The NBFC sector selloff – is it overdone?

In the last few weeks, shares of some NBFC/BFSI stocks have fallen between 15-60%. Here we try to find out the key causes, possible timelines and suggest next steps for investors. 

The recent developments in Indian Banking Financial Services and Insurance (BFSI) sector have created a fear of systemic risks – causing stocks in general, specifically NBFCs, to correct sharply.

The IL&FS Default

  • IL&FS is a core investment firm and the holding company of the Group with firms in infra, finance, social and environmental services. IL&FS is a “systemically important” NBFC firm as per RBI.
  • In Sep2018 IL&FS Financial Services, a group firm, defaulted in payment obligations of bank loans, term and short-term deposits. It failed to meet the commercial paper (CP) redemption due on Sept 14, 2018. After this ICRA downgraded the ratings of its short-term & long-term borrowing programs.
  • The short-term paper of IL&FS saw a credit rating fall to a rating of D on 17 Sept (indicating default), down from a rating of A4 (as on 8 Sept) and A1+ (as on 6 Aug). Similarly, ILFS Financial Services short-term paper credit rating fell to ‘D’ on 17 Sept, down from A4 (as on 8 Sept) and A1+ (19 Feb).
  • Infra sector in India does face challenges like long gestation periods, low returns, and funding issues. Investments in infra should be financed by long gestation sources like insurance and pension funds.

Spill over effect on equity market

  • IL&FS has total debt of Rs. 91,000 cr. at the group level from 350+ direct and indirect subsidiaries, JV’s and associate companies. Of this debt, 61% is in the form of loans from financial institutions, indicating its woes could spread to other shadow banks.
  • Fresh inflows into MFs, especially into debt funds, slowed, and debt fund managers began to adopt a “wait and watch” policy on deploying fresh funds. A few MFs started selling short term debt instruments issued by NBFC companies including those funding the housing sector. There are concerns over short-term liquidity in the market for CPs raised by NBFCs. Further, there is also an uncertainty about the ability of certain NBFCs to raise capital.
  • Fresh bond issuances by NBFCs declined and the costs of borrowing rose. Post the default, there was a sharp decline in bond prices for HFCs which brought funding/liquidity situation of NBFCs into fresh scrutiny. This resulted in a sharp sell-offs in anticipation of rising borrowing costs, tightening liquidity situation which could impact growth sharply in turn also. Hence there was a double blow to stock price targets from earnings downgrade as well as valuation multiples downgrade (faltering growth).

What added fuel to fire?

The macro is also seeing headwinds such as:

  1. The NPA issues around Public Sector Banks (already under resolution)
  2. High Crude Oil Prices and Depreciating Rupee against USD
  3. Consistent selloff by FIIs of debt & equity; and Trade War fears
  4. Regulatory Whip on private banks – Yes Bank, Kotak Mah. Bank, Axis Bank and Bandhan Bank
  5. The merger of 3 PSBs
  6. Upcoming State and General Elections
  7. Market Rumors causing volatility
  8. Mid-year cash flow issues due to advance tax and bank repayments

Regulatory Rescue and other Positives  

  • The RBI, Finance Ministry and MCA have stepped in quickly to avert a crisis. They  took control of IL&FS, and with NCLT approval, reconstituted the board and it is now headed by Uday Kotak as chairman. The new board is focused on turning around the operations of IL&FS soon.
  • The RBI will infuse Rs. 36,000 crores through open market purchase of bonds to ease liquidity concerns.
  • A reduction in excise duty was announced to reduce petrol & diesel costs.
  • The RBI MPC kept interests rates unchanged, indicating that inflation is under control and giving a thrust to economic growth.
  • Domestic liquidity and growth of MFs was strong recently and should continue.
  • India’s GDP grew at 8.2% cent in Q1 of FY19. This is an outstanding number,the highest growth in two years. Surely the growth will also reflect in the BFSI sector, as this sector addresses both consumer and industrial credit.

Which stocks got affected the most?

  • A lot of private sector banks and many of the HFCs from the NBFC space were affected. Here is how the share prices have moved in the last 1 year.

jainmatrix investments, nbfcFig 1 – One year Normalized Price Graph / Fig 2 – In Percentages jainmatrix investments, nbfcNote: The share prices in Fig 1 have been scaled for a better representation of relative movement of all the stocks over 1 year, which may not reflect the actual share price. The 9 stocks chosen above are an incomplete but sufficient representation of the sector. 

The Outlook

  • After a few weeks of uncertainty and liquidity dry-up, the financial system will surely rebound. Short term interest rates are firming up too.
  • IL&FS may undergo a restructuring; a fresh infusion of funds – maybe a rights issue and a sale of assets will help the firm meet its debt obligations. Some strategic announcements should happen in 1-2 months.
  • The developments around IL&FS and the macro economy do call for a correction in stock prices. However the correction has been overdone in BFSI/NBFC stocks.
  • Long term investors should look at selectively accumulating the beaten down quality stocks when some signs of recovery are in place.

Appendix / Legend – Sorry we keep using shortforms

  • BFSI – Banking Financial Services and Insurance
  • NBFC – Non banking Financial Services company
  • CP – Commercial Paper
  • HFCs – Housing Finance companies, a type of NBFC
  • RBI – Reserve Bank of India – India’s Central Bank and regulator for banking sector
  • MPC – Monetary Policy Committee, a group from RBI
  • FIIs – Foreign Institutional Investors
  • MF – Mutual Fund Industry
  • NPA – Non Performing Assets
  • NCLT – National Company Law Tribunal, is a quasi-judicial body in India that adjudicates issues relating to Indian companies.

Disclaimer 

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has positions in some of the firms mentioned in this report. JM objective is to draw attention to the sector rather than any specific stock. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

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This market needs Patience

Dear investor,

You got into an amusement park. And decided to take a peaceful ride, say a merry go round. You sat down, and found to your surprise that you are actually on a High Thrill Ride, buckled in, and you cant get off.

The market today is a little bit like this ride – it can be described as a Bull market undergoing a correction.

I would like you to see this 20 minute YouTube video. Its an interview with a great Indian investor, Mr Raamdeo Agrawal. The video in Hindi describes his own journey and has important lessons for the long term investor.

(Credits – thanks to Mr. Raamdeo Agrawal and CNBC Awaaz for this content).

Think of this market correction as an opportunity. Your already invested portfolio will recover soon. In fact it is time for you to confidently continue your investing in a market looking more reasonable. 

JainMatrix Investments provides 3 Model portfolios – Large Cap, Mid & Small Cap and Satellite portfolio. These solid research backed portfolios are all you need for your long term investments.

You just need to stay calm and ride out this high thrill ride. To meet your goals. 

Here’s to your Happy and profitable investing.

Punit Jain
JainMatrix InvestmentsBangalore

SIGN UP FOR – THE jainmatrix INVESTMENTs SUBSCRIPTION

DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Here’s a Great Construction Achievement

Every once in a while, I come across an event or achievement that worth appreciating. Here is one such incident. It is terrific of Indian Railways to be able to do this.

Indian Railways sets record, builds subway at a busy track in 5 hrs; watch video

See LINK

Regards, Punit Jain

Do comment or share forward if you like the post.

Indian Hotels Sector – Time to check in?

Shares of many hotel companies have rallied in recent months. What are the reasons for this? Can investors find good investment ideas in this sector?  

  • Related Research: We had published a report on Mahindra Holidays in Mar 2013. The share is up 109% in 5 years, or 22% annualized. To read the report, click on LINK
  • The Sector can be tracked on moneycontrol on LINK

Introduction:

  • Tourism in India accounts for 9.6% of GDP and is the 3rd largest forex earner. It is a high potential, sunrise sector with a multiplier effect on transportation, hotels and exports.

jainmatrix investments, hotel sector

Sector Trends:

  • Over the last decade, India’s hotel industry witnessed excess supply of hotel rooms which led to low occupancies, flat/falling Average Room Rates (ARR) and average financial performance of hotels operating across different business segments. See Fig 1 and 2.
  • The hotel sector in India experienced flat to negative growth in occupancies over FY08-13 primarily due to a substantial growth in supply and a decline in demand. During FY12-15, as many as 43,800 rooms were added creating nearly 70% new capacity; and simultaneously the economy and hotel demand grew so occupancy growth was flat. Several hotel firms were loss making in this period.

jainmatrix investments, hotels reportFig 1 – Average Room Rates of Indian Hotels  and Fig 2 – Occupancy Rates. Source: HVS 2017 Hotels report

  • The chart below (Fig 3) reflects the occupancy scenario over the years and the growth projections. We can see that the demand growth is rising, while supply growth has slowed. Improved occupancies are expected to create a base for higher room rates. The higher occupancy and higher ARR’s will improve the earnings of firms from the industry.
  • Fig 3 Sources are 1) Lemon Tree Hotels RHP 2) HVS 2017 report 3) STR and Horwath HTL India Reports

jainmatrix investments, hotels reportFig 3 – Hotel Industry Demand-Supply and Occupancy

Benchmarking:

We have done this exercise of key players to better understand their performance.

  • From the exhibit, we can see that a lot of the companies trade at high P/E ratios. This is generally due to depressed earnings earlier and a recent move from loss to profits. However, a few companies are even now loss making.
  • The 3 year sales and PAT growth for most of the companies was dismal. Returns too are low.
  • The industry was also affected due to liquor ban on operators near highways. This has however been sorted out and is applicable for non-urban locations.
  • The implementation of GST was neutral for the industry. However tax rates may fall now.

jainmatrix investments, hotel reportExhibit 4 – Benchmarking

Conclusion

The hotel industry is clearly witnessing a revival. The hotels witnessing higher occupancy rates and improved pricing power with conservative management will be profitable investments.

Disclaimer:

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has no positions in any firm mentioned in the report. JM also has no known financial interests in these firms. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

Indian Roads Sector – A Delightful Drive Ahead?

  • Date 26th April  
  • Industry – Roads Construction 

Summary

Here is a snapshot of the interesting Roads Sector. We sense a revival, and a number of players are active here.

Additional Roads Sector Reports from JainMatrix Investments

  • Please read our Feb 2018 report on HG Infra IPO by clicking on LINK.
  • And our July 2017 report – IRB Infra Developers – In Invit We Trust – LINK
  • Additionally do read our Aug 2016 report on Dilip Buildcon IPO by clicking on LINK.
  • We share a Nov 2015 Roads sector report – LINK

Introduction

  • The development of any nation depends on transportation networks, and this is applicable to India with its varied terrain ranging from mountains to plains to coast. Transportation includes Roads, Railways, Airlines and Shipping, however in this note we will focus on Roads.
  • India has the 2nd largest road network in the world, aggregating to 61 lakh kms. Roads are the most common mode of transportation and account for 86% of passenger traffic and 65% of freight traffic. In India, NHs with length of 1.04 lakh km are just 1.7% of the road network, but carry about 40% of the total road traffic. On the other hand, state roads and major district roads at the next level carry another 60% of traffic and account for 98% of road length.
  • There are 2 Govt. bodies which award road projects at the central level, NHAI which is in charge of the National Highway Development Programme (NHDP) and the Ministry of Road Transport and Highways (MoRTH), which covers those highways not under NHDP. In addition, it also awards projects under Govt. schemes like Left Wing Extremism (LWE) scheme (road development in Naxalite areas), Special Accelerated Road Dev. Programme for North-East Region (SARDP-NE), NH Interconnectivity Improvement Project (NHIIP), etc.

jainmatrix investments

Road Projects Progress

  • From Fig 1 and 2, we can see that road projects awarded and completed flattened out during FY12-FY14. Delays in land acquisition & receipt of environment/forest clearances, economic slowdown and cash flow issues faced by developers had adversely impacted the sector. From the Fig 3 below we can see the transition of project awarding to new modes over the last few years.

jainmatrix investmentsFig 1 – MoRTH projects Awarded / Fig 2 – NHAI projects / Source: MoRTH / NHAI ARs 

  • In FY16, the NHAI introduced the Hybrid Annuity model (HAM) as the earlier BOT-Toll based awarding caused financial distress to the developers and the EPC model involved high upfront investment of funds. In HAM, 40% the Project Cost is to be provided by the Govt. as ‘Construction Support’ to the developer during the construction period and the balance 60% as annuity payments over the operations period along with interest on outstanding amount. This model has received good response from industry and investors.

jainmatrix investmentsFig 3 – NHAI project awarded

  • CRISIL Research expects investment in road projects to double to Rs. 10,70,000 cr. over 5 years.
  • Investment in state roads are expected to grow steadily, and rise at a faster pace in case of rural roads, on account of higher budgets for Pradhan Mantri Gram Sadak Yojana (PMGSY) since FY16.
  • The GoI approved the Bharatmala program under which 53,000 kms of national highways have been identified to bridge critical infra gaps. It will give the country 50 national corridors as opposed to 6 at present. Phase I will be implemented from FY18-22 with 24,800 kms of construction expected.

Key Players

  • In Q4 FY18, the MoRTH had aggressively awarded projects to further accelerate the pace of road infra development. See the order book position of a few listed road developers, Fig 4 and Fig 5.

jainmatrix investmentsFig 4 – Order Books of Roads players / Fig 5 – Order Book FY18 / Fig 6 – Benchmarking 

  • Note: FY18# is the order book basis 9M FY18 data and documents available on the exchange.
  • In Fig 6, we have done a benchmarking exercise to compare a few sector players.

Conclusion

  • The development of road infra in India is witnessing great momentum. Robust demand, higher investments, favourable policies and government’s willingness has changed the face of the road sector in the country. The construction of roads per day hit a new high of 27 kms/day for FY18, which is much higher than what was achieved earlier.
  • The momentum of building a stronger road network in India is likely to improve as it generates mass employment and leads to significant growth in contribution to the GDP. Given the current roads sector scenario, investors should definitely not miss this exciting opportunity.

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has positions in IRB Infra since Feb 2008 and H G Infra post listing. Other than this, JM has no known financial interests in IRB Infra or any other firm mentioned in the article. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

Budget 2018 – LTCG Tax and Investor Updates

Date: 2nd Feb, 2018 

Taxation on Indian Equities

There are Tax rates in place for LTCG (Long Term Capital Gain) and STCG (Short Term). A long-term capital gain is a gain from selling a share held for longer than 1 year. Gains are aggregated across all an investor’s LTCG transactions for the FY. So far, LTCG was zero tax in India, while STCG rate was 15%.

The LTCG Tax proposals in the Union Budget for FY18-19?

In Budget 2018, the Govt. has proposed a 10% LTCG tax for equity and equity MFs with 2 conditions:

  1. The LTCG tax of 10% would be levied only on the LTCG in excess of Rs 1 lakh in one fiscal.
  2. The gains up to 31st Jan, 2018 will be grandfathered. This will protect our LTCG gains so far.

Let us understand this with an example the FM used while presenting the budget. If an equity share is purchased 6 months before 31st Jan 2018 at Rs. 100/- and the share price trades at Rs. 120/- on 31st Jan 2018 than in respect of this, there will be no tax on the gain of Rs. 20/- if this share is sold after 1 year from the date of purchase. However, any gain in excess of Rs. 20 earned after 31st Jan 2018 will be taxed at 10% if this share is sold after 31st July, 2018. To put it simply,

  • Any LTCG accrued until 31st Jan 2018 wouldn’t be taxed.
  • Any incremental LTCG above this would then be taxed at 10% (If you hold it at least for 1 year)
  • If you sold in less than 1 year, the existing 15% STCG would be applicable as earlier.

Background to LTCG and impact for investors?

It was in 2004 that tax on LTCG was removed and Securities Transaction Tax (STT) was introduced. STT levies a small tax on every transaction – buy or sale, done through stock exchanges. For FY18 the govt. may earn Rs. 7,769 cr. of revenue from STT. So now we see both STT and (LTCG – STCG) taxes in place.  As per projections, the govt. may collect Rs. 20,000 cr. through LTCG tax.

Tax Planning:

  1. If your portfolio gains have been 20% for LTCG so far, we can estimate that this may fall to 18% incrementally for fresh investments. Investors should continue to make Buy and Sell decisions based on portfolio growth objectives.
  2. Investors can Set Off the LTCG against any Long Term Capital Losses in the year for Tax planning.
  3. For investors with a direct equity and Equity MF portfolio of less than Rs 10 lakhs, they may like to plan the sales so that the ‘less than 1 Lakh LTCG rule’ applies for that financial year.
  4. Where the portfolio is larger, this additional tax will be inevitable.

So what might be the market mood now?

  1. The grandfathering concept will protect the Investors for past LTCG gains.
  2. Equity as an asset class has been enjoying good returns for the last few years. We feel it will continue to outperform other asset classes like gold, real estate, FDs etc.
  3. Investors need to bake in the LTCG tax impact. The markets may see a small correction or negativity for a few days before recovering.

Disclaimer 

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor or Chartered Accountant. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Vikas Ecotech – Get ‘Vikas’ for your Investments

  • Date: 22nd Jan 2018
  • CMP: Rs. 40.7

Today we have published an update report on Vikas Ecotech.

  1. To remind you, on 24th Apr 2017, at a CMP: Rs. 21.25, we had published this report on this website.
  2. We had set a Target price of Rs. 52.7 by May 2019, a growth of 143% from then CMP, over 25 months.
  3. The entire report is available on VIKAS ECOTECH – Get ‘VIKAS’ for your Investments
  4. We are happy to note that our Apr 2017 report has given 92% gains in 9 months. 
  5. However, this update report is restricted to our valued subscribers only.

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Disclaimer and Additional Details

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain discloses that he has been a shareholder at VET since May 2017. Other than this, Punit Jain and JM have no known financial interests in Vikas Ecotech & Co or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. Equity investments are subject to market risks. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, we recommend that investors looking to invest in equity should take advice from a Registered Investment Adviser. Punit Jain is certified and registered under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com