Companies & Sectors
Bitter first quarter for sugar producers; shipping, real estate are the other two worst performers

Sugar sector records net loss in April-June 2011 period; profits dip for shipping and real estate too

The sugar sector was the worst performer in the first quarter of 2011-12, a complete reversal for sugar producers who recorded the highest net profit growth in the previous quarter.

According to data for 29 major sectors tracked by Moneylife, shipping and real estate were the other two major sectors that did poorly in the June quarter. While sugar recorded a 2% revenue growth in the three-months period, shipping generated 3% growth and real estate grew by 4%.

The 24 sugar companies that we track recorded total revenues of Rs6,618 crore, a marginal increase from Rs6,478 crore with a net loss of Rs101 crore overall. Exactly half the companies (12) posted a net loss in the quarter, as compared to 15 companies that registered a loss in the corresponding quarter last year. Of the 10 companies that suffered an operating loss in the June quarter last year, nine of them posted an operating profit this quarter.

For Parrys Sugar Industries, which posted a good net profit growth in the previous quarter, sales grew by 90% y-o-y from Rs67 crore to Rs127 crore in the June quarter, but it registered a net loss of Rs27 crore.

Shree Renuka Sugars the better performers among the sugar producers, recording a growth in net profit from Rs9 crore in the June quarter last year to Rs47 crore in the corresponding quarter this year. Operating profit grew from Rs32 crore to Rs133 crore in the same period.

Shipping had another poor quarter, despite the growth in exports. Operating profit for the 12 companies in the sector fell by 17% from Rs757 crore to Rs632 crore. Net profit went down further from Rs429 crore to Rs90 crore. Five of the 12 companies registered a net loss in the June quarter.

Bharati Shipyard posted a revenue growth of Rs77 crore, up 21%, and operating profit was up by 49% from Rs95 crore to Rs141 crore. However, net profit declined from Rs22 crore to Rs17 crore in the period. Revenue for ABG Shipyard grew by 16% to Rs523 crore. Operating profit and net profit was up by 5% and 4% respectively.

Government-owned Shipping Corporation of India (SCI), registered a net loss of Rs6 crore. Revenues were up by 7% to Rs973 crore, whereas operating profit was down by 47% to Rs118 crore.

Real estate sector revenues grew from Rs4,036 crore to Rs4,210 crore y-o-y, a repeat of the dull 4% growth in the previous quarter. Operating profit for the sector declined from Rs1,541 crore to Rs1,298 crore in the same period.

Operating profit margin was down to 31% in the June quarter compared to 38% in the corresponding three-month period last year. Net profit of the 27 companies declined by 23% to Rs1,046 crore in the latest June quarter, with 16 of the 27 companies tracked by Moneylife reporting negative growth.

Phoenix Mills' revenues were at Rs47 crore, up 16%, with an operating profit margin of 70%, while net profit shot up 49% to Rs27 crore. Mahindra Lifespace Developers reported a revenue growth of 20%, y-o-y. Operating profit grew by 6%, y-o-y, to Rs17 crore and the operating profit margin was 21%. Net profit for the company was up 18%, y-o-y, at Rs17 crore. As for DLF, net profit was down 55% to Rs93 crore for the June 2011 quarter with a 5% increase in revenues from Rs652 crore to Rs686 crore.


Bad debt issues are becoming severe in emerging markets too and could hurt the global financial system

The lack of information about bad debts does not stop in developed countries. China, Brazil, Russia, and even India are dominated by state-owned banks whose lending is heavily influenced by politicians and they have less of an incentive to reveal the extent of the problem

The crash of 2008 was caused by two things. The first was a mountain of bad debt. This was accumulated during a period of economic growth when credit was given too easily to too many people. Of course this is a normal part of a business cycle. What looks like a good credit bet when times are good can look like a huge mistake when the economy turns bad. What turns a contraction into a crash is the other factor: bad information.

The information question is now causing problems for several financial institutions in developed countries. Bank of America's stock has fallen by 50% since May. Bank of America has $460 billion worth of real estate-related lending on its books and no one really knows how much it is worth. The real estate market in the US has continued to deflate, but information as to exactly how much is the subject of heated debate.

Like Bank of America, the shares of French banks including Société Générale, BNP Paribas and Crédit Agricole have been hit by large short-term losses. These were sparked by rumours, many of which turned out to be untrue. Still the risks associated with the French banks' exposure to potential losses from the sovereign debts of Italy and Spain are unknown. But the lack of information about bad debts certainly does not stop in developed countries. The issue is becoming quite severe in emerging markets as well.

China recently announced plans to bailout its local governments by assuming 2-3 trillion yuan ($308billion-$463 billion). The total amount of bad debts could go much higher, because many of these estimates do not include off-balance sheet loans. The information about debts in China is opaque even to the Chinese, much less to global markets. This could cause some severe problems. The ratings agency Fitch gave China the worst grade in its three-level scale of potential for systemic stress. Sixty per cent of countries that received the score had banking crises within a few years.

China is hardly alone. Most of the emerging market economies have been growing at a blazing pace. Over the past two years, emerging market economies have grown in excess of 7%, both stock markets and real estate prices have reached all-time highs. It would hardly be a surprise if there were credit problems, but information about the extent of the issues is hard to find.

India is a case in point. A recent report suggests that at least 17% of Indian banks' outstanding loan assets could be on the verge of default, and debt ratings for companies are deteriorating at the fastest pace since 2009. Public sector banks make up the vast majority of the banks in India and could be the worst hit, no doubt the result of loans to politically connected borrowers. The bad loans of the State Bank of India, the nation's largest lender, are a case in point. They rose 77% in the first three months of 2011, while the bank's net income fell 99%.

Brazil's banks are having similar problems. Brazil's biggest lender, Itau Unibanco raised its default-rate forecast for 2011 in July. Its shares have fallen 21% this year. In fact the entire Brazilian financial sector has lost more than its counterparts in Europe, as consumer defaults hit a 12-month high. But the exact numbers are not available, because Brazil has yet to implement recent legislation to allow Brazilian lenders to collect and share information on all borrowers.

Unlike Brazil, Turkey took the unusual step of lowering interest rates to protect itself from the wall of liquidity sloshing around the world. It didn't help. Despite attempts to curb bank lending, Turkey has experienced credit growth of more than 30%. Its reliance on foreign capital and a record current account deficit sets the stage for a capital flight crisis.

Not to be outdone, Russia's fifth-largest bank, Bank of Moscow, racked up at least 150 billion roubles ($5.4 billion) of unsecured bad loans. It recently required a $14 billion rescue. It may not be the only one required. Russia's banking sector, like the other BRICs, is dominated by state-owned banks whose lending is heavily influenced by politicians and not necessarily by accurate judgments of solvency. Worse, state banks have less of an incentive to reveal the extent of the problem, since their bad loans might reflect badly on those in power. So the information is likely to remain hidden until there are no alternatives.

But emerging market debt issues are not limited to emerging markets. The third-largest US bank, Citigroup, gets more than half of its profit from emerging markets. The stagnation of developed market economies has encouraged their banks to look to emerging markets for growth. Given the present issues in emerging markets, they might have been better off at home.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected].)




5 years ago

Debt, and job loss is a big issue. Having credit is important and a valuable asset for anyone or any business. Growth and expansion of fresh ideas, & resolutions depends on credit. You can have the greatest idea ever thought, but without the opportunity to develop your idea, it won’t resolve much. It will take generations of work to resolve some of the complications of the economy, but where there is a will there is a way.

RBI panel proposes tough regulatory norms for NBFCs

Besides prescribing threshold limits, the working group headed by former RBI deputy governor Usha Thorat suggested that NBFCs should be subjected to the same regulations as banks with regard to provisioning norms and lending to stock brokers and merchant bankers

Mumbai: A Reserve Bank of India (RBI) panel has advocated tough new norms for non-banking financial companies (NBFCs) with the aim of strengthening the regulatory and supervisory framework for such lenders, reports PTI.

Besides prescribing threshold limits, the working group headed by former RBI deputy governor Usha Thorat suggested that NBFCs should be subjected to the same regulations as banks with regard to provisioning norms and lending to stock brokers and merchant bankers.

"Accounting norms applicable to banks may be applied to NBFCs," it added.

The working group further said that all NBFCs with assets of over Rs1,000 crore, whether listed or unlisted, should be made to comply with Clause 49 of the Securities and Exchange Board of India's (SEBI) listing agreement, which pertains to the composition of a company's board of directors.

It also called for annual stress tests and inspection of such NBFCs to ascertain their vulnerability.

The panel also suggested that NBFCs should have a minimum 12% Tier-I capital adequacy ratio-which is the ratio of the bank's core capital to its risk-within three years of registration.

It also recommended assigning a higher risk weight to the capital market and commercial real estate exposure of NBFCs that are not sponsored by a bank or do not have any bank as part of their group.

The RBI panel suggested the imposition of a risk weight of 150% for capital market loans and 125% for commercial real estate loans by such NBFCs.

It also advocated giving NBFCs benefits under the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

The panel, however, suggested retention of the minimum net-owned fund requirement (NOF) for all new NBFCs that wish to register with the RBI at the present Rs2 crore till the RBI Act is amended.

"The RBI should, however, insist on a minimum asset size of over Rs50 crore for registering any new NBFC. Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years," it said in the report.

Moreover, any transfer of shareholding, direct or indirect, of 25% and above, a change in control, merger or acquisition of any registered NBFC should have prior approval of the Reserve Bank, the panel suggested.

The working group also called for recognition that registration as NBFC with RBI provides comfort to lenders and investors and enables leveraging of public funds and simplification and rationalisation of the scope of regulation and registration.

The RBI has sought comments on the report from all stakeholders and the public by end-September 2011.


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