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Nifty, Sensex upmove may slow down - Weekly closing report

Nifty sharp up move may slow down and the index may turn volatile around 8,800

 

The S&P BSE Sensex closed the week that ended on 23rd January at 29,279 (up 1157 points or 4.11%), while the NSE’s CNX Nifty ended at 8,836 (up 322 points or 3.78%). From here Nifty sharp up move may slow down and the index may turn volatile around 8,800. Last week we mentioned that Nifty will remain bullish as long as it does not end the coming week below 8,200.
 
On Monday, the gap up opening was followed by a volatile session and ended with the Nifty closing near the day’s high. Nifty closed at 8,551 (up 37 points or 0.43%). The highlight of the day was the loss recorded on Shanghai Composite after China's securities regulator last week banned three brokers from opening new retail accounts for three months, after they failed to correct practices. Back home the Union Finance Minister Arun Jaitley assured that the government has no intention to privatise either railways or Coal India.
 
The rally was further extended with the Nifty closing in the positive again on Tuesday which was also its new life time high. Nifty closed at 8,695 (up 145 points or 1.7%). Ratings agency Fitch said the recent interest rate cut by the Reserve Bank of India will have minimal impact.
 
On Wednesday Nifty made a fifth day of positive closing. Nifty closed at 8,730 (up 34 points or 0.39%). SEBI chairman UK Sinha has said the regulator has written to the government asking for access to recovery mechanisms to other investors beyond banks and financial institutions.
 
On Thursday Nifty hit an all-time new high for the third consecutive session and closed in the positive again in spite of giving up all the intra-day gain mid-way. Nifty closed at 8,761 (up 32 points or 0.37%). In the government's Housing for All Mission which proposes to build 2 crore houses across the nation by 2022, prime minister Narendra Modi has directed all concerned departments to immediately finalise the programme and the financing models for alternate sets of housing requirements. Chief Economic Advisor Arvind Subramanian has said the real investment flows should begin picking up from next fiscal.
 
European Central Bank (ECB) unveiled its bond-buying stimulus programme to boost sluggish Eurozone economy. ECB left interest rates unchanged and announced larger-than-expected measures. It plans to buy 60 billion euros worth of assets per month. This move further boosted market sentiments as there is anticipation that inflows from foreign funds into India will rise. Nifty closed at it new life time high at 8,836 (up 74 points or 0.85%).
 
Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:
 
 

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Are NBFCs on thin ice?

'Promoter funding', has contributed to the growth of NBFCs but there is no substantial productive asset behind such funding. Will the RBI act?

 

As children, it was a great fun to build castles with wet sand. The castle will stand fine and firm till it was small. But then there was always a temptation to make one bigger than the next kid – so, the height of the castle would grow bigger and bigger. Needless to say, it will eventually collapse under its own weight. The non-banking finance companies (NBFC) remind me of such castles in the sand.
 
The NBFC sector has had its own cycles of booms and busts. One shakeout that happened, following a mushroom growth in both number of players and volumes, was in 1997.
 
Prior to this, NBFCs were allowed to source public deposits to the extent of 1000% of their net worth, which many of them actually did, and many collapsed under burden of severe asset liability mismatches. Thereafter, there have been periods of optimism and pessimism, and sometimes, a mix of the two.
 
Over the last 10 years or so, the NBFC sector has grown impressively. This is best demonstrated by the consistent increase in the share of NBFC assets versus those of the banking sector. The growth has been steady, from 10.7% of bank assets in the year 2009, to 14.3% of bank assets in 2014. Please check for more details
 
 
The growth has been impressive but the financial sector is facing a huge burden of non-performing assets. The heady days of infrastructure development in the country were associated with too little capital luring too much debt. Most infrastructure operators formed thinly capitalised SPVs and piled debt to invest in infrastructure assets.
 
“Investments” included political and other non-returning expenditure. Many of them securitised their cash flows, and are effectively operating at negative capital.
 
Promoter funding in various ways – subordinated debt, SPV financing, loans against properties – have been quite popular with many an NBFCs. In fact, the sharp growth in numbers of several NBFCs has been associated with growth in these funding where there is no substantial productive asset behind the funding.
 
There are RBI guidelines against financing of promoter capital by banks. There was a similar guideline of the RBI issued in January 2014 in respect of NBFCs as well. The RBI made a strong, though a bit garbled, reference to “quality of promoter equity” and disguising of the debt/equity ratio if the equity is financed by external funding. 
In many ways, the scenario today, where NBFCs are sitting with huge portfolios which are effectively equity financing, is similar to what it was in the subprime crisis in the Western world in 2007-8. There were massive levels of leverage – too little equity was bearing the burden of too much debt. 
 
It is very important for regulators to ensure that real debt/equity ratios get reported. Build-up of leverage in the system is one of the most important handles for regulators to take timely action. Financing against equity comes from core investment companies. Sometimes, funding may also come in form of preference shares, which are effectively counted as equity but have features of external finance.
 
Despite substantial action taken by the new government after it came to power, there is still a long lag in the scenario on ground improving at all. NPAs continue to bulge. The capital levels of most NBFCs are easily five times of the reported net NPAs. However, there are two devils that lie in the detail. First, the reported NPAs may be disguising the substantial extent of restructured or refinanced loans. Second, the difficulty lies in tremendous squeeze on profitability that NPAs pose. Assets stop earning income; interest continues on the entire liabilities, and operating costs are in fact higher as there is more of expenditure to incur on collections. 
 
The coming few quarters may bring a new phase in the life of NBFCs. Whether it is one more turn of the cycle or not remains to be seen.
 
(Vinod Kothari is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance. He has written a book titled “Securitisation, Asset Reconstruction and Enforcement of Security Interests”, published by Butterworths Lexis-Nexis Wadhwa)

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Inordinate delays may precipitate a crisis in sugar industry
The state government has sought interest free loans, restructuring of financing for sugar mills and providing interest-free bridge loans from the sugar development fund
 
The Cabinet Committee on Economic Affairs (CCEA) has announced the FRP (fair remunerative price) of sugar at Rs230 per quintal, as against Rs220, for 2015-16 sugar season and is linked to a basic recovery rate of 9.5%.  Further, "this shall be subject to a premium of Rs242 per quintal for every 0.1 percentage point increase in recovery above that level".
 
Devendra Fadnavis, Chief Minister of Maharashtra, met Ram Vilas Paswan, Minister of Consumer Affairs Food and Public Distribution, in New Delhi, and reiterated the plight of the Sugar Industry, seeking his assistance in the (a) extension of subsidy for raw sugar exports and (b) hike in the import duty structure from 25% to 40%, to help the cash starved mills to clear arrears to farmers and recover slowly from the glut situation in the country.  It may be recalled that the export subsidy on raw sugar ended in September for the export of 4 million tonnes.
 
The state government has also sought interest-free loans, restructuring of financing for sugar mills and providing interest free bridge loans from the Sugar Development Fund.
On the top of these, the industry would like the creation of a buffer stock of say 5 million tonnes of sugar at the factory level in the state and increase the mandatory ethanol blending with petrol from current 5% to 10%.  In reality, however, the blending is less than 3%.
 
In the meantime, the state government in Maharashtra has issued notices to more than 120 mills to pay the FRP at Rs264 per tonne but the mills have been saying that they are unable to do so due to "bearish market conditions and the glut in international market!" Therefore, the government of Maharashtra has decided to waive sugarcane purchase tax worth Rs875 crore!
 
At present, the country has a carryover stock of over 7 million tonnes of sugar and the national output is around 32 million tonnes against the estimated consumption pattern of about 24 million tonnes. A large part of the surplus can be exported, if a subsidy of about Rs4,000 per tonne is given! Fadnavis, it appears, has spoken to the Finance Minister also on this issue.
 
In the case of Tamil Nadu, the South Indian Sugar Mills Association (SISMA) has stated the sugar industry was in deep trouble due to mounting surplus stocks, unprecedented loss and exhaustion of bank limits.
 
SISMA wants the State Government to abolish VAT (of 5%) and pay the differential price of Rs300 per tonne as subsidy to farmers and revise the electricity tariff for co-generation of power in line with other states'  tariff.  Also, sugar dealers do not want to buy from Tamil Nadu due to this 5% Vat as their cost becomes higher than, for example, Karnataka or Maharashtra!  Periyasamy, President of SISMA has stated that the power tariff for co-generation is lowest in Tamil Nadu at Rs3.15 per unit for old units and Rs3.76 for new units.  In UP, Maharashtra and MP, it is Rs6 per unit, and he claims that they are losing heavily on this account also!
 
In the case of UP, according to UPSMA (UP Sugar Mills Association), the mills in the state are not in a position to pay even the Fair and Remunerative price (FRP), given the low demand, sliding of price of the commodity with the ex-factory price going down to Rs2,750 from Rs3,000 in November, per quintal!
 
The industry has complained that they have become less competitive than Karnataka and Maharashtra where a rationalised cane pricing policy on the basis of Rangarajan committee recommended formula has been implemented!
 
As for Andhra Pradesh, the farmers have demanded a price of Rs3,500 per tonne for 8.5% recovery for the current season and the Federation of Sugarcane Growers have requested the government to pass on the purchase tax benefit of Rs60 per tonne, like in the past. They have demanded that factories should bear the cost of harvesting and transport as factories in some states do!
 
Finally, the Indian Sugar Mills Association (ISMA) has stated that "due to delays in the announcement of continuation of an incentive for production and export of raw sugar, sugar mills are not in a position to plan sugar production."  ISMA also says that at least 1.5 to 2 million tonnes of sugar needs to be exported for which incentives should be announced immediately.
 
It would appear from all these conditions prevailing in the four states mentioned above, that Minister Ram Vilas Paswan has been following what the Prime Minister Narendra Modi stated, while addressing his Cabinet colleagues, that government is trapped in ABCD culture, where, A means to "avoid", B to 'by-pass", C to "confuse" and D to "delay" in dealing with the sugar industry.  He needs to take the ROAD culture, where R stands for Responsibility, O for Ownership, A for Accountability and D for Discipline!
 
Paswan can no longer delay the announcement of export subsidy for raw sugar, or in stopping sugar imports or increasing the import duty from 25% to 40% to prevent the sugar industry. CCEA must also reconsider the recommendations made by the Rangarajan committee for the sake of the Industry, without delay.
 
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
 

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