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SEBI Registered: Research Analyst | Investment Adviser | Call: +91 97730 15000 | Email: research@stockaxis.com
January 04, 2019
|We are pleased to present to you our monthly market commentary and outlook for the forthcoming month. The ‘stockaxis’ Market Intelligence’ is a quick update on the markets for the month gone by and our view for the next month. Use our sharp and crisp synopsis to continue building your wealth!
NBFC
To counter the liquidity crisis faced by NBFCs a couple of months back, the RBI has provided some incentives to banks to lend to NBFCs. Banks can now use government securities as level 1 high-quality liquid asset equivalent to the bank’s incremental lending to NBFCs (including HFCs). This has eased the mandatory liquidity coverage ratio (LCR) requirements for banks as they have more funds to lend. Further, banks can now lend up to 15% (earlier 10%) of their capital funds to a single non-infrastructure funding NBFC. When originally announced, these measures were expected to facilitate ~ Rs.60,000 crore of bank lending to NBFCs and HFCs.
Furthermore, after the IL&FS scare, overall liquidity in the broader financial system is also improving, with about over 80 per cent of outstanding commercial papers (CP) rolled over without any serious mishap. In November 2018, NBFCs successfully rolled over Rs 1.52 lakh crore of CPs that came up for maturities. It’s forecasted that in December 2018, about Rs 1.11 lakh crore worth of CPs sold by NBFCs would have matured and rolled over.
These events coupled with a decent correction in NBFC valuations over the last few months, have provided a higher margin of safety in case of investments in NBFCs. Select (large) NBFCs have become a compelling buy with 2-3 year perspective.
PSBs
For the financial year of 2017-18, PSBs (public sector banks) declared a combined loss in excess of Rs.85,000 crore which was much more than the combined profits in earlier years. After stocks being beaten down over the last few quarters, additional slippages are now dropping and PSBs stocks are now showing resilience. Recent slippages were mostly from accounts that were already under watch and not from good quality accounts. The primary factor why banks recognized and provided such large NPAs in 2017-18 was change in policy from the RBI. Earlier, it allowed banks to keep restructuring doubtful loans and as banks kept on reporting low NPAs in the past using this ‘ever-greening’ technique, the asset quality rot grew bigger. When RBI changed its stance, banks were forced to recognize all their existing NPAs. This done, it’s now believed that the worst is behind us as far as NPA recognition is concerned.
Recent amendment of the Insolvency and Bankruptcy Code (IBC) is also helping as these amendments will safeguard the interests of lenders and spur the pace of resolution under IBC. Fine tuning of this Code is also expected to increase the number of eligible bidders significantly for distressed assets. Several accounts marked as NPAs may get reversed if there is some resolution during the bankruptcy procedure at the National Company Law Tribunal (NCLT).
Also with falling oil prices and increasing rupee strength, inflation is gradually decreasing. This is expected to put pressure on interest rates and increase bond prices resulting in a significant rise in valuation of PSU banks’ investment portfolios.
Furthermore, the government had earlier announced an infusion of Rs.65,000 crore in PSBs in 2018-19. Of this, Rs.23,000 crore was disbursed, while Rs,42,000 crore was pending. Of this pending amount, the government has decided to pump Rs 28,615 crore into seven public sector banks (PSBs) through recapitalization bonds soon. This recapitalization would enhance the lending capacity of PSBs and help them come out of the Reserve Bank of India's Prompt Corrective Action (PCA) framework.
These measures are expected to give a fillip to the severely beaten down PSB stocks.
Capital Goods
Investment cycle continues to strengthen and is presenting an improving picture after a long time. This is suggesting a strong pick-up in private industrial investments. Investments are happening in auto and auto parts, chemicals, consumer, engineering, cement and steel selectively.
Index of short cycle industrial products is up double digits in FY18 and up 24% in 2Q FY19. Growth is broad based across categories like bearings, abrasives, electricals, automation, etc. Capital goods imports (1H up 26%), order inflows (2Q up 34% YoY) and capacity utilization is also strong.
A recent report by CARE Ratings also suggests that based on several factors including improved gross fixed capital formation and higher government expenditure, investment climate is on an upswing. Gross fixed capital formation has been at 29% in the first half of FY19 (28.3% in first half of FY18). Government spending is also increasing in infrastructure, housing and defence. The report goes on to mention that overall capex of the government in the first 7 months of the year was Rs 1.77 trillion as against Rs 1.62 trillion last year. Capacity utilization has been picking up in recent times. Revival of investment cycle portends happy days for capital goods stocks.
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