words, the core business of ICICI Bank continues to disappoint. The bigger worry for ICICI Bank is on the NPAs front. Gross NPAs improved marginally from 7.99% to 7.87% but that was more due to a higher loan base. In rupee terms, the Gross NPAs are actually higher by 3.1%. But the real worry for ICICI Bank could come from another 18 accounts that have been identified by the RBI as stressed accounts. The total exposure of ICICI Bank to these accounts is to the tune of Rs.10,475 crore of which only 31% is already provided for. If the bank is required to provide 100% on these accounts, then the actual gross NPAS of ICICI Bank will shoot up from 7.87% of total loans to a whopping 9.13% of the total loan book. That will make ICICI Bank one of the most vulnerable among private banks and that impact is likely to show up on the stock price of the bank sooner rather than later.

There is good news for HUVR…

Hindustan Unilever, along with other FMCG companies, became the whipping boy when the demonetization drive was first announced. In a way, this quarter redeems HUVR. The volume growth has actually picked up by 4%,which is the standard growth rate that HUVR was enjoying in better times. This growth in volumes clearly indicates that the company appears to have overcome the negative effects of demonetization and of GST too. Hindustan Unilever has also managed to reduce its expenses during the quarter which can be largely explained by lower logistics expenses in the post-GST scenario. The sharp rise in the EBIT margins is also a big plus for the company. As far as HUVR is concerned, the company appeared to have emerged out of its prolonged phase of weak consumer demand growth. Remember, India is the second largest market for Unilever after the US and the parent has been focusing on improving volumes with a concomitant increase in pricing power too. That is what is leading to a re-rating of this stock as the FMCG play is finally getting its pegs in place! ©

Investor’s Dilemma

We may have seen the beginning of a major market re-rating…

The day after the bank recapitalization package was announced, there was a frenetic rally in PSU banking stocks. This rally not only took the Bank Nifty to a new high but even propelled the Nifty index to an all-time high beyond the 10,300 levels. There are obvious valuation worries at this level. Here are 3 sectors that you should seriously focus on as a long-term investor.

Banks will be the nucleus…

With a 30% share of the index, the banks have to do well for the index to go up further. There are 2 trends that are emerging and these are important from an investor’s perspective. Firstly, investors in private banks are getting a little more discerning. There are banks like HDFC Bank, Kotak Bank and IndusInd Bank that appear to have managed growth, margins and NPAs quite well. These will be the key out performers going ahead. Then there are banks like ICICI Bank, Axis Bank and Yes Bank where there are clear worries on the NPA front.These banks are likely to be a lot more vulnerable to price shocks as we have already seen in the recent past. But the big question is what to do about the PSU banks. With the recapitalization and the huge infra boost, PSU banks could see a major re-rating. Avoid the highly stressed PSU banks as they are unlikely to benefit from these capital bonds. Your focus should primarily be on banks that have the capacity to expand their loan books!

Consumer stocks will be hot…

One of the themes even at these levels of the market appears to be that the consumer demand is robust. Latest numbers from two-wheeler sales,auto sales and FMCG sales substantiate that. Most of these sectors are seeing a bottoming out of business metrics as growth in sales,profits and margins is picking up supported by volumes. The results of Bajaj Auto, TVS Motors and Hindustan Unilever appear to underline this trend. Many of these stocks are still underpriced considering their future potential as the proxies of the Indian consumption story. As an investor, if you are genuinely wondering what to do at market highs, this is another story you should keep an eye on.

Expect alpha from capital goods…

Capital goods stocks have not been the greatest of ideas in the last few years. Credit flow has been tight and the revival in the capital cycle appears to be some time away. But, that could be changing fast.With banks recapitalized, we could see the flow of credit once again to these capital goods companies. Secondly, the $100 billion investment proposed for the Bharat mala project could have a multiplier effect on the demand for capital goods. The sweet spot may have finally arrived. If you are looking ahead, you cannot create a portfolio without these stocks. The turnaround may be underway! ©

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