Invest Without Emotions
The NIFTY ended on a negative tone, drifting down -1.39% for the week.
Biggest losers were INFY(-15.33%), JPASSOCIAT(-8.79%) and TCS(-8.69%). And the biggest winners were KOTAKBANK(6.87%), HINDUNILVR(5.94%) and RANBAXY(5.24%)
Decliners eclipsed advancers 27 vs 23
Gold: 1.61%, Infrastructure: 1.49% and Banks: 0.91%
Daily news summaries are here.
Gone are the heady days of blowout earnings and record revenues. All that has given way to defaults, debt restructuring and distress sale. The once blue-eyed boys of corporate India are now in deep red, giving blues to investors and lenders.
Corporate credit defaults surged to the highest in a decade last fiscal with textiles, steel and construction & engineering sectors accounting for a quarter of total defaults, according to 
rating agency CRISIL. It noted that 3.4% of the companies it rates defaulted on its debts.
Rising input and interest costs coupled with slackening demand and weak pricing power have impacted corporate margins. Therefore, servicing of loans has come under stress. CRISIL adds that weak liquidity caused by elongation of working capital cycles have led to defaults. Companies like Bharati Shipyard, Kingfisher, GTL Ltd, Hindustan Construction Co, etc have managed to restructure their debt or sought approvals, thus avoiding default on their existing debts.
Domestic funding has been hit hard in the last 18 months, thanks to the record 13 times (175 bps) hike in repo rate since March 2010. Asset quality stress has permeated into the health of banks. Between March 31 and December 31, 2011, gross NPAs of banks rose to 2.9% of advances from 2.3% while the quantum of restructured debt spiked to 3.3% of advances from 2.5%. Higher provisioning requirements as a result of rising non-performing assets will dent the profitability of banks.
Going forward, pressure on corporates’ balance sheet is expected to ease due to lower interest rates, softening of commodity prices 
and flexibility to defer capital expenditure. But credit quality may take time to recover as interest rates are only expected to decline at a slower pace while global demand, especially in the Eurozone, looks wobbly.
Even as more companies opt for Corporate Debt Restructuring (CDR) or moratorium on loan payments, lenders can learn a lesson or two from these events. Their aggressive lending practices during the preceding boom years coupled with lack of due diligence and laxity in monitoring of loan accounts are also to blame for the deterioration in their asset quality. Banks would do well to tighten the screws from their end to insulate themselves in stressful situations.
[stockquote]KFA[/stockquote] [stockquote]CRISIL[/stockquote] [stockquote]GTL[/stockquote] [stockquote]BHARTISHIP[/stockquote] [stockquote]HCC[/stockquote]
Coal India Limited (CIL) is at the receiving end from different quarters. While, on the one hand, it is facing the government’s wrath for failing to fulfill the country’s burgeoning coal demand, minority shareholders, on the other side, are crying foul at the lack of corporate governance standards at CIL and its failure to protect their interests.
On Tuesday, the government issued a presidential directive to force CIL to sign fuel supply agreements (FSAs) with power producers to supply as much as 80% of the fuel requirements committed to power plants. Softening the blow, it however, allowed the PSU’s board the freedom to decide on penalty that would be payable in case it breaches the pact.
The presidential diktat was enforced after Independent Directors of CIL’s board, which has been holding discussions for the last few days, put their foot down on committing fuel supplies.
Going by CIL’s current output and ramp-up capabilities, independent ![clip_image002[5]](http://stockviz.biz/wp-content/uploads/2012/04/clip_image0025.jpg)
directors felt it was impossible for the state-run miner to meet supply requirements and it may have to opt for imports which is a costly affair.
Instead, they questioned the lower price paid by the power sector for coal and suggested that CIL should cut down on fuel supplies to the power sector and sell excess coal through e-auction to augment profitability.
Amidst this furor over fuel supplies, investors are clearly not impressed at the way Coal India is being arm-twisted. UK-based hedge fund and CIL shareholder, The Children’s Investment Fund Management (TCI) has threatened arbitration against the Indian government, alleging that the government was going out of its way to help private power producers by pressurizing CIL.
TCI, which holds 1% stake in the monopolistic miner, has charged Coal India of selling the fuel at a price that’s up to 70% lower than the market price, hurting minority shareholders.
The country’s powerful lobby comprising of Cyrus Mistry, Anil Ambani and other corporates, who forced the government’s hand on Coal India by knocking on the PM’s door for seeking solution to the power crisis, must be relieved as more than 25,000 MW projects will be kick-started. The demand-supply gap for coal, which stood at 84 million tonnes (MT) during FY 2010-11 is likely to touch 142 MT in FY 2011-12.
While the Prez decree will awaken Coal India from its ![clip_image001[5]](http://stockviz.biz/wp-content/uploads/2012/04/clip_image0015.png)
deep slumber and help meet fuel requirements, the government would do well to address some pertinent issues that plague the miner than just issuing diktats. Coal India faces land acquisition problems and delays in environmental clearances due to which several projects have missed deadlines while domestic prices are yet to align with international rates, hurting the company’s profits. To make matters worse, the coal behemoth has almost been headless, critically hampering its decision-making. At present additional secretary in the ministry Zohra Chatterjee is filling the post.
If Coal India is to retain its tag as the darling of D-Street (thanks to its blockbuster listing), the government would do well to address these ‘bitter truths’ instead of just administering ‘bitter pills’.
[stockquote]COALINDIA[/stockquote]
The NIFTY ended on a positive note, drifting up 1.39% for the week, helped by the monster rally on Friday.
Biggest losers were CAIRN(-5.92%), RCOM(-5.88%) and NTPC(-5.52%). And the biggest winners were RANBAXY(13.79%), DRREDDY(5.86%) and TATASTEEL(5.28%)
Advancers lead decliners 26 vs 24
Gold: 0.40%, Infrastructure: -3.72% and Banks: 1.05%
Daily news summaries are here.
Loans (Photo credit: jferzoco)
As the saying goes, all good things must come to an end. Even in these difficult times, gold loan non-banking finance companies (NBFCs) saw roaring sales and record margins. According to ratings agency ICRA, “`Gold loan companies have reported an estimated compounded annual growth rate (CAGR) of over 100% during the last three years, with the portfolios of the top three companies cumulatively exceeding Rs. 410 billion as on Dec. 31, 2011.
Consider this- During the third quarter of the current fiscal, Manappuram Finance [stockquote]MANAPPURAM[/stockquote] more than doubled its net profit from a year ago to Rs. 161.37 crore, loan disbursements surged 86% while assets under management rose 90% to Rs. 12,358.21 crore. Industry leader Muthoot Finance [stockquote]MUTHOOTFIN[/stockquote] posted a 61% growth in net profit to Rs 251 crore, while total income galloped 91% to Rs 1,231crore and assets under management increased by Rs 1,944 crore to Rs 22,885crore.
But the honeymoon is over. Fearing risks to banking system and retail investors due to the sharp surge in loan against gold, the Reserve Bank of India (RBI) tightened lending rules saying these companies can’t lend more than 60% of the value of gold jewelry. It also directed them to maintain a minimum tier-1 capital of 12% by April 2014 while depriving them of granting loans against bullion, primary gold and gold coins.
![clip_image001[6]](http://stockviz.biz/wp-content/uploads/2012/03/clip_image00161.png)
RBI’s moves are not without reason. The sharp surge in gold prices has resulted in an equally sharp increase in demand for gold loans, especially in rural areas. Since these NBFCs depend heavily on public funds like bank loans and non-convertible debentures, any reversal in gold prices will not only catch NBFCs off guard but may also pose a systemic threat, affecting banks and retail investors.
While the prudential norms has found favour with experts who believe it would improve the sector’s asset quality in the long-run and help them absorb any sharp volatility in gold prices, they maintain that the lower loan-to-value- (LTV) ratio will moderate disbursement volumes and result in business ![clip_image001[8]](http://stockviz.biz/wp-content/uploads/2012/03/clip_image0018.png)
shifting to unorganized players like moneylenders who can still extend loans at higher LTV ratios.
Gold NBFCs, which are used to high profit margins, may have to reduce interest rates to prevent borrowers from shifting elsewhere, which will take the sheen out of their high flying business. Business growth is likely to fall from 80 per cent per annum to 20-25 per cent per annum and return on assets (RoA)may moderate from the current high level of 4.5 per cent to 2.5-3.0 per cent.
