Companies & Sectors
Kotak ‘positive’ On NBFCs after RBI released draft guidelines

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:

  1. 90-day non-performing loan (NPL) recognition: The current practice is 180 days; which means that if a loan has not been recovered within 180 days of its due date, it has to be recognized as bad loan or NPL and be written off. Now the RBI has made this 90 days, which means NBFCs need to tighten their screws if they are to recover loans quickly, else they will just keep piling up. It will be implemented after March 2015. One could expect cleaner and healthier balance sheet and a safer industry but a possibly impacted bottom-line on account of more NPL and higher provisioning.
  2. 10% Tier-I Capital Adequacy Ratio (CAR) for most NBFCs: Infrastructure Financing Companies (IFCs) are required to have a minimum CAR of 10%, which is lower than the 12% mentioned in the Usha Thorat Committee Report. This is somewhat more lenient and provides some breathing space, in terms of capital requirements. However, gold-loan NBFCs and captive finance companies would need to maintain CAR of 12%. While NBFC-NDs are required to have a higher threshold of 15%. This should be implemented by March 2015.
  3. NBFCs would need to take permission of RBI of shareholding changes by over 25%: Sometimes, NBFCs, from time to time, may need capital infusion if there is a crisis or urgent need of capital. In this case, it might need to sell stake. But if the stake sale is more than 25% or there’s change in control in a NBFCs, it would need to seek RBI’s permission. This is to ensure that RBI has some level of understanding and control over the industry.


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.


Excitement over banking sector bills placed before Parliament unlikely to yield immediate positive results: Kotak

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

Kotak Institutional Equities, in its banking sector update, is guarded about the recent excitement surrounding bills placed before the Parliament. The amendment bill (banking) is a step towards issuing new licenses for banks, but not the final step. There are very few positives in the amendments. 
However, the changes in the SARFAESI Bill are positive as they increase the strength of banks to initiate recovery of bad loans, says the Kotak update. (SARFAESI stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest).
The Kotak update maintains its cautious outlook as there is no strong RoE (Return on Equity) improvement as slowdown in revenue growth may be accentuated and credit costs are unlikely to decline sharply over FY2013-14. The RoE is estimated to be 14%-15% for public banks and 16%-17% for private banks. 
SBI (State Bank of India) and ICICI Bank are the preferred stocks, conclude the analysts of the Kotak update regarding the performance of major players on the banking sector in the stock market.
On the proposed banking sector legislation and its consequences, the Kotak update says that new licenses are to take time; and new instruments will be allowed to raise capital for public banks. The likely delay in passing the bill implies that RBI (Reserve Bank of India) could extend the timeframe to take the next step towards issuing fresh bank licenses. The RBI is looking to have the power to supersede the board and/or inspect books of entities that are not directly supervised. 
The amendment bill (banking), according to the Kotak analysts, has some positives, though: (a) Nationalized banks can issue bonus/rights shares, which would be important as investors and regulators can expect a strong capital-raising exercise ($20 billion) over the next few years as banks transition to Basel-III; and (b) increased shareholder voting rights (10% for public banks and proportionate holding for private banks) is a positive as it gives shareholders better representation.
According to the amendment bill (banking), the RBI will be given powers to supersede the board of directors for a period and to appoint an administrator for a period not exceeding 12 months. Currently the RBI has the power to remove a director or any other officer. The RBI will also have the power to seek information, inspect books and returns of associate companies. There will also be increased fines and penalties for violation of the Banking Regulation Act, 1949. Depositor Education and Awareness Fund will have access to deposits that have been unclaimed or non-operative for more than 10 years. Mergers in banks will be exempt from the Competition Commission Act, 2002, as these activities are closely monitored/regulated by the RBI. All these factors are likely to improve the safety of the money brought into the banking sector by many small customers.
SARFAESI (amendment) Bill will put banks in a better position to recover bad loans, according to the Kotak update. The passing of the SARFAESI (amendment) Bill is positive in the current environment. The amendment  bill (a) reduces the time at the DRT (Debt Recovery Tribunal) by giving banks a fair representation by filing a caveat before granting any stay and (b) the period to respond to borrowers (after notice) will be extended to 15 days from seven days currently. Time-bound disposal of cases (as mandated in the Act) should improve after the new amendment, says Kotak. Asset reconstruction companies would be allowed to convert the debt (all or part of it) of borrower companies into equity/ shares.
The other bills pending before Parliament include: (1) Insurance: A hike in FDI in the sector to 49% from 26%; (2) Pension Fund: Statutory powers to the interim authority set up earlier; (3) Micro Finance: Development and regulation of these entities; (4) National Housing Bank: Transfer of ownership and increase in RBI’s power (5) SIDBI: Expansion of definition of activities. 
Of these bills, Kotak feels that the insurance bill could have a positive impact on the market as it gives an opportunity to select insurance companies to unlock value of their investments.
The Kotak update points out that the banks listed in the stock market are fairly valued at the current levels. It maintains a cautious outlook on select recent developments as broader concerns about asset quality and slow growth persist. Revenue slowdown (less than 15% growth due to slower loan growth and higher margin pressure) will be accentuated in FY2014E and credit costs (1.3% of loans) are unlikely to decline from their peaks. 
Apart from restructuring of the SEB (state electricity boards) portfolio, Kotak analysts do not see any large impairment from the infrastructure space, especially loans taken by private companies for power generation. From historically low levels of delinquency, Kotak expects to see higher slippages in the retail portfolio of banks but this would not be a serious cause for concern in the medium term.
NPLs (non-performing loans), which have risen sharply in recent quarters, are likely to remain elevated in the priority sector, predict Kotak analysts. They believe slippages may remain elevated (more than 2.5% over FY2012-14E) as the NPL (non-performing loan) cycle is yet to peak, especially from corporate balance sheets, infrastructure and iron and steel. 
The Kotak update maintains the view of there being higher credit costs due to (a) higher slippages (b) improving coverage ratio, which has deteriorated in recent quarters, and (c) dynamic provisions. Implementation of dynamic provisions may result in a situation in which the asset-quality cycle and loan-loss provisioning cycle could be different.


BSE Sensex, Nifty struggling: Friday Closing Report

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.


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