“We expect Punjab National Bank to continue to see asset quality troubles for some time as it recovers from the excesses of its past growth. We would stay away, and reiterate our ‘SELL’ recommendation,” says Espirito Santo Securities in its evaluation of the PNB stock
The stock of PNB (Punjab National Bank) just got hit on poor September quarter results and currently trades at the seemingly attractive valuation of 1.1 times FY14E P/B which is one standard deviation below its long-term average. But Espirito Santo Securities remains bearish on PNB as it is sceptical of recovery in the bank’s asset quality due to: high growth in risky segments, weakening CASA, and increasing NPAs (non-performing assets) and restructuring.
In PNB’s case along with high GNPA (gross non performing assets) of 4.66% as of Q2 FY13; restructured advances have ballooned to over 9.1% of its advances—the highest among the large PSU (public sector undertaking) banks. The deteriorating asset quality led to high provisioning costs which eroded PNB’s profitability for the last four quarters, according to Espirito Santo.
PNB has consistently grown above the systemic credit growth for the past few years. PNB’s growth during these six years averaged more than 26% versus systemic credit growth of only 21%. More than the higher growth, a big concern for PNB has been the high advances growth in several risky segments which are currently witnessing asset quality stress. PNB has more than doubled its exposure to infrastructure and particularly the power sector where its portfolio grew by more than 15 times in just one year, says the brokerage.
PNB has increased its exposures to riskier segments such as infrastructure (power), construction, iron & steel, mining and textiles which are currently facing severe asset quality concerns, adds Espirito Santo.
“We expect Punjab National Bank to continue to see asset quality troubles for some time as it recovers from the excesses of its past growth. We would stay away, and reiterate our ‘SELL’ recommendation,” says Espirito Santo Securities in its evaluation of the PNB share in the market. It has clearly been a case of growth objectives overtaking the more important objectives of profitability and asset quality in the bank.
Late gains helped the market close in the green but Nifty’s downtrend may be mitigated on a close above 5,645
Due to lack of transparency and poor records builders are unable to claim input tax credit available under the tax provisions. But they still expect property buyers to cough up the additional money
Following the dismissal of builders’ petition by the Bombay High Court, developers across Maharashtra have to pay value-added tax (VAT) at the rate of 5% on all property transactions between 2006 and 2010 by 31st October. Several builders were found exerting pressure on property buyers to pay the VAT, when the obligation rests on themselves. What we found is builders are reluctant to pay VAT @5% not because the amount is high but because they don’t have detailed record for claiming input tax credit or deductions.
For example, it is known that several builders keep actual purchases like sand, iron and steel, stone and cement hidden from account books. While this may have helped them to earn tax-free profits, in the absence of any proof or bill, they will have to pay VAT on total agreement value of the property. If a builder buys 10 trucks of sand and had shown purchase of just 1-2 trucks of sand in his accounts, he cannot claim input tax credit or exemption on 10 trucks.
Same is the case with land purchase price. Several builders have shown the land price less than its actual market value and this is also affecting their tax credit under the VAT rules.
“In Indian real estate, transparency levels are proportionate to the reputation and market standing of individual developers. While the market certainly has had its share of less scrupulous smaller operatives, the fact is that larger developers consistently maintain high levels of accountability. The degree and nature of impact of the VAT issue on various developers varies accordingly,” said Kishor Pate, honorary secretary of Confederation of Real Estate Developer’s Associations of India (CREDAI) (Maharashtra) and chairman and managing director of Amit Enterprises Housing.
Another issue the builders are facing is with the money (mostly cash) collected from buyers under different heads. All builders receive non-refundable deposits and other charges like electricity meter deposit, water connection charges, charges towards forming a co-operative housing society (CHS), legal charges, development charges and parking charges from buyers.
It is a known fact that almost all builders charge exorbitant amounts under these and other heads, while they pay very less money towards the actual purpose. For example, one flat buyer from Pune paid Rs20,000 to Runwal Housing and Townships Pvt Ltd as charges towards formation of a co-operative society. However, according to information provided by Commissioner for Cooperation and Registrar, Cooperative Societies (Maharashtra), registration charges for a CHS are just Rs2,500 and membership charges are Rs500 per member. Even as per the guidelines of MSEDC and the information from Grahak Panchayat, electricity meter charges are just Rs3,000 to Rs10,000 per flat. The above mentioned buyer had to pay Rs65,000 towards electricity meter charges.
The Sales Tax department also seems to be aware about this trick. In its frequently asked question (FAQ) section about VAT, the department says, “The amounts which are received as deposits will be deduction to the extent such amounts are actually paid to other authorities”. No wonder why the builders do not like this tax!
We discussed the issue of VAT calculations with both the government sources and a few builders. As per rough estimates the actual VAT chargeable comes to about 2% to 2.5% of the agreement value and not 5% as being talked about. This means the builders will not have to pay tax @5% for all property transactions between June 2006 and March 2010, provided that they have maintained all accounts and actual purchase records.
While the builders have shown readiness to pay VAT @1% for property transactions between 2006 and 2010, so far the government has not shown any interest. As per the notification, from 1 April 2010 onwards the developer would have to pay 1% tax on agreement value without any “land deduction” and “input tax credit”.
Here are the specific points mentioned in the circular issued by the Sales Tax department under its FAQ section...
From 20.06.2006 to 31.03.2010
1. Composition Scheme u/s 42(3): Under this scheme, the developer has to pay 5% tax on the agreement value. Land deduction is not available. Input tax credit is available to the reduction of 4%.
2. Actual Expense Method u/r 58: Under rule 58, the deduction of labour & service charges is available on actual basis. Land deduction is also available. Set-off will be calculated subject to the condition u/r 53 and 54.
3. Standard Deduction Method u/r 58: Under rule 58, the deduction of land cost will be allowed. Thereafter 30% standard deduction from remaining amount will be available as per proviso to sub-rule 1. Set-off will be calculated subject to the condition u/r 53 and 54.
The developers can opt for fourth option also, under this option u/s 42(3A), developer has to pay 1% tax on agreement value. No land deduction and input tax credit is available.
It further states: “Needless to mention that the developer will be required to make the payment of interest according to the provisions of law.”