Companies & Sectors
AirAsia India files application to launch operations

The airline had filed its application with the civil aviation ministry on 23rd April. It has plans to launch operations with a few aircraft and proposes to bring in 37 planes in the next five years

The newly formed AirAsia India, the Indian arm of Malaysia's low cost carrier AirAsia, has filed an application with the civil aviation ministry seeking permission to launch its operations, official sources said on Thursday.


The airline had filed its application with the ministry on 23rd April. It has plans to launch operations with a few aircraft and proposes to bring in 37 planes in the next five years, it said.


The joint venture company is likely to have at least six members on its board, comprising two nominees each from AirAsia and Tata Sons and one representative from Telestra Tradeplace. There would be an independent director on the board who would also be the non-executive chairman.


Tata Sons has nominated R Venkatraman, former executive assistant to Ratan Tata, and Bharat Vasani, the chief legal counsel of the Tata Group, on the board.


AirAsia would be represented by Tony Fernandes and Kamarudin Bin Meranun, who are among the largest shareholders in AirAsia Bhd, while Arun Bhatia would represent Telstra Tradeplace on the board of the newly formed venture.


Air Asia, the largest low-cost airline in Asia, has formed the joint venture with Tata Sons and Telestra Tradeplace of Arun Bhatia in a 49:30:21 holding to launch a low-cost carrier in the domestic market.


The venture received a formal approval from the Foreign Investment Promotion Board on 4th April to set up the company in the country.


The airline has a fleet of Airbus A320 planes and has even started hiring of cabin and cockpit crew.


Nomura bullish on Mahindra & Mahindra Financial Services; ups target price to Rs250

Unusual optimism saw Nomura revise upwards its target price of the automotive lender from Rs230 to Rs250

The above average annual numbers posted by Mahindra & Mahindra Financial Services (MMFS) for the March 2013 quarter prompted Nomura Equity Research to revise its target price from Rs230 to Rs250, on back of increase in earnings multiples estimates. The positive results were driven by the optimism in the utility vehicle segment and a rebound in the tractor segment. According to Nomura, the report stated: “We are bullish on retail-focused NBFCs for their relatively higher growth, stable asset quality, superior RoEs and decreasing regulatory uncertainty.” It has reiterated a ‘Buy’ call on the company due to positive asset under management, earnings growth and non-M&M lending. Furthermore, the report states, “We estimate the proportion of non-Mahindra & Mahindra disbursals to UV and tractor segment (put together) to have doubled in the 2013 fiscal compared to the previous year.”

MMFS disburses loans to different segments of the industry: utility vehicles, car, tractor, commercial vehicles, pre-owned vehicles and rural housing finance. Nomura expects the company to grow its assets under management (loans disbursed) 24% year-on-year. MMFS was able to protect its margins in FY13 despite growing its AUM at 35% y-o-y in a weak macro environment, the report said. A 24% growth forecast is optimistic considering that the automotive sector itself is going through a tough time. With interest rates heading lower, it is quite possible that disbursement will increase (at the risk of future NPAs, if interest rates go back up).

Nomura has estimated UV segment to grow 20% y-o-y for the 2014 fiscal, with strong growth forecast of M&M, XUV and Quanto models. The tractor segment is expected to grow at 15% y-o-y even though it has been performing badly last year. The car segment is expected to grow at 25% y-o-y with a market share of 11-12% in Maruti vehicles alone. It expects the CV vehicle segment to grow even more impressively by 37%, owing to small base. Surprisingly, Nomura expects pre-owned market disbursal portfolio to increase 33% y-o-y. India is a country with a poorly developed pre-owned automotive market, so this is somewhat rather optimistic expectation.

MMFS has guided 3%-4% as the fair range for GNPLs (gross non performing loans) and credit cost within 2% in a worst-case scenario, according to Nomura. The company has a decently controlled delinquency ratio. The gross non performing assets stood at 3.94%, an unusually high figure.


Nomura's China Stress Index recorded highest level in Q1

Nomura felt the risks in China were sufficiently non-trivial to assign a one-in-three likelihood of a “hard landing” commencing before the end of 2014

Almost 18 months ago, global brokerage firm Nomura in its China Risks report provided six reasons why it thought the risk of a hard economic landing in China had increased. They were: 1) overinvestment and excessive credit; 2) rudimentary monetary policy architecture; 3) too many privileges to state-owned enterprises; 4) potential unintended consequences of financial liberalization; 5) the Lewis turning point associated with a dwindling supply of surplus rural labour; and 6) the setting in of growing pains from worsening demographics and increasing strains on natural resources.


The brokerage defined a “hard landing” as an abrupt slowdown in real GDP (gross domestic product) growth to an average of 5% y-o-y or less over four consecutive quarters, and Nomura felt the risks were sufficiently non-trivial to assign a one-in-three likelihood of a hard landing commencing before the end of 2014.


Eighteen months on, while Nomura’s base case is that China’s economy will grow, on average, by 7.5% in 2013-14, the macro risks remain high and it has kept the one-in-three likelihood of a hard landing commencing before the end of 2014.


To help quantify the macro risks on an ongoing basis Nomura constructed its China Stress Index (CSI). It is made up of 18 indicators that are first standardized and then weighted. The CSI indicates that hard-landing risks steepened after the global financial crisis and has yet to reverse course; in fact, it rose from 101.5 in Q4 2012 to 101.6 in Q1 2013, a record high on quarterly basis


Decomposing the latest data point of the CSI—March 2013—reveals that its elevated level is because of strong credit growth, including shadow financing outside the official banking sector, and a frothy property market



The record high CSI reading is consistent with the main findings from Nomura’s recent thematic report. The brokerage highlighted three symptoms that preceded major financial crises in Japan, US, and Europe, namely the rapid build-up of leverage, the rise in property prices, and a decline in potential growth. Such symptoms also currently prevail in China.


Nomura also focussed on an interesting phenomenon that it called the “5-30” rule: financial crises in large economies are usually preceded by the domestic credit-to-GDP ratio rising sharply by 30 percentage points (pp) in the five years before the crisis is triggered. So it is not only the level, but also the speed of the debt build up, and China is in the “5-30” rule danger zone.


It appears that the rapid build-up of stress in the economy has weighed on asset prices. The renminbi forward used to price in appreciation against the US dollar now prices in a depreciation, in line with the rapid rise in the CSI in recent years. Equity prices in Shanghai have performed poorly in recent years, which probably also reflects an elevated risk premium.


Real GDP growth slowed from 9%-10% in 2008-11 to 7.8% last year, which is still strong, but there is concern among investors over its quality and hence sustainability, given the heavy reliance on debt-financed housing and infrastructure investment. Nomura believes that asset prices reflect such concerns.


Recent economic development suggests investors’ concerns are warranted. GDP growth in Q1 slowed to 7.7% from 7.9% in Q4 2012, despite very aggressive policy easing as total social financing reached an historical high. The HSBC flash manufacturing PMI dropped to 50.5 in April from 51.6 in March, despite positive seasonal factors that usually drive April readings of the PMI up. Moreover, there are many signals that the government is now tightening controls on shadow banking activities. For instance the China Banking Regulatory Commission announced several guidelines in March to tighten regulations on wealth management products and contain banks‟ exposure to local government financing vehicles. The government set the target for M2 growth for 2013 at 13% in the National People’s Congress, suggesting monetary tightening beyond Q1, as M2 growth was 15.7% in March. Nomura believes these tightening measures are necessary and will help to contain systemic risks, though in the short term they will lead to a growth slowdown.


The brokerage believes that most pivotal for the outlook to it CSI and hence China’s hard-landing risk is policy. If the government tightens policy further in 2013 (which is Nomura’s baseline case), growth will slow to 7.2% in Q4, a small price to pay, for avoiding a systemic financial crisis.


There may be isolated bankruptcy cases in the non-bank financial sector and corporate sector, but the government still has the resources to protect the banking system and avoid a sharp growth slowdown to 5% or below. By contrast, if the government focuses on the short-term business cycle and loses sight of the continued build-up of the financial cycle, by loosening policy again to boost growth (which is a policy mistake and a risk scenario), Nomura believes that it can attain growth of 8% in 2013, but the risks of a systemic financial crisis and economic hard-landing rise. In other words, easing policy this year only postpones the day of reckoning at the cost of sharper growth slowdowns down the road, according to Nomura.


Nomura maintains its out-of-consensus cautious view on China’s economy. Its 2013 GDP growth forecast has been at the low end of consensus. Moreover, the 7.5% growth reflects its baseline view, which it sees as the most likely scenario, but the brokerage also views a one-in-three likelihood of a hard landing beginning by the end of 2014.



From its analysis of China’s macro challenges and risks, Nomura identified 18 indicators to construct its China Stress Index, or CSI for short. Each was chosen not to predict GDP growth per se, but to signal the chance of an abrupt slump in growth. The indicators are forward-looking, so data such as non-performing loans are not included. The data are monthly and start in January 2000. For the indicators that are available only on a quarterly or annual basis, monthly series were interpolated from the longer frequency data. CSI is then defined as a weighted average of standardized indicators as follows:



One limitation of the CSI is that it does not give a probability of a hard economic landing. To do so would require a reference variable measuring past episodes of hard economic landings in China, the obvious one being real GDP. Yet in the past 20 years Chinas GDP growth has not fallen below 5% and before then the causes of hard landings in GDP were influenced heavily by social and political unrest. So what the CSI tells us is: 1) the direction of overall macro risk; and 2) how fast the risk has changed compared with history.



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