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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.

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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

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[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. 

SBI Associate banks propose merger with parent SBI

May 17, 2016: After over five years of hiatus, associate banks of SBI including State Bank of Bikaner and Jaipur have proposed to merger with the parent lender.

The respective boards have proposed merger with the State Bank of India (SBI) in a meeting , sources said.

The meeting of central board of SBI is going to consider the merger, they added.

Meanwhile, a section of employee unions have registered protest against any such move and threatened to go on a strike if such move is approved by the SBI and the government.

Photo: The Hindu Business Line

All employees of Associate Banks will go on strike on May 20, All India Bank Employees Association (AIBEA) General Secretary C H Venkatachalam said.

The country’s largest lender has five associate banks - State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad.

Among these, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore are listed.

SBI first merged associate State Bank of Saurashtra with itself in 2008. Two years later in 2010, State Bank of Indore was merged.

The government recently set up the Bank Board Bureau (BBB) to look into the issues including consolidation in public sector banking space.

The BBB headed by former CAG Vinod Rai had conducted interview for appointments of Managing Directors of some of the banks where posts will be falling vacant during the current fiscal.

The Bureau was constituted to help the government select heads of public sector banks and financial institutions and assist banks in developing strategies with regard to capital—raising and consolidation.

Besides Chairman, the Bureau has three ex-officio members and an equal number of expert members.

Expert members are ICICI Bank’s former joint MD H N Sinor, Bank of Baroda’s former CMD Anil K Khandelwal and rating agency Crisil’s ex-chief Rupa Kudwa.

Its ex-officio members are Secretary, Department of Public Enterprises, Financial Services Secretary and RBI Deputy Governor.

Courtesy: The Hindu

Do You Know?

That negative WPI is NOT GOOD for any economy, be it India or the US or the UK. 

For India, the WPI inflation in April came in POSITIVE for the first time in last 18 months, rising to 0.34% compared to negative 0.85% in preceding month. 

This marks the end of a depressing (or should we call it DEFLATION) era and heralds, the beginning of a POSITIVE START. 

This event is significant for all the sectors, especially the Banking space (SBI @ Rs.76 and PNB @Rs.74 and Allahabad Bank @Rs.50.40, are my top picks in a sector, which is a proxy of Indian economy) should cheer, the development, but unfortunately it selling off. 

As a thumb rule generally 2% inflation is taken to be beneficial for any growing economy. Hence, in future, we might see the sales (or turnover) apart from EBIDTA margins of companies improving; till the inflation numbers do not prove to be a menace once again. 

The Nifty is still down 36 points, but strongly feel that it would not only close in the Green but Nifty might actually close above 7830. 

Punjab National Bank to modernise enterprise data warehouse

10 May, 2016: Punjab National Bank (PNB), one of India’s “big four” banking groups, is looking to renovate its data management set-up. It issued an RFP “to revamp existing functionality” either by enhancing its current enterprise data warehouse (EDW) or to deploy a new one.

The RFP was issued late last year, for an end-to-end solution for EDW encompassing big data and analytics. Following a number of clarifications and deadline extensions, the RFP has finally and recently closed, Banking Technology understands.

The bank adopted its current EDW nearly ten years ago. IBM supplies the hardware and software components, and the reporting tool is based on SAP’s Business Objects.

The set-up provides information by utilising historical and current data from all source systems at PNB, including risk management software, CRM, an asset and liability management (ALM) solution from SAS, Infosys’ Finacle core banking system, ATM switch, Misys’ FusionCapital Kondor for treasury, HR management, digital banking and so on.

The new solution will leverage the existing IT architecture and will cover the entire organisation. It will be capable of handling large and complex data with 2,000+ concurrent users, and will handle both structured and unstructured data. It will be based on “the latest technology”, PNB states, such as Hadoop, Data Lake, Data Discovery etc. The availability of the solution should be at least 99.5%.

PNB expects the “extract, transform and load” (ETL) process of the new solution to be capable of processing data real-time and end-to-end. “Existing ETL process should be integrated in such a way that loading process can take place with least manpower requirement,” it states.

Scalability is vital too, with the system built capable of processing incremental 100 GB of data and overall database size of more than 200 TB.

PNB: facts and figures

PNB is state-owned. Its HQ is in New Delhi.

It has a network of 6,300 branches and over 7,900 ATMs.

It serves over 80 million customers.

Outside its domestic market, PNB has branches in Hong Kong, Dubai and Kabul. It also has a subsidiary in the UK – PNB International Bank – with seven branches.

It has representative offices in Oslo, Shanghai and Sydney.

PBN owns 51% of Druk PNB Bank in Bhutan, 20% of Everest Bank in Nepal and 84% of PNB Bank in Kazakhstan.

Courtesy: BankingTech.com

Do You Know?

State Bank of India Ltd is an Indian multinational, public sector banking and financial services company. It is India’s largest commercial bank.

Founded in 1806, Bank of Calcutta was the first Bank established in India and over a period of time, evolved into State Bank of India Ltd (SBI). SBI represents a sterling legacy of over 200 years. It is the oldest commercial Bank in the Indian subcontinent, strengthening the nation’s trillion-dollar economy and serving the aspirations of its vast population. The Bank is largest commercial Bank in terms of assets, deposits, profits, branches, number of customers and employees, enjoying the continuing faith of millions of customers across the social spectrum. Its banking activities include Personal Banking, Agricultural/Rural, NRI Services, International Banking, Corporate Banking and Services. 

State Bank of India is a regional banking behemoth and has 20% market share in deposits and loans among Indian commercial banks.As of 2014-15, it has assets of Rs.20,48,080 crores and more than 14000 branches, including 191 foreign offices spread across 36 countries, making it the largest banking and financial services company in India by assets. 

The Book Value of the shares of the company is Rs.165.49 and it has an EPS of Rs.160. This gives the fair value of the scrip as Rs.225-250, with suitable discounts. Therefore, buy the shares of SBI at Rs.176, for short term targets of Rs.225-250. 

SBI-hired 'bouncers' take over Vijay Mallya’s palatial holiday home in Goa

The villa, valued at Rs 90 crore, used to be Mallya’s base in Goa and also venue of many famous parties hosted by him during ‘good times’.

Vijay Mallya's Kingfisher house in Goa (Photo: Video grab)

May 15, 2016: Panaji: A troop of 50 staff members marched out of Vijay Mallya’s 'Kingfisher Villa' on Saturday giving way to bouncers from Mumbai, brought in by the State Bank of India, after the lenders took physical possession of yet another prime asset of the liquor baron to recover the loans defaulted by him.  

The palatial holiday resort was taken over after the revenue officials in Goa had on Wednesday allowed the lenders to take physical possession of ‘Kingfisher Villa’ in Candolim.

According to reports, the bouncers — over 40 of them distributed across the sprawling three-acre property — were not briefed about how long their stay at the famed villa would be, but the men are quite kicked about the idea of being there.

“Initially we were told by our agency that our client SBI’s property needed to be secured in Goa. It was much later that someone told us the property belonged to Mallya. Given the high-profile case, we were told to be keep a watch for media presence and be on our best behaviour,” Radheshyam heading the ‘bouncer team’ of Mumbai-based ADF security services said.

“For some of us, visiting Goa itself is a first, let alone visiting Mallya’s mansion,” he added.

Revealing that the villa staff were allowed to take away some furniture and other movables along with their personal belongings, Radheshyam said that they also took away a few cars. “But two cars are still on the premises. Proper authorisation is needed to take them away,” he explained.

The villa, valued at Rs 90 crore, used to be Mallya’s base in Goa and also the venue of many of the famous parties hosted by him during his ‘good times’.

Advocate Parag Rao, who appeared on behalf of United Spirits, said that the company had withdrawn its claim before the collector on Saturday.

Representing the bankers’ consortium, SBICAPS had sought physical possession of the property under Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act in late 2014.

Last week, media reports had said that Mallya put up a “villa manager” as a caretaker to thwart the bank’s attempt to take it over.

The villa was mortgaged to the lenders while obtaining loans for the now defunct airliner, but the caretaker, who claimed to be an employee of United Breweries, and the subsequent establishment of tenancy rights would have made it difficult for the banks to take over the property.

According to reports, bankers’ attempts to take possession of the villa were repeatedly stalled by USL, which claims the first right to buy the property as it is a tenant.

So far, the banks have recovered over Rs 1,400 crore by selling shares and collaterals and over Rs 1,200 crore is blocked in escrow accounts at Debt Recovery Tribunal, Bengaluru and the Karnataka High Court. Mallya had told the Supreme Court he was ready to repay up to Rs 6,800 crore of the total dues of over Rs 9,400 crore.

Last month, the consortium of banks had failed in its attempt to sell Kingfisher Airline’s erstwhile headquarters Kingfisher House in Mumbai because of the high reserve price of Rs 150 crore.

Attempts to sell the Kingfisher brands and associated trademarks carrying a reserve price of Rs 367 crore had also found no takers. Mallya left the country on March 2 for London. Earlier this week, the Government asked Britain to deport Mallya, citing the revocation of his passport and a non-bailable warrant against him.

Courtesy: The Deccan Chronicle

Corporate Results Show Signs of Recovery in Q4: BS

Photo: Money Control

After a poor report card during the first nine months of financial year 2015-16, corporate results for the fourth quarter offer hope of a recovery.

The combined net sales of 350 companies, which have declared results so far (upto 8th May, 2016), were up 5.6%, year-on-year (y-o-y) for the quarter ended March 31, 2016. This marked the fastest growth in the past six quarters, reports Business Standard.

Before this, these companies had reported a decline in revenue for four consecutive quarters.

The combined net profit (adjusted for exceptional gains and losses) was up 16.9% y-o-y, growing at the fastest pace in the past six quarters. 

The reported net profit was, however, down 8.8% y-o-y, resulting in a decline in companies’ underlying earnings per share.

Do You Know?

Photo: India.com

This week the Rajya Sabha passed, Insolvency and Bankruptcy Code Bill, that seeks to create time-bound processes for insolvency resolution of companies and individuals. The Lok Sabha had passed it on May 5, 2016. This is one of the major reforms brought about by the Narendra Modi government. 

The Insolvency and Bankruptcy Code 2015 is expected to address the problem of dealing with multiple laws for anyone wanting to do business in India. The present government has realised that the ease of doing business is not only about convenient entry into the market but also providing easy exit and restricting debt.

One of the most important reform envisaged in this bill is to make substantive changes in eleven enactments and repealing some to avoid conflicting rules. There is also provision to takeaway the jurisdiction of the civil court to ensure fast and effective process. Specialised adjudicating authorities like NCLT and DRT will be adjudicating authorities to deal with special corporate issues effectively.

To ensure effective implementation of the procedure prescribed under the bill, there is provision for establishment of a new board to deal with this specialised matter because strong financial institutions have a major role in sustainability of the economy of any country, which will be ensured after enactment of the bill. Another unique feature of the bill is that it gives right to operational creditor to initiate procedure and the right is not limited to big creditors only who want their money back.

The operational creditor will also have a say in the procedure. Workmen and other employees have priority as per the bill. This code is here to say, “enough playing around with scattered laws and living a lavish life with unlimited debt.” There will be a limit in waiting for repayment of debt. In short, either restructure, repay or windup. One of the unique features of the bill is to establish an information utility for collection of all authentic information at one place.

It is a new concept in India that will facilitate one to check  the information before investing. It will consequently ensure one’s investment is secured. Information utility will collect, collate, authenticate and disseminate financial information to facilitate insolvency, liquidation & bankruptcy. The bill has provisions for the creation of a class of professionals, who will be specialised in dealing with such matters and will be accessible to the persons who need them because they will be registered with the agency as ‘insolvency resolution professionals’, who will ensure an efficient, effective and professional handling of repayment of debt.

One of the most important challenges before investors was to deal with bad debt in India with assets outside Indian jurisdiction. The bill has provisions to tackle issues of cross-border insolvency. If one cannot repay debt, then assets situated outside India can also be considered for repayment if the Indian property is insufficient.

For this purpose, two provisions have been included and details will be available in rules framed subsequently for the legislation. The bill, in short, will ensure that creditors are secured in India and could usher in a new economic era, where India could attract investors more than ever.

Taking cues from this new act, most of the Bank Stocks including HDFC Bank and SBI, rallied on Thursday; as the passage of the Bankruptcy Code in Parliament has rekindled investor hopes on the country's banks hit by rising bad loans.

Analysts, across the board expect a number of rating upgrades in the next few months as the implementation of the code, which suggests a time-bound settlement process for insolvent entities, at a time when some bank stocks are trading at their 2-3-year lows due to high non-performing assets (NPAs) in their books.

The bankruptcy legislation will set a time limit of 180 days - which can be extended by 90 days if three-fourths of creditors agree - to make a resolution when a borrowing entity fails to make loan repayment on schedule. If the borrowing entity fails to stick to the time limit, then the company will be liquidated.

Most analysts said this would give much needed confidence to long only funds to buy into the banking sector.

"Long only funds with contrarian bets are expected to invest in lenders such as ICICI Bank, Axis Bank, SBI, Bank of Baroda that stand out as major beneficiaries from the bankruptcy bill," said Kunj Bansal, chief investment officer-equity at Centrum Wealth Management.

Analysts said a robust and effective bankruptcy code will benefit lenders by improving the credit culture in the economy. "The code gives banks a legal path for recovering their dues in a time-bound manner. This should make lenders more confident in lending, and borrowers more accountable," said Sonal Varma, chief economist at Nomura India.

Here are some inputs regarding my recommendations on banking stocks: 

(i) Allahabad Bank Ltd (Rs.53.40): As long as the scrip does not break Rs.52.35, on the downside, the investors can continue to accumulate it on dips and can wait for it to break out above Rs.55.50.

(ii) State Bank of India Ltd (Rs.188.40): It closed near the day's high of Rs.189.40, adding to the further bullishness. As long as it does not break Rs.183.80, on the downside, the traders can continue to accumulate the stock and wait for a break out above Rs.191.55.

(iii) Punjab National Bank Ltd (Rs.79.50):  As long as the scrip does not break below Rs.77.50, the traders can accumulate the scrip, waiting for it to break Rs.83.50 on the upside.

Nomura in a report said, “India currently ranks 136 in the World Bank’s resolving insolvency ranking; It takes 4.3 years to resolve insolvency and the recovery rate (at 25.7 cents to a dollar) is very low. The Code will play a key role in improving the ease of doing business in India.”

Insolvency is a situation where an individual or a company is unable to repay their outstanding debt.

The government expects that the new framework will help in improving India’s position in the World Bank’s ease of doing business ranking.

The World Bank estimates that winding up an ailing company in India typically takes four years, or twice as long as in China and Russia, with an average recovery of 25.7 cents on the dollar, one of the worst rates in emerging markets.

Under the new law, a debtor could be jailed for up to five years for concealing property or defrauding creditors. Bankrupt individuals would be barred from contesting elections as well.

Bankers say the courts are usually reluctant to sign "death warrants" against defaulting companies to safeguard jobs, often resulting in delays in winding-up procedures and poor loan recoveries.

The new law virtually empowers creditors to decide whether a defaulter is declared insolvent or not, though legally their decision could still be challenged in the higher courts.

Currently, over 70,000 liquidation cases are pending in debt recovery tribunals and courts.

To conclude, I would like to point out that:  the new bankruptcy code has provisions to take tough and time bound action against corporate defaulters and help Indian banks to recover nearly 8 lakh crore, in troubled loans. In other words, the insolvency and bankruptcy code, will strengthen hands of lenders to recover outstanding debts by setting a deadline of 180 days for companies to pay or face liquidation.

You can go full hog on the banking counters, on Friday.

Indian Firms are Deleveraging Fast says the leading Public Sector Bank: The SBI

[Editor: In view of the Rajya Sabha, passing the Insolvency and Bankruptcy Code 2016, a vital reform, which is likely to make business environment easier; one can buy the shares of Public Sector Banks. Once the President signs the legislation, India will have a new bankruptcy law that will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters.Along with the proposed changes in India’s two debt recovery and enforcement law. The new code will replace existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms. It will amend laws including the Companies Act to become the overarching legislation to deal with corporate insolvency. It will also help creditors recover loans faster.The move is also expected to help India move up from its current rank of 130 in the World Bank’s ease of doing business index, since all reforms undertaken by 31 May are incorporated in the next ranking.

On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve a case of bankruptcy in India, according to the World Bank. The code seeks to reduce this time to less than a year. The bill proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies. It also provides for creation of information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system. The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator of these utilities and professionals.It also proposes to use the existing infrastructure of National Company Law tribunals and debt recovery tribunals to address corporate insolvency and individual insolvency, respectively.

Therefore, I have suggested my Premium Clients to buy the shares of SBI at Rs.184.95, PNB at Rs.79.50 and Allahabad Bank (Rs.53.45)]

Photo: Money Munch

Indian companies are deleveraging in a meaningful manner and the perception that they are highly leveraged might not be the right one, says a research report by State Bank of India (SBI).

According to the report, authored by SBI’s chief economist Soumya Kanti Ghosh, domestic companies, particularly those in the cement, fertiliser, trading, finance and transport (airlines) sector, are deleveraging, or are now less dependent on debt.

“Top-rated companies are prepaying debt mostly from cash accruals. Cement, for instance, is one such case. However, some of them would be building a war chest for acquisition and may also resort to debt later at fine price,” said Ghosh.

Out of the 200 companies for which the research was done, 60 reported fall in debt levels in 2015-16 over 2014-15. The aggregate decline in debt levels, according to the report, was Rs 6,862 crore.

“Clearly, things are now looking better, contrary to popular perception,” the report said.

Indian firms deleveraging fast, says SBI
According to the report, focusing more on interest cover and the debt servicing ratios of the top 10 Indian companies to drive home the extent of corporate indebtedness is misleading, because what’s more important is “net worth, cash in hand, yearly accretion to net worth, investments, market value of assets and unbundling of value of some subsidiaries, thus, overall defining its repayment capacity”.

The overall indebtedness and debt-to-market capitalisation of such companies should be the right criterion. In that sense, SBI’s estimates show that on an aggregate basis, the top 10 companies’ ratios stood at 1.93x and 1.88x, respectively, which were “well within (the) respected level of 2x”.

Most of the ratings of these top 10 firms were above investment grade.

“While rating agencies' uniformity in applying rating parameters to various companies has also been inconsistent across continents, one nevertheless considers, as a matter of no choice, this as benchmark in raising debt. The investment grade companies... have been always able to raise resources at competitive rates,” the report said.

In listed companies, three finance companies -- Shriram Transport Finance, Cholamandalam Investment Finance and Motilal Oswal Finance, are reporting lower overall debt levels in FY16.

In fertilizer, Gujarat Narmada Valley Fertilizers Co Ltd (GNFC) reported loss to profit in FY16.

According to SBI, the fertiliser sector is also seeing a silent revolution, probably for the first time in 25 years.

Government's new investor policy is encouraging setting up of gas based urea plants in country. Already, there are three plants being set up in Kota (Chambal Fertlisers), Ramagundam (EIL and National Fertilisers Limited) and RCF. Additionally, with an aim to encourage setting up urea based plants in eastern part of country, government has directed NTPC, Coal India and ONGC to help set up plants at Sindhri, Gorakhpur and Barauni for facilitating Jagdishpur to Haldia gas pipeline being laid by GAIL.

SBI lauded UltraTech Cement Ltd for reporting lower long term indebtedness, but said the company needed to be watched more closely if it acquires Jaypee group's cement business.

Companies such as Maruti Suzuki and Essel Propack have also consistently brought down debt levels in last four years or so, the report said.

Among top five entities that deleveraged between fiscal 2016 and 2015, UltraTech Cement brought down debt by Rs 1,682 crore, Ushdev International by Rs 753 crore, GNFC by 711 crore, Interglobe Aviation by 639 crore and Shriram Transport by 632 crore, according to the report.

Courtesy: The Business Standard   

Idea Cellular Ltd: Buy

CMP: Rs.113.10

Idea’s 5% revenue and 16% Ebitda growth q-o-q were strong resulting in 340bp Ebitda margin improvement which is one of the highest in recent history. 

On the core business, it did well on voice with 4% improvement in prices and 1% in volumes. This is somewhat different to Bharti’s result—but both did well. Data trends are slow and steady—revenue rose 5%, ARPU 1% and 1.7 mn 3G adds growth.

In another significant, much-awaited relief for telecom operators, the Supreme Court on Wednesday struck down compensation policy for call drops levied by the Telecom Regulatory Authority of India. 

The operators had challenged the compensation of Rs 1 for every call drop, limited to a maximum of three such calls per day. Following an adverse judgement against them in the High Court, telcos approached the Supreme Court which stuck it down today, calling the Trai order "arbitrary and unconstitutional" as well as "illegal and not transparent".

"(The) SC has rendered historic judgement today by striking down the Trai s regulation," said Kapil Sibal, who was representing telecom operators in the court.

"SC said the regulation was unreasonable, arbitrary and the procedure followed was not transparent. Government and ministers should not try to be populist and do it in accordance with laws, not outside," he added. 

In October last year, Trai had come out with the regulation which was to come into effect from January 1, mandating operators to give one rupee for every call drop to the user, with a maximum of three per day.

The telcos had termed the regulation as arbitrary and whimsical, contending that providing compensation to consumers amounted to interfering with the companies' tariff structure, which could only be done by an order, and not by any regulation.

Trai had told the high court that consumers have a right to get compensated for call drops and this was different from the quality of service guidelines that cellular service providers have to follow under the licence conditions. However, telcos had argued that even if consumers were facing problems, a regulation without statutory backing cannot be created.

According to analysts, if Trai’s regulation is implemented, it could lead to a decline of seven-eight per cent in the operating income of telecom operators. However, for companies that had a call drop rate of two per cent or below – as was mandated earlier – will see a negative impact of three-four per cent on their operating income.

Interestingly, the new regulation did not allow leeway of two per cent call drops, which means the regulator expects the network to be perfect and telcos to pay for every call drop.

The government has been asking operators to invest in infrastructure to improve the quality of services, while operators say spectrum crunch is a major problem for call drops scenario.

Highlights:

## SC stucks down Trai s regulation for call drops compensation saying it's arbitrary and not transparent.

## In October last year, Trai had mandated telcos to pay subscribers Rs 1 for every call drop, subject to a cap of three call drops a day per user.

## Operators challenged the ruling in Delhi HC in December, 2015 which was dismissed on February 29 Telcos went to SC for a stay on March 3, but got no interim relief, hearing fixed for March 10.

## Telcos have earlier said the outgo from the industry would be nearly Rs 54,000 crore annually, but TRAI debunked these claims and said the payout would be only nearly Rs 800 crore annually.