Most equity analysts I have interacted with till date had little understanding of debt beyond leverage ratios. As a result, they are not able to fully comprehend the risks associated with debt. Here are a few lessons for equity analysts. 1/11
1. Unviable promoter level debt would adversely impact the operating company eventually. A promoter who is financially cornered will always look for ways to squeeze money out from the operating company. Some of these desprate measures could well be unscrupulous. 2/11
2. A debt-stressed company drains out healthier companies of the group. It is rare that a promoter lets go of a company easily. He tries hard to support the weaker entity through the resources of stronger entities (via ICDs, guarantees etc.) thereby jeopardising the later. 3/11
12 things to remember while buying Life Insurance:
1. Take term plan and not an endowment plan. The insurance cover is higher for a term plan for the same premium. However, you do not get maturity benefits in term plan. Remember, you are buying Insurance and not a FD. 1/9
2. Take your plan from an insurance company that is expected to survive 20-30 years. Insurance is used over long periods and therefore it is necessary to choose a company that has a size/ networth for a long life (what an irony!). Don't look beyond LIC, SBI, ICICI and HDFC. 2/9
3. Take adequate cover - If you think Rs. 2 Cr is a good enough cover for you; wait; increase your cover to Rs. 5 Cr. Inflation levels are high in India and money loses its value very fast. Remember how valuable Rs. 1 lakh were 20 years back. 3/9
Microfinance Institutions on the brink...yet again!!
The microfinance industry in India could never really recover from the Andhra crisis of 2009-10. Just when things start to normalise, a new crisis rocks the boat. There has been no respite. Thread 1/11
From inept legislation to demonetisation, from political interference to religious diktats and from frauds to natural calamities, Microfinance Institutions (MFIs) have been battered by every risk possible. The latest in this series of pitfalls is the Corona lock-down. 2/11
Following is why I feel it's the biggest threat ever:
1) Collections have come to a grinding halt - The loan collections have largely been in cash. The lock-down has severely impaired collection efforts as the mobility of collection agents and borrowers is restricted. 3/11
Recently, Standard & Poor (S&P) warned that India's SR will be downgraded if the country's economic growth does not recover. Bond yields spiked soon after the S&P red flag. Here's why India should take the warning seriously. Thread 1/11
SRs of 3 agencies - S&P, Moody's and Fitch are considered important. Currently, India is rated BBB- (Stable) by S&P, Baa2 (Negative) by Moody's and BBB- (Stable) by Fitch. Simply put, India is barely investment grade as per S&P and Fitch and a notch better as per Moody's. 2/11
Following are the reasons why SRs are important and why India should heed S&P's warning.
1. There is a clear correlation between bond yields/ spreads and SRs i.e. a poor SR could increase the cost of borrowings of Government as well as corporates. 3/11
A letter from Sterling Wilson Solar Ltd. (SWSL) dated Nov 14, informing the exchanges about the extension of debt repayment deadline granted to promoters (Shapoorji Pallonji Company Pvt. Ltd. - SPCPL & K. Daruvala) has created widespread panic. 1/14
As at Aug 19, other companies of the promoters owed Rs. 2,563 crore to SWSL. SWSL, in Aug 19, was IPO bound and the promoters, in the red herring prospectus, promised to pay off the entire debt owed to SWSL, within 90 days, from the IPO proceeds. 2/14
The SWSL IPO was entirely an offer for sale i.e. the IPO was meant only to dilute the promoters' shareholding and no IPO proceeds went to SWSL. The IPO was under subscribed (92%) yet the promoters managed to raise ~Rs. 2,850 crore. 3/14
Insolvency & Bankruptcy Code (IBC): The story so far
IBC was enacted in Dec 2016, with the objective of ensuring speedy resolutions of NPAs. It was hailed as one of the most landmark reforms in India. This post is an attempt to understand if this code lived up to its promise.1/9
Till June, 2019, 2162 cases have been admitted. Of these, 174 have been closed on appeal or review or settled; 101 have been withdrawn; 475 have ended in liquidation and 120 received an approval of resolution plans. 1292 cases are pending. 2/9
The 120 closed cases have yielded resolution worth ~Rs. 1,08,070 crore as against total admitted claims of ~Rs. 2,52,577 crore i.e. the recovery rate was 43%. The liquidation value of these assets was merely 23% of the claims. So, IBC yielded a better than expected recovery. 3/9
Corporate Bond Market comprises of all the debt fund-raising/ financing/ fund mobilisation activities by Corporates through debt capital market instruments - Debentures or Bonds. Read on to know more about this market. Thread 1/12
As per SEBI data, the total outstanding corporate bonds in India aggregate to ~ Rs. 30.63 lakh crore.
This is about one third the size of the G-Sec market as well as the aggregate of Bank credit (i.e. total outstanding loans of banks). 2/12
The accumulated value of all the Corporate Bonds outstanding is only about 16% of the GDP.
In comparison, the size of the US corporate bond market to GDP is ~124%. It shows that the corporates in India rely heavily on banks. 3/12
As the GDP growth (at 5%) slowed to a 25 quarter low in Q1 of FY 2020, let us examine the various economic indicators to understand the 'real' state of the Indian economy. Here is a thread. 1/13
1) 2-Wheeler Sales - dipped by ~17% in July, 2019. Motorcycle sales fell by 19% while Scooter sales declined by 12%. Scooters sell more in urban India. Motorcycles sell in both urban as well as rural India. The data shows distress in both India and Bharat. 2/13
2) Car sales - saw a massive YoY volume degrowth of 30.3%. Car purchase is a discretionary spending. People buy cars only when they are assured of future economic prospects. It shows that urban economic sentiment is at rock bottom levels. 3/13
Believe me! Your mobile phone activity now decides if you get a loan.
New age Fintech companies are using your mobile/internet trails to decide if you are worthy of getting a loan. Will you now think twice before hurling an abuse on Twitter or downloading a 'free' App? 1/12
More and more lending companies (Banks, NBFCs etc) are deploying powerful data analytics tool to judge the credit worthiness of a loan applicant.
So next time you wish to buy a TV on EMI, see what you've been asked to fill in an application form. It all starts from there. 2/12
Your phone number, picked up from the application form, tells the following things about you to the lender -
a) Location of your residence and office addresses.
b) If you are paying your bills on time or have you been missing your payment dates (through SMS alerts). 3/12
State Government Debt Risk - a history that repeats too often!
As the work on building Amravati, the new capital city AP, comes to a grinding halt, concerns emerge about Amravati (APCRDA) bonds held by Franklin MF (~Rs. 1000 Cr) and Birla MF (Rs. ~300 Cr). Thread 1/11
During the Chandrababu Govt, Amravati received political as well as financial patronage. Now, with Jagan Reddy being incharge of the state, the project is in shambles. World Bank & ADB pulled out of the project and the Government is looking for reasons to scrap it. 2/n
The bonds issued to support the financing needs of the project were subscribed by Franklin MF and Birla MF. The bonds are guaranteed by the AP Govt but it's not sure if the Govt would keep servicing the bonds. The risk of lending to a state govt has again come to the fore. 3/11
What explains Canadian Pension Funds' risky bets in India?
Pension Funds are custodians of retrial money of public and hence are expected to be conservative. Canadian Pension Funds, however, are different. Thread 1/11
These Pension Funds are not shy of picking up assets in the troubled sectors. Real Estate and Infrastructure assets are key bets of these funds in India. They have invested in roads, airports, solar energy, commercial real-estate and other perceptibly riskier assets. 2/11
As per Financial Post, the Canadian Pension Funds '...rank as five of the top 30 global real estate investors, seven of the world’s biggest international infrastructure investors, and were at the table during six of the top 100 leveraged buyouts in corporate history. ' 3/11
After the buildup and the crash-course in my last post, here is my post analysing Promoter Financing market in India. The analysis attempts to explain the slowdown in promoter financing in India and brings out some interesting facts. Read on to know more. Thread 1/12
As per BSE data, the aggregate value of promoters' pledged shares was ~1.85 lakh crore as at Aug 23, 2019. In comparison, the value of promoters' pledged shares stood at ~Rs 2.5 lakh crore as at Aug 30, 2018. The fall in pledge levels indicate slowdown in promoter financing. 2/12
An ET article (July 22), observed that 'pledging of shares by promoters of NSE companies dropped to a six-year low'. Another ET article (Aug 15), noted that 'interest rates on loans against shares (LAS) have surged by about 300 basis points in the past 3 months'. 3/12
The Economic Times, today, on its front page, carried a news item proclaiming 'Rana Kapoor holding companies pre-pay part of loans'. Nothing can be more misleading than the use of word 'pre-pay'. Thread 1/8
The article quotes Mr. Kapoor's statement that bonds issued by promoter hold cos - Yes Capital and Morgan Credits, have been pre-paid ahead of maturity dates i.e. Oct 2020 and Apr 2021 respectively. 2/8
The clever use of 'maturity date' to imply voluntary prepayment hides the fact that these facilities were probably pre-paid owing to the pressure of fund managers (Franklin and Reliance MF) on account of failure of these hold cos to meet the obligations under the facility. 3/8
Germany, yesterday, issued a 30-year bond that offers negative yield (average yield of -0.11%).
This typically means that investors are paying German government to hold their debt. Why would investors invest in such a bond? Thread 1/8
The coupon set on these bonds (or Bunds, as they are called in Germany) is 0% i.e. the government will not pay any interest at all on these bonds.
In comparison, if GoI issues a 30 year bond today, the interest rate offered would be ~7%. 2/8
A negative yield of -0.11% means that an investor in this bond will pay 11 basis points per year to German Govt to borrow the sum i.e. an investment of Rs. 100 in these bonds would yield ~Rs. 97 in 30 years, a loss of ~Rs. 3. 3/8
How off-mark were the analysts about Yes Bank stock.
Today, share price of Yes Bank crashed to Rs. 71.25 on concerns surrounding financial misreportings by Crompton Greaves Power (CGP). Yes Bank has 13% stake in CGP. The stock was trading at Rs. 400 abt an year back. Thread 1/11
For many-many years, people cast aspersions on lending practices of Yes Bank and doubted the low NPA numbers it reported quarter after quarter.
All those fears came true post cutting short of Yes Bank's MD, Mr. Rana Kapoor's term by RBI in Sept. 2018. 2/11
Bewildering though, in this entire saga, is the cluelessness of the equity analysts (the supposedly well-informed lot). The level of ignorance was such that even after RBI action, many analysts kept giving 'buy' calls. Below is a list of such misplaced, ignorant calls. 3/11
8 questions to ask before you invest in a Credit Fund.
Q1) How much yield should the fund offer?
A) The principle of 'higher-the-better' does not apply to credit funds. Higher yields come with disproportionately higher risks. Funds offering 11%+ are a clear avoid. Thread 1/8
Q2) How diversified is the fund?
A) A fund with higher diversification is less risky. As per regulations, exposure in a company cannot exceed 10%. Well managed funds cap exposure in one company to 5% or lower. Lower exposure means lower hit on return if an accident happens. 2/8
Q3) Does the fund have high exit loads?
A) Usually exit loads ensure that investors allow fund managers time to execute strategies. However, very high exit loads often result in debt-traps restricting investors' exit even when there are glaring mistakes made by fund-managers. 3/8
Today I cover the Government Securities (G-Secs) market. G-Secs, in short, are debt instruments through which Government borrows from the public (banks, financial institutions etc.). This post covers the size, type of lenders, and other broad contours of G-Sec market. Thread 1/8
The total size of the G-Sec market is approx. 92.86 lakh crore. In comparison, the size of the listed equity market (total market capitalisation of all listed stocks) was 141.47 lakh crore in July, 2019. (2/8)
Out of the total borrowing of Rs. 92.86 lakh crore, ~ Rs. 64.49 lakh crore borrowing is from Central Govt and the remaining Rs. 28.37 lakh crore borrowing is from State Govts i.e. of the the total borrowings 69.45 % is from Central Govt and 30.55 % is from State Govts. (3/8)
Government, on August 13, issued a 'Scheme to provide a one-time partial credit guarantee to PSBs for purchase of pooled assets of financially sound NBFCs'. This scheme is a step in right direction towards solving the liquidity crunch that NBFCs are faced with. Thread (1/12)
It may be recalled that the Finance Minister, in her budget speech, had made an announcement to this effect. Thid scheme attempts to address temporary asset liability mismatches of NBFCs/HFCs so that they don't have to resort to distress sale owing to paucity of liquidity. 2/12
The major features of this scheme are:
A) It is a one time guarantee provided by GoI, for a period of 24 months.
B) The schemes is only applicable to PSU banks for first loss of up to 10%
C) Guarantee can be invoked if the credit rating of the pool goes to 'D' (default). 3/12