New York-headquartered full-service investment company says the Indian equity market is among very few around the world that looks poised to advance on a long-term bull phase over the next 5-10 years
Oppenheimer & Co has in a report dated 7th December made out a very positive case for investments in India’s equity markets. Its key arguments are pretty standard—“demographics, a sound medium- and long-term earnings outlook, a vastly improved policy backdrop and India’s allure at a point in history where its growth premium is most likely bound to reset at higher levels.” Another important factor it says is “the vast under-owned status of Indian equities, both at the domestic and international levels (retail and institutional).”
The US-based investment company, which also has operations in India, believes that “the Indian equity market holds the potential for annualized returns in the vicinity of 12-18% in rupee terms, and 15-21% in US dollar terms over the next 5-10-year horizon.” Oppenheimer supports its forecast, saying it expects an improvement in the inflation scenario (but the report does not state how) leading to a fall in the risk premium, and a revaluation of the rupee versus the dollar. The firm also expects a stable government, with the Congress-led UPA at the helm until 2014, to implement policy reforms.
Among other positives, Oppenheimer mentions India’s lower vulnerability to global economic shocks due to high local demand and low exports. “India is considered primarily a domestic economy—its share in world trade is a measly 1.1%, with exports constituting only 21% of its GDP.” Of course, it is debatable if at 1/5th of the GDP, exports can be considered ‘low’.
Oppenheimer bets on the usual suspects, including favourable demographics, which means a high working age population and declining dependent population. It makes a good point when it says that since there are “limited investment options (globally) for overseas investors”, India, which is one of the few economies growing at sustainable 6%+ levels, makes a good investment bet.
Oppenheimer is counting on the wallet-share shift of the Indian consumer from basic necessities to discretionary items. It cites McKinsey’s estimates which predict that discretionary spending of the Indian consumer is expected to rise to 70% of the total spending by 2025, from 52% in 2005.
Contrary to the general belief that things are going to be tough for banks going forward, Oppenheimer is quite positive on the banking sector. “We expect further loan growth pickup due to the following factors: 1) working capital requirements are likely to rise on the back of increased industrial activity and rising inflation, and 2) capital expenditure related requirements are likely to increase on account of better confidence levels. Better loan growth is likely to be positive for bank margins and asset quality.”
Oppenheimer is also upbeat about the Indian IT industry. “Even though India has a 51% market share of the off-shoring market, there is tremendous headroom for growth as the current off-shoring market is still a small part of the overall outsourcing industry. Significant opportunities exist in core vertical and geographic segments of BFSI and US, and emerging geographies and vertical markets such as Asia Pacific, retail, healthcare and government respectively. Development of these new opportunities can triple the current addressable market, and can lead to Indian IT-BPO revenues of $225 billion by 2020.”
It is also positive on the education sector, citing the large young population as the reason for this. “India ranks second in the world in population. Of India’s population, 44% is below the age of 19, making it the youngest nation in the world. This bodes extremely well for the education sector. Demand for education will continue to increase over the next decade at surprising speed, we think.” It also points out that the education sector is recession-proof.
It must be said that while education remains a foreign investor favourite thematic investment, very few stocks have given any returns. A year ago, Educomp was at Rs730 and it now trades at Rs515. NIIT, which trades at Rs53 now, was at around Rs70+ levels a year ago. Only Everonn Systems seems to have given good returns—the stock was at Rs400 levels a year ago and now trades at Rs600.
On the retail business, Oppenheimer believes that “Indian retailers also need to go through two-three more business cycles, before they achieve meaningful stability.” It remains positive on media companies since low advertising spend as a percentage of GDP means good potential. However, with huge competition, only those players with deep pockets and quality content will survive. It is positive on the auto sector as well, but expects the cost of finance to rise sharply. It believes that domestic players (Maruti, Tata Motors, Mahindra and Hyundai) are better placed than new entrants.
Oppenheimer likes the Indian travel market, which it believes “is poised for growth, given a strong domestic economy, the growth in the LCC market and a highly-fragmented lodging industry.” However, Thomas Cook, Taj GVK Hotels, Indian Hotels, Hotel Leela Ventures have given poor annual returns. Only Cox & Kings has given decent returns.
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author’s own and may not necessarily represent those of Moneylife.)
The market, which witnessed a fair deal of volatility today, ended in positive territory for the third day in a row, tracking global cues and on better-than-expected domestic inflation numbers for November.
Trading opened on a positive note on good cues from the global arena. Along with support from the broader indices, the market also witnessed buying in oil & gas, metal and capital goods stocks. However, investors took the opportunity to take profit off the table, pulling down the indices into negative terrain. Choppy trading followed, with the indices staying on both sides of the neutral line.
The market received a push at noon following the announcement of better-than-expected wholesale price index (WPI)-based inflation numbers for November, taking the benchmarks further northwards. Some bit of nervousness resulted in range-bound trading in post-noon trade. The market pared some of its gains after scaling its intraday high, albeit ending in the green.
The Sensex closed the session at 19,799.19, up 107.41 points (0.55%) from its previous close. The benchmark touched an intraday high of 19,836.82 and a low of 19,621.41. The Nifty rose 36.45 points (0.62%) to settle at 5,944.10. The index swung between a high-low of 5,953.95 and 5,888.75 today.
The market breadth was positive. The Sensex had 19 gainers and 11 losers. The Nifty returned with 33 stocks in the advancing list, 16 in the declining list and one stock ended unchanged. The broader market continued to outperform the key barometers as the BSE Mid-cap index surged 1.52% and the BSE Small-cap index gained 1.62%.
Sterlite Industries (up 3.46%), Reliance Infrastructure (up 2.67%), Tata Steel (up 2.33%), Tata Motors (up 2.19%) and State Bank of India (up 1.66%) were the noteworthy gainers on the Sensex today. On the other hand, Hero Honda (down 3.30%), Jindal Steel (down 1.41%), Mahindra & Mahindra (down 1.34%), Hindustan Unilever (down 0.77%) and Maruti Suzuki (down 0.52%) were among the losers.
In the sectoral space, BSE Consumer Durables (up 3.14%), BSE Metal (up 1.60%) and BSE Public Sector Undertaking (up 0.97%), were the top performers. On the other hand, BSE Auto (down 0.20%) ended as the lone loser.
Asian markets ended mostly higher, as China deferred its move to hike interest rates. On Friday, the Chinese central bank raised the reserve requirement ratio by 50 basis points. However, investors were still wary of the government’s next move as part of its policy-tightening measures. Investors are awaiting the outcome of the US Federal Reserve’s policy meeting later in the day.
The Shanghai Composite was up 0.14%, the Hang Seng rose 0.49%, the KLSE Composite gained 0.05%, the Nikkei 225 advanced 0.22%, the Seoul Composite surged 0.62% and the Taiwan Weighted added 0.04%. On the other hand, the Jakarta Composite lost 0.07% and the Straits Times declined 0.17%.
Continuing with its trend towards moderation, the WPI-based inflation declined to 7.48% in November, mainly boosted by lowering of pressure on certain food items. Inflation was at 8.58% in October and was 4.50% in November 2009.
The inflation figure has been revised upwards to 8.93% for September, from the provisional number of 8.62%. This is the fourth consecutive month when the overall inflation has been in the single digits. It had remained over 10% for six months till July.
Markets in the US finished almost flat on Monday, as concerns over growth prospects in China after the steep rise in November inflation, played on investors’ minds and on profit-taking after the recent rise in stocks. Meanwhile, in the US, the much-debated $858 billion bill to extend tax cuts for two years secured 60 votes in the US Senate, the threshold needed to schedule a final vote. Investors are awaiting the outcome of the Federal Reserve’s policy meeting later today. Marketmen expect little change from the central bank with respect to its near-term outlook for monetary policy or its second round of quantitative easing.
The Dow rose 18.24 points (0.16%) at 11,428.56. The S&P 500 added a mere 0.06 of a point to close at 1,240.46. The Nasdaq shed 12.63 points (0.48%) at 2,624.91.
Foreign institutional investors were net sellers of stocks worth Rs287.77 crore on Monday while domestic institutional investors were net buyers of Rs334.54 crore worth equities on the same day.
ITD Cementation India (up 9.65%) has informed the Bombay Stock Exchange that in a joint venture with its promoter, Italian-Thai Development Public Company Ltd, one of the contracting firms in South East Asia, the company has bagged the letter of acceptance from Delhi Metro Rail Corporation for a Rs228 crore contract.
Ashok Leyland (down 0.87%), the flagship company of the Hinduja Group, has secured an order for 600 vehicles from Karnataka-based VRL Logistics. The order comprises 500 multi-axle vehicles in the 8x2 configuration, a newly-developed, first of its kind for the Indian commercial vehicle industry, along with 100 of the company’s 12-metre buses. The order is cumulatively worth Rs125 crore.
Prism Informatics (up 1.77%) has secured a contract for SAP Support from Nycomed, a global pharmaceutical company based in Germany. Under this project, the company will be responsible for supporting Nycomed to monitor the operative SAP system on a daily basis in 2011, especially monitoring of interfaces and incident management, which are the key areas of improvement for the pharma major.
Credila Financial Services, which specialises in education loans, says it has been successful in particularly helping students who are otherwise deprived of a good education due to their poor economic condition
In an interview to Moneylife, Prashant Bhonsle, country head of Credila Financial Services, explained various aspects of education loans in India, and elaborated how Credila is working to help students and universities. He discussed the criteria for sanctioning loans, interest rates, credit rating of students and co-borrowers, rating of universities and so on. Mr Bhonsle also answered questions about the shortage of basic education and facilities. Following are excerpts from the interview.
Moneylife (ML): How different is Credila from banks and other financial institutions, whether they are in the public or private sector? What are your unique features?
Prashant Bhonsle (PB): We have innovative products and services. Many lenders prefer giving loans to students applying at institutes and universities recognised by National Assessment and Accreditation Council (NAAC) or some other accreditation agency. Seeing the growth in the number of private institutes, we are also providing loans to such students. We take into consideration factors such as the quality of education, employment potential, and so on, when sanctioning loans. There is flexibility in the collateral guarantee. We provide services for legal verification of collateral documents, whereas banks ask students to do that on their own. Banks insist on a confirmation of admission and universities ask for a proper guarantee that finance will be secured to pay the fees. Here the student is in a catch-22 situation. At Credila, we give the student the sanction letter based on his documents and the institute he has applied to. Once admission is completed, the loan is disbursed. We provide loans of up to 20 lakhs. We fund students even up to 100% of their fees for those who can't afford to pay margin fees, based on merit. Finally, we even consider relatives, cousins as co-borrowers (other than parents), which is generally avoided by banks. And we don't have hidden charges.
ML: How many students have availed of education loans from Credila, for higher education within India as well as to study abroad? Has there been an increase in loan disbursements?
PB: There has been a big increase in the number of students applying for education loans in both segments-for those seeking to study in India and at foreign universities. The cost of education is rising and these days students want to be independent in funding their education, so many of them apply for loans. Another reason is the incentive on loans-students can claim a tax benefit on the interest paid. We saw around 500 students applying on each day during the peak season. In the last study we did, we recorded an average one student applying every minute at Credila.
ML: Credila offers customised loans for students and co-branded loans to academic institutes. Can you explain these products?
PB: The customised loan programme, as the name suggests, is structured based on the institute and the course, or the individual student. Here we evaluate factors like the student's and co-borrower's credit history, fees schedule and repayment capabilities holistically, after which the loan amount is decided. A co-branded loan is basically using the Credila tag together with the particular university or institute. Suppose a new course is launched by the university, many of the banks may not sanction loans to the students applying for this course. But Credila partners with the university to become an exclusive loan partner and provide students with finance for the course.
ML: As per the information on your website, there is a borrower and co-borrower's underwriting criteria as part of the eligibility for a loan. Please explain the criteria.
PB: Primarily it is the occupation profile of the co-borrower, which in most cases are parents. The credit history of the co-borrower forms a major pillar in sanctioning loans. We have tie up with credit bureaus to evaluate credit history. But we do have provision for deviation if the student is highly meritorious.
ML: Credila has an exclusive credit scoring model for student loans. Is the score given in a particular number or in percentage terms? What is the range for high and low scores? Does the credit score of a student influence the amount of loan he will get?
PB: In 2005-06, when we launched our service, we conducted research to understand the domain of the education loan sector in India. A lot of data pertaining to the sector was studied. We partnered with Fair Isaac Corporation to give credit scores for education loans, based on the data collected by us. It is a complex algorithm of various factors such as the quality of the student, the institute, the type of course, the quality of the collateral, credit history of co-borrowers, and so on. We also give weightage to the merit of a student. The score depends on each individual student and there is no particular range.
ML: How will a credit score given to universities based on their programme benefit them?
PB: This is a ranking which is given to the university. Many times, universities lack in talented students as meritorious ones are financially weak. When we co-brand with a university, we become a platform for the student applying at the university and the loan is provided to him/her there. This way the university gets quality of students and vice versa.
ML: Credila offers partner programmes for foreign universities which allow them to provide Credila Financial Services as a student loan provider to fund Indian students entering Indian Universities and Indian students entering US universities. Is this limited to universities in India and the US?
PB: This is not limited to American universities. We have funded loans for students applying at universities across the globe. Many students have been enabled loans to study at campuses in New Zealand, Germany, France and other countries.
ML: How many universities-Indian and foreign have you partnered with? What has been the overall response from universities and students who opted for a loan from you?
PB: Many universities from both India and abroad have partnered with us. The response has been good and encouraging from both students and universities. Students who have benefited from the loan have recommend others to apply to Credila. Universities see it as a value-addition service. Insead University in France has recommended us on their website for loan services for students.
ML: What is the current rate of interest and how is this calculated? Does Credila have a universal interest rate for all, or is the rate calculated depending on the university? For instance, State Bank of India charges special interest rate for students of ISB Hyderabad and it has a different rate for students of other institutions.
PB: We have both services. As I said earlier, various factors are taken into account for customisation of loans and interest rate at the individual student level. The rate of interest can vary depending on the institute, the student's academic achievement, and so on. We only provide loan on floating interest. We too provide special interest rates to certain institutes. For students applying from ISB Hyderabad we have provided loans at a rate of 9.75%. There is a special rate for universities like Insead University.
ML: Azim Premji recently donated around Rs8,846 crore as a gift towards his foundation, which promotes education and related work. Do you think this trend of big financial houses investing in the education sector will grow?
PB: Personally, I think it will be beneficial. The demographic deviation of India, as suggested by policymakers, corporate, states that education will facilitate the workforce. The scope for this sector is growing.
ML: The cost of private education is spiralling day by day. Will corporate investment in the sector (as it is happening now), make it more costly, or is it the other way around? Also, is it possible to opt for a public-private partnership, given that the large population is dependent on the government for even a basic education?
PB: Currently there is a lot of positive environment for the education sector in India. The government is taking steps which are conducive for the sector to grow. The cost of education is definitely increasing, but the quality is also increasing. In this situation a better enabler should be provided, which can provide financial backing to students for achieving quality education. Public-private partnership is good and I see it growing in the right direction.
ML: Mahindra & Mahindra managing director Anand Mahindra gave $10 million to Harvard University and Ratan Tata's Tata group gave $50 million to Harvard Business School. At the same time there are many people in India who cannot afford even a basic primary education, usually because of the lack of finances and facilities. Do you think there is a need to give more attention to basic education and provide funds to make it affordable to everyone?
PB: Basic education should be given more emphasis. The current five-year plan, that is the 11th plan, is making positive changes in the area of primary education. The incentive along with educational programmes like the mid-day meal programme, and so on, have helped improve the attendance level. A better enabler who can provide loans to students will contribute to making education more affordable. This is currently going in a positive direction.
ML: As on 31 March 2010, non-performing assets in the education portfolio of public sector banks had increased and now they are putting certain mechanisms in place to check delinquencies. How does Credila track students in case of default or delay in re-payment?
PB: We constantly communicate with students during the academic tenure of the student who has been granted a loan. We generally ask for 3-4 references, apart from the borrowers. Again there is constant engagement with all the references. As of now, for the students going to the US, we have tied up with some government agencies there which help us track a particular student. But since we only specialise in students' loans, we undertake thorough research, so we have the upper hand to track the student in case of any default.
ML: There has been talk that the government's UID (unique identity) project will help trace borrowers. Also, banks could seek updated data from credit bureaus to help overcome these defaults. Do you plan to tie up with any of them?
PB: We have partnered with Credit Information Bureau (India) to evaluate credit history while screening the application. There has been cases were loans have been rejected because of credit history. But we don't solely depend on credit histories, but there are various factors (as I had explained earlier) that play an important part. As regards the UID project, we would want to partner with them.
ML: When it comes to education loans, there is a lot of documentation hassle, which is the biggest hurdle for students who are opting for education abroad. How can this be made more user-friendly for student borrowers?
PB: Customer education is the most important. Every aspect of education loan portfolio should be explained. At Credila we perform KYC (Know your customer) as per RBI guidelines. Most banks don't provide education on the student loans mainly because this is one of the services provided by them also it is seasonal in nature. We make parents and students understand that opting loan will not only give them tax benefit but also build credit history.
ML: There is a lot of confusion among people regarding education loans and the processes. How do people seek guidance on this?
PB: I think there has to be some onus on the borrowers to undertake research. Students should start their preparation, especially financial preparation, much earlier. A lot of information about banks is available. An early start will make things easier.
ML: Given the fact that there is an increase in the number of students opting for higher education, the number of education loan-seekers has also increased. What is Credila's roadmap for the year ahead?
PB: We are aiming at multi-fold growth. We want to scale up the loan disbursements, for which we are expanding our operations, workforce and locations.
ML: What are the major challenges Credila faces in verifying applications, disbursing loans and recovery?
PB: Our operational capacity is very efficient, because of which there is hardly any challenge in verifying, disbursing, or even recovering loans. Our main challenge is to reach out to a larger number of people. We are expanding our operations in phases. Our biggest challenge is the cost of funds. Being a non-banking financial company the costs are higher.