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Morgan Stanley: Telecom, real estate and utilities have stressful balance sheets

A new report released by Morgan Stanley Research has found out that Bharti Airtel, DLF, Adani, Lanco Infratech, Aditya Birla Nuvo, Indiabulls Power, Jaiprakash Associates are at high risk of deterioration

Arecent research report by Morgan Stanley Research (Asia), titled, “Where Is The Balance Sheet Stress?” used the Altman Z-score methodology for measuring the strength of company balance sheet and found out that telecom (2.13), utilities (1.53) and real estate (2.21) have high balance sheet ‘stress’ while information technology (8.87), consumer staples (7.70) and consumer discretionary (5.12) have the strongest balance sheets. However, it found out that, on an overall basis, the Altman Z-score for the entire universe was 3.21, which largely remained the same from last year. Balance sheet is crucial for stock picking, whether you’re a growth or value investor. The report said, “Balance sheet stress is a cyclical factor in stock picking—it comes to the fore in a rising rate and slowing growth environment. The market’s preference for quality will shift if rates soften further and growth bottoms out.”

Altman Z-score is a quantitative methodology used to measure risk of bankruptcy by quantifying various parameters of the balance sheet. According to the report, a company is considered “safe” when the score exceeds 3.0, while anything below 1.8 would imply increased probability of financial stress. The formula for arriving at Z-score for services companies was tweaked and anything above 1.6 was considered “safe”, while south of 1.1 was considered risky. Methodology tweaked as balance sheets of services and banking are inherently different from manufacturing and industrials.

According to the report, it found out that 17 companies have Altman Z-scores of less than 1.8 and had serious balance sheet issues. Some of these were Adani Enterprises (1.53), Adani Power (0.52), Jaiprakash Associates (1.48), Indiabulls Power (0.64), IL&FS Transportation Networks (1.39), Lanco Infratech (0.88), IRB (1.36) and Bharti Airtel (1.53). These companies had both balance sheet and cash flow problems. The companies which were “border-line” (i.e. having Altman Z-score between 1.8 and 2.2) were Tata Power (1.87), DLF (1.93), Reliance Infrastructure (2.17) and NTPC (2.20), to name a few.

Not surprisingly, companies which had fantastic balance sheets (i.e. high Altman Z-score) were usually the fast moving consumer goods companies as well as information technology. Colgate Palmolive was the highest (a whopping 28.29 Z-score), followed by Hindustan Unilever (27.86), Jubilant FoodWorks (19.56), Nestle India (15.92), Titan Industries (12.16), Infosys (11.56), ITC (11.00) and Infotech Enterprises (10.28), to name a few. Likewise, these companies had no problems with refinancing whatsoever.



Gaurav Parikh

5 years ago

Morgan Stanley Research is pretty mediocre at best ~ In May 2011 they predicted on a modified earnings yield basis a Sensex of 30000 by Dec 2012 ! It was @ 18000 then
Even their Wealth Creator Ideas in December 2011 of OnMobile Global @ Rs 66 and Jain Irrigation @ Rs 120 + (Enam too was heavily bullish here) have sunk 50% inside 9 months while Sensex and Nifty have held levels ~ Wonder what their Alt-Z scores were and what are they saying about these now ! ~I have differed on both their macro and micro calls and have commented on these on my blog for those who care to visit it for my fundamental reasons ~ use the search engine on the blog for quicker access to the relevant posts ~ Cheers !

SEBI imposes Rs1.75 lakh fine on Galaxy Broking in T Spiritual World case

SEBI probe found that a group of entities connected to each other and to T Spiritual World had dealt in the stock in a fraudulent and manipulative manner

New Delhi: Market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs1.75 lakh on Galaxy Broking Ltd on charges of aiding and abetting its clients in fraudulent dealings in shares of T Spiritual World Ltd (TSWL), by seeking to create artificial volumes and influencing the stock price, reports PTI.


SEBI passed the order, dated 4th September, after a probe into the share dealings of TSWL for a period from 12 July 2004 to February 2005 -- during which its share price fell from Rs27.85 to Rs5.06.


A total of 2,07,94,921 shares got traded in 130 trading days with an average daily volume of 1,59,961 shares in this period.


The probe found that a group of entities connected to each other and to TSWL had dealt in the stock in a fraudulent and manipulative manner during the investigation period, by creating artificial volume, false and misleading appearance of trading and price manipulation.


It was further found that Galaxy Broking Ltd aided and abetted three of the entities in executing trades in the scrip as a broker and had allegedly failed to maintain complete and proper Know Your Client (KYC) forms of its clients.


SEBI further found that the broking firm had placed large orders in the scrip for a quantity during the investigation period. Out of the total 48 such large buy orders and 21 large sell orders placed in the scrip, Galaxy Broking accounted for 40 buy orders and 7 sell orders, respectively.


The said buy orders were placed at rates which were marginally lower than the prevailing market price.


Further, most of such large buy orders were deleted by the broker at a later stage and only two% of the total large orders placed by it got executed.


The broker deleted most of the large buy orders from the system after keeping them exposed for some time and the orders were generally placed at prices lower than prevailing market price, making it clear that the same was done to avoid buy orders getting executed, SEBI said.


The regulator said the entity had also influenced the price by placing buy orders at higher price in the scrip for its client, Vintel securities Pvt Ltd, while it also did not maintain proper KYC forms of its clients.


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