Kotak Institutional Equities maintains a ‘positive’ outlook on NBFCs and expects Mahindra Finance, Shriram Transport, IDFC and Reliance Capital while bearish on HDFC, Rural Electrification Corporation (REC), Bajaj Finserv
Kotak Institutional Equities (Kotak) has voiced positive sentiments on Non-Banking Financial Companies (NBFCs) on the back of the recently announced draft guidelines issued by the banking regulator, the Reserve Bank of India (RBI). The report released on 13 December 2012 stated, “We are positive on the business of asset-finance NBFCs even as the recent rally caps upside.” In other words, it is positive on the sector even though the market has discounted the upside movement because it believe the guidelines will make NBFC fundamentally stronger over the long-term. It expects most of the NBFCs under coverage to report 7%-10% lower pre-tax earnings if these guidelines are to be implemented straightaway instead of in 2015 as stipulated in the draft guidelines. It bullish on Mahindra Finance, Shriram Transport, IDFC and Reliance Capital while it is bearish on HDFC, Rural Electrification Corporation (REC), Bajaj Finserv.
Check here for some of our write ups on NBFCs.
Some of the highlights of the draft guidelines are:
Kotak stated, “RBI’s proposed guidelines for NBFCs are marginally better than expected.” The final guidelines are slated for January 2013, which will be implemented by NBFCs. Other than impact on pre-tax earnings, it finds that its universe of NBFCs has CAR of over 15% (as of September 2012) which is well above stipulated norms. For instance, according to the report, Shriram Transport has 16.8% Tier-I CAR, Muthoot Finance has 14% tier-I CAR (this is flirting with the 12% norm and could go lower if gold prices crash). Mahindra Finance has around 14% tier-I CAR. IFDC is well placed with tier-I CAR of 19.2%.
According to the Kotak report, some of the companies likely to be impacted on account of higher provisioning due to stringent NPL norms are Power Finance Corporation, Rural Electrification Corporation and L&T Finance Holdings. The table below shows which companies are likely to be impacted and their overall loan picture.
However, Kotak said that these guidelines will not impact significantly the companies it covers. It says, “We don’t find a significant impact of the draft guidelines on sustainable earnings of NBFCs under our coverage”. It furthermore said, “While M&A activity in the sector will be exposed to higher regulatory scrutiny, higher regulatory control will provide comfort to stakeholders”.
On 12th December, RBI released draft guidelines to address issues and concerns in the NBFC sector. The draft guidelines are based on recommendations on the basis of Usha Thorat Committee Report. The Committee reviewed existing regulatory and supervisory framework of non-banking finance companies (NBFCs) and to strengthen the overall regulatory framework. The draft revised guidelines relate to entry point norms, principal business criteria, prudential regulations, liquidity requirements for NBFCs and corporate governance.
Check here for our take on some of our Kotak Institutional Equities reports.
The amendment bill (banking) is a step towards issuing new licenses for banks, but not the final step, says Kotak Institutional Equities update on the banking sector
The market indices went up after three days of decline but the trend is down
Easing of the November headline inflation pushed the market higher on hopes that the RBI will cut interest rates at next week’s policy meeting. Although the market indices went up after three days of decline the trend is still down as the benchmarks are struggling to find direction. The National Stock Exchange saw a volume of 73.16 crore traded on the exchange and advance-decline ratio of 795:909.
The domestic market opened on a cautious note ahead of the release of the headline inflation numbers for November. Uncertainty over the US budget deal, which pulled the US markets down on Thursday, also weighed on the sentiments.
The Nifty resumed trade five points down at5,847 and the Sensex opened at 19,218, a cut of 11 points from its previous close. Intense volatility saw the benchmarks fluctuating between red and green in early trade as chairman of the Prime Minister’s Economic Advisory Council C Rangarajan hinted that the Reserve Bank of India, in its monetary policy review on 18th December, will not change interest rates.
The indices touched their intraday lows in the first hour of trade with the Nifty going down to 5,839 and the Sensex falling to 19,193. A fall in the wholesale price index (WPI) based inflation to 7.24% in November from 7.45% in the previous month gave the market a much-needed boost, which pushed the benchmarks into the positive in late morning trade.
The gains pushed the indices to their intraday highs in noon trade. At the highs the Nifty touched 5,886 and the Sensex rose to 19,349. However, profit booking saw the indices paring part of their gains subsequently.
The market touched its previous closing level once more in the post-noon session as selling intensified. However, a smart recovery in late trade resulted in the market closing near the day’s high. The Nifty gained 28 points (0.48%) to 5,880 and the Sensex finished trade at 19,317, up 88 points (0.46%).
Among the broader indices, the BSE Mid-cap index gained 0.60% and the BSE Small-cap index rose 0.08%.
The top sectoral gainers were BSE Metal (up 2.31%); BSE Bankex (up 1.27%); BSE Realty (up 1.01%); BSE IT (up 0.73%) and BSE PSU (up 0.60%). The losers were BSE Consumer Durables (down 1.23%); BSE Healthcare (down 0.29%) and BSE Power (down 0.23%).
Fourteen of the 30 stocks on the Sensex closed in the positive. The chief gainers were Sterlite Industries (up 3.57%); Hindalco Industries (up 3.54%); State Bank of India (up 2.58%); Jindal Steel & Power (up 2.48%) and Tata Steel (up 2.33%). The main losers were Bharti Airtel (down 1.52%); BHEL (down 1.38%); Dr Reddy’s Laboratories (down 0.99%); Tata Power (down 0.90%) and Cipla (down 0.60%).
The top two A Group gainers on the BSE were—Muthoot Finance (up 7.94%) and Jaypee Infratech (up 4.45%).
The top two A Group losers on the BSE were—Pipavav Defence & Offshore Engineering (down 3.28%) and TTK Prestige (down 2.88%).
The top two B Group gainers on the BSE were—Polar Industries (up 20%) and Wheels India (up 20%).
The top two B Group losers on the BSE were—Taksheel Solutions (down 19.95%) and GTL Infrastructure (down 19.94%).
Out of the 50 stocks listed on the Nifty, 32 stocks settled in the positive. The major gainers were Bank of Baroda (up 3.75%); Hindalco Industries (up 3.71%); Sesa Goa (up 3.40%); Tata Steel (up 2.92%) and SBI (up 2.77%). The key losers were Bharti Airtel (down 1.86%); Power Grid Corporation (down 1.48%); Jaiprakash Associates (down 1.36%); BHEL (down 1.29%) and Siemens (down 1.24%).
Markets in Asia settled mixed with a negative bias. The China HSBC Flash Factory PMI for December rose to 50.9, up for the fifth month in a row while the tardy progress of the US budget talks concerned investors.
The Shanghai Composite soared 4.32%; the Hang Seng climbed 0.71% and the Straits Times gained 0.38%. On the other hand, the Jakarta Composite declined 0.26%; the KLSE Composite and the Nikkei 225 fell 0.05% each; the Seoul Composite dropped 0.39% and the Taiwan Weighted tanked 0.75%.
At the time of writing, the CAC 40 of France was down 0.07%; DAX of Germany was up 0.20% and UK’s FTSE 100 was trading 0.11% lower. At the same time, US stock futures were trading with small gains.
Back home, foreign institutional investors were net buyers of stocks totalling Rs1,256.57 crore on Thursday while domestic institutional investors were net sellers of equities amounting to Rs665.66 crore.
Diversified tiles manufacturer Asian Granito India has decided to sett up a chain of Asian Tiles World (exclusive) retail stores across the country. The company, which currently has 20 exclusive outlets, expects to have a chain of 50 stores across top cities by next year. The stock rose 0.11% to settle at Rs45.50 on the NSE.
Drug major Suven Life Sciences on Thursday said it received grant of five product patents from China and Korea for its new chemical entities for treatment of disorders related to neurodegenerative diseases. With these new patents, Suven now has a total of eight granted patents from China and ten from Korea. Suven Life Sciences declined 2.59% to close at Rs32 on the NSE.