Corporate asset quality to weaken further says Credit Suisse

With the financial health of the corporate sector showing no signs of improvement and rising leverage at stressed corporates, Credit Suisse said it expects corporate asset quality to weaken further

In the recently reported September quarter, bank’s problem asset additions remained elevated at about 4% (annualised) and total problem asset levels are now around 10%. However, recognised problem loans in the large corporate segments are still relatively lower at 5%. “With  the financial health of corporates  showing no signs of improvement and rising leverage at stressed corporates, we expect corporate asset quality to weaken further and remain cautious on the corporate lenders like State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BOI), Union Bank of India and Yes Bank,” says Credit Suisse in a report.


According to the report, the second quarter to end-September, witnessed further deterioration in corporate health, as share of loans with corporates having interest coverage (IC)<1 went up to 34% against 31% in 1Q14. Of these, 80% of loans were with companies which had IC<1 for at least four quarters in the past two years and for 26% of them in the last eight consecutive quarters. In second quarter,  the  share of infra and real estate companies among the IC<1 companies rose as Jaiprakash Associates, DLF and Hindustan Construction Company (HCC) were added, while Adani Ports and Reliance Communication (RCom) went off the list, it said.



Credit Suisse said, of the total debt with companies having interest cover less than 1 (i.e. 34% of total sample debt), about 80%  was with companies not covering interest in four  or more quarters in the  past two years, i.e., companies facing chronic stress (around 27% of total sample debt). This share of companies facing chronic stress within IC<1 companies has gone up from about 50% as of FY12 to around 80% currently. Also about 26% of debt is in companies not covering interest for eight consecutive quarters. 

According to the report, infra and metals continue to dominate the share of companies with IC<1, with the share of infra and construction increasing further to about 39%.  This was also reflected in an increase in restructuring referrals from the infra and construction sector. During the quarter, Jaiprakash Associates, HCC, DLF, Unitech and Gitanjali Gems & Jewelleries were among the large additions to the IC<1 list. Utilities, energy and telecom saw their share decline as RCom, MRPL and Torrent power exited from the list.

Credit Suisse said, many of the under-stress companies have reported significant increases in erosion of net worth in the past few quarters. It said, "26% of sample debt was with loss making companies. Moreover, with consistent losses, several companies have now witnessed 22%–80% net worth erosion in last two years even as their debt levels continue to rise."

"Given continuing cash flow strain and currency depreciation, debt levels for most of the stressed corporates have increased further. Debt levels for many of the larger stressed corporates (eight out of nine largest companies with IC<1 being the “house of debt” companies) increased 5–12% in 1HFY14. Bank loan growth to stressed sectors like power (26% YoY), metals (21% YoY) remained high, the report said.


Credit Suisse said, given the continuing cash flow strain and currency depreciation, debt levels for most of the stressed corporates have increased further.  Even as some of the large corporates have been increasing focus on de-leveraging and asset sales, this is not visible as yet.


The report said NPL slippages (gross), despite moderation from 1Q14 levels, remained elevated at 2–5% for most PSU banks. PNB, IDBI, Indian Overseas Bank (IOB) and Union Bank of India witnessed high slippages while BOI, Canara Bank & Bank of Baroda (BOB) witnessed sequential improvement.  Credit cost picked  up to 1.3% (versus 1.1% in 1Q14) even as NPL coverage broadly remained flat on account of higher provisions for restructured loans with the  provisioning requirement @5% on incremental restructuring and increases in standard asset provisions for existing stock. With a high degree of under-provisioning, increased provisioning requirements for restructured loans and ageing of NPAs, we believe that an improvement in credit cost is unlikely in the coming quarters, Credit Suisse concluded.


Sensex, Nifty in a precarious state: Wednesday closing report

The market fell Wednesday on higher volumes. Only a close above 6,140 tomorrow may bring the NSE Nifty back into an uptrend

As mentioned in Tuesday’s closing report the market fell Wednesday after making three days of gains. The worry for the bulls is that the fall of 80 points on the NSE Nifty was on a higher volume of 68.17crore shares. This fall is the highest since 30 September 2013. Today, the indices had a weak opening and made attempts to cross yesterday close but finally gave up in the last hour of the trading session and closed sharply in the negative.


The BSE Sensex opened at 20,857 and moved down to 20,580 after hitting a high of 20,895. The Sensex closed at 20,635 (down 256 points or 1.22%). The NSE Nifty which opened at 6,187 hit a low of 6,107 at the fag end of the session after hitting a high of 6,204. The Nifty closed at 6,123 (down 80 points or 1.30%).


Except for Metal (up 0.10%) all the other indices on the NSE closed in the negative. The top five losers were Media (2.28%); PSU Bank (2.02%); Bank Nifty (1.97%); Finance (1.75%) and Service (1.48%).


Of the 50 stocks on the Nifty, only four ended in the green. The four gainers were Coal India (1.83%); Sesa Sterlite (1.22%); Tata Power (0.44%) and A C C (0.09%). While the top five losers were I C I C I Bank (3.57%); Jaiprakash Associates (3.52%); B P C L (3.01%); Hindalco (2.82%) and IndusInd Bank (2.61%).


Of the 1,229 shares on the NSE, 535 closed in the positive, 626 closed in the negative while 68 remained unchanged.


The Organization for Economic Cooperation and Development (OECD) cut its global growth forecasts on Tuesday citing a slowdown in developing nations. The world economy will probably expand 2.7% this year and 3.6% in 2014, instead of the 3.1% and 4% predicted in May, the Paris-based OECD said in a semi-annual report. Indian economy will grow just 3.4% in the current financial year and 5.1% in 2014, down from 5.7% and 6.6% forecasted earlier.


Sugar shares gained on reports that the Centre has reportedly convened a high-level meeting today, 20 November 2013 which is expected to discuss a relief-package for the crisis-ridden sugar industry in Uttar Pradesh and Maharashtra, which could include interest-free loans from banks.


Petroleum minister M Veerappa Moily today said that diesel would be completely decontrolled within next six months time.


US indices closed in the negative yesterday. US Federal Reserve's FOMC minutes are due to be released today, 20 November 2013 for any fresh clues on Fed monetary policy moves upcoming. The minutes will be from the October 29-30 meeting.


The Federal Reserve would like to move away from using its balance sheet to help the economy and focus more on "forward guidance" about keeping short-term rates low, but the timing of this shift remains an open question, said Federal Reserve Chairman Ben Bernanke on Tuesday. Bernanke was much clearer about the central bank's plan for short-term rates, saying the Fed would likely hold short-term rates near zero well after the economy reaches the 6.5% unemployment rate that is the threshold for considering a rate increase.


Except for Shanghai Composite (up 0.62%) and Hang Seng (up 0.18%) all the other Asian indices closed in the negative. Jakarta Composite was the top loser, 1.08%.


European indices were trading in the negative and the US Futures were trading marginally lower.


March-end 2014 Sensex target is 22,000, says Nomura

Exporters and private banks are preferred investments among rate cyclicals, but one must remain cautious on domestic growth cyclicals, says Nomura in a research note

Nomura has a set a March-end 2014 Sensex target of 22,000. Its top stock picks are ICICI Bank, HCL Technologies, Reliance Industries, TCS and NTPC.


Nomura continues to prefer exporters, and private banks among rate cyclicals, but it remains cautious on domestic growth cyclicals.


In its September quarter review, Nomura says that it expected strong top-line growth and relatively muted input cost pressures to translate into a rebound in profits, while supporting margins and offsetting, to an extent, margin-erosive high competitive intensity. Corporate results were largely consistent with this forecast.


Nomura observes that a large part of this turnaround in top-line and net profit growth is driven by a clutch of external-facing sectors—non-PSU oil & gas, IT services, autos (driven by JLR) and pharma (to a smaller extent).


The sector-wise earnings scorecard is given in the table below:


The quarterly earnings changes for Nifty stocks are given in the table below:




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