Rolta India Ltd: Result Update

Rolta India Ltd has come up with a decent set of numbers for Q4FY16, with its Consolidated profit Zooming by 26% to Rs.59 crore on QoQ basis, mainly due to lower depreciation and amortization expenses.

However, its consolidated net sales in Q4FY16, dipped marginally by only 13.7% at Rs.846 crore The information technology company had net sales of Rs.981 crore in December 2015 quarter.

The depreciation and amortization expenses declined 89% to Rs 19 crore in March quarter from Rs170 crore in December quarter.

However, the share nosedived by more than 7%, as the rating agencies S&P Global Rating and Fitch Ratings cut the company's credit score.

S&P Global Ratings on Monday lowered its long-term corporate credit rating on Rolta India to 'CCC-' from 'B+'. At the same time, the credit rating firm lowered its long-term issue rating on the senior unsecured notes that Rolta Americas and Rolta issued to 'CCC-' from 'B+'. Rolta guarantees the notes.

On Friday, Fitch Ratings too had downgraded Rolta India's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured class rating to 'CC' from 'B'.

Meanwhile, Rolta India Ltd's CMD, Mr.K K Singh said that the company is confident of making a USD 6.9-million payment on overseas notes before the grace period deadline of June 15, 2016. 

He was talking to CNBC-TV18 after S&P and Fitch downgraded the firm's credit rating following a default on its 10.75% 2018 unsecured currency notes. Singh said an increase in the company's receivables period, from average 120-125 days to almost 185-190 days led to a cash crunch. But he maintained that the company was transitioning into an IP-led solutions business and is looking to rope in a strategic partner for large projects like defence, something that would help revive margins and return to comfortable leverage levels. He also clarified that the recent exit of two senior-level management personnel had no connection to the business performance. 

Therefore, the investors are suggested to buy the scrip of Rolta India Ltd (Rs.72.20) at the CMP and hold on, for some decent returns over a period. 

NDA Government: Report Card

Rolta Ltd: Buy

CMP: Rs.72.20

Buy Rolta Ltd at Rs.72.20 for short term targets of Rs.77-79, SL--Rs.69. Rolta Ltd's Q4FY16, Consolidated PAT grew 26.3% QoQ as reported by PRNewswire. 

The stock fell today as S&P Global Ratings on Monday lowered its long-term corporate credit rating to 'CCC-' from 'B+'. This is a temporary phenomenon and the stock is expected to recover very soon. 

What the market has ignored till now is that, Fitch also believes that Rolta India Ltd, has a high chance of collecting these receivables because most receivables are from either government agencies or U.S.-based multi-national corporates.

Therefore, this is a sure shot risk free counter at the CMP of Rs.72.20.

Mcleod Russel Ltd: Results Update

The Economic Times wrote on 30 May, 2016: 

Leading tea grower firm McLeod Russel reported widening of its standalone net loss at Rs.235.67 crore in the fourth quarter of the 2015-16 fiscal on higher expenses and financial cost.The Kolkata-based company had posted a net loss of Rs.207.95 crore in the same quarter previous year, it said in a BSE filing.

But what the news portal missed out is to present the CONSOLIDATED RESULTS which are NOT THAT BAD. The stock reacted to the news and fell to Rs.179.80 at the time of writing this report. 

The company said its EBIDTA on standalone basis was lower at Rs.82 Cr against Rs.126 Cr on substantial increase in wages during the year. The impact of price increase of Rs.2 per kg, was not sufficient to take of such increase in cost. EBIDTA cost per kg went up to Rs.167 as compared to Rs.150 per kg. This means from the following quarters the company will not have this factor this; as far as the standalone results are compared. But we are more interested in the CONSOLIDATED RESULTS, because the shareholders generally look at the consolidated results, to find how a company is faring, isn't it? Moreover, we invest in a company depending on its future outlook. 

Now let us see what the company said in a BSE filling. 

(a) The Consolidating Operating Earnings Before Interest Depreciation and Tax (EBIDTA) is HIGHER at Rs.167 Cr as against Rs.130 Cr last year. The increase in EBIDTA was mainly due to increase in production and prices for Uganda and Rwanda operation. So, does that look SCARY? 

Now let us hear, what the company, spoke about its future outlook: 

Black Tea production during 2015, was negatively impacted by lower production in India and Kenya. Tea prices at Mombasa auction increase by 20% over previous year. However, tea prices in India maintained at last year's level. 

(b) We observed COMPLETE REVERSAL of these FACTORS during the FIRST FOUR MONTHS of the current year. 

Tea production in Kenya is reported to be HIGHER by 40 million kg upto March, as compared to previous year on account of much improved weather conditions. 

Tea prices at Mombasa auction during the first four months of the year have decreased by 20% as compared to last year. 

Weather conditions in India during the first few months of new season have IMPROVED substantially as compared to dry weather conditions last year. It is expected that the industry would recover substantial part of crop losses suffered last year. 

Prices in India are likely to REMAIN FIRM mainly due to ROBUST DEMAND in Indian as well as Global markets. Recovery of crop should help in setting of increase in the wages and other input costs. 

Now what does it mean? It indicates that the company is expected to perform much better than the previous year's performance. 


Moreover, in an interview with a Business Channel, CNBC-TV18, its Chief Financial Officer Mr.Kamal Baheti, said that the Tea company McLeod Russel  expects to produce 87 million kilograms of tea at its plantations in India, and 30 million kilograms at its overseas plantations. 

He said last year was difficult, but he expected a better performance this year. Baheti expects domestic realisations to imporve by 5 % this year and overseas realisations by 15-20%.

He said the company aimed to export 21-22 million kilograms of tea this year, compared to 13 million kilograms last year.

Also, remember, McLeod Russel is the largest tea plantation company in the world. It prides itself on running a successful business that directly employs over 90,000 people and has an excellent reputation around the world.

Hence, I would suggest the shareholders, to accumulate the scrip on all declines for an increased short term price target of Rs.220. 

WINNING STROKES: THINK DIFFERENT

The State Bank of India Ltd recommended at around Rs.167-168, some weeks back, today touched Rs.203. The investors can book partial profits and enter Punjab National Bank Ltd at around Rs.77, for  targets of Rs.83-87.One can also accumulate Allahabad Bank Ltd at Rs.52-53, for a target of Rs.61; in the short term. The Punjab National Bank Ltd is the 3rd largest bank in India. 

Mcleod Russel India Ltd, recommended a couple of days back in this blog at Rs.181.70, today touched Rs.186, intra-day. The stock is soon expected to cross Rs.190, due to revival of the tea sector. 

Engineers India Ltd recommended around Rs.177, today touched Rs.184.50. The next target for the scrip is Rs.191, which it should achieve within a couple of weeks.  

Reliance Communications Ltd recommended today at Rs.49.50, today touched Rs.50.60, intra-day. The stock should give decent returns over a period; as it shares infrastructure with Mukesh Ambani's Reliance Jio. 

Moreover, you should go full hog on all Anil Ambani Group Companies (ADAG) as according to a report published in DNA India, on 27 May, 2016:

Anil Ambani’s ADAG has set aside assets worth Rs.59,761 crore to manage a debt of Rs.1,24,956 crore. That is a little less than 50 per cent of the total debt. Reducing debt will improve not only the balance sheet of the corporation, but also that of the banks with their stressed assets.

Vedanta Ltd recommended around Rs.61-62, today again touched Rs.107. In the 1st week of May, 2016, it touched Rs.114 -- almost doubling in less than 6- months.  

Adani Enterprise Ltd recommended at Rs.71.35 on 25 May, 2016, touched Rs.74, intra-day. The stock will slowly move towards Rs.87-88, in the short term. 

Reliance Communications Ltd: Buy

CMP: Rs.49.50

T: Rs.57

SL: Rs.47

Triggers:
1. Reliance Communications is introducing 4G LTE with network partner Reliance Jio in most of its service areas. The company derives a large proportion of its revenue from wireless internet services. It also offers the cheapest voice rates in the country, and has an estimated 5 mln customers on its CDMA network.

2. Reliance Communications, the telecom firm from Anil Ambani Group, has extended the sale of its 4G SIM cards to all circles except the three southern states and Rajasthan. The states which are not getting a 4G upgrade immediately — including Karnataka, Tamil Nadu and Kerala — are among the most lucrative data markets in India. It is not clear why subscribers in these four states are not being upgraded, but part of the reason could be the presence of MTS — which is being acquired by RCom — in these areas. MTS is present in eight circles including the above four, as well as Delhi, Kolkata, West Bengal and UP West. Since MTS is already present here, RCom has shifted its CDMA subscribers to the network of MTS, thus freeing up its spectrum. This spectrum will be joined with Reliance Jio’s 4G spectrum to create a combined network.

3. In states where RCom does not have a back-up partner in the form of MTS, the Anil Ambani company has to first shift its subscribers outside the network before switching off its CDMA service and diverting its spectrum to Jio’s 4G network. The three southern states especially are lucrative data markets, and by launching 4G services before, or at the same time as, RCom, Jio will enjoy the first-mover advantage in these areas. Of course, incumbents like Idea Cellular and Bharti Airtel have also launched their 4G services in these states, but their networks cover only a fraction of the area that the combined RCom and Jio network currently covers. While Jio has a total of around 1.5 lakh 4G base stations in India, Bharti Airtel and Idea Cellular have only around 15,000-17,000 each. This gives an added edge to Reliance Communications Ltd, due to obvious reasons. 

4. The last correction seen in the domestic market continued only for few days, as FIIs pumped in fresh funds. Moreover, domestic institutional investors (DIIs) has been lending their much-needed support to the market and has been cushioning a free fall. 
In such a situation, and especially when the Nifty (cash) is above 8116-8150 levels, the short term TREND remains UP,both in the daily and weekly charts. 

Also, the history suggests investors have always made money when there is fear. The current market conditions are something like that.....

In another very important development, the big Indian corporate houses are finding ways to deal with debt and the banks are encouraging them to go ahead. As reported recently in DNA India the economic research department of the State Bank of India has found that some of the big corporations are setting aside part of their assets to deal with debt.


For example, Anil Ambani’s ADAG has set aside assets worth Rs.59,761 crore to manage a debt of Rs.1,24,956 crore. That is a little less than 50% of the total debt. Reducing debt will improve not only the balance sheet of the corporation, but also that of the banks with their stressed assets.

Conclusion: Buy the stock of Reliance Communications Ltd at Rs.49.50, for short term targets of Rs.57-59. 

Tea to turn costlier by 15% as output falls

[Editor: Last week the stock of McLeod Russel Ltd (the world's largest tea planter), was recommended in this blog at Rs.81.70, on the back of buoyancy in the tea market and due to revival of the tea sector. Meanwhile, there were media reports that: 

Heat wave conditions and drought in tea growing areas in South India have hit production of the tea crop by about 10 per cent, according to planters in the region. South India accounts for 20 per cent of India's total tea production of 1,200 million kg. "April-May is one the peak season for tea production. Whatever we lose in April-May is very difficult to make up," said Peter Mathias, former president of UPASI and a tea producer in Karnataka.

Mcleod Russel Ltd,  is one of the largest tea plantation companies in the world and produces around 100 million kg of tea a year from its estates in Assam and West Bengal and other estates in Vietnam, Uganda and Rwanda. 

In another significant development, the B.M. Khaitan Group-controlled Williamson Magor Group announced a major recast of engineering companies in its fold to consolidate its operations. The major companies in the Williamson Magor Group are dry-cell battery maker Eveready Industries India Ltd, bulk tea producer Mcleod Russel India Ltd and the engineering companies. 

The scrip closed at Rs.183.55 in the BSE. I am expecting the stock to cross Rs.195 at the end of this week. Those who have bought this share, can keep accumulating, on all dips. The company is coming up with Q4FY16 results on 30 May, 2016]

KOLKATA: A drop in tea production in Assam and West Bengal in April is likely to push up prices of tea this month to at least 15% above March rates when there was oversupply, say experts. Tea production had grown by 56% in March due to favourable weather conditions.

Experts said packet tea players are expected to purchase tea from the market in the middle of May, a situation which will firm up the market further.

"In March, production was up as early rains had improved the crop production. But incessant rains in Assam and a dry spell in Dooars and Darjeeling in West Bengal have impacted production of first flush teas in April," Azam Monem, director of McLeod Russel India, told ET. "End March prices dipped because of oversupply. But since April crop was affected, the supply will be less in May which will firm up prices."

In April 2015, India had produced 75.61 million kg of tea. Though the Tea Board is yet to come out with figures, industry executives said they expect April 2016 production to be less by 10-15%.

Domestic tea production in March grew 56% year-on-year to 68.34 million kg, according to estimated production data of the Tea Board. In March, Assam produced 31.29 million kg of tea, up 163% from a year ago. West Bengal, which has tea-producing regions of Darjeeling, Terai and Dooars, produced 20.48 million kg of tea in March compared to 14.45 million kg produced in the corresponding month last year. South India's production fell 8.33% to 15.30 million kg in March.

Tamil Nadu, Kerala and Karnataka had together produced 16.69 million kg in March last year. Packet tea players like Ramesh Chand Agarwal, managing director of Mohani Tea, said from mid-May prices of CTC tea quality will shoot from 160kg to Rs 140 kg in March. Mohani Tea, a major north Indian player, has already used up its old stock of tea. "We need to buy fresh tea from next week. Prices will be up but we will not pass on the price rise to our consumers," Agarwal said.

Parag Desai, executive director of Wagh Bakri Tea said prices may rise because of speculation. "There was a good crop in March. The impact of rains will not be much as far as tea production in Assam is concerned. We have spoken to the weather department and there will be no shortage of tea this year. Volumes will be good and, we do not see prices shooting up suddenly," Desai said.

Courtesy: The Economic Times

McLeod Russel India Ltd: Buy

CMP: Rs.181.70
Target: Rs.205
Time: 60 days

The stock of Mcleod Russel India Ltd has not taken part in the current rally. Buy the share at the CMP of Rs.181.70, for a short term target of Rs.197. 

This Williamson Magor group-controlled company aims to scale up their packet tea business to become the third largest in India.

There were media reports last month that inclement weather is taking a toll on people across the country, especially the North-East where tea production might be impacted owing to difficult weather conditions. While Assam has witnessed heavy rains, Darjeeling has gone through a dry spell (though the company does not have much exposure here). Speaking to Bloomberg TV India, McLeod Russel CFO Kamal Baheti says while there could be some impact of April, FY17 looks brighter than last two years.

He said: "If you look at the full financial year, April produces 5 per cent of the overall production. So, the loss of crop in April may not really impact the annual production. But, it really depends on how the weather plays out. We hope that things will improve. It is normal in Assam to get rain continuously for 10-15 days. As I said, it’s too early to really make a call on this. But you know, if you really have to look at the structure of industry per se, it has been losing crop since last two years because of dry weather. This is the first time we’re getting enough rains in Assam. With a little bit increase in the overall temperature and rainfall, it may be a good year for production. And since the rate of production has been low in the last two years, we also expect the prices to be strong this year. Compared with the previous year, 2016-17 looks much better, both on the production as well as the price".

Earlier in an interview with CNBC TV18, on 22 March, 2016, Mr.Kamal Baheti, CFO said, "Considering supply shortages, good demand and firm closing prices during the last season (higher by Rs.20-25 per kg), tea prices are expected to be strong in the upcoming auction". 

He feels the tea prices are likely to increase by at least 15-20% in the new season from July to October.   

Baheti pointed out that a major chunk of the company’s profitability kicks in only during the third and fourth quarters as the new season begins.   Although overseas business of the company is also expected to perform better, the focus will be on the domestic market, he said.

Therefore, we can look for taking positions in the share of Mcleod Russel Ltd at the CMP of Rs.181.70, for target of Rs.193-197-205. The Company is coming up with Q4FY16 results, on 30 May, 2016. 

Adani Enterprise Ltd: Buy

CMP: Rs.71.35
Target: Rs.91
Period: 30 days

Adani Enterprises Ltd, the flagship company of the Adani Group, came out with a consolidated net profit of Rs.167 crore in the March, 2016 quarter.

The company said that earnings for the quarter and the fiscal year 2015-16 are not comparable with previous corresponding periods due to the demerger of ports, power and transmission businesses from Adani Enterprises from 1 April 2015.

Consolidated total income from operations for the quarter was Rs.10,950 crore. The consolidated total income from operations for the fiscal year ended 31 March 2016 was Rs.44,023 crore. Consolidated profit after tax for FY16 is Rs.1,041 crore.

Gautam Adani, chairman Adani Group, said, “Our portfolio of businesses across mining, Renewable energy and agro vertical benefits from vastly improved macro-economic and regulatory environment. Encouraging policy initiatives particularly in renewable space, enables us to explore new business opportunities in the sector.”

Ameet Desai, CFO, Adani Group and executive director, Adani Enterprises, said, “Our results reflect growth in operating performance across mining, city gas and agro businesses. We have already begun our renewable foray by commencing activities in solar generation.”

Also, U.S. crude oil prices rose to a new 2016 high in on expectations that continued supply disruptions would help reduce the oversupply of crude. 

Citigroup analysts said that the worst is over for the oil market, as a slowdown in production is setting prices up for a steeper rebound than predicted at the beginning of the year; Citi sees Brent reaching $50/bbl in Q3 “if not earlier,” before climbing to ~$65 by the end of 2017, and forecasts WTI will hit $50 by year-end 2016 and $61 by the close of next year.

“In Nigeria, Venezuela, Libya and a host of other countries, the threat of disruptions seems to be increasing and not decreasing,” Citi says. “Prices look likely to march forward to the mid-$60 range.”

This is positive for all renewable energy companies like Adani Enterprise Ltd.  

Adani Enterprises Limited is an infrastructure company. The Company deals in coal trading, coal mining, oil and gas exploration, ports, multi-modal logistics, power generation and transmission, and gas distribution. It has already forayed into renewable energy space by commencing operations in solar generation.

Among its various businesses, AEL's mine development and operations (MDO) business at Parsa Kente saw the company extracting and supplying washed coal of 5.5 MMT to RRVUNL in FY'16 as compared to 3 MMT in FY'15.

Under its city gas distribution business, the project implementation work at seven cities under joint venture with Indian Oil Corporation Limited is progressing as per the schedule, the company stated.


AEL recently launched India's first Diabetic care oil under brand "VIVO" for specific target segment under its agro business.

Adani Enterprises massively stepped up its a new renewable energy division over FY2016. 

June 2016 Adani Enterprises will fully commission its new 648 MW solar project in Tamil Nadu – which on commissioning will be the largest solar project in the world (to-date).


Adani Enterprises reports it has established a further 700MW solar and wind project pipeline over the last 12 months. Additionally, Adani has recently signed a joint venture with the Rajasthan government to develop a 10,000MW solar park. Adani Enterprises has also started construction of a greenfield 1.2GW solar module manufacturing facility in Gujarat, due for completion by March 2017.

Moreover, the brother of Gautam Adani, is known to be close to Prime Minister Narendra Modi.

Punjab National Bank Ltd on path to cut NPAs: MD

Photo: The Economic Times

May 24, 2016: Punjab National Bank Ltd (Rs.71.95) has already recovered Rs.1,800 crore in 54 days of Q1 FY17 against the targeted Rs.5,000 crore in the first quarter, MD and CEO Usha Ananthasubramanian said.

“You must see the robustness of the bank. The bank is very solid, otherwise it would not have made Rs.12,000-crore operating profit. We would like to resolve and minimise NPAs,” she said while addressing media persons in Mumbai on Tuesday.

PNB would be cautious about lending to sectors such as steel and textiles, she observed.

She said that the bank was undertaking a cost-cutting exercise and expected to maintain its cost-to-income ratio just above 40% for the next couple of years. 

PNB’s cost-to-income ratio for FY16 stood at 44.94% compared with 46.74% in FY15.

Courtesy: The Hindu Business Line

Engineers India Ltd: Buy

CMP: Rs.177
Target: Rs.185
Period: 7 days

Engineers India Ltd., Navratna public-sector undertaking, will announce its financial results on May 23 for the fourth quarter ended March 31, 2016.

IIFL estimates the company’s net profit to rise to Rs.91 crore at 46.1% Q-o-Q; however, it is likely to fall 16.7% Y-o-Y.

As per IIFL’s forecast, the company’s net revenue for Q4 FY16 is expected to soar to Rs.429 crore at 16.5% Q-o-Q; however, the same is likely to fall 12.2%,Y-o-Y.

Operating profit margin is likely to come in at 17.5%, with a Q-o-Q rise of 700 bps and 178 bps on a Y-o-Y basis. Not bad results at all. 

Moreover, the daily candle stick chart is giving some indication of the scrip bottoming out. In such circumstances it would be prudent to take position in the share of Engineers India Ltd at the CMP of Rs.177, for a short term target of Rs.185. SL--Rs.175 (strict). 

Do You Know?

Photo: Scroll.in

India’s largest public sector bank is about to get even bigger. In a move that could herald the long-awaited consolidation of India’s banks, the State Bank of India Ltd (Rs.70.50) has just taken the first step towards merging its five associate banks. The result will be a new banking behemoth with assets worth Rs.37 lakh crores – one-fifth the size of India’s gross domestic product.

This will bring all of SBI’s associate banks under its fold – the bank has already merged with two of them – State Bank of Indore and State Bank of Saurashtra in the last decade.

For long, experts have pointed towards the need for bank consolidation at a time when financial inclusion is rapidly expanding and small entities often don’t prove viable to execute bigger projects. Even as the bank insists that the effort is “purely exploratory” at this stage, there are signs that this might indeed turn out to be the moment of reckoning for India’s banking sector. Finance Minister Arun Jaitley hinted at it a few weeks ago when he asked reporters to “wait for a few days” on being asked about banking consolidation.

Photo: Scroll.in

Moreover, the Reserve Bank of India has regularly stressed upon the need to consolidate non-performing entities and cleaning up of balance sheets to reform the banking sector. If the approval goes through, the newly set up entity will turn out to be more than five times the size of the country’s second largest lender ICICI Bank which has a total business size of about Rs 7.2 lakh crores.

Photo: The Financial Express

SBI itself has more than 17,000 branches across the country and about 200 offices in foreign countries. These branches do a total business of about Rs.29 lakh crores as of now having advances of Rs.13.91 lakh crores and Rs.16.71 lakh crores worth of deposits as of December last year. These five additional banks will also bring in an additional Rs.12 lakh crores of business with them.

SBIN and its Associated Banks (AB's) board has provided an in-principle approval to proceed for a merger creating a behemoth with a quarter of assets. SBI will also usurp the two-year old Bharatiya Mahila Bank (FY15: Profit Rs.290 m, Assets:Rs.185 bn). AB merger would entail higher employee costs given the difference in pension/gratuity calculation between ABs and SBIN— approx. Rs.7 bn per bank or in aggregate about 2.2% of consol equity. The greater challenges are in employee redundancies, HR/Operations, Branch and ATM rationalization, etc. Technology and accounting are similar.

We see a potential of risk-arbitrage between the listed-cubs—State Bank of Bikaner & Jaipur (SBBJ IN, Rs 507, NC), State Bank of Mysore (SBMS IN, Rs 424, NC) and State Bank of Travancore (SBTR IN, Rs 403, NC) —and SBIN. We see this as the first of many reports on which ink will be spilt as we proceed closer to the eventual merger. To begin that journey, we do a deep-dive of the annual performance of the five associate banks.

Valuation/risks:

SBIN trades at 1.3x consol trailing BV (Mar 16) and 5.1x EPS (12 m to Mar 17e). We value SBIN at Rs.280, implying P/B & P/E multiples of 1.4x (Mar 17e) and 6.4x (12m to Mar 18e). This compares with 10-year averages of 1.5x and 9x, respectively. 

Key risks: Weak asset quality, weak loan growth.

Cubs—important for growth & asset quality: SBIN’s associate banks (five smaller banks or cubs) aggregate to ~26% of the standalone loan. In terms of total assets, it’s about 20% of consol assets. However, over time their contribution to the consol profits has come off to ~10% in FY16e versus >30% in FY11. However, the cubs’ contribution in slippages as compared to the standalone bank’s slippage has been significantly higher in the last two years. The net profit and ROE profile of the cubs has not diverged materially from the parent, except in the December 2015 quarter.

Growth consolidation to improve slippages over time: As we had highlighted in an earlier report, the growth consolidation at the cubs continued in FY16 as well, with aggregate loan growth coming in at 3.1% against an industry average of 10.7%+. We understand the cubs had an explicit direction from the parent bank to limit risk-weight asset (RWA) growth to 12% in FY16. While slippages have increased, we expect the trend to reverse over time.

Asset Quality—accelerated recognition: The key takeaways from the full year asset quality data of the cubs are as follows —

* Slippages are elevated this year, especially in Q4—a potential indicator that SBIN too could recognise larger NPAs

* Aggregate stressed asset has come off to 9.3% from 11%, implying accelerated recognition through classification of restructured accounts as NPA

* Most SDR accounts are either restructured or have already become NPA

* The only possible underreporting could come from 5/25 refinancing on which we have no data points.

It is possible that conversion of restructured DISCOM loans to bonds have also aided the fall in the total stressed assets, although we cannot ascertain the impact of this at present.

Restructured assets have declined: Restructured assets for cubs in aggregate declined to 5.8% in FY16 versus 8.4% in FY15, aided by lower fresh restructuring post removal of forbearance on asset quality from April 2016, and higher slippages of restructured assets to NPA (12.2% in FY16 vs. 11.3% in FY15). Conversion of DISCOM loans to bonds may have played a role in this too.

Conclusion: The scrip of SBI has more or less bottomed out at the CMP of Rs.170.50. Therefore, BUY the Shares of State Bank of India Ltd at Rs.170.50, for a short term target of over Rs.200. Keep a SL of Rs.167 (sell 50%)--164 (exit) for any short term trade. However, the long term investors should buy and keep holding. 

PNB moves passport authorities to stop defaulters from going abroad

Photo: Slideshare.net

[Editor: The shares of Punjab National Bank  Ltd (Rs.73.30) and State Bank of India Ltd (Rs.173.25) have corrected more than it should have been. The respective Public Sector Banks (PSBs) are doing all their best to recover the bad debts and at the same time they are taking effective measures to clean up their balance sheets. Moreover, NPA does not always mean bad debt, because after 90 days of non-payment of EMIs, an account becomes NPA. These accounts could be revived or the bank with the help of new Bankruptcy law (and/or earlier Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; also known as the Sarfaesi Act)  can settle the claims within 180 days. 

Besides, lot of negatives have been said on various business channels regarding the merger of five associate banks of State Bank of India: namely State Bank of Travancore, State Bank of Mysore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, and State Bank of Patiala, into itself.

However according to a report published in The Hindu: "The garment exporters and technocrats by and large feel that the absorption of the associate banks would be good for the seekers of higher volumes of loans and for those who look for quicker payments from overseas banks".

“Merger is primarily an excellent idea as sanctioning of term loans and packing credit in large volumes at the level of tier-II and tier-III type of cities/clusters like Tirupur, becomes faster.......technocrats like T. R. Ramanathan, a chartered accountant, say that consolidation would bring down administrative expenditure as so many branches were not required in this technologically advanced banking scenario".

Also, according to a report published on The Economic Times on 18 May, 2016: The State Bank of Mysore does have a lot of assets........the State Bank of Mysore for itself does have a lot of landed property particularly in Bangalore which may on revaluation be worth quite a bit...

In another significant development, according to a news report in Money Control on 17 May, 2016: India's largest lender  State Bank of India   is looking to sell a part of its non-core assets in National Stock Exchange (NSE). SBI along with its subsidiaries have a total of 15 percent stake in NSE. SBI Capital Markets Limited has been appointed as a consultant to the client for advising and managing the proposed disinvestment process. The last date for submission of bid is May 19. The bank expects about Rs 1,000 crore from the stake sale. It may also sell the remaining 10 percent stake in NSE during its listing, the notice said. 

Not only that, according to an article on First Post on 10 May, 2016: The Veteran banker and president of the BRICS-promoted New Development Bank KV Kamath downplayed the NPA threats, saying worries about bad debts are over-blown and that higher growth will ensure that stressed assets turn productive in the short-term.

"I don't understand what the noise is about...My belief is that most NPAs will turn productive in the short run, and not in the long-term," he told reporters on the sidelines of a CII event to encourage trade and innovation ties between India and China here this evening.

Comparing the Indian scenario with China's in the early 2000s, Kamath said at USD 500 billion, non performing assets accounted for 50 per cent of the northern neighbour's GDP at that time and now, have recovered to be among the largest banks in the world.

"We are (NPA numbers) not even 10 per cent of GDP. I think we should make less noise about it," he said, adding that we should not be "freightened by the clean-up that has started".

In case of Punjab National Bank Ltd, the research house Edelweiss is bullish on the stock and has recommended buy rating on the stock with a target price of Rs.120 in its research report dated May 18, 2016.

Another news item published  on 19 May, 2016, by the Business Standard, says the following: 

Banking funds have rallied 17.3 per cent over the past three months (according to category average data from Value Research), compared to the broad market index, Nifty 50, which is up 8.23 per cent. Investors keen to profit from this rally should, however, assess carefully the sector’s fundamentals.   

The current rally in banking, say experts, is part of the broader ‘risk-on’ rally in global markets, following the recovery in commodity prices. The second factor is fund flows. Banking constitutes 25-35 per cent of the major indices. “Whenever fund flows come in, especially from foreign exchange-traded funds (ETFs), a large part of it gets invested in banking stocks,” says V Srivatsa, fund manager, UTI Mutual Fund. Third, the sector’s underperformance before the current rally had made valuations attractive.

Hence the crisis in the PSBs is not as severe, as it is made out to be by some marketmen; who come on various business channels, and parrot the same hackneyed story. Most of these poor fellows neither have any accountability nor any responsibility towards the shareholders. 

Therefore, I feel that instead of paying heed to what they say on Business Channels, it is better that you do your individual researches and come to appropriate conclusions. I am sure your inference will concur with that of mine. 

Moreover, the government of India is contemplating to infuse around Rs.25,000 crore each into public sector banks in Fiscals, 2016 and 2017 and Rs.10,000 crore each in 2018 and 2019. However, he had also made it clear that if more money is required, the government will not shy away from its responsibility.

I would therefore, reiterate that the worst is probably over for the PSBs and the investors can take a 30 days horizon and stay put in these two Blue Chips (apart from Allahabad Bank Ltd; CMP: Rs.51.10) to get at least 20-30% returns on their CMPs]

19 May, 2016: Punjab National Bank (PNB) has turned smarter after l’affaire Vijay Mallya. The public sector lender has started moving the passport authorities to ensure that ‘wilful defaulters’ do not leave the country without the bank’s approval.

Photo: Slideshare.net

PNB has, through the Debt Recovery Tribunal (DRT), ensured that the names of 250 ‘wilful defaulters’ are recorded by the immigration authorities in their systems, Usha Ananthasubramanian, Managing Director and CEO of the bank, said.

Whenever a wilful defaulter goes to immigration for going abroad, the system will automatically throw up a message: “permission required to move abroad”.

Requests have also been made by PNB to the DRT for a similar process in the case of another 500 wilful defaulters, sources said.

In India, neither banks nor civil courts have the power to impound passports and this can be done only by the passport authority under the Passports Act 1967, Amit Vyas, Founder Partner, Vertices Partners, a Mumbai-based law firm, told BusinessLine. Banks, such as PNB, are approaching the DRTs, which then go to the passport authorities to do the needful. In February, PNB had created history of sorts by making public the list of 900 wilful defaulters, including Winsome Diamonds, Zoom Developers and Nafed, which owed ₹11,000 crore to the bank.

Till date, there are over 7,000 deliberate and wilful defaulters who owe ₹60,000 crore to banks.

Meanwhile, sources said PNB was unlikely to accept any offer from liquor baron Mallya that does not involve full payment of the dues. “PNB view is he (Mallya) has to pay the money in full,” a top bank official said.

Mallya has reportedly made a new settlement offer to consortium leader State Bank of India expressing his willingness to settle for less than what is due to the banks. He has been showing willingness to pay up after running out of all options to avoid repayments.

Courtesy: The Hindu Business Line

Why I am Bullish on some of the PSBs...

Three of my recently recommended Public Sector Banking (PSB) counters: 
(i) Allahabad Bank Ltd (Rs.53.20; intra-day high: Rs.53.60; Up: 3.20%; Book Value: Rs.192.83; 52-week L/H: Rs.39.40/Rs.108.25), 
(ii) Punjab National Bank Ltd (Rs.76.20; intra-day high: Rs.77.20; Up: 3.25%; Book Value: Rs.192.06; 52-week L/H:  Rs.69.25/Rs.180.55) and 
(iii) State Bank of India Ltd (Rs.180.20; Intra-day high: Rs.180.55; Book Value: Rs.165.49; 52-week L/H: Rs.148.25/Rs.305.00), were up yesterday on Bargain Hunting. 

Speaking with a Business Channel, Ms.Usha Ananthasubramanian, MD & CEO of Punjab National Bank said, the bank has done a major cleansing exercise in the last quarter and is now targeting recovery of loans worth about Rs.50,000-20,000 crore in FY17. 

"There is about Rs.700 crore coming out of the discoms. So, it is a process by which we have done a major cleansing because we have moved on for the last few months into a daily recognition of NPAs which has thrown some surprise. But we are on top of it. So, at this point in time, as I said, because we have done a major cleansing. Whatever happens in future and if the recovery is robust, I think we would have done a good job" she said. 

Meanwhile, Hemindra Hazari, www.hemindrahazari.com, said: "This is not the end but the beginning of the end for bad asset quality for banks". 

Now, it is a fact that, given the asset quality baggage and the subsequent earnings pressures, the return ratios for the above mentioned PSBs are anticipated to be not so encouraging. Besides, levered corporate exposures and meaningful restructured pipe-line, indicates pain is here to stay for the PSBs for sometime. However, the stocks are already trading near their lowest bands of historical multiples and hence, further downside is, limited. 

Moreover, since the GOI holds a major stake in these PSBs, it is expected that Narendra Modi government, will try its best to revive the sector, especially when it has taken some positive steps to inprove the health of DISCOMS. 

It is to be remembered that Banks have been forced by the Reserve Bank of India to provide higher amounts for the bad loans, thus ensuring that the red ink spreads across their balance sheets. 

"The (PNB) bank intentionally took much higher provisions for cleaning up of the balance sheet. Naturally they had to take provisions for the high NPAs as they had not accounted for the asset quality review in Q3 of the previous fiscal," Siddharth Purohit, senior equity research analyst -- banking, Angel Broking told IANS. "Going ahead certainly this kind of loss will not be there for Punjab National Bank Ltd; though asset quality has still not stabilised, the last part is done," he added.

Reserve Bank of India had given a deadline for all banks to complete their asset quality review by March 31, 2016. In this connection, the government said last week that banks' gross non-performing assets (GNPAs) could rise to 6.9% by March 2017, the deadline given by Reserve Bank of India (RBI) Governor Raghuram Rajan for banks' balance sheet clean-up. 

In another significant development, The State Bank of India (SBI) board on Tuesday decided to submit a proposal to the central government seeking an “in-principle approval” to initiate negotiations with its five associate banks. there are long-term benefits that SBI can derive from the merger. For instance, the total market share of the entire group put together is 22-23 per cent while that of SBI is 17-18 per cent. The merger adds 400-500 basis points to the market share of SBI, estimates Suresh Ganapathy, financials analyst at Macquarie Capital. The merger could also throw up opportunities to cross-sell products. SBI is far more aggressive to grow its retail products as well as fee income and this will rub off favourably on the prospects of its subsidiaries. All these will happen in a gradual manner.

Also, the SBI management believes that after the merger, its balance sheet will increase to Rs.37 lakh crore from Rs.28 lakh crore currently and SBI will get fixed assets worth Rs.4,000 crore from the books of its subsidiaries. The management expects its cost of funds to come down by 100 basis points within a year, as subsidiaries currently have high deposit rates.

Photo: The Hindu

Considering the above facts I, continue to remain BULLISH on some of the PSBs, as all efforts are being made to recover the bad loans, an expectation of, credit offtake to pick up steam in the following quarters, as Indian Economy, has perhaps come out of the "Deflation Trap"; after a long gestation period and the Steel Sector is on a recover mode (CLSA in its February, 2016 report wrote: Steel sector lead the slippages for the PNB) and the meteorology department had indicated, a good monsoon season, ahead (In case of PNB, 68% advances are in the rural and semi urban -- so it gives them a lot of scope to lend to agriculture sector and also, the other small tickets like the retail). 

The Punters are betting on some well known PSBs, on the premise that a  revival in global growth and better monsoon rains in India will help cut bad loans and revive credit growth. 

The Indian Finance Minister recently said, that he is getting a sense that the stressed sectors that have caused these huge holes in bank balance sheets, they are now beginning to recover, sectors like steel, sectors like roads. So, he expects balance sheets to start recovering. 

Therefore, those investors who have still not entered these "Blue Chip PSBs", can consider, buying them in every dip for 25-30% appreciation from their CMPs, in the next 30 days. I am expecting their price to double in the next 6-9 months; as worst seems to be over for some of these PSBs.

State Bank of India plans to sell up to 5 percent stake in NSE

17 May, 2016: SBI plans to sell part of its holding in National Stock Exchange (NSE), where it owns 15% stake. 

SBI intends to disinvest up to 5 per cent of its equity holding in NSE through a competitive bidding process, a public notice said. 

SBI Capital Markets Limited has been appointed as a consultant to the client for advising and managing the proposed disinvestment process. 

The last date for submission of bid is May 19.