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.

MAS Financial Services IPO – Small but Ambitious

  • Date 9th Oct
  • IPO Opens 6-10th Oct at Rs. 456-459
  • Valuations: P/E 36.6 times TTM, P/B 4.4 times (Post IPO)
  • Small Cap: Rs. 2,500 cr. Mkt cap
  • Industry – NBFC
  • Advice: SUBSCRIBE with a 2 year perspective

Summary

  • Overview: MAS is a Gujarat-headquartered NBFC with the business products focused on middle and low income customer segments. Revenues and profit for FY17 were Rs. 365 cr. and Rs. 69 cr. The revenues, NII and PAT grew at 26.3%, 22.8% and 25.8% CAGR in 5 years.
  • At a P/B of 4.44 times (adjusted post IPO), the valuations of the IPO are on the upper side. However strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • Risks: 1) Regional concentration: As of FY17 60% of the AUM was in the state of Gujarat 2) Small size of the firm exposes business to seasonal and employee exit risks.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on MAS Financial Services (MAS) IPO.

IPO highlights

  • The IPO opens: 6-10th Oct 2017 with the Price band: Rs. 456-459 per share.
  • Shares offered to public are 0.98 cr. The FV of each is Rs. 10 and market Lot is 32. The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.

Exhibit 1 – IPO Selling Shareholders

  • The IPO in total will collect Rs 460 cr. while selling 18.3% of equity. The IPO include an OFS for Rs. 227 cr. (at UMP) and an issue of fresh shares of Rs. 233 cr.
  • The promoter group owns 80.6% in MAS which will fall to 73.1% post-IPO. Other selling share-holders are DEG, FMO and Sarva Capital. DEG and FMO are selling 100% of its stake, whereas Sarva Capital is selling 60% of its current stake in the company.
  • The unofficial/ grey market premium for this IPO is Rs. 170-180/share. This is a positive.
  • On day 2, the offering is subscribed 4.8 times, so it looks headed for a very successful listing.

Introduction

  • MAS is a Gujarat based NBFC with business focused on middle and low income customer segments.
  • Revenues and profit for FY17 were Rs. 365 cr. and Rs. 69 cr. It has 606 employees.
  • It offers (i) micro-enterprise loans (ii) SME loans (iii) two-wheeler loans (iv) Commercial Vehicle loans (which include new and used CVs, used cars and tractor loans) and (v) housing loans.
  • 59% of their gross AUM are micro enterprise loans (FY17). Also, 83.9% of their loans were secured.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (a) – Loan products 

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (b) AUM in FY17 

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (c) – AUM growth 

  • MAS operated across 6 States and the NCT of Delhi through 121 branches.
  • The gross AUM of MAS are displayed in Fig 2b and 2c. 60% and 20% of the AUM’s were from Guj. and Mah. in FY17. Hence there is a geographic concentration.
  • Borrowings were Rs 1,506 cr. (Q1 FY18) and the average cost of borrowings was 9.47% (FY17), an increase from 8.41% in FY13. But in Q1 FY18 cost of borrowings stood at 9.05% indicating a fall.
  • Leadership is Kamlesh Gandhi (CMD), Mukesh Gandhi (CFO) and Darshana Pandya (COO).

News, Updates and Strategies of MAS

  • MAS’s business strategy is as follows:
  • Strengthen marketing and sourcing channels while maintaining growth and quality of portfolio.
  • Expand product offerings –extend loans to the agricultural input and equipment segment.
  • Leverage existing network and customer base to develop their housing finance business.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 3 – Acquisition Cost for selling shareholders

  • The average cost of acquisition of equity shares for selling shareholders is in Exhibit 3.
  • Motilal Oswal Financial Services invested a total of Rs. 135 cr. ($20.8 mn.) in pre-IPO placement of MAS in March 2017 at Rs. 338/share. The IPO valuations are 36% higher than this.
  • They have been in operation for more than two decades, and as of June 2017, they had 500,000 active loan accounts. The AUM has increased at 33.4% CAGR since FY13 and NNPAs have remained below 1% during this period. They have developed stringent credit quality checks and customized their operating procedures to regularly monitoring the loan portfolio.
  • Mukesh Gandhi (CFO) is also the chairman of the Gujarat Finance Companies Association and a director of the Finance Industry Development Council.

NBFC Industry Outlook in India

  • Financing needs in India have risen along with economic growth over the past decade. By complementing banks and other financial institutions, NBFCs help meet this need.
  • NBFCs that cater to the masses in rural and semi-urban reaches, who have limited access to formal financing channels, and lend to the informal sector and people without credit histories, enable the govt. and regulators to realise the mission of financial inclusion.
  • In the past, NBFCs gained market share at the expense of banks owing to focused lending, widening reach, and resource raising ability. However, going forward, the BFSI sector is on a revival path and competition will intensify given a slew of recent regulation changes.
  • About 80-85% of NBFC lending is secured. In contrast, banks secure 60-70% of their lending portfolio. Security collateral is as plant and machinery, or current assets. To add to this, secondary collateral is collected in the form of immovable assets such as commercial and residential property and shares. Approval rates vary across NBFCs at between 70% and 75%.
  • The loans of NBFCs grew at 20% between FY12-16. As of Mar 2016, they accounted for 15% of the overall credit. The loan book of NBFCs may post 17% CAGR between fiscals 2017-18.
  • The contribution of the MSME sector to India’s GDP currently stands at 8% for 2011-12, and is growing at a rate higher than the projected GDP. MSME in India has the potential to increase the share of contribution to GDP from the current 8% to about 15% by the year 2020.
  • MAS competes with Janalakshmi and Bharat Financial Inclusion in micro-finance, Shriram Finance and M&M Financial in auto finance; and Dewan Housing Finance and PNBHF in housing loans.

Financials of MAS

JainMatrix Investments, MAS Financial Services IPO

Fig 4 – Financials  

  • MAS’s revenues, NII and PAT grew at 26.3%, 22.8% and 25.8% CAGR in 5 years, see Fig 4.
  • MAS had a RoE of 18.8% in FY17 while the FY15-17 avg. was 23.7%. The RoCE stands at 28.1%.
  • In FY17, the disbursement growth was slow on account of demonetization.
  • MAS declared a low dividend in FY17, as compared to prior years, to maintain prudent asset quality.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 5 – Loan disbursement growth and dividends declared 

JainMatrix Investments, MAS Financial Services IPO

Fig 6 – Financial Metrics

  • From Fig 6, we can see that the NIM’s, yield and spread have fallen from FY13-FY17. This is due to increased costs of borrowings and higher competition. However it is not a concern as the management has been able to maintain their asset quality combined with high growth numbers.
  • The NIM’s have fallen steadily from 10.4% in FY13 to 7% in FY17. Also the cost of borrowings has risen during this period. This is a sign of increasing competition.
  • The AUM growth and disbursement growth slowed in FY17 due to demonetization related issues.
  • MAS’s asset quality has been robust over the last 5 years at NNPA’s lower than 1%. This is excellent as asset quality is crucial. The asset quality was maintained in spite of change in the classification of NPA for NBFC’s as per RBI NPA norms for overdue payments.

Benchmarking

We benchmark MAS against other NBFC’s from the same sector. See Exhibit 7.

  • PE appears moderate at 36.5 times (diluted post IPO) compared to peers. But the P/B ratio appears high at 4.44 times (diluted post IPO). Established NBFCs like Shriram, Capital First and M&M Financial are in the 2.5-3.5 range. The highest is Bajaj Finance at 11.21 times. Thus the P/B is between above average and lower than some of the most expensively traded NBFC’s.
  • The D/E ratio at 2.87 (diluted post IPO) is in the lower range and hence gives MAS scope to aggressively lend. The CAR of MAS stood at 22.9% for FY17 as against RBI’s minimum of 15%, which indicates that it is adequately capitalized.
  • The RoE is the high at 20.6%. ROCE is the highest at 28.04%. This is a positive.
  • MAS has witnessed good sales and profit growth. The 3 year growth is high while not the best.
  • Dividend yield is low.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 7 – Benchmarking

Positives for MAS and the IPO

  • MAS has a track record of consistent growth with quality loan portfolio.
  • The return ratios are high and amongst the best in the industry.
  • MAS has deep market knowledge through sourcing channels. They have developed an extensive operational network in Gujarat and Mah. They entered into commercial arrangements with a number of sourcing intermediaries including commission based DSAs as well as sourcing partners where part of a loan default is guaranteed by the sourcing partner.
  • MAS has an experienced management team. The promoters, Kamlesh Gandhi (CMD) and Mukesh Gandhi (CFO) have over 21 years of experience in financial services.
  • The asset quality of MAS is stable with NNPAs at 0.92% for FY17. The financials of the company are also good. This is a positive for long term investors.

Risks and Negatives for MAS and the IPO

  • As a very small player (revenues Rs 365 crores.) MAS may be affected by senior executive exits and seasonal fluctuations.
  • The valuations are on the higher side in terms of P/B at 4.44 times (adjusted post IPO). Additionally as a small company MAS is still asking for rich valuations associated with mid to large companies with good reputations. This is an anomaly.
  • Promoter shareholding is high at 73% post IPO. This can affect policies and decision making, and make MAS possibly prone to unilateral decisions not favoring small shareholders.
  • MAS is facing an increasingly competitive industry, that may affect margins, income and market share. Consumers are being served by a range of financial entities, including, traditional banks, captive finance affiliates, NBFCs and SFB’s approved by RBI to enhance credit penetration.
  • Geographic concentration: MAS’s business is primarily in Gujarat and Maharashtra. As of FY17, roughly 80% of AUM was located in such states, with Gujarat accounting for 60%.

Overall Opinion and Recommendation

  • The BFSI sector has done well over the last few years (barring pockets like PSU Banks) with underpenetration in financial services, a fast growing economy and new emerging sectors and opportunities. In the private sector NBFC space, well managed firms have seen good growth.
  • MAS has a good record in the regional markets of Guj. and Mah. There is ample scope for growth in these affluent regions.
  • Strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • High geographical concentration of AUM and high valuations are key risks for MAS.
  • At a P/B of 4.44 times (adjusted post IPO), the valuations of the IPO are on the upper side. However strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

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. JM has no stake ownership or known financial interests in MAS or any group company. Punit Jain intends to apply for this IPO in the Retail category. 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.

AU SF Bank IPO – Transformation Required, Valuations Stretched

  • Report dated 26th June
  • IPO Open 28-30th June at Rs. 355-358
  • Valuations: P/E 31 times TTM, P/B 5.1 times 
  • Large Cap: Rs. 10,000 cr. Mkt cap
  • Industry – Small Finance Bank
  • Advice: AVOID
  • Overview: AUB is a Jaipur based small finance bank (SFB) which operates in 3 business lines: vehicle finance; MSME and SME loans. They used to be an asset oriented NBFC earlier, and commenced SFB operations in Apr 2017 and launched new retail and rural focused loan services.
  • Revenues and profit for FY17 were Rs. 1,431 cr. and Rs. 329 cr. It has 8,515 full time employees. AUB’s revenues, NII and PAT grew at 36.4%, 43.9% and 47.5% CAGR in 5 years. The gross AUM and disbursements of AUB for FY17 stood at 10,734 cr. and 6,730 cr. resp.
  • AUB has a massive task ahead of itself to rebuild itself within 3 years as a priority sector SFB institution. This involves setting up deposits infra, giving MFI loans which are high volume low value and reaching out into the villages. PSL (Priority Sector Loans) to non PSL is 35:65% today and has to become 75:25% in 3 years. These changes are costly, time consuming and involve staff retraining.
  • At a P/B of 5.09 times TTM FY17, the valuations of the IPO are high and aggressive. Further the book value per share rose sharply in FY17 due to the sales of subsidiaries and associates, and BVPS growth may not sustain operationally. Thus on the P/B parameter, AUB is overvalued.
  • Risks: 1) Regional concentration: As of FY17 54% of the AUM was in the state of Rajasthan 2) Business concentration: Vehicle loans constitute 50% of AUM, making AUB dependent on this sector 3) The recent farm loan waivers by govts. may affect the credit behavior of farmers.

Opinion: This IPO offering is an AVOID, investors can pass up this opportunity and instead look to pick up the shares at more reasonable levels in future.

To get the entire equity research report in PDF format, sign up for free alerts on top right panel with your email. 

JAINMATRIX KNOWLEDGE BASE

See other useful BFSI reports:

  1. PNB Housing Finance IPO: A Transformed Lender
  2. RBL Bank IPO – A Grand Revival
  3. New Banks: Big Changes in Small Change
  4. Equitas IPO  – Leader in Small Finance Banks
  5. Announcement – SEBI approval as a Research Analyst

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. JM has no stake ownership or known financial interests in AUB or any group company. Punit Jain does intend to apply for this IPO in the Retail category. 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.

Hudco IPO – Sector Uncertainties, AVOID

  • 9th May 2017 
  • Industry – Loans PSU
  • IPO Open 8-11th May at Rs. 56-60  
  • Large Cap: Rs 11,611 crore Mkt cap 
  • P/E 16.52 times and P/B 1.30 times 
  • Retail investors and employees get a discount of Rs. 2/share 
  • Advice: The IPO is rated AVOID   

Overview: HUDCO is a PSU engaged in providing loans for housing and urban infrastructure projects in India. HUDCO primarily lends to state governments and their agencies. 69% of HUDCO’s loan portfolio is in the urban infrastructure segment and the remaining 31% is in the housing finance loan segment. It’s revenues, EBITDA and PAT have grown at 4.8%, 4.2% and 6.8% CAGR over FY12-16. Revenues for FY16 were Rs. 3,350 cr. and profit Rs. 810 cr. It has 874 full time employees. 

Key risks: 1) HUDCO has weak growth in a recent environment of shortages and massive demand 2) High GNPA’s and NNPA’s 3) It’s a weak institution and performance is unpredictable. Clearly the activities are not commercially driven, so how can investment results be attractive? 4) It is far better to own a wonderful business at a fair price than a fair business at a wonderful price”. We feel that HUDCO is an average business available at a good price.

Opinion: This IPO offering is rated AVOID, and investors may look elsewhere for long term gains.

The detailed report will be attached soon for your reference.  

For full report, see LINK 

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. JM has no known financial interests in HUDCO or any group company. 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.

Investment Outlook – Short Term Pain, Medium Term Gain

  • 22nd Nov 2016
  • Report Type: News Analysis

Recently the global markets have been very volatile and the same is being witnessed in the Indian markets as well. The Sensex has fallen around 12% from peak of 29,045 on 8th Sept, after a 26% rise since the 2016 budget. Here are the key events which have likely affected the mood of the market.

I) Demonetization:

The high value currency notes of Rs 500 and Rs 1000 were demonetized on the 9th of Nov, 2016. Just overnight 86% of cash in INR has become obsolete. This measure was taken by the govt. to 1) tackle the widespread presence and hoarding of undisclosed (black) money and 2) destroy the counterfeit notes in the economy. A 50 day window till 30th Dec was given by the govt. to public to deposit or exchange these high value notes.

  • Per estimates about Rs 14.73 lakh crores is in the form of 500/1000 Re notes, and these will be replaced with new Rs 500/2,000 notes which are being distributed by bank branches /ATMs.
  • On 22nd Nov, the RBI eased NPA recognition norms as many SMEs, Agri and other business making cash based settlements/transactions could face repayment issues. RBI has given additional 60 day limit for Banks and NBFCs to recognize loans as NPA over and above standard regulatory limits for dues payable between 1st Nov – 31st Dec 2016 in cases where sanctioned limit is below Rs 1 crore.

The Cash categories are:

  1. Daily cash for individuals and businesses: There is a short term pain as people have to wait in queues outside banks and ATMs to deposit, withdraw or exchange money. We expect this to continue in urban areas for 10 days and semi-urban/ rural for another 2 weeks. Already limits are being raised for individuals & businesses. Online /mobile payments are gaining acceptance. New bank accounts will grow; usage of Jan Dhan Yojana accounts has begun.
  2. Black/ undisclosed cash: Over many years, cash has become a massive store of wealth in India. The reasons were convenience and lack of bank accounts on one side, and to avoid tax, under-declare property values, run illegal business, naxalite movement, etc. on the other. It is estimated that 25-40% of above 14.73 lakh crore of cash is undisclosed. This money is expected to either 1) be deposited in bank accounts and declared, accruing taxes and converting to white, 2) Some of this may leak out to other asset classes like currency, gold, real estate, forex and other people’s bank accounts 3) Be destroyed so as not to leave a trail.
  3. Counterfeit / fake currency: There is a reported presence of fake currency in the system, which is debasing the banking operations. By collecting all high value notes and issuing new ones, these will be flushed out of the system. It’s difficult to estimate this type of cash.
JainMatrix Investments

Fig 1: Ring out the Old, Ring in the New

Impact: For individuals and in business, there will be some disruption before we limp back to normalcy. This will be worse in rural areas with poor banking penetration.

  • But 30 years of cumulative black money will in one stroke be converted or destroyed.
  • This cash exchange, coupled with GST, may radically alter consumer behavior. Bank accounts usage will multiply, as also money transfer facilities and transparency.
  • The govt. is trying to switch from equilibrium in Tax Non-compliance to one in Compliance. In other words break a vicious circle of saving in black money to a virtuous circle of white money.
  • The market sentiment in the short term is affected as several cash oriented sectors may be impacted. Real estate, jewellery, microfinance / NBFC and retail operations may be affected. However the new 22nd Nov rule will ease liquidity for NBFCs and allow operations to stabilize.
  • Data available today indicates the money deposited with banks by customers crossed Rs 6 L crore from Nov 10, after demonetization. Withdrawals, including exchange of old notes, were above of Rs 1.35 L crore (per IBA). We estimate that in another 10 days, the depositing should be complete. The withdrawal / exchange of notes may take 2-3 weeks more to meet daily cash needs.

II) US election results:

Donald Trump won the 45th US Presidential elections on the 9th Nov, 2016. This was against the market consensus of various polls indicating a win for Hillary Clinton, thus shocking many Americans and investors worldwide. After the initial surprise, the US markets stabilized.

Impact: We expect the US policies to change once Trump takes over presidency in Jan 2017. The immigration, foreign business treaties, tax rates and a host of domestic policies may change. The impact on Indian investors too will unravel over 6 months. There is a higher uncertainty in US markets. Some FIIs are pulling out funds from Emerging Markets in a Risk off move. However after an initial knee-jerk reaction, this may not continue.

III) Tension along the India – Pak Border:

Indian stock markets fell almost 2% on 29th Sept, 2016 after the Indian army conducted “surgical strikes” on terror launch pads across the Line of Control (LoC) in Jammu and Kashmir amidst rising tensions between India and Pakistan. Thus the Indian side has taken a firm stand against terror from Pakistan. This event has been followed up with many incidents of firing on both sides and disruptions along the border.

Impact: We feel that there will be ongoing tensions between India and Pakistan. However a war like situation might not come up. Though the issues are unlikely to be solved soon, negotiations and dialogues should happen. Any aggressive attacks from either side could lead to a short term fall in markets. There is a higher uncertainty.

IV) Tata Group Clash:

The Chairman of the Tata Group, Cyrus Mistry was ousted from his post. The past Chairman Ratan Tata took over and will appoint a new Chairman within 2-3 months. The main reason for this was stated to be a loss of confidence in Mistry. This sounded like a painless coup for investors but the spat between the two has gone public, and it may be some time before the changes are rolled out across the group.

Impact: We feel that the operations of most companies will not be affected in the near term. Some strategic direction may be changed. The aggressive and combative stand of Tata group seen in recent cases like Tata Corus and Tata Docomo may soften in line with group philosophy.

Indices movements: Sensex, Nasdaq, S&P 500 and Dow Jones

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Fig 2 – Index movements – 1 year

  • We can see that there has been a fair correlation between Indian and USA markets over 1 year.
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Fig 3 – Index movements – 1 week

  • But over the last week, perhaps thanks to demonetization and the Trump election, Sensex has fallen relative to other markets.

Conclusions

  • There has been a sharp fall in Indian indices and many stocks from recent peaks. The fall reflects a break in the positive run, an increase in uncertainty and sudden unexpected events. It’s not all bad news. We feel that most of the events are short term disruptions, with a recovery possible in a period of 2 weeks to 3 months.
  • This is a correction in an overall bull run as we are seeing a lowering of interest rates, positive moves on GST and 7th pay commission and until recently, steady investments from FIIs and domestic retail. The IPO market too has been euphoric with a lot of pent up demand from retail investors.
  • This short term fall is a buying opportunity if you have a time horizon of a period longer than 3 months.

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Disclaimers

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 independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

SKS Microfinance – a Magical Mix

  • Date: 01st Sept, 2015
  • CMP: Rs 457
  • Mid Cap – with Mkt Cap of Rs 5800 crores
  • Advice: High risk, high return stock, BUY
  • Target: Rs 844 by Mar 2017, an 85% appreciation

Summary

Overview: SKS Microfinance is a leader in small business loans for low income people in rural and village areas. State policy changes in AP in 2010 affected operations and SKS plunged into losses. But now the recovery is complete. Total income, NII (Net Interest Income) and Net Profit have grown at 24%, 22% and 36% CAGR over the last 7 years. NPA levels are quite low.

Why buy now: 1) SKS has a magical mix of Social Service and Good Business. 2) It’s a turnaround opportunity that is stabilizing now, and the firm should be able to grow at 40% CAGR over the next 2 years 3) In a recent correction, it has fallen 22% in the last month from a recent high.

The rest of this report is available on this LINK – JainMatrix_SKS Aug 2015

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 a personal shareholding in SKS since Nov 2014. Other than this, JM has no known financial interests in SKS 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. 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 independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

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Bajaj Finance – August 2015

JainMatrix Investments has just published a report on Bajaj Finance. We’ve been tracking this stock since many years. See some of our older reports –

This share has provided 11X returns to shareholders over 5 years, to become one of the best wealth generator mid caps today. We saw this early, and analysed and reported on this. We set bold and aggressive targets in our reports that many readers found incredible. And what happened? The share actually outperformed even our targets !!

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So why do you need this report from JainMatrix Investments? Because once again we are bold, aggressive and seeing things early. And high quality research pays for itself many times over.

This report is restricted to subscribers, so visit the Payments Page, become a subscriber to the Investment Service and claim your copy of this report.

Regards,

Punit Jain  Founder, JainMatrix Investments