Over 1,300 fresh FPIs register in April-August FY17

More than 1,300 new foreign portfolio investors (FPIs) have registered with capital markets regulator Sebi in April-August of 2016-17, showing a sign of their willingness to be part of India’s growth story.

In the last fiscal, a total of 2,900 FPIs had received approval from Sebi.

The number of FPIs with Sebi approval increased to 5,626 at the end of August from 4,311 in March-end, reflecting an addition of 1,315 such investors, latest data from the Securities and Exchange Board of India (Sebi) showed.

FPI investors consider India as a preferred and stable market, given its macro-economic stability, long-term growth prospects and ongoing economic and social reforms, market experts said.

Besides, Sebi has decided to offer direct entry to well-regulated foreign investors for investing in corporate bonds, they added.

They had pumped in over Rs 36,000 crore in the capital markets (debt and equity) in April-August period.

In a big revamp, Sebi had in 2014 released norms that clubbed different categories of foreign investors into a new class called FPIs.

FPIs have been divided into three categories as per their risk profile and KYC (know your customer) requirements, while other registration procedures have been made simpler for them.

They are granted permanent registration as against the earlier practice of approval granted for one year or five years to overseas entities seeking to invest in Indian markets.

The registration remains permanent unless suspended or cancelled by the board or surrendered by FPI.

Maruti Suzuki Q2 net rises 60% to Rs 2398 cr, revenue up 29%

India’s largest car manufacturer Maruti Suzuki   ‘s quarterly earnings surpassed analysts’ expectations with profit rising sharply by 60.2 percent year-on-year to Rs 2,398 crore. It was boosted by other income, operational income and volume growth.

Revenue during the quarter grew by 29.3 percent to Rs 20,296.8 crore compared with year-ago period as the company sold 4.18 lakh units in Q2, registering a 18.4 percent growth over corresponding period of last fiscal.

“Higher volumes leading to higher capacity utilisation, lower expenses on sales promotion and marketing, and higher non-operating income contributed to increase in profits. This was partially offset by adverse foreign exchange movement,” Maruti said in its filing.

Domestic sales in Q2 increased 18.5 percent to 3.83 lakh units and exports grew by 17.9 percent to 35,440 units on yearly basis, largely driven by Baleno, Vitara Brezza etc.

Other income was up significantly by 71.6 percent to Rs 812.6 crore while operating profit jumped 35.3 percent to Rs 3,037 crore compared with year-ago period.

Margin expanded by 80 basis points to 17.3 percent on yearly basis, though growth was partly restricted by adverse forex impact.

Earnings growth to be in mid-teens: Birla Sun Life AMC

Speaking to CNBC-TV18  Mahesh Patil of Birla Sun Life AMC said that a year down the line, one could look at much better outlook in earnings. “The past four quarters could see a decent earnings growth,” he said adding that he doesn’t see any reason for a re-rating from current levels.

He expects earnings growth to be in the mid-teens. The drivers, according to him, that will be key, are auto, privae sector banks, consumer durables, pharma, cement and media to some extent.

IT looks interest, he said. It is on his watchlist. He admits that long-term growth has come down. “We are at around 9-11 percent growth,” he said.

There will be periods when the sector will do well and there could be some buybacks or payouts. There could be some tactical play, he said.

Latha: We would have begun with your Samvat picks or your Samvat sentiment but today we have to start with your Tata sentiment. Would you be shaken in terms of your holding in any of the group stocks?

A: Not really, as you mentioned earlier, most of the companies are professionally managed, they have an independent board and to that extent I don’t think it should matter too much. There could be some pause in terms of certain long-term strategies as you expect a new Chairman to take on board, so, there could be some pause in terms of the longer term plans. However, we don’t see any significant impact in any of these stocks.

Sonia: What is your view on the market, it has been stuck in a funk of sorts because we are devoid of any knee-jerk incremental good news, how are you placed?

A: The market is kind of in a consolidation phase. We have seen a lot of the things which needed to be happen, have really happened. So, if you look at, monsoons have been good, we have seen big reforms in the last six to nine months which you will see the benefits of that come through. Interest rate cuts also which we were expecting, I think bulk of it has happened. So, I think now it is for all that impact to flow through down to corporate India into the earnings and that is what market will look forward. Until then, I think it will remain kind of — next one and a half months or so, I think until end of this calendar year, it could probably remain range bound.

We have some global events which market would want to wait out but clearly I think as the earnings trajectory starts to improve and second half looks to be pretty promising because the impact of all these things would really — bulk of it will be felt in the second half and that is where the market would again start to gain momentum on the back of earnings and probably scale new highs as we move into the next calendar year.

Anuj: Would you bet on some of these corporate facing banks like ICICI Bank   which is one of your top holdings which has started to do well, State Bank of India (SBI) has started to do well, would you back these stocks now incrementally?

A: The corporate banks, we have seen that in the recent past, Reserve Bank of India (RBI) also has given a lot of window in terms of kind of restructure some of the assets but more importantly the balance sheet deleveraging has started to kick in which is good. Some of the large corporates, they have struck some deals and in a position where we would see some ease of in terms of the total watch list which some of these banks have mentioned. So, while the earnings numbers might not really show a big improvement in the near term, that is something which we don’t expect in this fiscal year, but the incremental outlook in terms of asset quality will start to improve a bit.

Even somewhere down the line you could see some recoveries also on some of the NPAs which have been given. So, given that, looking at the broader macro outlook, I think we are slightly more constructive on the corporate banks. Obviously be selective over there looking at the valuations but the risk reward looks slightly favourable. We have always been slightly positive on the private sector banks, they have done well, we continue to like that but the marginal risk higher return over the next couple of years could be in some of these corporate banks.

Latha: All the assets that were sold were not NPAs, they were standard and very good performing assets, the only assets that gave any money to the leveraged groups. I have not seen too much evidence of the promoters making money on the family silver and putting that money into the NPAs, that has not happened. So, the NPA list again is that Rs 8 lakh crore of stress, it doesn’t seem to be going down. Therefore, up to what extent will you be wanting to bet on these corporate banks, is it just because they are debased valuations or will you be willing to back them a little more?

A: It is not just some of the promoters kind of deleveraging or selling the assets to take care of the immediate liquidity issues but I think it is more about a macro call also in terms of overall economy where we see that improving from here. So we have been slightly constructive on that. If you look at the specific sectors where there has been lot of stress, one is the metal space for example. In the metal sector also we have seen a significant stability in the metal prices. On the back of China demand, it has improved a bit and also some kind of a protection given to domestically to steel companies. So, I think you should see pretty good numbers from the metal names.

Obviously some of the large companies with huge debt, it won’t be sufficient but at least there is some kind of a better liquidity which you would see around. Other sector where larger pain was in the power sector for example, so, there again things have improved materially over there in terms of fuel availability. Even the power demand has picked up after the UDAY program, state electricity boards (SEBs) have started to buy a bit; not in a big way but marginally.

So, I think you should see some alleviation of stress across some of these sectors and cut in interest rate would also help. We have seen in fact in the last two to two and a half years, we have seen 250 basis points for the lowering of rates for AAA corporates and we further expect another 25-50 basis point kind of a rate cut. I think that would lead to kind of a cyclical upturn which we expect in some of these companies.

Sonia: Another sector that has been a good wealth generator this year is the auto space. So, names liked Eicher Motors  , Tata Motors  , even Maruti Suzuki  , all up about 25-40 percent this year. Do you think that they can repeat that performance next year?

A: Auto sector, even last year if you look at, did pretty well in terms of the earnings growth. Despite lower volumes growth, probably because of the better margins and the benefit of commodity prices, we have seen decent growth even in FY16. FY17 also looks to be a good year in terms of the earnings growth. Volume pickup has been kind of, we haven’t seen it, still we are getting strong signals over there.

We are yet to await the festive months, the October month numbers are yet to be out but that will be a good indicator in terms of strength of the market revival. However, as I said, the urban pickup, we have seen some pickup over the rural demand if it picks up I think that should be good. Cut in interest rates would also help and by and large going forward I think even the goods and services tax (GST) should be slightly favourable in terms of bringing out the overall excise duty structure. So, there are a lot of good tailwinds for the sector which I think will favour the sector going forward.

The outperformance in the last one year or so, there has been a slightly P/E multiple rerating but that we have seen across the market. However, these companies have pretty good return ratios if you look at the operating cash flows. So, while they are not really consumer stocks, but in terms of return ratios, some of these companies are almost comparable with better volume growth expectations going forward. So, we continue to like the auto sector and even auto ancillary space.

Sonia: Coming back to the markets, you were telling us about earnings, so far what has your reading been of earnings season, it has been pretty lackluster if you look IT, telecom, some banks, etc but what is your view here on?

A: This quarter again would be slightly — if you look at the first quarter numbers, probably it will be similar to that. So, we saw around 3-4 percent kind of a growth, the bottomline, I think similar numbers you would see. However, I think interestingly this time around you will see that the topline growth, probably because we have seen the nominal growth starting to  inch up now, I mean last year, revenues had grown so if you look at wholesale price index (WPI) last year, average at negative 2.5 percent, it is already now at 3.5 percent or so.

Looking at that number, I think you will see the nominal topline growth even this quarter, in fact in the last three quarters, it has been negative. If you look at for the Nifty companies, the sales growth has been in negative territory. We see a reversal of that trend in this quarter at least to come through. Overall numbers would still be similar to what we see in the first quarter, 3-4 percent kind of, not a big jump.

Latha: When the year runs out, what kind of returns can you expect from the Nifty and what would your incremental themes be for the next 12 months?

A: I think a year down the line probably while we again sit year down the line I think you would probably look at a much better kind of an outlook, at least the past four quarters would have seen a decent kind of earnings growth which has been lacking for the last three to four years I would say. Valuations, I don’t see any reason for market P/E multiples to really re-rate from these levels. They could happen if the liquidity continues to pour in but I think earnings growth is what I think the market should track over a one year timeframe.

So, I think a mid teens kind of a return is what I think one should expect over the next one year or so. The strong driver for that growth I think would be sectors like autos, private sector banks, consumer durables, media to some extent, pharmaceuticals, cement. So, these are some of the sectors where we expect the growth rate to be above the market average growth rate.

Anuj: These stocks have done well, they have been the leaders, what about IT which has slipped off a bit? Infosys is closer to 52 week lows, we have seen Tata Consultancy Services (TCS), the midcap IT, there are pockets which have  done well but in general the space has not done too well.

A: I think IT looks pretty interesting. It is there on our watch list as a contrarian but one has to still wait for some kind of signals because a) I think clearly the longer term growth rates have come down so we have seen IT as a sector in the last decade or so has structurally we have seen growth rates come down every three years by around 200 basis points or so. Currently we are meandering at around 9-11 percent in that range. So, that kind of a growth rate, I don’t think you will see long-term great value being created unless the growth rate picks up.

Obviously there will be periods where the sector would do well. If sector rotation happens, the valuations are very decent, some of these companies could also start, they have a huge amount of cash which is where free cash flows so you could see some buybacks or payouts over there because I don’t see any of them making large acquisitions, they haven’t done that. So, that could rerate, so, there could be a kind of a tactical play in that sector and considering that is underweight — but unless the growth rates improve, I don’t see significant wealth creation in that sector from a medium to long-term perspective.

HDFC Bank Q2 profit rises 20% to Rs 3455cr, asset quality stable

India’s second largest private sector lender HDFC Bank   ‘s second quarter profit met analysts’ expectations, rising 20.4 percent year-on-year to Rs 3,455.3 crore. Net interest income, other income, operating profit and lower provisions boosted profitability while asset quality remained stable, though net interest margin declined sequentially.

Net interest income, the difference between interest earned and interest expended, grew by 19.6 percent YoY to Rs 7,993 crore in July-September quarter, which missed estimates due to lower-than-expected loan growth.

Loan growth for the quarter stood at 18.1 percent against analysts’ estimates of 22-23 percent. Net interest margin remained steady at 4.2 percent on yearly basis but sequentially declined 20 basis points from 4.4 percent.

According to analysts polled by CNBC-TV18, profit was estimated at Rs 3,443 crore and net interest income at Rs 8,214.8 crore for the quarter.

Provisions for bad loans dropped 13.5 percent year-on-year to Rs 749 crore in Q2 but sequentially increased 10 percent.

Asset quality was stable during the quarter with gross non-performing assets as a percentage of gross advances falling to 1.02 percent from 1.04 percent and net NPAs down to 0.3 percent from 0.32 percent on sequential basis.

In absolute terms, gross NPAs increased 3 percent quarter-on-quarter to Rs 5,069 crore but net NPA fell 0.3 percent to Rs 1,489 crore in the quarter ended September 2016.

Other income (non-interest income) grew by 13.7 percent year-on-year to Rs 2,901 crore and operating profit rose by 19.5 percent to Rs 6,024.5 crore in Q2.

HDFC Bank said cost-to-income ratio for the quarter was at 44.7 percent against 45.4 percent in corresponding period of last fiscal.

At 13:10 hours IST, the stock was quoting at Rs 1,254.85, down Rs 10.55, or 0.83 percent on the BSE.

Upward spike in commodity prices in focus: Motilal Oswal AMC

Speaking to CNBC-TV18 Taher Badshah, Senior VP & Head, Fund Manager at Motilal Oswal AMC said the tide could turn favourably towards corporate-facing banks.

Growth opportunity won’t get constrained for banks, he said. He is optimistic that there could be some improvement in overall credit growth.

The only thing that is now coming back into focus is the upward spike in commodity prices and one has to guard oneself against it, he said, adding that it may begin to tell on other parts of the market. “We are waiting for the hump of the growth to come back to the overall numbers,” he said.

He also spoke about pharma companies. He said that these have been bottom pick opportunities. These companies are strong in the domestic circuit and they are looking forward to making a breakthrough in the US markets. “The story has panned out well, and the sector has done well.”

However, he warns that one has to be careful about regulatory challenges.

He doesn’t think IT has become more of a stock-specific story. Most of the companies in IT are facing similar challenges, he said.

Prashant: I just want to start with banks. If I look at the Motilal Oswal Focused 25 portfolio, over 50 percent of your portfolio is in two sectors, autos and banks. Let me just address banks specifically. With the Essar-Rosneft deal which was announced at the beginning of this week, may have turned very bullish on corporate focused banks. You do not exposure to primarily what you would describe as corporate focused banks, ICICI Bank   and Axis Bank   . You have investments in HDFC Bank   , etc. As a fund manager, do you feel comforted also because some of these banks are trading in deep discount to the HDFC Banks of the world? Are things changing? Is the tide turning? What is your view?

A: At the margin, you may be right that there could be some tide, which turns favourably for some of the more corporate focused banks or some of the public sector banks but that does not necessarily mean that growth will get constrained for the other banks.

Broadly, we are also seeing, in addition to some of the stress getting addressed, in addition to which we are probably also likely to see improvement in overall credit growth getting better compared to what it has been in the last couple of years. So if that were to happen then in any case, there is growth for the other banks as well. The private sector banks as well.

Some of them have been smartly gaining market share as well from quite a lot of the other part of the public sector space because the public sector space is also pretty wide and if there is a lot to offer in terms of market share or a lot to take in terms of market share out there.

So we do not think the growth opportunity is going to get constrained and in general, we have kind of kept a lesser eye on valuations while taking our stock positions or taking our portfolio positions. We have been more worried about or concerned about longer-term growth and longer-term structural benefits. So, from that perspective, we are fairly well positioned. Amongst the public sector banks, we do have a little bit of exposure now. It is not that we do not have any exposure at all and we are comfortable with that exposure that we have at this stage.

Ekta: What is your view on the markets? We have been stop and start since the surgical strikes and the Nifty breaking even that level post that.

A: The internals of the market are not bad at all and things are gradually improving. We have got a good amount of things going for ourselves from the government side both in terms of reforms, activity levels picking up, investments going up and so on, the foreign direct investments (FDI). So, that is happening.

At the monetary level too, we are relatively comfortable both in terms of inflation as well as in terms of interest rates. But the only thing that is now coming back into focus is the upward spike in commodity prices and that is something which one has to guard oneself against and that is something which may kind of tell on some parts of the market. The other of course, being that we need to see, we are waiting for that hump of the growth to come back into the overall numbers.

So, in that regard, at some level, there is a certain amount of valuation which is already being built in and baked in by the markets. It wants to see more evidence of growth coming into the system. Maybe this quarter will show up a little bit. Larger expectation is out of the second half. And if we see numbers supporting, then we will make further headway up into the market. Till then it will be a kind of gradual approach. I do not see any reason for any great deep corrections unless influenced by significant and unexplained events.

Prashant: You have exposure to some pharmaceutical stocks. I understand that you have recently purchased some quantity of Jubilant Life Sciences   . It has done phenomenally well. I do not know if you want to talk about the sector or prospects of the company, that would be great.

A: We have got some exposure to a few mid-sized pharmaceutical companies and some of them have been with us for a fairly long period of time. Basically, these have been the kind of very bottom-picked opportunities where we have seen typically these companies being very strong in the domestic circuit and having decent cash flows out of that domestic business plus, looking forward to the opportunity of making a breakthrough in the US markets and other developed markets. So, it has helped us be in good stead, because larger part of the business till now has been driven by domestic and that has ticked along pretty well in terms of growth and without significant regulatory challenges at their end. Now, the US opportunity or the developed market opportunity, generics opportunity for some of these are now on the cards and we are looking forward to that part of the growth option to start crystalising. So, all in all, these stories have kind of panned out pretty well especially in the light of the fact that the sector has not done too well. And that has been the approach. It has not been a sector call.

Prashant: Jubilant Life is a new addition?

A: Yes, that is something that we have added more recently. But, again, the story is largely the same that we like companies, at least in this sector one needs to be a little more careful about regulatory challenges, if they are behind and if you are reasonably comforted with growth.

Prashant: You would look to build positions here across funds because obviously, you like this story?

A: This is not something which I can talk about, but yes, as you have identified, this is as part of the disclosure, it is in the portfolio as of now.

Ekta: Has IT become more and more stock specific story as well, something that the pharmaceutical space is, especially post this quarter?

A: I do not think so. There is still quite a lot of sector or broad market headwinds, which exist and a little bit of a structural headwind also, which exists for this sector. This structural headwind is entirely not crystallised and some companies, smarter ones are trying to defend it and fend off that structural headwind. But still there is a fair bit of a slower activity on the ground overall and I would not say that it is at this stage very stock specific, barring those, which are not necessarily linked to IT services, but probably are a combination of IT related, but product services. Those are opportunities which probably are less head-winded but otherwise, barring those most of them are facing similar kind of challenges.

Prashant: As far as autos are concerned, as I began the interview by saying, autos and banks are some of the largest occupied top slots in terms of overall weight in the portfolio. In your assessment, are autos, especially players like Maruti, set for, they have kind of moved on into another gear altogether. Some of the numbers they are reporting monthly, they are very large and it is a big step up from as recently as last year.

A: That is correct. I have said this on earlier occasions also that in case of stocks like Maruti in particular and particularly the car industry, we now need to get into a situation where the volume growth needs to come back. The last couple of years were substantially driven by margin expansions and benefits on raw materials and so on and then they have exploited it to great effect. I am happy to see that volume trajectory is now is getting into a new zone and getting stepped up.

We are hoping that the conditions which are developing will sustain these growth rates from a macro perspective. To that extent, some of these names that figure in our portfolio are largely a consequence of that that we are seeing ultimately he next round of growth being more volume led growth and for companies, which are also becoming a little more strategically well positioned from the perspective of taking up the value curve. So, that story still holds relevant with many of our auto companies that we have in the portfolio and that is also the reason why it forms a larger part of our overall exposure today.

Sub-9% marginal cost of lending rate is doable soon: SBI Chief

Speaking to CNBC-TV18, State Bank of India   ‘s Chairman Arundhati Bhattacharya said that the Essar deal will get the group’s debt to move to another organisation and believed it was a good deal with Rosneft. “I am hoping it will help Essar Group to bring down leverage and stress they have in other accounts.”

State Bank of India (SBI) has proposed to launch a joint venture with Canadian company Brookfield Asset Management. Brookfield has agreed to commit Rs 7,000 crore to buy distressed assets. India’s largest lender will contribute up to 5 percent of the total investments made by the fund.

Bhattacharya said that Brookfield is still looking for deals, adding that we need to do much more to ease business.

She believes that given favouring macro winds blowing in our direction  — WPI and CPI numbers — the rates will come down month after month. The banks are also constrained in reducing deposit rates, she said, emphasising that till now the bank has cut 95 bps of the total 150 bps cut in rates .

She maintained that a sub-9 percent MCLR (marginal cost of lending rate) is possible very shortly.

Q: First up the Brazil, Russia, India, China, South Africa (BRICS) summit quite clearly is a success. One of the big deals with Essar and Rosneft has been struck. Can you give us your reactions to that alone? What kind of an impact it is for the banking system?

A: In a way it is a good deal, in the sense that the Essar Group will at least get some amount of money because of the sale of their equity. The Essar oil debt will also now move to another organisation, which will probably be a better risk given the dept that they have of operations. So, all in all it is a good deal. I am hoping that this will help the Essar Group also to bring down the leverage as well as the stress that they are experiencing in many of their other accounts.

Q: You have any idea whether that a little bit of money can come as promoter contribution to Essar Steel?

A: Very difficult at this point of time to say whether that will happen. The promoters have been saying that it will happen. So, at this point of time we have to go with what they are saying. However, the proof of the pudding is in the eating, so we will wait and see what happens.

Q: Will it be possible that you will be able to segregate a sustainable and unsustainable debt for Essar, looks like a good candidate?

A: Depending upon the kind of equity that is brought in yes, we can have a look at it. However, again all these options are on the table. It all depends upon how things work out.

Q: You expect a solution at all?

A: Some solution will happen, now what kind of solution is very difficult to say at this point of time. However, I think all of us are very focused on the fact that now that so much of identification has happen it is time that resolutions also start happening faster. I will not say that some resolutions haven’t happened.

Some resolutions have happened, so you have turnarounds like Haldia Petrochemicals, you have Suzlon, which is doing much better now. You have Jindal Stainless again doing much better, so you do have turnarounds may be you don’t have that many turnarounds and then there are still some 10-15 very large accounts, which have stress but we are working on all of them and we do believe that we will be able to find some solution.

Q: Brookefield also have taken off some assets from Reliance Telecom.

A: That is right, so they are also deleveraging very fast, which is as per the plan that they had submitted to us. So, most of this large corporate houses have given us plans as to how they have intended to do take things forward. Many of them are proceeding as per plan. Some of them are delayed but then we have to wait and see how things work.

Q: From 2012 onwards you must have read the Credit Suisse house of debt which kept increasing because obviously there was more debt being taken. Now do you think FY17 will be the year when that will show a reduction?

A: I definitely think so and if you have read our house research, which countered this house of debt theory by saying that there were a lot of good assets and those were not being considered when you are looking at house of debt. In fact in some of those cases the numbers that had been taken were on account of the loans taken for acquisition but they didn’t take the cash flows from the acquisitions.

So, I don’t think that is the last word in the entire matter and definitely as these assets change hands or parts get taken out that will help these corporate to bring down the leverage.

Q: We can expect an Essar Steel resolution you think, one last question on that issue itself? I am sure there will be the resolution but will it be in this fiscal?

A: Very difficult as I said, we definitely do not want it to exceed March 2017. By March 2017 we hope that we will be able to bring resolutions to few others as well not only Essar Steel. We are working on those lines.

Q: This Scheme for Sustainable Structuring of Stressed Assets’ (S4A) now being tweaked, so that sustainable debt will not be counted in the bad loan, will not have to be provided for is a big relief?

A: It is definitely a big relief and we believe that if it is sustainable, there is no reason for keeping it as restructured because the cash flows are there in order to sort of support it. However, we still believe that S4A may need a few more tweaking and we have been talking to that Reserve Bank of India (RBI) about it. One of course is on the interest rates, which they had said should be the same as now which is not feasible because currently most of these have penal interest rates, so it should be a normalised interest rate.

The second thing also we believe that is that we should be allowed to take cash flows of more than six months. Because the six months is a very short period of time and that too you are looking at a stress period. You are not looking at a better period. So, to that extent also we have been saying that we should be allowed to take a little longer period may be a year’s period, which will also ensure that the sustainable debt portion is also of a amount which is correct instead of something that is very low. So, all of these things we have been talking to the regulator about and we don’t have their decision as yet in the matter but let us see how things go.

Q: There were some bankers who were saying even 50 percent minimum sustainable debt should be rethought. In some cases, even if it is 40 percent, we should be allowed to recast 60 percent.

A: The main thing is the sustainability and if you really take a hair cut of that nature then is it worth all of the trouble? If you are just going to do it at 20 cents to the dollar, you might as well give it to somebody else and be rid of all the trouble. But, if you are doing it for a bigger amount then obviously, it makes sense to keep it on your balance sheet. So, we have to take a reasonable and a practical call in these matters.

Q: Has the Brookfield’s arrangement with you led to any distressing in smaller accounts?

A: No, not at this point of time. They are still looking at deals and we have not yet come up with the first deal. These things take time and specially for funds, when they come in, I always say that it takes at least two years for them to get going. So, to expect that it will happen so quickly is being a little too optimistic, to greedy.

Q: But it is true that they also come with an internal rate of return (IRR) expectation of 15-18 percent and the reality on the ground is very different.

A: But frankly, it is not that they have very unrealistic expectations. The expectations may be slightly on the higher side, but I do not think it is unrealistic. It can be done. What is required is for them to get the comfort that they can make it work and that is something where people are still a little cautious because the Indian environment is such that it is still not very easy for people to just come in and start doing business. We have done a lot on ease of doing business, but we need to do even much more.

Q: The fall in interest rates in the bond markets, and we can see marginal cost of funds based lending rates (MCLR) getting sliced off month after month. Will that also make a difference to relieving stressed assets? It will be applicable to them as well, is it not?

A: Absolutely. It will be applicable to them and definitely, it will make for relief and as you can see, the accommodative cycle is there. You have seen the wholesale price index (WPI) numbers, you have seen the consumer price index (CPI) numbers. So, the rates will come down. There is no doubt about it, it will come down month after month. Yes, it may not come down in 25 basis point dollops, because we have to also reduce on the deposit side, which makes it very difficult. People do feel a little aggrieved if your deposit rates keep going down so much. So we have to balance the whole lot, but I do think that rates will come down. They will come down quite sharply.

If you look at it over the year, you will find already this year we have done 30 basis points, before that we have done 65 basis points. So, till now, we have already transmitted 95 basis points of the 175 basis points of which 25 basis points has just come after our last revision. So, if you leave out the 25 basis points, of the 150 basis points, we had done 95 basis points. So, of the 175 basis points, we have to see how much more we do and I can assure you that it will definitely come down. Yes, it will be a relief for many of the stressed accounts, however, what will be a better relief is demand coming back. That is what is going to — it is like the tide, if raises all boats. So, as and when the demand comes back in the economy, you will see everybody doing much better.

But, one thing I would like to share, just recently, we had one of our weekly board meetings and I was commenting there that for the first time, I saw more accounts there with upgradation of rating than downgradation of rating. This was of course a one-off, I will not say that it is — these are like straws in the wind. But the fact of the matter is yes, it is something that pleased me because after a long time, I was seeing more upgradations than downgradations.

Q: So, a sub-nine percent MCLR is possible you think in next six months?

A: Yes, very shortly.

Q: You are looking at selling a bit of stake in your insurance joint ventures (JV) do the valuations improve a goodish bit because of the two listings?

A: I should think so, definitely because now there is a price discovery and I believe our insurance company is very good. There are several things that is better for them than the two that have already got listed. So, to that extent, the price discovery is there and definitely, some benchmarking has occurred, so people will come in with more confidence.

Q: ICICI Bank   is going at almost 3.5 times embedded value, so you would expect that you could get at least that?

A: Surely, and more because if you look at our range of products, our product range is greater, our margins are better, our cost structure is better because in fact, SBI Life has the lowest cost structure in the industry. We have a very strong distribution channel and this channel is becoming better. In the last two years, this distribution channel has become much better and is getting better by the day. So, we have a lot going for us.

Q: So, we should hear something for this fiscal?

A: Hopefully, yes.

Q: In that case, you will not need more capital from the government?

A: At this point of time, no. What they have already offered us that is around Rs 7,500-7,600 crore, that of course, we will be taking. At this point of time, no, it is not required. But then we would look at good growth and for growth, we need capital.

Q: But, is that growth there around the corner? Can you smell it in the festive season?

A: Growth in the rural, agricultural and per segment is good. Especially the agricultural segment has done very well this year, but in the corporate side, I still think it is a little way-off because we do not have that pipeline of projects as yet. That pipeline of projects gives you that comfort that things are going to happen. On the working capital side, as I said, the commodity prices are not high. And therefore, the need for greater working capital is not there unless there is some difference in the working capital cycle. Somebody was importing something, not importing it, needs to have greater stock now. So, that kind of a thing, unless it happens, the need for greater working capital is not seen. So, because of these twin things, on the corporate side, we are still a little far-off, but it will happen.

Q: What is your number? 11 percent?

A: Yes, I should think so. I hope so, definitely and let us hope we achieve it.

US polls, Fed hike in Dec key issues for FIIs: Bank Julius Baer

Presidential elections in the US is a key issue and is the number one concern for equity markets across the globe, says Mark Matthews, Bank Julius Baer and Co. This and a possible US Federal Reserve rate hike are two issues that have also concerned Foreign Institutional Investors FIIs, leading to sell-offs in India.

Although, Donald Trump’s economic policies, which include higher infrastructure spending, would lead to higher US growth rate, the market does not like his policies on trade barriers and building walls on borders and other such rhetoric.

The Indian market is big and liquid, there is not reason for money to move out of India, he says. He expects the Indian market to do well over the next 12 months.

He is positive on the Chinese stocks as the Producer Price Index rose for the first time in four years. He also likes UK stocks due to the weaker pound.

Sonia: I wanted to ask you what the fear is now because there is some risk aversion that we are seeing in global equities including India. There has been Rs 2,500 crore of selling in India in just three days. What are foreign investors worried about?

A: The election in the US obviously would be a key issue even though Clinton’s popularity has far surpassed Trump’s in the last two weeks. You never know until the day itself. As the Trump campaign seems to be encountering more and more difficulties, we are seeing a great increase in tensions there. So, political tensions in the US, I would probably put as number one. And then, with the Fed, you can also never say never, there is a November meeting just a couple of days before the presidential election. They will not move then. But possibly in December. Personally, I do not think so. So, those would be the two big issues emanating both from the United States.

Latha: Over the last two weeks, we have seen money moving out of Indian markets, foreign institutional investor (FII) money, as well, we have seen a strengthening of the dollar in the last one week. Should we see more of this, more dollar strengthening, more yield and India aversion?

A: I do believe that the dollar of the three major currencies should continue to be the strongest, but only on a very small basis. I do not see it going significantly above 100 on the dollar index. It is currently around 97-98. So I do not see that much upside, but I do think that between the dollar or the euro and the yen, there are still more compelling reasons to own the dollar. And then, on flows, I cannot really say why people would have been taking their money out of India over the last two weeks, because ironically, it is considered a relatively defensive market in that it is big and liquid. So, I do not know why people would have been doing that.

Sonia: Coming back to the first concern that you spoke about which is the political tensions in the US due to the elections, do you get a sense that whoever becomes the president of the US, once that event is out of the way, it will be back to normal for the markets and they could perhaps resume the uptrend because the overhang is going out of the way?

A: Clearly, if it is Donald Trump, that is a very different path from what the US has been on over the last 10 years and it is difficult to say ironically, his economic policies would probably produce a greater economic growth rate because he wants to cut corporate and income taxes, wants to boost infrastructure spending. But it comes with all of this rhetoric which the market clearly does not like in terms of building walls and various trade barriers, etc. And then with Hillary, one could say it should be business as usual. The only thing is that I do not think that the democrats will get either the senator or the house and so we will be in a situation where the president will still be a little bit unable to pass major legislation because they will not have the Congress on their side.

Latha: What is your pecking order in terms of equity markets now?

A: I do not know if I put it in a particular order, but I would say that I like Chinese stocks because the important number for the whole world including India on Friday was that China’s producer price index broke above zero on a year-on-year basis for the first time in 55 months. So, when you think about all the deflation that China has been exporting to the rest of the world is a major piece of news. And I think it should continue to trend higher into positive territory. So, China I like. I also think that UK stocks are good because the weakness in the pound without doubt be a great benefit to their economy. And actually if you look at their stock market, only about 25 percent of their revenues come from the UK itself. So, the more the pound falls, the more their profits rise. A little bit like Infosys or Tata Consultancy Services (TCS) in India. And I like energy stocks because they have high dividends and the oil price should be relatively firm.

Sonia: So, over the next six months, what do you think the market trajectory could be? How high is the possibility of a big crash in global markets or do you think that it could just restrict itself to about a 5-10 percent cut?

A: If you consider that the US is by far the largest market in the world – it is a USD 24 trillion dollar market – the next largest is Japan and it is only a fifth of the size. We all take our cue from the Standard and Poor (S&P) and for good reason. I would have thought that the S&P should remain in a consolidation kind of phase simply because it is too expensive, the price earnings ratio now touching 19 times. If you look back in history, when the US stock market gets to this kind of price earnings ratio, the returns on an annual basis over the next few years are usually below 5 percent per year. So, the US I would see as being constrained by its high valuation and therefore, that does not necessarily mean that the other markets cannot go up. But, the benchmark I do not expect to rise significantly. But that leaves other markets at least, if the S&P is not collapsing, they can do fine. And India should be one market that also does fine over the next 12 months.

Pharma cos may report subdued performance in Q2 FY17:

Domestic pharmaceutical companies are likely to report subdued sales, EBITDA and PAT figures in the second quarter of this fiscal, even as the formulations business may see a strong recovery, a report said.

“We expect the pharmaceutical companies to report subdued performance on sales, EBITDA and PAT front in Q2 FY17 led by the quiet US business on lack of fresh ANDA approvals due to the pending US FDA issues.

“Pharma companies are likely to report sales, EBITDA and PAT growth of 10.2 per cent YoY, 9.4 per cent YoY and 14.3 per cent YoY, respectively in Q2 FY17,” Reliance Securities said in its report here.

“However, industry expects strong recovery in domestic formulations business for most companies under our coverage driven by strong monsoon, while favourable y-o-y movement in non-USD currencies and new drugs approvals will drive growth in emerging markets,” the report said.

It said EBITDA margins will continue to be under pressure on account of increased R&D spending and adverse product-mix.

“We continue to remain positive on long-term prospects of the pharma sector and recommend being stock-specific,” it added.

The US remains mainstay for most companies, contributing 55-60 per cent of total exports.

Measures like aggressive R&D spend and scale-up in complex ANDA filings are considered to be the key re-rating triggers, it said.

However, few operational metrics have exhibited lack of momentum like critical facilities under US FDA lens, channel consolidation and slowdown in approvals.

While Sun Pharma   Halol warning letter and Cadila’s Moraiya warning letter are awaiting re-inspection from the US FDA, Dr Reddy’s pending Form 483 to three plants is still undergoing Corrective and Preventive Action (CAPA) process and it is expected to submit re-inspection request shortly.

Lupin is awaiting the US FDA resolution for its Goa plant.

“The US revenue for the companies under our coverage universe is expected to decline sequentially by 5-6 per cent owing to increased competition leading to price erosion in base product portfolio, Gleevec/Glumetza 180 days exclusivity ends and lack of meaningful launches,” it added.

Pharma companies are likely to witness strong recovery in domestic formulations business.

“We expect strong recovery in India formulations business for most companies driven by strong monsoon,” it said.

The Indian pharma market has reported strong growth of 15 per cent and 18 per cent in July and Aug, respectively.

It is expected to witness 16-17 per cent CAGR in next few years, led by new product launches.

FY18 to witness earnings turnaround: Ambit’s Gubbi

After forecasting 10 percent plus earnings in fiscal years 2015 and 2016, both of which turned out to be nearly flat in terms of profit growth, analysts hoping for a 15 percent earnings rise in 2017 may again have to revise estimates lower, says Pramod Gubbi.

In an interview with CNBC-TV18, Gubbi, Director – Institutional Sales, Ambit Singapore, however, said earnings were on course for a turnaround almost definitely in fiscal 2018 and 2017 was not a cause of concern as the financial year has been halfway through.

Gubbi was speaking about earnings in the context of the broader stock market, which, he said, appears to be in a steady state given the liquidity situation globally.

While it is difficult to estimate when liquidity will turn, Gubbi said that as long as earnings growth comes through, investors need not worry too much.

He picked out shares of private banks and automobile companies (especially commercial vehicles makers) as those offering strongest growth potential over the medium to long term.

Latha: One was under the impression that because Wall Street cheered even after those hawkish statements from the Fed and Asia also was in the green, India would perhaps start building. Are you a little worried that India is kind of balking and not quite emphatically going towards 8,800 or taking its near-term highs?

A: No, not really. I don’t think a day’s movement would worry us given nothing exceptionally has seen from the global liquidity fund, which remains the main driver for markets across asset classes globally. So, unless and until we have any changes there, there is nothing on the anvil to worry even for India or elsewhere.

Perhaps the European Central Bank (ECB) minutes today could shed some light whether there is any change in the tone of the ECB in terms of their bond-buying program beyond March 2017. But other than that, India, in fact, looks relatively better amongst most markets. To that extent, I don’t think I would be worried about today’s reaction.

Anuj: The market leadership is stumbling a bit, the Bank Nifty has started to fall and there are some signs similar to last year when the Bank Nifty made a top even after a rate cut. Would that worry you the fact that we have started to see quite a bit of decline in some of the large private sector banks?

A: Not really. Again, as we have maintained, there is a structural opportunity for the private sector banks given the state of the public sector banks and their ability to try credit growth and given the fundamental changes in terms of access to consumer finance be it through the form of technology or the development of micro finance and credit bureaus, which provide credit history of consumer database.

There are plenty of opportunities for private sector banks provided of course they keep their asset quality in check. Again coming back to the basic quality parameters that would make up a good bank. To that extent, you could talk about the near-term weakness given the strong rally they have had. But from a medium to longer term perspective, this is perhaps one of the best places to be in India.

Latha: What kind of earnings growth are you factoring in, there are people talking about 10 percent earnings growth in the second quarter itself. What is your outlook for the quarter and more importantly for the year?

A: We have been consistently maintaining that the market is running ahead of itself or the street is running ahead of itself in terms of expecting earnings growth to be quite healthy time and again over the last three years.

And we have seen earnings downgrades come through each and every single year. This year again, we reckon there is a bit of scope for downgrades to come through given we have already seen Q1. There is a lot of expectations from H2 to make up for that weak Q1. So, we reckon there is perhaps 3 more percentage points of downgrades to come for FY17.

In any case, the market will now look ahead to FY18, we are already half-way through the year. That is where we think there is more cheer to come. After three years of consistent disappointment on the earnings growth FY18 both in the broader economy [and earnings], there is a reason to believe there is a turnaround happening, which will also feed into corporate profitability.

So, FY17 more downgrades to come but I won’t be worried too much given we are already half way through and more eyes are on FY18.

Latha: Are you at this moment buying anything at all, are you net buyer or are you net moving into cash?

A: That is tough to answer. We have always maintained that it is tough to invest in India if you look at the market as a whole. There have always been pockets which do better than others.

As long as you have your sight set on that and you are able to separate the wheat from the chaff, there is always an opportunity to make money in India. So, to that extent, we remain net buyers and we remain invested in those positive looking pockets.

Anuj: The other space which has done well is the discretionary consumption led by autos which keep making new highs. You still buy them, even at current valuations, do you think there is enough momentum or is it time to just take a step back?

A: Valuations have always remained a challenge particularly given valuations are now being driven by the global liquidity. So, we can’t deal with that. We have looked at it, we can’t really second guess when it is going to change though.

So, to that extent, the best way to look at these is there enough visibility that earnings growth is going to maintain or perhaps improve from here on.

In autos, there are different segments and different drivers. First, the consumer-facing autos: there is enough reason to believe that there is a positive momentum there. Earnings growth is likely to sustain if not improve from here. So, we remain positive on that.

From a medium-term perspective, we are also positive on the commercial vehicle space given the investments, which are happening in roads, which are likely to get higher share of the freight traffic in India. That will require more commercial vehicles. So, there is enough growth visibility built in and this sector has always produced good quality companies which always show up as attractive investments.

So, I keep valuations aside and remain a buyer on this sector.

Latha: Can I delve a little more into your structural opportunity in private banks. Now private banks are quite a category. There are these three big retail giants, HDFC Bank, Kotak Mahindra Bank, IndusInd Bank. There are the corporate facing banks like ICICI Bank and Axis Bank — I don’t know where you will put YES Bank and Federal Bank. And there is a long tail of small banks, Equitas, Ujjivan, RBL. Then the old guys: LVB, Karur Vysya Bank. What are you buying in this entire space?

A: We would rather stick to a more bottom-up approach because there are plenty of opportunities here rather than look at the segment [as a whole]. Because remember our underlying opportunity that we see is the space vacated or gradually being vacated by the public sector banks (PSB). That leaves the opportunity open for anybody and everybody willing to put their money in the right place.

Particularly in the financial space, you need a little bit of conservative approach to not get carried away by the opportunity and run ahead of the opportunity itself. So, if you have put those filters in place there are plenty of opportunities. I won’t say any particular space whether it is the new generation private sector banks or the old generation regional banks, there are good quality management teams in each of these. A mix of all these segments would be the right way to look at the private-sector financial space.

Anuj: More macro question: what is happening with fund flows, since you represent the sale side because we have clearly seen that the flows have ebbed over the last fortnight or even the last one month compared to the kind of run rate that we have seen from the foreign institutional investors (FIIs)?

A: We have seen a change in the nature of those flows over the past several months. If you put yourself in the end investor’s shoes you would be worried about where markets are in general globally. Given there is no fundamental support, it is all liquidity driven but yet you can’t be sitting out and watching it pass by. To that extent, you would want to stay invested and ride it as long as it lasts. For that, you need to be able to pull out at the first sign of trouble.

Exchange traded funds (ETFs) have increasingly led themselves as a vehicle of choice for that sort of an approach and that is where we are seeing the shift of money coming more through ETFs and passive funds, which provide this sort of a liquidity to exit very quickly as opposed to traditional long-only funds, which have relatively stickier liquidity requirements. That remains the situation even now.

Perhaps after today’s event people are watching the ECB minutes quite closely. You could see some more allocation coming through if it comes out that the ECB has no intention of reducing its bond buying program and much of that money will continue to come through ETFs.

Latha: Is the bottom for this market protected, where would you place it?

A: That is a difficult question. Because any sort of event in the event that liquidity dries up – I won’t want to guess the bottom – there will be some sort of shake-up and that is not going to be quite nice to talk about. So, I would avoid that question.

Latha: We appear to be heading toward 6 percent yield on the 10 year. How will that translate as a stock picker?

A: To the extent that liquidity is benign and that has helped across sectors particularly the financial space, those who have been borrowing from the bond market. The cost of funds has gone down — that made them more competitive, partly to drive growth, partly to boost their own margins.

So, non-banking financial companies (NBFCs) is the obvious winner there and you need to identify lenders and segments where they are historically bank borrowing heavy and their shifting increasingly to bond market, that is a place where margin gains will be more and those will be the biggest beneficiaries of where yields are headed.

NSE gets board nod to launch IPO via OFS, clears bonus shares

Ahead of its much-awaited IPO, top stock exchange NSE’s board has decided that the public issue will be in the form of an offer for sale by shareholders while the directors have approved issuance of bonus shares, stock split and a dividend payout for the existing investors.

NSE plans to get listed in India as well as abroad. It will file draft IPO papers with market regulator Sebi for the domestic public issue by January 2017 while it will file for overseas listing by April next year.

The exchange has been facing intense pressure from its shareholders to go public and had formed a listing committee to expedite the process and seek support for self-listing.

At its board meeting on October 4, NSE has decided that its IPO will be in the form of an offer for sale (OFS) of shares by the existing shareholders.

Besides, the board declared an interim dividend of Rs 79.50 per share of Rs 10 each of the company for 2016-17.

The record date to determine the eligibility for payment of the interim dividend is fixed as October 17. The dividend will be paid by October 31.

Further, NSE’s board has decided to issue one bonus share of Rs 10 each for every 10 shares of Rs 10 each held by the shareholders.

The number of shares after the bonus issue will rise to to 4.95 crore shares from the existing 4.50 crore.

“Share premium required for implementing the bonus issue is Rs 4.50 crore. Share premium account as on March 31, 2016 was Rs 40 crore,” NSE said, adding that bonus shares will be credited by November 30.

The board has also decided “sub-division of shares of Rs 10 into shares having a face value of Re 1 each subject to the approval of the shareholders in the general meeting and regulatory approvals, if any. The record date for the same will be announced later”.

The decision was taken “keeping in mind future corporate actions the exchange may undertake in compliance with applicable regulations in future”.

Its authorised share capital of Rs 50 crore will remain unchanged, post stock split.

The National Stock Exchange (NSE) said the splitting of shares is expected to be complete by December 15, subject to regulatory and shareholder nod.

The exchange has already roped in four merchant bankers — Citigroup and Morgan Stanley, JM Financial Institutional Securities and Kotak Mahindra Capital Company — to manage its upcoming initial public offer (IPO). Besides, the exchange has engaged Cyril Amarchand Mangaldas as the legal advisor.

NSE has reportedly approached the government and Sebi to bring in norms for self-listing. Regulations of the Securities and Exchange Board of India (Sebi) do not provide for self-listing of a stock exchange and the watchdog has so far said no to considering the matter.

The exchange’s closest competitor, BSE, has already filed draft prospectus with Sebi to float an IPO.