Friday, June 29, 2012
Thursday, June 28, 2012
IT AIN'T OVER YET
The Indian banking system has been plagued with the twin devils of deteriorating asset quality and rise in non performing loans, a trend synonymous with high interest rates and slowdown in the economy. For most part the stress is being faced entirely on the corporate loan book of banks.
CORPORATE LOANS UNDER STRESS
Corporate debt restructuring cases hit record high in 2011-12. Indian banks sought to restructure $12 billion in corporate loans in the fiscal year that ended in March, up 156 percent from a year earlier, according to data from the Corporate Debt Restructuring Cell (CDR). The debt crisis in Indian banking continues, with loans over Rs4,400 crore referred for corporate debt restructuring until May 2012. Mid-cap public sector banks are likely to see the bulk of this. Between April and May, PSBs have referred Rs11,700 crore for CDR. In April 2012, at least 18 cases, accounting for more than Rs7,300 crore were referred for CDR.
BANKS DE-'RISK'ING INTO RETAIL
Some of the large private sector and even PSU banks in an effort to de-tangle themselves from the corporate stress have been increasing exposure to the retail side. Take for instance ICICI Bank where retail forms 35% of the total loan book. A string of defaults in its personal loan and credit card businesses severely damaged its asset quality, forcing a drastic change in its loan book which was three-fourth retail way back in 2008-09. But now the bank is betting big on the retail side again with a target to increase the retail book to 40% of total loan book.
RETAIL BORROWERS TO FEEL THE HEAT ?
The outlook for the economy has got gloomier after the shocking March quarter GDP growth of 5.3%. Industry watchers feel this could hurt demand for retail credit, and even lead to defaults on some of the existing loans. Already, demand for homes and automobiles have been slackening over the last few months.
As corporates in their effort to cut costs start freezing salary hikes and slash jobs it is just a matter of time before in individual borrower starts to feel the heat. As fuel, food, housing and living expenses go through the roof, to what extent would an individual borrower service his debt commitments (in an era of rising interest rates) only time will tell.
** Continuation of series on 'Why its still not the right time to buy bank stocks'
Wednesday, June 27, 2012
STILL NOT THE 'RIGHT' TIME TO BUY BANKS
BANK NPA WORRIES MAY NOT BE OVER
SBI'S GOOGLYThe management of SBI recently met Morgan Stanley and dashed any hopes that investors had of a turnaround in asset quality in FY13. SBI management indicated that gross and net new NPL formation during Q1'FY13 could be at `5000 crore and `3000 crore, respectively. This is higher than the outlook of `4000-4500 crore quarterly slippages run rate and `6000 crore of net new NPL creation in FY13. Management indicated that Q1 credit costs could be around 120 basis points. Restructuring during the quarter could be in the range of `2000-2500 crore.
RATE CYCLE UNLIKELY TO TURNThe Reserve Bank of India in its June mid quarter policy review stated clearly that any further reduction in interest rates hinges on the inflation trajectory. Inflation is likely to inch higher with a deficit monsoon and supply side factors playing spoilsport, it might be a long time before the RBI starts to cut interest rates aggressively.
ASSET QUALITY PRESSURES MAY PERSISTAfter having restructured massive amounts of exposure to the airline, steel, textile and State electricity boards banking sector may be forced to re-assess its exposure to the textile, power and agriculture sector in the coming quarters. This coupled with a decline in GDP growth, slowdown in industrial activity and no signs of a pickup any time soon may compound asset quality issues for most of the sectors including manufacturing.
SBI'S GOOGLYThe management of SBI recently met Morgan Stanley and dashed any hopes that investors had of a turnaround in asset quality in FY13. SBI management indicated that gross and net new NPL formation during Q1'FY13 could be at `5000 crore and `3000 crore, respectively. This is higher than the outlook of `4000-4500 crore quarterly slippages run rate and `6000 crore of net new NPL creation in FY13. Management indicated that Q1 credit costs could be around 120 basis points. Restructuring during the quarter could be in the range of `2000-2500 crore.
RATE CYCLE UNLIKELY TO TURNThe Reserve Bank of India in its June mid quarter policy review stated clearly that any further reduction in interest rates hinges on the inflation trajectory. Inflation is likely to inch higher with a deficit monsoon and supply side factors playing spoilsport, it might be a long time before the RBI starts to cut interest rates aggressively.
ASSET QUALITY PRESSURES MAY PERSISTAfter having restructured massive amounts of exposure to the airline, steel, textile and State electricity boards banking sector may be forced to re-assess its exposure to the textile, power and agriculture sector in the coming quarters. This coupled with a decline in GDP growth, slowdown in industrial activity and no signs of a pickup any time soon may compound asset quality issues for most of the sectors including manufacturing.
Monday, June 25, 2012
RBI'S COSMETIC SURGERY FOR THE AILING ECONOMY
MUCH A 'DO'LLAR ABOUT NOTHING
In its efforts to attract more capital inflows and offer a lifeline to INR, the government and the RBI announced some liberalisation measures that are broadly in line with its infamous track record.
Overall, the measures are positive but perhaps not as significant as markets expected given that those expectations were raised over the weekend by the outgoing finance minister's comments about some major measures. Once again, the government unnecessarily raised expectations only to disappoint.
RBI seems to be taking a more sensible approach while the government appears to be looking for painless quick-fixes that are impractical. The latest set of measures will gradually attract foreign capital but they cannot correct the underlying macro imbalances, such as the unsustainably large twin deficits of fiscal and current account, entrenched inflation and a rapidly depreciating INR.
KEY MEASURES
Boost in external commercial borrowing (ECB) limit to USD10bn. This applies to Indian companies in manufacturing and infrastructure sector that have foreign exchange earnings to borrow overseas for repayment of outstanding INR loans towards capital expenditure and/or fresh INR capital expenditure under the approval route. Note that the overall annual FY13 ECB limit remains unchanged at USD30bn.
Increase in FII limit in local currency G-secs increased by 5bn to USD20bn: The USD5bn increase is for pension/sovereign wealth funds. In order to broad base the non-resident investor base for G-Secs, the RBI has decided to allow long-term investors like sovereign wealth funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of USD20bn.
The lock-in period for infra bonds has been cut to 1year from 3 years.
FIIs can buy bonds with 3-year residual maturity.
NEED FOR TOUGH DECISIONS
There are all sensible moves but may not offer immediate relief for INR, which will also come under pressure to weaken further if USD strengthens. Another aspect to this is to what extent would the FIIs be willing to buy sovereign paper given the sluggishness in the economy and the threat of a rating cut.
India's macro imbalances cannot be fixed by a patchwork of Band-aids or by applying balm. The government needs to facilitate several macro adjustments, but some of which may not be politically palatable. So far, it has been busy treating the symptoms rather than fixing the causes of the macro imbalances.
In its efforts to attract more capital inflows and offer a lifeline to INR, the government and the RBI announced some liberalisation measures that are broadly in line with its infamous track record.
Overall, the measures are positive but perhaps not as significant as markets expected given that those expectations were raised over the weekend by the outgoing finance minister's comments about some major measures. Once again, the government unnecessarily raised expectations only to disappoint.
RBI seems to be taking a more sensible approach while the government appears to be looking for painless quick-fixes that are impractical. The latest set of measures will gradually attract foreign capital but they cannot correct the underlying macro imbalances, such as the unsustainably large twin deficits of fiscal and current account, entrenched inflation and a rapidly depreciating INR.
KEY MEASURES
Boost in external commercial borrowing (ECB) limit to USD10bn. This applies to Indian companies in manufacturing and infrastructure sector that have foreign exchange earnings to borrow overseas for repayment of outstanding INR loans towards capital expenditure and/or fresh INR capital expenditure under the approval route. Note that the overall annual FY13 ECB limit remains unchanged at USD30bn.
Increase in FII limit in local currency G-secs increased by 5bn to USD20bn: The USD5bn increase is for pension/sovereign wealth funds. In order to broad base the non-resident investor base for G-Secs, the RBI has decided to allow long-term investors like sovereign wealth funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of USD20bn.
The lock-in period for infra bonds has been cut to 1year from 3 years.
FIIs can buy bonds with 3-year residual maturity.
NEED FOR TOUGH DECISIONS
There are all sensible moves but may not offer immediate relief for INR, which will also come under pressure to weaken further if USD strengthens. Another aspect to this is to what extent would the FIIs be willing to buy sovereign paper given the sluggishness in the economy and the threat of a rating cut.
India's macro imbalances cannot be fixed by a patchwork of Band-aids or by applying balm. The government needs to facilitate several macro adjustments, but some of which may not be politically palatable. So far, it has been busy treating the symptoms rather than fixing the causes of the macro imbalances.
Thursday, June 21, 2012
SHORT TERM BORROWING COSTS SPIKE
Short-Term Debt: Rates of CDs fall further on surging demand
Rates on certificates of deposit and commercial papers are on the downtrend as demand for these papers is surging as per dealers. "There are a lot of papers maturing now, because of the large number of
issuances that took place in March," according to dealers. As a result of this, mutual funds, the largest buyers of short-term papers are flush with cash. In March 2012, a whopping `93919 crore was raised by banks through the issuance of CDs.
PSU banks have been the most active in the CD market. For instance Indian Overseas Bank was the largest issuer of CDs today, having raised `1000 crore through three-month papers at 9.05%.
Three-month CDs were placed at 9.05-9.20% compared with 9.25-9.40% on Wednesday. One-year CD rates fell to 9.50-9.60% from 9.60-9.70%. "Rates have softened, but it is unlikely that the three-month CD rates will fall below 9% in the near term," said a dealer with a state-owned bank. Rates on commercial papers also declined tracking the fall in CD rates. Three-month CPs were placed at 9.40-9.50% today.
Rates on certificates of deposit and commercial papers are on the downtrend as demand for these papers is surging as per dealers. "There are a lot of papers maturing now, because of the large number of
issuances that took place in March," according to dealers. As a result of this, mutual funds, the largest buyers of short-term papers are flush with cash. In March 2012, a whopping `93919 crore was raised by banks through the issuance of CDs.
PSU banks have been the most active in the CD market. For instance Indian Overseas Bank was the largest issuer of CDs today, having raised `1000 crore through three-month papers at 9.05%.
Three-month CDs were placed at 9.05-9.20% compared with 9.25-9.40% on Wednesday. One-year CD rates fell to 9.50-9.60% from 9.60-9.70%. "Rates have softened, but it is unlikely that the three-month CD rates will fall below 9% in the near term," said a dealer with a state-owned bank. Rates on commercial papers also declined tracking the fall in CD rates. Three-month CPs were placed at 9.40-9.50% today.
BATTERY SECTOR RUNNING LOW ON POWER
PRICING WAR AHEAD IN BATTERY SPACE
In FY12, industry-leader Exide lost significant market share (~1,000bps) in the auto-replacement segment due to capacity constraints. This gave Amara Raja and other players the chance to improve their market share in this category. With capacity constraints now resolved, Exide is out to regain lost market share – it is being pro-active on pricing and is trying to win back dealer confidence.
On pricing, Exide was the first to cut prices in the replacement segment, which it did in March 2012, forcing competition to follow suit. Exide has also adopted the two-tier distribution strategy favoured by Amara Raja. In a two-tier distribution strategy, a company also sells products to end consumers through multi-brand retail outlets. This helps dealers as their risk is spread over multiple brands. This method is expected to help it retain dealers who faced a tough time when Exide had capacity constraints last year.
In FY12, industry-leader Exide lost significant market share (~1,000bps) in the auto-replacement segment due to capacity constraints. This gave Amara Raja and other players the chance to improve their market share in this category. With capacity constraints now resolved, Exide is out to regain lost market share – it is being pro-active on pricing and is trying to win back dealer confidence.
On pricing, Exide was the first to cut prices in the replacement segment, which it did in March 2012, forcing competition to follow suit. Exide has also adopted the two-tier distribution strategy favoured by Amara Raja. In a two-tier distribution strategy, a company also sells products to end consumers through multi-brand retail outlets. This helps dealers as their risk is spread over multiple brands. This method is expected to help it retain dealers who faced a tough time when Exide had capacity constraints last year.
CCI HITS HARD AT CEMENT COMPANIES
THE ORDER
The Competition Commission of India has found cement manufacturers in violation of the provisions of the Competition Act, 2002 which deals with anticompetitive agreements including Cartels. The Commission has imposed penalty on 11 Cement Manufacturers named in the information @0.5x profit for the FY10 and FY11. The penalty amount so worked out amounts to over `6000 crore. The Commission has also imposed penalty on the Cement Manufacturers Association. The Cement Manufacturers upon whom the penalty has been imposed are ACC, Ambuja Cements Limited, Ultratech Cements, Grasim Cements now merged with Ultratech Cements, JK Cements, India Cements, Madras Cements, Century Cements, Binani Cements, Lafarge India and Jaypee Cements.
CCI CAUTIONS CEMENT MAKERS
While imposing penalty, the Commission has considered the parallel and coordinated behaviour of cement companies on price, dispatch and supplies in the market. The Commission has found that the cement companies have not utilised the available capacity so as to reduce supplies and raise prices in times of higher demand. The Commission has also observed that the act of these Cement Companies in limiting and controlling supplies in the market and determining prices through an anti-competitive agreement is not only detrimental to the cause of the consumers but also to the whole economy since cement is a crucial input in construction and infrastructure industry vital for economic development of the country.
WHAT NEXT
Cement companies are likely to appeal against the CCI order in the Competition Appellate Tribunal and may obtain a stay order against the same. Courts have the power to rule against the Compat order. Financial strength of large cement makers may enable them to withstand the financial impact of this order but pricing power likely to get severely constrainted in the future.
The Competition Commission of India has found cement manufacturers in violation of the provisions of the Competition Act, 2002 which deals with anticompetitive agreements including Cartels. The Commission has imposed penalty on 11 Cement Manufacturers named in the information @0.5x profit for the FY10 and FY11. The penalty amount so worked out amounts to over `6000 crore. The Commission has also imposed penalty on the Cement Manufacturers Association. The Cement Manufacturers upon whom the penalty has been imposed are ACC, Ambuja Cements Limited, Ultratech Cements, Grasim Cements now merged with Ultratech Cements, JK Cements, India Cements, Madras Cements, Century Cements, Binani Cements, Lafarge India and Jaypee Cements.
CCI CAUTIONS CEMENT MAKERS
While imposing penalty, the Commission has considered the parallel and coordinated behaviour of cement companies on price, dispatch and supplies in the market. The Commission has found that the cement companies have not utilised the available capacity so as to reduce supplies and raise prices in times of higher demand. The Commission has also observed that the act of these Cement Companies in limiting and controlling supplies in the market and determining prices through an anti-competitive agreement is not only detrimental to the cause of the consumers but also to the whole economy since cement is a crucial input in construction and infrastructure industry vital for economic development of the country.
WHAT NEXT
Cement companies are likely to appeal against the CCI order in the Competition Appellate Tribunal and may obtain a stay order against the same. Courts have the power to rule against the Compat order. Financial strength of large cement makers may enable them to withstand the financial impact of this order but pricing power likely to get severely constrainted in the future.
PENALTY ON CEMENT COMPANIES
Name Penalty (Rs. crore)
JP Associates `1323.6
ACC `1147.59
Ambuja `1163.9
Ultratech `1175.49
Lafarge India `480
Binani `167.32
Monday, June 18, 2012
Rate changes by RBI under Liquidity Adjustment Facility
Below is a listing of the changes in rates at which the Reserve Bank of India absorbs and injects liquidity under its Liquidity Adjustment Facility since Jun 5, 2000. Since Oct 29, 2004 the RBI changed the nomenclature for repos and reverse repos under the Liquidity Adjustment Facility. Since then, it absorbs liquidity through reverse repos and injects liquidity through repos.
------------Reverse repo----------- -----------Repo-----------
Date rate change rate for liquidity rate change rate for liquidity
in bps absorption in bps injection
Apr 17, 2012 -50 7.00 -50 8.00
Oct 25, 2011 +25 7.50 +25 8.50
Sep 16, 2011 +25 7.25 +25 8.25
Jul 26, 2011 +50 7.00 +50 8.00
Jun 16, 2011 +25 6.50 +25 7.50
May 3, 2011 +50 6.25 +50 7.25
Mar 17, 2011 +25 5.75 +25 6.75
Jan 25, 2011 +25 5.50 +25 6.50
Nov 2, 2010 +25 5.25 +25 6.25
Sep 16, 2010 +50 5.00 +25 6.00
Jul 27, 2010 +50 4.50 +25 5.75
Jul 2, 2010 +25 4.00 +25 5.50
Apr 20, 2010 +25 3.75 +25 5.25
Mar 19, 2010 +25 3.50 +25 5.00
Jul 27, 2009 -- 3.25 -- 4.75
Apr 21, 2009 -25 3.25 -25 4.75
Mar 4, 2009 -50 3.50 -50 5.00
Jan 2, 2009 -100 4.00 -100 5.50
Dec 8, 2008 -100 5.00 -100 6.50
Nov 3, 2008 -- 6.00 -50 7.50
Oct 20, 2008 -- 6.00 -100 8.00
Jul 29, 2008 -- 6.00 +50 9.00
Jun 24, 2008 -- 6.00 +50 8.50
Jun 11, 2008 -- 6.00 +25 8.00
Mar 30, 2007 -- 6.00 +25 7.75
Jan 31, 2007 -- 6.00 +25 7.50
Oct 31, 2006 -- 6.00 +25 7.25
Jul 25, 2006 +25 6.00 +25 7.00
Jun 9, 2006 +25 5.75 +25 6.75
Jan 24, 2006 +25 5.50 +25 6.50
Oct 25, 2005 +25 5.25 +25 6.25
Apr 29, 2005 +25 5.00 -- 6.00
Oct 27, 2004 +25 4.75 -- 6.00
Aug 25, 2003 -50 4.50 -50 6.00
Mar 3, 2003 -50 5.00 -25 6.50
Oct 29, 2002 -25 5.50 -25 6.75
Jun 27, 2002 -25 5.75 -50 7.00
Mar 5, 2002 -50 6.00 -50 7.50
May 28, 2001 -25 6.50 -25 8.00
Apr 27, 2001 -25 6.75 -25 8.25
Mar 2, 2001 -50 7.00 -50 8.50
Feb 20, 2001 -50 7.50 -50 9.00
Oct 25, 2000 -25 8.00 -25 9.50
Oct 24, 2000 -25 8.25 -25 9.75
Oct 10, 2000 -25 8.50 -25 10.00
Oct 9, 2000 -25 8.75 -25 10.25
Oct 6, 2000 -25 9.00 -25 10.50
Oct 5, 2000 -25 9.25 -25 10.75
Oct 4, 2000 -25 9.50 -25 11.00
Oct 3, 2000 -25 9.75 -25 11.25
Sep 15, 2000 -25 10.00 -25 11.50
Sep 13, 2000 -25 10.25 -25 11.75
Sep 12, 2000 -50 10.50 -50 12.00
Sep 11, 2000 -100 11.00 -100 12.50
Sep 4, 2000 -150 12.00 -150 13.50
Aug 31, 2000 -75 13.50 -75 15.00
Aug 30, 2000 -25 14.25 -25 15.75
Aug 22, 2000 -50 14.50 -50 16.00
Aug 18, 2000 +50 15.00 +150 16.50
Aug 14, 2000 +50 14.50 -50 15.00
Aug 8, 2000 +150 14.00 +150 15.50
Aug 7, 2000 +100 12.50 +100 14.00
Aug 4, 2000 +325 11.50 +325 13.00
Aug 3, 2000 +25 8.25 +25 9.75
Jul 24, 2000 +100 8.00 +100 9.50
Jun 5, 2000 7.00 8.50
------------Reverse repo----------- -----------Repo-----------
Date rate change rate for liquidity rate change rate for liquidity
in bps absorption in bps injection
Apr 17, 2012 -50 7.00 -50 8.00
Oct 25, 2011 +25 7.50 +25 8.50
Sep 16, 2011 +25 7.25 +25 8.25
Jul 26, 2011 +50 7.00 +50 8.00
Jun 16, 2011 +25 6.50 +25 7.50
May 3, 2011 +50 6.25 +50 7.25
Mar 17, 2011 +25 5.75 +25 6.75
Jan 25, 2011 +25 5.50 +25 6.50
Nov 2, 2010 +25 5.25 +25 6.25
Sep 16, 2010 +50 5.00 +25 6.00
Jul 27, 2010 +50 4.50 +25 5.75
Jul 2, 2010 +25 4.00 +25 5.50
Apr 20, 2010 +25 3.75 +25 5.25
Mar 19, 2010 +25 3.50 +25 5.00
Jul 27, 2009 -- 3.25 -- 4.75
Apr 21, 2009 -25 3.25 -25 4.75
Mar 4, 2009 -50 3.50 -50 5.00
Jan 2, 2009 -100 4.00 -100 5.50
Dec 8, 2008 -100 5.00 -100 6.50
Nov 3, 2008 -- 6.00 -50 7.50
Oct 20, 2008 -- 6.00 -100 8.00
Jul 29, 2008 -- 6.00 +50 9.00
Jun 24, 2008 -- 6.00 +50 8.50
Jun 11, 2008 -- 6.00 +25 8.00
Mar 30, 2007 -- 6.00 +25 7.75
Jan 31, 2007 -- 6.00 +25 7.50
Oct 31, 2006 -- 6.00 +25 7.25
Jul 25, 2006 +25 6.00 +25 7.00
Jun 9, 2006 +25 5.75 +25 6.75
Jan 24, 2006 +25 5.50 +25 6.50
Oct 25, 2005 +25 5.25 +25 6.25
Apr 29, 2005 +25 5.00 -- 6.00
Oct 27, 2004 +25 4.75 -- 6.00
Aug 25, 2003 -50 4.50 -50 6.00
Mar 3, 2003 -50 5.00 -25 6.50
Oct 29, 2002 -25 5.50 -25 6.75
Jun 27, 2002 -25 5.75 -50 7.00
Mar 5, 2002 -50 6.00 -50 7.50
May 28, 2001 -25 6.50 -25 8.00
Apr 27, 2001 -25 6.75 -25 8.25
Mar 2, 2001 -50 7.00 -50 8.50
Feb 20, 2001 -50 7.50 -50 9.00
Oct 25, 2000 -25 8.00 -25 9.50
Oct 24, 2000 -25 8.25 -25 9.75
Oct 10, 2000 -25 8.50 -25 10.00
Oct 9, 2000 -25 8.75 -25 10.25
Oct 6, 2000 -25 9.00 -25 10.50
Oct 5, 2000 -25 9.25 -25 10.75
Oct 4, 2000 -25 9.50 -25 11.00
Oct 3, 2000 -25 9.75 -25 11.25
Sep 15, 2000 -25 10.00 -25 11.50
Sep 13, 2000 -25 10.25 -25 11.75
Sep 12, 2000 -50 10.50 -50 12.00
Sep 11, 2000 -100 11.00 -100 12.50
Sep 4, 2000 -150 12.00 -150 13.50
Aug 31, 2000 -75 13.50 -75 15.00
Aug 30, 2000 -25 14.25 -25 15.75
Aug 22, 2000 -50 14.50 -50 16.00
Aug 18, 2000 +50 15.00 +150 16.50
Aug 14, 2000 +50 14.50 -50 15.00
Aug 8, 2000 +150 14.00 +150 15.50
Aug 7, 2000 +100 12.50 +100 14.00
Aug 4, 2000 +325 11.50 +325 13.00
Aug 3, 2000 +25 8.25 +25 9.75
Jul 24, 2000 +100 8.00 +100 9.50
Jun 5, 2000 7.00 8.50
IT SECTOR HIRING SLOWING DOWN ?
Infosys is delaying taking on board some of its planned 28,000 new recruits until mid-2103, underlining the slowdown faced by India's No 2 software services company, according to media reports on Monday. Engineering graduates who were offered jobs from campus placements between August and September last year have started to receive joining dates from September this year to as late as after mid-2013. "Based on business imperatives and manpower requirements, we expect onboarding of fresh hires to be completed by the first quarter of fiscal 2014 (which ends in June)," the report quoted Infosys as saying in an email. The company's financial year runs from April to March. Infosys, which is also listed on Nasdaq, disappointed investors in April with a weaker-than-expected revenue growth outlook due to an uncertain global economy. The result sparked worries about the prospects for the country's $100 billion outsourcing sector, which is facing slowing demand from western clients, intense competition from global rivals and volatile currency markets.
RBI SHOULD WAKE UP AND SMELL THE REALITY
CAN'T LIVE IN ISOLATION
The RBI in its policy statement on June 18, 2012 indicated clearly that factors other than high interest rates are contributing to GDP slowdown. As part of the policy document the guidance clearly states that evolving growth inflation dynamics would continue to influence future stance. This should be read as follow up to what the RBI said in its last policy on April "The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates". In the current ever worsening domestic macro environment and turbulent global economy can the RBI afford to act in such a way. ? Consider the last 3 economic statistics i.e WPI, Industrial Production and Q4 Gross Domestic Product it seems growth has moderated significantly with the threat of a general economic slowdown looming large. Not to forget joblessness rising consistently. To squarely put the blame for the current crisis on fiscal policy is uncalled for, rather there is a need for a co-ordinated approach to tackle the current threats.
NEED TO BE PRO-ACTIVE
Looking back at the 2008-09 global financial crisis one can't help but wonder the speed and intensity with which RBI had cut rates to ensure an easy monetary policy environment.
One wonders why such a loose monetary regime cant be implemented to jump start the economy.
The RBI in its policy statement on June 18, 2012 indicated clearly that factors other than high interest rates are contributing to GDP slowdown. As part of the policy document the guidance clearly states that evolving growth inflation dynamics would continue to influence future stance. This should be read as follow up to what the RBI said in its last policy on April "The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates". In the current ever worsening domestic macro environment and turbulent global economy can the RBI afford to act in such a way. ? Consider the last 3 economic statistics i.e WPI, Industrial Production and Q4 Gross Domestic Product it seems growth has moderated significantly with the threat of a general economic slowdown looming large. Not to forget joblessness rising consistently. To squarely put the blame for the current crisis on fiscal policy is uncalled for, rather there is a need for a co-ordinated approach to tackle the current threats.
NEED TO BE PRO-ACTIVE
One wonders why such a loose monetary regime cant be implemented to jump start the economy.
Sunday, June 17, 2012
NO QUICK FIX TO THIS ONE
2012 is turning out to be a difficult year for global jobs market. Corporates worldwide in their efforts to cut costs are going back to the age old formula by chopping at the most vital resource of all i.e. human resource. Nokia recently announced job cuts of around 10,000 globally. According to reports corporates worldwide have already announced job cuts of over 70,000 this year, including HP and Nokia. The cuts have been announced by companies from various sectors, during the first six months of 2012, and those from the technology services space are the worst hit.
Thursday, June 14, 2012
THE GOVERNMENT DOES IT AGAIN
UREA PRICE HIKE DEFERRED
The government which is already paralysed neck down has done it once again. On Thursday the issue of Urea pricing was again referred back to the Group of Ministers who of course might take some time before arriving at some kind of a resolution on the same. Urea is a regulated fertiliser with current retail price at `5310/tonne. The last revision in urea prices happened in 2010 when they were raised to Rs 5,310/tonne from Rs 4,830. Complex fertilisers such as DAP and MoP which were decontrolled some time ago have been showing a sharp rise in prices due to supply side conditions and the steep INR depreciation in recent months, thereby boosting the demand even further for urea as a cheaper alternative. The 10% price hike was not expected to change the fortunes of the beleaguered fertiliser sector but was seen as an signal that the government is serious about pushing reforms through in the form of an eventual urea de-regulation. According to analysts a 10% hike in urea could have resulted in the PBT for Urea manufacturers Rashtriya Chemicals and Chambal Fertiliser going up only by `50-60 crore. The proposal to hike urea prices was made to redress the imbalanced use of soil nutrient and reduce the subsidy burden of the government which has been pegged at close to 65000 crore this fiscal.
SPANISH BOND YIELDS @ EURO ERA HIGH
Bond Yields show no signs of cooling off
Italy 3-year Bond Yield Jumps; Spain 10-year Yield At Record 7%
Italy raised the targeted maximum amount at a debt auction on Thursday, but the yield on its three-year bond surged as investors remained worried that the country may be the next to seek a bailout after a EUR 100 billion rescue of Spanish banks failed to calm concerns.
Elsewhere, Spain's benchmark 10-year bond yield hit a euro-era record high 7 percent after Moody's downgraded the country's credit rating to just above junk yesterday. Cyprus, which is also rumored to be in need of a bailout, was also downgraded.
The Italian treasury sold a total EUR 4.5 billion of its longer-term debt, including a three-year bond or BTPs. The agency was aiming proceeds between EUR 2.75 billion and EUR 4.5 billion.
The yield on the 2.50 percent March 2015 bond climbed to 5.3 percent from 3.91 percent in the previous sale on May 14. Analysts had widely expected the yield to come in above 5 percent.
Demand, however, improved slightly. The bid-to-cover ratio rose to 1.59 from 1.52.
The country paid a yield of 6.1 percent for its 4.25 percent February 2019 off-the-run BTP and 6.13 percent for its 4.25 percent March 2020 debt.
Italy 3-year Bond Yield Jumps; Spain 10-year Yield At Record 7%
Italy raised the targeted maximum amount at a debt auction on Thursday, but the yield on its three-year bond surged as investors remained worried that the country may be the next to seek a bailout after a EUR 100 billion rescue of Spanish banks failed to calm concerns.
Elsewhere, Spain's benchmark 10-year bond yield hit a euro-era record high 7 percent after Moody's downgraded the country's credit rating to just above junk yesterday. Cyprus, which is also rumored to be in need of a bailout, was also downgraded.
The Italian treasury sold a total EUR 4.5 billion of its longer-term debt, including a three-year bond or BTPs. The agency was aiming proceeds between EUR 2.75 billion and EUR 4.5 billion.
The yield on the 2.50 percent March 2015 bond climbed to 5.3 percent from 3.91 percent in the previous sale on May 14. Analysts had widely expected the yield to come in above 5 percent.
Demand, however, improved slightly. The bid-to-cover ratio rose to 1.59 from 1.52.
The country paid a yield of 6.1 percent for its 4.25 percent February 2019 off-the-run BTP and 6.13 percent for its 4.25 percent March 2020 debt.
GROWTH VS INFLATION DEBATE
EYE ON RBI: WILL IT WON'T IT
INFLATION: NO SIGNS OF SLOWING
India's inflation rate in May ticked up to 7.5% which is likely to make the RBI's task even more difficult in the backdrop of a weakening growth trajectory. The price of primary articles, which accounts for 20% of the index, rose 10.9% y/y. Food prices increased by 10.7% y/y, including a strong rise in the price of pulses (+16.6% y/y), vegetables (+49.4%), potatoes (+68.1%), and egg, meat, and fish (+17.9%). The only silver lining was that price growth in manufactured goods, which account for 65% of the index, continued to ease, up 5% y/y in May. India has an inflation problem. Wholesale price inflation reaccelerated in May and has now been on a steady uptrend since bottoming at 6.6% y/y in January. This is entirely due to supply-side factors and we can see this clearly in the WPI breakdown. In particular, the recent plunge in the rupee is pushing up the price of local goods, especially imported goods and commodities priced in U.S. dollars. The prices of food and metals accelerated in May, and the price of fuels no doubt would have accelerated if not dictated by the central government.
INDUSTRIAL OUTPUT SAGGING
Another miserable Indian statistic as industrial production growth stagnates in April. After bouncing around the turn of the year, growth momentum appears to have slipped back once again to a decidedly sub-par pace. A number of headwinds are restraining industrial production growth in India: sluggish export markets, the lagged impact of previous INR real overvaluation, policy (and demand) uncertainty and a high cost of capital exacerbated by excessively loose fiscal policy settings. Whatever the relative weight of these factors India’s industrial sector (and the broader economy) appears to have lost its way. The FY2012Q4 GDP report, which saw y/y GDP growth falling to a 9-year low of 5.3% y/y, also revealed that, after growing at a mere 4% annualised rate in 2011H2, GDP growth momentum actually firmed to around 7-7½% in the last quarter. Key manufacturing surveys such as the manufacturing PMI along with hard data such as auto sales and non-food bank credit had already signalled a momentum shift beginning in late 2011. However, all of the other indicators have shown renewed signs of softness since March as the external environment, especially Europe, has soured once again
READING BETWEEN THE LINES
"The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates".
RBI's April Policy Guidance
Wait and watch for June 18
INFLATION: NO SIGNS OF SLOWING
India's inflation rate in May ticked up to 7.5% which is likely to make the RBI's task even more difficult in the backdrop of a weakening growth trajectory. The price of primary articles, which accounts for 20% of the index, rose 10.9% y/y. Food prices increased by 10.7% y/y, including a strong rise in the price of pulses (+16.6% y/y), vegetables (+49.4%), potatoes (+68.1%), and egg, meat, and fish (+17.9%). The only silver lining was that price growth in manufactured goods, which account for 65% of the index, continued to ease, up 5% y/y in May. India has an inflation problem. Wholesale price inflation reaccelerated in May and has now been on a steady uptrend since bottoming at 6.6% y/y in January. This is entirely due to supply-side factors and we can see this clearly in the WPI breakdown. In particular, the recent plunge in the rupee is pushing up the price of local goods, especially imported goods and commodities priced in U.S. dollars. The prices of food and metals accelerated in May, and the price of fuels no doubt would have accelerated if not dictated by the central government.
INDUSTRIAL OUTPUT SAGGING
Another miserable Indian statistic as industrial production growth stagnates in April. After bouncing around the turn of the year, growth momentum appears to have slipped back once again to a decidedly sub-par pace. A number of headwinds are restraining industrial production growth in India: sluggish export markets, the lagged impact of previous INR real overvaluation, policy (and demand) uncertainty and a high cost of capital exacerbated by excessively loose fiscal policy settings. Whatever the relative weight of these factors India’s industrial sector (and the broader economy) appears to have lost its way. The FY2012Q4 GDP report, which saw y/y GDP growth falling to a 9-year low of 5.3% y/y, also revealed that, after growing at a mere 4% annualised rate in 2011H2, GDP growth momentum actually firmed to around 7-7½% in the last quarter. Key manufacturing surveys such as the manufacturing PMI along with hard data such as auto sales and non-food bank credit had already signalled a momentum shift beginning in late 2011. However, all of the other indicators have shown renewed signs of softness since March as the external environment, especially Europe, has soured once again
READING BETWEEN THE LINES
"The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates".
RBI's April Policy Guidance
Wait and watch for June 18
Wednesday, June 13, 2012
Indian markets may fall further: Goldman Sachs
Goldman Sachs recommends staying "underweight" in Indian equities on a three-month horizon as equities may slide further on the back of "a sluggish domestic and global growth outlook." However, adds "the trough in NIFTY is behind us". Goldman recommends staying "market weight" on 12-month horizon, says one-year target for the Nifty at 5,600 is underpinned by 12.7 times multiple on fiscal 2014 EPS of 438 rupees/share. "Equities may start to price a recovery in FY14 as well as a better external backdrop," Goldman says. Goldman favors Indian defensive and domestic demand-driven sectors and says to "underweight" global growth and investment-cycle sectors such as banks and commodities.
CARS WITH STARS
Cars would now have star ratings like ACs/Refrigerators.
GET READY FOR 'STAR' RATED 'CARS'
As per a proposal being considered cars could be very soon sporting star ratings just like ACs and refrigerators. This is likely to be implemented in next 3 months as per reports.
Rating sticker to be sported on every car as per weight specification with a range for lowest and highest efficiency. How much fuel economy can a car give under test conditions would also be sported under bold.
Ratings based on a car's fuel efficiency would help buyers make their purchase decisions.
GET READY FOR 'STAR' RATED 'CARS'
As per a proposal being considered cars could be very soon sporting star ratings just like ACs and refrigerators. This is likely to be implemented in next 3 months as per reports.
Rating sticker to be sported on every car as per weight specification with a range for lowest and highest efficiency. How much fuel economy can a car give under test conditions would also be sported under bold.
Ratings based on a car's fuel efficiency would help buyers make their purchase decisions.
M&A Tracker May 2012
• Value of outbound deals (Indian companies acquiring businesses outside India) in May 2012 was US$0.95 billion (8 deals) as compared to US$.2.26 billion (20 deals) and US$4.00 billion (19 deals) during the corresponding month in 2011 and 2010 respectively
• Total value of inbound deals (foreign companies or their subsidiaries acquiring Indian businesses) in May 2012 was US$2.10 billion (9 deals) as compared to US$ 1.32 billion (8 deals) and US$3.83 billion (5 deals) during the corresponding month in 2011 and 2010 respectively
• Value of domestic and internal restructuring deals in May 2012 was US$0.51 billion (24 deals) as compared to US$0.73 billion (28 deals) and US$0.29 billion (28 deals) during the corresponding month in 2011 and 2010 respectively
• PE deal values amounted to US0.35 billion (27 deals) in May 2012 as compared to US$1.14 billion (43 deals) and US$0.26 billion (15 deals) during the corresponding month in 2011 and 2010 respectively
• There were 2 IPOs listed in the month of May 2012, which raised a sum of US$75.22 million from the public. The total amount raised through IPO during the period Jan-Dec 2011 was US$ 1.20 billion from 30 IPOs.
Deal of the Month: • Piramal Healthcare Ltd acquired Decision Resources Group for US$ 680 million, marking its entry into the global healthcare database and consulting services industry.
Source: Grant Thornton
Fund Managers Turning Pessimistic
BofA Merrill Lynch Fund Manager Survey Finds Investors at Most Pessimistic Since Summer 2011
Fears of a global economic slowdown have come sharply back into focus, and
expectations of decisive action by policy makers have grown, according to the
BofA Merrill Lynch Survey of Fund Managers for June.
A net 11 percent of the global panel believes that the global economy will
deteriorate in the coming 12 months – the weakest reading since December 2011.
Last month, a net 15 percent believed the economy would strengthen and the
negative swing of 26 percentage points is the biggest since July-August 2011
as the sovereign crisis built. The outlook for corporate profits has suffered
a similarly negative swing. A net 19 percent of the panel believes that
corporate profits will fall in the coming 12 months. Last month, a net 1
percent predicted improving corporate profits.
Investors have adopted aggressively “risk off” positions. Average cash
balances are at their highest level since the depth of the credit crisis in
January 2009 at 5.3 percent of portfolios, up from 4.7 percent in May. The
Risk & Liquidity Composite Indicator fell to 30 points, versus an average of
40. Asset allocators have moved to a net underweight position in global
equities and increased bond allocations.
Support for policy stimulus has grown. The majority of the panel now believes
that global monetary policy is “too restrictive.” A net 6 percent take that
view, the highest since December 2008. A net 15 percent said policy was “too
stimulative” in May. The proportion of global investors saying global fiscal
policy is “too restrictive” has continued to rise to a net 28 percent from a
net 23 percent in May.
“Investors have taken extreme ‘risk off’ positions and equities are oversold,
but we have yet to see full capitulation. Low allocations in Europe are in
line with perceptions of growing risk levels in the eurozone,” said Gary
Baker, head of European Equities strategy at BofA Merrill Lynch Global
Research. “Hopes expressed last month of a policy response have now become
expectations. Markets are keenly anticipating decisive action from key policy
meetings in June,” said Michael Hartnett, chief Global Equity strategist at
BofA Merrill Lynch Global Research.
Global equity under-valuations match all-time low
Global equities are at their most undervalued since August 2011. A net 48
percent of the global panel believes global equities are undervalued, matching
the lowest level since the survey began. The reading is up from a net 35
percent in May and a net 22 percent in April. At the same time, a net 83
percent of the panel says that bonds are overvalued – also an all-time high
and up from a net 74 percent a month ago.
The view is even more concentrated in Europe. A net 45 percent of the global
panel sees Europe as the most undervalued region - an all-time high reading
and up from 27 percent in May.
Asset allocators moved out of global equities with a net 4 percent underweight
the asset class, compared with a net 16 percent overweight equities last
month. They reduced their underweight position in bonds to a net 23 percent,
down from a net 33 percent in May. Global investors have reached their closest
position to being equal weight equities and bonds since November 2011.
Fears resurge of Chinese hard landing
Last month’s growing optimism about China’s economy has halted in June’s
survey. The panel is equally split about whether China’s economy will get
stronger or weaker in the year ahead; last month, a net 10 percent predicted
it would strengthen. Significantly, 16 percent of respondents now believe
China’s economy faces a “hard landing” – up from 9 percent in May.
Broadly, sentiment towards emerging markets has softened. A net 17 percent of
global asset allocators are overweight Global Emerging Market equities – down
from a net 34 percent in May. Commodities have also lost favor. A net 8
percent of the panel is underweight the asset class, the lowest reading since
February 2009.
Allocation by global asset allocators to U.S. equities improved with a net 31
percent overweight U.S. stocks, up five percentage points month-on-month. In
contrast, domestic investors have turned bearish. A net 36 percent of U.S.
respondents to the Regional Survey expect the U.S. economy to deteriorate in
the coming 12 months.
Back to the old counter-cyclical routine
In line with the “risk off” mood, investors reached for their counter-cyclical
auto-function key again this month. Allocations to Pharmaceuticals, Utilities,
Telecoms and Staples all rose from May’s levels. The biggest reductions in
sector positions came in Materials, Energy and Industrials. Technology remains
the most favored sector.
Survey of Fund Managers
An overall total of 260 panelists with US$689 billion of assets under
management participated in the survey from 31 May to 7 June. A total of 188
managers, managing US$522 billion, participated in the global survey. A total
of 141 managers, managing US$297 billion, participated in the regional
surveys. The survey was conducted by BofA Merrill Lynch Research with the help
of market research company TNS. Through its international network in more than
50 countries, TNS provides market information services in over 80 countries to
national and multi-national organizations. It is ranked as the fourth-largest
market information group in the world.
Investors vying for Indian Shipbuilding Sector
MHI TO TAKE STAKE IN L&T SHIPBUILDING
Mitsubishi Heavy Industries Ltd. plans to acquire a stake in L&T Shipbuilding Ltd. of India within a few years to secure its first shipbuilding base overseas, an MHI executive said.
The plan was revealed by Executive Vice President Hisashi Hara at a briefing Monday on the comprehensive heavy machinery maker's business plans.
MHI is currently providing L&T Shipbuilding with technological assistance ranging from design drawings to quality control under a technical tieup agreement signed by the two companies last year.
Mitsubishi Heavy intends to provide capital to L&T Shipbuilding at a time when Japanese shipbuilders are struggling to win orders in competition with Chinese and South Korean rivals.
Source: Japan Times
PIPAVAV SHIPYARD TIES UP WITH DCNS
Pipavav Shipyard will tie up with French naval shipbuilder DCNS for technology transfer.
The focus of teaming together is to build the most modern assets, including modern warships for the Indian Navy and the Coast-Guard, Pipavav Shipyard said.
DCNS is a global major in naval defence and an innovative player in energy. DCNS designs, builds and supports surface combatants, submarines and mission-critical systems and equipment. It also proposes services for naval shipyards and bases, besides offering solutions in civil nuclear engineering and marine renewable energy.
The Group employs 12,800 people and generates annual revenues of about €2.6 billion.
Source: Hindu Business Line
BRIGHT PROSPECTS AHEAD
According to ASSOCHAM the Indian Shipbuilding & ship repair industry is poised to reach Rs 9,200 crore by 2015.
The Indian shipbuilding and ship repair industry is likely to reach Rs 9,200 crore from the current level of just over Rs 7,310 crore and is growing at a compounded annual growth rate (CAGR) of about 8 per cent, as per ASSOCHAM.
The global shipbuilding and ship repairing industry is growing at a CAGR of about 24 per cent and is likely to reach Rs 14 lakh crore by 2015 owing to rising global sea borne trade, according to the ASSOCHAM study.
The overall cargo traffic at major ports in India is about 600 million tonnes and is likely to reach 1,230 million tonnes by 2015 and 3,000 million tones by 2020 growing at a compounded annual growth rate (CAGR) of about 20 per cent, said ASSOCHAM study.
This also denotes huge scope for private sector and foreign direct investment (FDI) in the shipping industry and the maritime states can develop a composite project on the public-private partnership model.
Indian companies are cashing in on the huge scope in building and repair of offshore vessels (OSVs) as leading nations in this industry are jostling with limited capacities.
High input costs and rising costs of raw material, freight together with miscellaneous duties and taxes being imposed amounts to a huge price differential of about 50 per cent in building a ship in India and other countries.
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