MAS Financial Services IPO Review and GMP

Ahmedabad based MAS Financial Services is a  Non-Banking Financial Company. MAS Financial offer product and services under 5 categories:

1. Micro-enterprise loans 2. SME loans 3. Two-wheeler loans 4. Commercial Vehicle loans 5. Housing loans. As of September 30, 2016 Company had more than 530,000 active loan accounts and 3,200 Customers.

The Company operated across six States and in Delhi through 119 branches. It also has commission-based direct sales agents (DSA) and has revenue sharing arrangements with some of the dealers and distributors where part of loan default is guaranteed by such sourcing dealers.

The company has been in this business over 2 decades. It has a track record of consistent growth with quality loan portfolio.The company has developed an extensive operational network in Gujarat and Maharashtra. Another important aspect of this company is  Robust credit assessment and risk management framework.

AUM in micro enterprise, two wheeler, Commercial Vehicle and housing loan segments increased at a CAGR of 39.78%, 10.61%, 22.24%, and 56.00% from March 31, 2012 to March 31, 2016, respectively, and AUM in SME loan segment increased at a CAGR of 161.64% from March 31, 2013 to March 31, 2016. As of March 31, 2016 and September 30, 2016, its total outstanding debt including security deposits received from customers (excluding assignment’s) was 16,015.31 million and 16,874.25 million, respectively, and its finance cost was 1,423.01 million and 831.24 million, respectively.

mas

IPO Dates & Price Band:

  • IPO Open: 06-October-2017
  • IPO Close: 10-October-2017
  • IPO Size: Approx Rs. 550 Crore (Approx)
  • Face Value: Rs. 10 Per Equity Share
  • Price Band: Rs. 456 to 459 Per Share
  • Listing on: BSE & NSE
  • Retail Portion: 35%

Market Lot:

  • Shares: Apply for 32 Shares (Minimum Lot Size)
  • Amount: Rs.14688

IPO Allotment & Listing:

  • Basis of Allotment: 13-October
  • Refunds: 16-October
  • Credit to demat accounts: 17-October
  • Listing: 18-October

Lead Managers:

  • Motilal Oswal Investments Advisors Pvt Ltd

Registrar to the IPO:

Link Intime India Private Ltd

The promoters :

1. Kamlesh Chimanlal Gandhi
2. Mukesh Chimanlal Gandhi
3. Shweta Kamlesh Gandhi and
4. Prarthna Marketing Private Limited

Objects of the Issue

  1. Fresh Issue
  2. Offer for Sale

Competitive Strengths

Track record of consistent growth with quality loan portfolio.

Diversified product offerings presenting significant growth opportunities.

Access to diversified sources of capital and cost effective funding.

Deep market knowledge through extensive sourcing channels.

Robust credit assessment and risk management framework.

Experienced management team with reputed investors.

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Business Strategies

Strengthen marketing and sourcing channels while maintaining stable growth and quality of portfolio.

Expand its product offerings.

Leverage its existing network and customer base to develop its housing finance business.

Leverage technology to foster growth.

Positive

MAS Financial Services has been growing its loan book and it clearly reflects in its revenues which have not dipped in any of the last four years. Growing at an average rate of 26.3%, revenues jumped from Rs. 43.1 crore in FY2013 to Rs. 364.7 crore in FY2017. Profits have also maintained almost the same rate in recent years and as a result, earnings in FY2017 stood at INR68.6 crore. Margins have consistently remained in the healthy range of 16.7% to 19.1% in these years.

The company is on track to excel further as the performance in the first quarter indicates. Profitability in the latest quarter actually shot up to 22.4%, although it is always a good practice to discount the sudden jump in earnings or margins.

It has a wide spectrum of products and this is kind of diversification is positive. Although the company has a high exposure to micro-enterprise loans (accounting for 59.5% of the loan book), this risk is mitigated by low gross NPAs of 1.06%. Net NPAs are even lower at 0.92%.

Another positive development is that loan disbursement in SME and housing loan categories have outpaced the micro-enterprise category, resulting in increasing average loan size.

As of 30 June 2017, MAS Financial Services cost of borrowing stood at 9.05%, as a result of its excessive reliance on short term bank loans. However, this is likely to come down following the IPO as the company will use proceeds to augment its capital base.

Negative

The Company, Promoters, Directors, and its Subsidiary are involved in certain legal proceedings, any adverse developments related to which could materially and adversely affect its business, reputation and cash flows.

MAS Financial Services business operations involve transactions with relatively high risk borrowers. Any default from its customers could adversely affect its business, results of operations and financial condition.

MAS Financial Services extend loans to other financial institutions such as MFIs, NBFCs and HFCs. If there is a default by these financial institutions or if the company are unable to maintain its relationships with these institutions, its business, financial condition and results of operations may be adversely affected.

MAS Financial Services inability to maintain relationships with its sourcing intermediaries could have an adverse effect on its business, prospects, results of operations and financial condition.

The quality of its portfolio may be impacted due to higher levels of NPAs and its business may be adversely affected if MAS Financial Services is unable to provide for such higher levels of NPAs.

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MAS Financial Services business requires substantial funds, and any disruption in funding sources would have a material adverse effect on its liquidity and financial condition.

MAS Financial Services inability to compete effectively in an increasingly competitive industry may adversely affect its net interest margins, income and market share.

As part of its business strategy, MAS Financial Services have assigned or securitized a significant portion of the receivables from its loan portfolio to banks and other financial institutions. Any deterioration in the performance of any portfolio of receivables assigned to banks and other institutions may affect its ability to conduct further assignment and securitization and thus adversely impacting its business prospects, financial condition and results of operations.

MAS Financial Services financial performance is subject to interest rate risk, and an inability to manage its interest rate risk may have a material adverse effect on its interest income from financing activities, thereby adversely affecting its business prospects and financial performance.

The recent currency demonetisation measures imposed by the Government of India adversely affected the Indian economy and similar unanticipated measures may adversely affect its business its business operations, financial condition, results of operations and financial condition.

MAS Financial Services business is highly regulated and it may be adversely affected by future regulatory changes.

MAS Financial Services is subject to regulations in relation to minimum capital adequacy requirements and a decline in its CRAR will require us to raise fresh capital which may not be available on favourable terms, or at all. This, in turn, may affect its business, prospects, results of operations and financial condition.

An inability to effectively manage and sustain our rate of growth, or maintain operational efficiencies, may adversely affect its business and it may not be able to increase its revenues or maintain its profitability.

Some of its loans are unsecured and are susceptible to certain operational and credit risks which may result in increased levels of NPAs which may adversely affect its business, prospects, results of operations and financial condition.

MAS Financial Services may not be able to recover its secured loans on a timely basis, or at all, the full value of collateral or amounts which are sufficient to cover the outstanding amounts due under such defaulted loans, its inability to recover outstanding amounts under loans may adversely affect its business.

Valuations

PE RATIO

The price band of  Rs.456 – 459 per share and Earnings Per Share (EPS) of 15.33 mean the company is asking for a Price/Earnings (P/E) ratio of 29.94 at the upper end. This is in line with the competition, although some NBFCs are still available at a lower valuation, Shriram City Union Finance Limited – trading at a P/E ratio of 23.75 – being one of them. Nevertheless, valuations of almost financial plays have jumped in recent months and most of its competitors including Capital First Limited, Mahindra & Mahindra Financial Services Limited and Bajaj Finance Limited are quoting at high multiples. This valuation stands to come down if first quarter earnings are taken into consideration but we don’t see merit in doing that.

MAS Financial Services’ Return on Net Worth (RONW) of 20.65% is on the higher side among its peers and is even better than Bajaj Finance. While this is helpful and may give an impression that pricing is on the lower side, the company is seeking a high valuation on Price/Book Value (P/B) front. On this parameter, the company’s valuation is at 6.92 which is higher than Shriram City Union Finance, Capital First, Mahindra & Mahindra Financial Services.

Grey market Premium

Grey market premium is Rs.190/- and Kostak is Rs.400/-

Conclusion

Investment may be considered for short term to medium term.

DISCLAIMER

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here.

SBI Life insurance IPO and Current GMP

SBI Life Insurance Company Limited ( Incorporated in 2000) is leading private life insurer. It is a joint venture between the State Bank of India and BNPPC(an insurance subsidiary of BNP Paribas), BNPPC has operations across 36 countries across the world and is among the leading life insurance company across the world whereas  BNP Paribas is one of top 10 global financial institution in terms of revenue.

The Company has developed a multi-channel distribution network comprising bank branches of SBI,individual agent network of 93,849 agents.It has also developed other distribution channels including direct sales and sales through corporate agents, brokers, insurance marketing firms and other intermediaries.

SBI Life Insurance raises Rs 2,226 crore from 69 anchor investors.

Please check the list of Anchor investors.

Download (PDF, 1.42MB)

Issue Details

IPO Open: 20-September-2017
IPO Close: 22-September-2017
IPO Size: Approx Rs.8400 Crore (Approx)
Face Value: Rs. 10 Per Equity Share
Price Band: Rs. 685 to 700 Per Share
Listing on: BSE & NSE
Equity Shares: 120,000,000

Market Lot:

Shares: Apply for 21 Shares (Minimum Lot Size)
Amount: Rs. 14700

IPO Allotment & Listing:

Basis of Allotment: 27-September-2017
Refunds: 28-September-2017
Credit to demat accounts: 29-September-2017
Listing: 03-October-2017

Lead Managers

Axis Capital Limited
BNP Paribas
Citigroup Global Markets India Private Limited
Deutsche Equities India Private Limited
ICICI Securities Limited
JM Financial Consultants Private Limited
Kotak Mahindra Capital Company Limited
SBI Capital Markets Limited

Registrar to the IPO

Karvy Computershare Private Limited.

The promoters :

State Bank and BNPPC( an insurance subsidiary of BNP Paribas )

Object of the issue :

a. to achieve the benefits of listing Equity Shares on the Stock Exchanges and
b. to carry out the sale of up to 120,000,000 Equity Shares by the Selling Shareholders.

sbi lifeGlobal Life Insurance Industry

Growth in the global life insurance industry has been almost stagnant after the financial crisis in 2008. Before the crisis, the total premium of the industry grew at 4% CAGR (in nominal dollar terms) during 2003 to 2007.However, there was a revival in growth from 2014 onwards, as the global life insurance industry recorded 3.5% CAGR growth during 2013-2016 on the real premium basis.

Growth was primarily driven by  China, where premium grew over 15% CAGR during the period.(Source: CRISIL Report)

Growth in the post-crisis era has been primarily driven by emerging markets, where premiums grew 6.6% CAGR during 2009 to 2016.Growth in the Indian life insurance industry has been in-line with the emerging market average during the period.(Source: CRISIL Report)

Asia is the largest market for life insurance, accounting for 38% of the premium collected. India’s share in the global market was 2%.(Source: CRISIL Report)

globalWhen it comes to the global insurance industry, 55% of the premium comes from life insurance (and the rest from non-life), compared with 78% for India and 50% for other emerging markets. At 3.5%, the global life insurance industry’s penetration is 80 basis points more than that of India’s. (Source: CRISIL Report)

chartChina’s life insurance penetration was low and stagnant at 1.7% from 2006 to 2014. However, the industry’s growth has been stupendous over the past decade, with insurance density quadrupling from US$ 34.1 in 2006 to US$ 127 in 2014. China was in a high economic growth phase during this period, with its nominal  GDP growing at 18% CAGR, according to the International Monetary Fund (IMF).(Source: CRISIL Report)

In purchasing- power parity (PPP) terms, China’s per capita GDP increased from US$ 5,800 in 2006 to US$ 13,130 by 2014.

China’s scorching growth subsequently led to soaring insurance density. Therefore, the life insurance industry grew 4x during 2006 to 2014 on a total-premium basis. (Source: CRISIL Report)

Penetration of Insurance in India

At current prices, India’s GDP was ₹151.9 trillion as of fiscal 2017. India’s life insurance penetration stood at 2.7% in 2016, compared with 4.4% in 2010. Among Asian countries, life insurance penetration in Thailand, Singapore and  South Korea were at 3.7%, 5.5%, and 7.4%, respectively, in 2016. Hence this suggests the untapped potential of the Indian life insurance market.

The protection gap for India stood at US$ 8.5 trillion as of 2014, which was much  higher compared with its Asian counterparts. The protection margin for India was highest among all the countries at 92% in Asia Pacific.(Source:  CRISIL Report)

With India expected to be the fastest-growing Asian economy GDP increasing  at 10% CAGR in the next five years (in dollars, current prices), according to IMF  forecast (published in April 2016) the Indian life insurance industry seems poised for strong growth in the years to come. (Source: CRISIL Report)

As per IMF data, India is expected to grow at a significantly faster rate as compared with China and the rest of the world.Therefore, increasing per capita GDP will fuel growth in the life insurance industry, evidenced in China’s scenario.The per capita GDP for India over the next five years (2017 – 2022) is expected to grow at 8.5% CAGR as compared with 4.7% in the 97 previous  five  years.  Further,

Further,the prevailing low insurance density and penetration in the country  will also support strong growth in the life insurance sector on account of the low base. (Source: CRISIL Report )

Growth projection for different countries

growthNegative

It’s Company, Directors, Promoters and certain Group Companies are involved in certain legal and other proceedings.

An inability to maintain its market share, implement growth strategies or effectively address the requirements of specific customer segments by maintaining a strategic portfolio of insurance products may materially and adversely affect its business operations and prospects, and consequently its financial condition and results of operations.

Any termination of, or adverse change in, its bancassurance arrangements, and in particular its bancassurance agreement with the State Bank, or a decline in performance standards of its bancassurance partners, may have a material adverse effect on its business, results of operations and financial condition.

A significant proportion of its New Business Premiums are generated by a certain category of products. Any adverse regulatory or market development that adversely affects the sale of such products could have a material adverse effect on its business, financial condition and results of operations.

Any adverse change in its relationship with its individual agents and other distribution intermediaries, a decline in performance of its agent or other distribution network or an inability to enter into additional distribution arrangements may have a material adverse effect on our business, results of operations and financial condition.

Its investment portfolio is subject to liquidity risk and volatility in the market value of such financial instruments and may be concentrated in certain asset classes.

Changes in interest rates may have a material adverse effect on its business and results of operations.

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Any actual or alleged misconduct or fraudulent activity, including any mis-selling by its employees, agents or other intermediaries may result in customer claims or regulatory action against the company, which could adversely affect its reputation, business prospects, financial condition and results of operations.

An inability to verify the accuracy and completeness of information provided by  or on behalf of its customers and counterparties may subject to company to fraud, misrepresentation and other similar risks, which could adversely affect its business, financial condition and results of operations.

Its business reputation is critical to maintaining market share and growing its business and any adverse publicity may have a material adverse effect on its  business, prospects, financial condition and results of operations.

Any catastrophic event, including any major natural disaster, could result in significant claims which could have a material adverse effect on its business, prospects, financial condition and results of operations.

Company are subject to various credit risks in the course of its operations which may expose us to significant losses.

Company do not own the “SBI” trademark or the “SBI Life” logo, and the termination of the SBI Trademark License Agreement with State Bank or otherwise inability to use the “SBI” name or the “SBI Life” logo may materially and adversely affect its business, prospects, financial condition and results of operations.

Company benefit from its relationship with State Bank and BNPPC, in particular  drawing from their established brand equity and goodwill among customers. Any adverse change in these relationships may adversely affect its business and financial performance.

Positive

Largest private life insurer with a consistent track record of rapid growth.

Significant brand equity and pre-eminent Promoters.

Expansive multi-channel distribution with pan-India bancassurance channel and high agent productivity.

Sustainable business model is driven by robust financial position, superior investment performance, diversified product portfolio and effective risk management.

  1. Robust financial position supported by high operating efficiencies.
  2. Superior investment performance.
  3. Diversified product portfolio.
  4. Effective risk management

Strong focus on customer service standards.

Professional and Highly Experienced Board of Directors and Senior Management Team.

In the year to March, its mis-selling ratio of 0.20 percent was the lowest among the top five private life insurers, compared to ICICI Prudential’s 0.76 percent. In the year to March, SBI Life had the highest persistency ratio among the top five private life insurers.

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Business Strategies

Capitalize on insurance industry growth opportunities.

Ensure profitable growth through balanced product portfolio and expansive distribution network.

Enhance brand equity and continue to focus on customer satisfaction.

Leverage technology to improve operating efficiencies and support growth Financial.

  • SBI Life’s net worth was Rs 5,552 crore as of March, according to its red herring prospectus.
  • The embedded value, the consolidated value of shareholders’ interest in the business, rose 32 percent in the year to March.
  • At the upper end and lower end of the price band, the stock will trade at 4.23 times and 4.14 times its embedded value, respectively.
  • It earned Rs 1,037 crore in new business at a margin of 15.4 percent in the year to March.
  • SBI Life’s net premium rose 33 percent to Rs 20,850 crore for the year ended March.
  • It reported a profit of Rs 955 crore, up 13 percent year-on-year.
  • SBI Life has declared dividends every year since 2012.

Peer Comparison

The company has a market share 20.69 percent among private life insurers and 11.16 percent of the entire industry. It’s has only one listed rival in ICICI Prudential Life Insurance Company. Another private rival, HDFC Standard Life, is also awaiting the market regulator’s nod for its initial share sale.

Financial and Valuations

Total income/net profits of Rs. 17369.42 cr. / Rs. 727.75 cr. (FY14), Rs. 23186.49 cr. / Rs. 814.87 cr. (FY15), Rs. 19119.72 cr. / Rs. 844.10 cr. Rs. 30277.51 cr./ Rs. 954.65 cr. (FY17). For Q1 of the current fiscal, it has reported a net profit of Rs. 313.45 cr. on a total income of Rs. 6388.37 crore.

Comapany is asking higher price band of Rs.700/- in the P/E ratio of 73x to 78x .ICICI Pru life share price is trading at Rs.427/- which is at P/E ratio of 36x. Means SBI Life issue price at P/E ratio of 73x to 78x is overpriced.

Grey market premium

Current Grey market premium is Rs. 19/-

DISCLAIMER

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here.

The Fall and Rise of the U.S. Economy, from the Wall Street Crash until Now

In his inaugural speech, president Trump painted a gloomy picture of an America that was broken and is in dire need of fixing. In fact, as this graph shows, the U.S. economy he inherits has been improving steadily over the past six years, with unemployment showing in an equally steady decline.

unemployment

The graph pulsates and changes color to indicate the state of the nation. Larger circles indicate higher levels of unemployment, and vice versa. Green means GDP growth, more so if darker green. Red indicates crisis moments, when the Gross Domestic Product contracts – by more, as the shade of red darkens.

The graph starts in 1929, an ominous year for the economy of the U.S., and indeed the world. The Wall Street Crash sets off the Great Depression, which causes hardship on a scale not seen for generations – before or since.

Unemployment almost triples, from 3.14% in 1929 to 8.67% in 1930, almost doubles again by the next year to 15.82%, and adds another 8% by 1932. The rate peaks in 1933, when almost a quarter of the workforce – 24.75% – is out of a job. By that time, the benefits of president F.D. Roosevelt’s New Deal start to kick in.

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But the massive programme for Relief, Recovery and Reform (which also included the beginning of Social Security) did not translate into a smooth or swift recovery. Unemployment stubbornly stayed in the double digits throughout the rest of the decade, and even ticked up four and a half percentage points again, to 18.91% in 1938. Only by 1941 did the unemployment rate dip below 10% again, and the mobilisation effort that followed U.S. entry into war the next year led to the historically low unemployment rate of 1.2% in 1944. Never since has the U.S. unemployment rate ever been as low as that – nor ever as high again as 11 years previously.

Post-war America, in the public imagination, turned from military victory to the commercial conquest of the world, bringing stability and growth in the domestic economy. Point in case: the Employment Act of 1946, which extended the federal government’s powers to fight inflation and unemployment – although the bill stopped short of advocating full employment, as so nearly achieved a few years earlier. But in reality, as this graph shows, peace did not bring immediate prosperity. Between 1945 and 1949, GDP contracted and unemployment crept up again, to 5.9%. But from 1950 onwards, growth returns, and unemployment goes down again.

By 1954, the Dow Jones had returned to pre-Crash levels, officially ending the Recession. Apart from two ‘red’ years this decade – 1954 and 1958 – the economy keeps growing and growing, all the way to the early 1970s. Unemployment gradually drops to a low of 3.6% in 1968; but starts to creep up again even before the Oil Crisis, which turns the start of the next decade red, and leads to ‘stagflation’ – low growth plus high inflation.

President Reagan oversees an even bigger contraction of GDP in the early 1980s, but the rest of the decade sees a recovery to growth and lower unemployment – only perforated by the Savings and Loan Crisis of 1989, a financial meltdown that was felt well into the 1990s. However, the Clinton years witness another long stretch of economic growth, the establishment of NAFTA and the balancing of the federal budget.

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The presidency of George W. Bush was hit by the stock market crash of 2000, and by 9/11 a year later. The ensuing war on two fronts – in Afghanistan and Iraq – doesn’t seem to have a negative impact on the home front, where growth stays strong and unemployment stays low. But the fact that the European Union overtakes the U.S. as the world’s largest economy in 2007 could be seen as a sign of underlying weakness – but that warning is soon rendered obsolete by the financial crisis that erupts the next year. Dubbed the Great Recession, it sees a serious contraction of the economy and a spike in unemployment spike at 10%. Measures taken by president Obama avert an even worse crisis, and the economy starts to grow again, although the so-called ‘jobless recovery’ leaves many ordinary Americans wondering when or even whether they will reap the benefits of the improving economy.

Unemployment has now fallen to what has come to be considered a natural low, of 5%. Could it ever return to the catastrophic levels of the early 1930s – or the near-full employment of the mid-1940s? As the Trump era begins, it remains to be seen whether the new president’s policy changes will extend the virtuous cycle of rising growth and falling unemployment – or punctuate it with a red mark for recession, followed by rising jobless rates.

source : howmuch

Know the Portions of Your Rs.100 Bank Deposit.

In all the noise about rising bad loans, a deposit deluge in the aftermath of demonetization and the collapse of credit growth, it’s time to take stock of where public funds are lying right now in the economy.

In a report from the Reserve Bank of India, the credit-deposit ratio as of the month of May was 72%, which means that out of Rs.100 deposited in the bank, Rs.72 used for lending and the rest Rs.28 was used to buy government bonds. In the same time of the previous year, banks have used Rs.76 out of Rs.100 deposit for lending and had left the rest Rs.24 in bonds. This is as per the stock of deposits on the 30th of the month.

1001Source : Centre for Monitoring Indian Economy

Taking a look at the additional credit-deposit ratio, which shows what portion of the new flow of deposits, is getting placed in the credit. And this reflects the slump in credit growth in 2016-17.

By the time of March-end the additional credit-deposit ratio was 42%, this shows that more than half of the deposits that came in were placed in government bonds. These are low-yielding and very safe assets. This could be easily understood by the fact that the deposit stream following the demonetization of Rs.500 and Rs.1000 currency bills left a little choice to the banks to buy nothing but the government bonds as the loan demand is very less. Moreover, during the demonetization period, this was even lesser in the month of November, it was 1% only which aroused to nearly 13% in the month of December.

Trouble in India’s Credit System of banks having foremost NPAs

Now, if we talk about the month of May where the credit-deposit ratio was 72%, the large amount of share is still placed with industry through the loans accompanied by credit to services as well as individuals.

Share/Portion of Rs.100 Deposited

Out of every Rs.72 lent, nearly Rs.17 only went to personal loans and services each, and approximately Rs.28 or 29 went to build or run the factories. A share of Rs.10 went to agriculture. The share of personal loans has aroused in one year to approximately 25% of total non-food credit from 21%. On the other side, the industry has dropped to 38% from 41% while farming maintained its portion of nearly 14%. Basically, only Rs.25 of every Rs.100 deposited in a bank comes back to the people in the form of loans like home loans, car loans and other credits.

It is known that the banks are burdened with a big heap of bad loans. Approximately Rs.14 of every Rs.72 lent is now classified as stressed portion, which means it neither originate any income for the banks or due to the late payments by the borrowers to lenders.

Nifty 50 Journey to 10,000 level

NIFTY 50 is a broad based index consisting of 50 large and liquid companies listed on National Stock Exchange of India (NSE). NIFTY 50 is the benchmark index of India, reflecting the overall conditions of Indian equity market as well as Indian economy. Over the years, NIFTY 50 has be-come the most widely used benchmark for exchange traded products in Indian equity market.

NIFTY 50 & GDP growth rate

Growth rate of India’s GDP is fairly captured in the growth story of NIFTY 50. Over the years, India has been one of the fastest growing large economies of the world which is also reflected in the rise of NIFTY 50 Index.

Performance of NIFTY 50 and GDP Growth Rate

nifty 50 and growthNIFTY 50 values as on financial year end & on days of reaching multiples of 1000 levels and GDP growth rate for respective financial year.

Beginning FY 2003-04, Indian economy was in a boom phase driven mainly by investments until it was disrupted by the global financial crisis of 2008. Large fiscal stimulus helped spur the growth process and so India began to recover much before most economies of the world.

Recovery had been hampered by temporary shock in FY 2016-2017, while since beginning of FY 2017-18, market has picked momentum primarily on back of introduction of GST & several other reforms intro-duced by the Government of India.

The 10,000 milestone that NIFTY 50 has reached is a faithful representation of India’s growth prospects.

nifty1

Journey to 10,000 level

From its base value of 1000 in November 1995, the NIFTY 50 reached the 2000 mark in December 2004, taking 9.1 years to double. Thereafter, the journey of NIFTY 50 was swift wherein it reached the 6000 mark in only 2.9 years. It took another 6.4 years to reach the 7000 mark in May 2014 from 6000 in December 2007. The 9000 level was achieved in March 2017 which was relatively faster from 7000 level taking only 2.8 years.

The flagship index ‘NIFTY 50’ hit the 10,000 mark on July 25, 2017, taking only 4.3 months to move from 9000 to 10000.

Time takenMethodology

The NIFTY 50 Index tracks the performance of a portfolio of the 50 largest and most liquid Indian securities. The companies are filtered for liquidity on the basis of impact cost which is the cost of executing a transaction in a security in proportion to its index weight, measured by market capitalization at any point in time. NIFTY 50 methodology delivers the most replicable and reliable benchmark index for the Indian equity market.

Index is rebalanced on semi – annual basis. The cut-off dates are January 31 and July 31 of each year, i.e. for semi-annual review of indices, average data for six months ending the cut-off date is considered. Four weeks prior notice is given to market from the date of change.

NIFTY 50 Index has an inception date of November 3, 1995. The index was constructed using a unique concept of impact cost, which helps in the selection of highly liquid stocks and results in the creation of a replicable index. Initially constituents were weighted on the basis of full market capitalization and from June 26, 2009 onwards, the computation was changed to free float methodology.

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Performance

Since inception, NIFTY 50 has given annualized returns of 11.2% while having annualized volatility of 24.5%. Volatility in recent periods has reduced from over 24% since inception to close to 8-11% in more recent times (6 month to 1 year period). The return to risk ratio of NIFTY 50 has also improved substantially over the years from 0.46 since inception to 1.98 in the last 6 month period.

NIFTY 50 as on July 24, 2017 was trading at P/E of 25.45x and P/B of 3.55x which are lower than the previous highs of 28.5x on Feb 11, 2000 and 6.6x on Jan 08, 2008 respectively.

NIFTY 50 Performance – Price Return Index (Nov’95 to Jul’17)

performance

Nifty 50 Performance – Return and Risk

risk vs return

Calendar Year Performance

In terms of calendar year returns, since 1996, NIFTY 50 has given more than 50% return in 4 calendar years and more than 30% return in 7 calendar years. NIFTY 50 has fallen by over 20% only in 2 calendar years, giving positive returns in 15 out of 23 years.

Calender Year wise performance of NIFTY 50

calender wise

At the time of inception, NIFTY 50 represented 13 sectors while there are 12 sectors as of June 30, 2017. Over the years weight allocation in these sectors has undergone a significant change. IT sector was not represented at the time of inception, but now represents around 11.6% of weight in the index as on June 30, 2017.

Sector weights for 1995 is as on date of inception (Nov 03, 1995) and for 2017 & 2005 as on June end.

sectorwise

From 1995 to 2017, weights of financial services sector has increased from 19.7% to 35% and for metals and consumer goods have declined from 11.6% to 4% and 18.8% to 11.2% respectively. Other sectors like chemicals & textiles which represented 5.4% and 5.5% respectively at the time of inception, no longer form part of NIFTY 50.

 

Japanese investors Nomura India Fund owned $13 billion of Indian stocks and bonds

“India is the only country among major emerging markets that satisfies all the conditions — a sizable economy, high growth rate and yield, and political stability,” said Go Ikeda, a senior fund manager at Mitsubishi UFJ Kokusai Asset Management Co.

“Investors are looking at where the growth will be in the medium to long term, without having to worry about short-term swings in the market.”Kazuto Wada, an executive director at Nomura, Japan’s largest brokerage.

Indian economy that’s growing at 7 percent annually with reforms showing tangible progress.

India’s economy is expanding at about seven times the pace of Japan’s, buoyed by a burgeoning middle class and more one than million young people joining the labor force every month. Indian shares have hit multiple records this year amid optimism about Prime Minister Narendra Modi’s policies.

Sumitomo Mitsui Asset Management Co.’s Indian bond fund, co-managed with Kotak Mahindra Asset Management, took in a net 24 billion yen ($214 million) from December through June, lifting total assets to about 87 billion yen as of July 10.

Japanese investment trusts’ holdings of Indian securities more than doubled to 898 billion yen in June from a year earlier, data from Investment Trusts Association, Japan show.

The rupee has gained 5.8 percent versus the dollar in the past six months in Asia’s top performance. The nation’s 10-year bond yield of 6.45 percent ranks second after Indonesia among major Asian economies and compares with 0.07 percent in Japan.

The combined assets of three India funds run by Nissay Asset Management Corp. have topped 100 billion yen since their launch 2015.

For Franklin Templeton’s Michael Hasenstab, “unprecedented” structural reforms by Modi and relatively high yields make India a “sweet spot” among emerging markets. On July 1, India introduced a goods and services levy designed to unify the nation into a common market and widen the tax net.

noumura

Kato shared his views in an interview in Tokyo on Friday.

Key Point

Why is India so popular now?

  • India is becoming a popular destination because of improvements in fundamentals.
  • The fiscal deficit has narrowed and is likely to shrink further, while the current-account deficit has also decreased. Inward direct investment can finance the current-account gap, which is positive for the rupee and currency stability.
  • Inflation has been under control and the Reserve Bank of India has gained credibility for curbing it.
  • A series of positive news including the ruling party’s win in state elections have helped boost Prime Minister Narendra Modi’s government; the goods and services tax roll out has led to limited disruption, nd the impact from the scrapping of high-value currency bills has been smaller than expected.

How does India compare with other countries?

  • Stocks in developed markets look relatively expensive and face more downside risks, while bond yields in those markets may rise amid hawkish tone of major central banks.
  • India’s defensive character also makes it stand out; it is less dependent on exports and when the global economy is weakening, because domestic demand is solid, the impact from a slowdown is less.
  • The South Asian country’s reliance on China is low in terms of trade and the two don’t compete in terms of the goods they sell in global markets. That makes India resilient to external shocks.
  • India is a net importer of oil and falling crude prices contribute to a lower trade deficit and slower inflation. Foreign ownership of Indian bonds is also relatively low, which shields it at a time of capital flight.

What is your outlook on RBI’s monetary policy, impact on bonds?

  • Even if the RBI cuts rates, yields are unlikely to drop sharply because the move has been priced to a certain extent. The 10-year rate will probably stay above 6 percent, which remains relatively high, while the rupee may also remain stable. The real yield will still be high and the nation’s debt will continue to be attractive for foreigners.

What is your outlook for the rupee?

  • The rupee is likely to trade steady, near the 65 per dollar area. From a valuation standpoint, the currency seems to have become expensive but a narrower current-account deficit and ability to finance it with the direct investment should be supportive.

Rupee

What does the India bond fund hold now?

  • Rupee bonds account for about 70 percent of total assets, while dollar-denominated notes make up the rest. The fund is becoming cautious about its dollar-bond holdings on prospect for higher interest rates.
  • Duration of the dollar notes is also relatively shorter at about three years, while that of local-currency securities is longer at about 6 to 6.5 years as yields are under pressure because of stable inflation outlook

With assistance by Garfield Clinton Reynolds

India’s Market cap is likely to strike $4 trillion in 6-8 years

Although, Indian equities may have generated negative returns in 2015 losing up to 5% with Sensex and Nifty, the longer term prospects for the Indian market seems to be brighter in the upcoming years.

According to some experts, India’s equity market capitalization is very close to reach $3 trillion by the end of 2020. The Indian market which entered the $2 trillion market capitalization club recently in the previous month will very soon is going to enter the $4 trillion club in the upcoming 6-8 years.

For the knowledge, the Indian market’s present market capitalization is $2 trillion which is more than many big countries like Brazil, Korea, Taiwan, Indonesia and also Russia.

SENSEX2

The market reported a record hike in the recent 5 months courtesy rectified by the Narendra Modi- led Indian government, the supposition of higher earnings for the country recover in the growth of the economy and a steady political environment.

The S&P BSE Sensex rose more than double in the previous 10 years, on the other hand, the market cap rose over 250 percentage in the exact same time period. Currently, India’s share in the market capitalization of the world is at 2.6% which is 0.2% more than its average of 2.4% in the past years. Considering a recent report, the market capitalization of the world has increased 17.6% within a year. On the other side, the market cap of India has increased 33% within a year.

 

market cap

Source : MOSF,Industry

Market capitalization is said to be the function of growth in earnings, liquidity and rate of interest. In FY17, India has recorded better growth in earnings than expected, which combined with an unparalleled inflow of domestic liquidity has forced market cap of India share of the market cap of the world.

In the FY17, Indian market rose approximately 17% followed by MSCI EM which has also raised over 17%, the growth rate of Korean market is 16%, Taiwan market is up by 9% and Indonesian market rose nearly 8% in the same time period.

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Mentioned countries were the top performers among prime global markets in local currency terms. Among prime markets, Russia which has recorded 18% growth has provided negative returns.

The United States is currently holding the top position in the names of the largest market cap in the world with $26.9 trillion, followed by China having a market cap of $6.7 trillion and Japan having a market cap of $5.6 trillion.

Analysts and Experts are expecting 10 to 12% CAGR growth in the Indian market cap which is approx. $4-5 trillion in the next 6 to 8 years which will bring India above UK market cap which stands at $3.5 trillion.

 

Trouble in India’s Credit System of banks having foremost NPAs

To run the economy efficiently and for a proper growth of the economy, there must be a steady banking system in the country. But the continuous inflating of NPAs (Non-Performing Assets) is one of the major hindrances that obstruct the operations of Indian Lenders.

Here are the well-known and big Indian Banks and the total of NPAs they had on their accounts until quarter of March.

1.Indian Overseas Bank

2. IDBI Bank

3. Central Bank

4. Bank of India

5. Punjab National Bank

6. Oriental Bank

7. Dena Bank

8. Canara Bank

And before reading any further,

There’s no need to panic as the Government of India remains committed to support these banks wherein it’s the single largest shareholder.

Indian Overseas Bank

IOBANK

The gross NPA of Indian Overseas Bank has risen to 22.39% of its total lending which is Rs.35,098.25 Crores.

The bank recorded a loss of Rs.646.66 Crores in the March quarter in comparison to the net loss of Rs.936.19 Crores in the March quarter previous year.

IDBI Bank

IDBI

The gross NPA of IDBI Bank has risen to 21.25% of its total lending which is Rs.44,752.59 Crores.

The bank recorded a loss of Rs.3,199.76 Crores in the March quarter this year which is almost double the net loss of Rs.1,735.81 Crores in the March quarter previous year.

Central Bank

CENTRAL

The gross NPA of Central Bank has risen to 17.81% of its total lending which is Rs.27,251.33 Crores.

The bank recorded a loss of Rs.591.77 Crores in the March quarter this year in comparison to Rs.898.04 Crores in the March quarter previous year.

Bank of India

BANK OF INDIA

The gross NPA of Bank of India has risen up to 13.22% of its total lending which is Rs.52,044.52 Crores.

The bank recorded a net loss of 10.46 billion INR for March quarter in comparison to the loss of 35.87 billion INR in the previous year.

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Punjab National Bank

PUNJAB

The gross NPA of PNB is 12.53% of its total lending which is Rs.55,370.45 Crores.

The bank recorded a loss of Rs.22,415 Crores as a comparison to Rs.42,252 Crores in the March quarter last year.

Oriental Bank

OBC

The gross NPA of Oriental Bank is 13.73% of its total lending which is Rs.22,859.27 Crores.

The bank recorded a net loss of Rs.1,218.01 Crores for March quarter in comparison to Rs.21.62 Crores in the March quarter previous year.

Dena Bank

DENA

The gross NPA of Dena Bank is 16.27% of its total lending which is Rs.12,618.73 Crores.

The net loss of the bank has increased to Rs.575 Crores in the March this year in comparison to Rs.326 Crores in the March previous year.

Canara Bank

CANARA

The gross NPA of Canara Bank is 9.63% of its total lending which is Rs.34,202.04 Crores.

Surprisingly, the bank recorded a profit of Rs.2.14 billion in the March quarter this year as a comparison to a loss of Rs.39.05 billion in the previous year.

Market Cap to GDP Ratio Signals Upside for equity

Weak earnings, lackluster IPO market and inconsistency make market cap lag GDP growth.

The market cap to GDP ratio is currently well below 100 percent, indicating that equity has room to move higher.

This ratio measures the value of all the stocks listed on Indian exchanges against the GDP and is used by analysts to see if the stock market is rightly valued.

As a thumb rule, when the ratio moves well above 100 per cent, stocks are said to be expensive and when it is far below 100 percent, stocks are assumed to be cheap.

Based on the GDP growth estimate for 2016-17 (which was revised down recently), the current market cap to GDP stands at 74 per cent. While this is an improvement from the 64 percent recorded in 2012-13, the current level is almost half of the 149 percent recorded in the bull market frenzy of 2006-07.

Market cap to GDP

Weak earnings

The poor performance of listed companies has led to the diminishing market cap/GDP ratio. Revenue of companies in the CNX 500 index has been declining over the past few years. While revenue for these companies has grown by 5.4 per cent annually between 2011-12 and 2015-16, net profit has been more or less flat (0.2 percent) during this period.

There has been a vast difference in the sector-wise growth too. For example, while revenue and profit for software companies have grown (annually) by a vigorous 16 and 18 per cent, respectively, capital goods companies’ sales and earnings have declined annually by 4.4 and 11.7 percent, respectively, during this period.

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Lackluster IPO market

Another reason for a poor Market cap/GDP ratio could be lackluster IPO market. Market capitalization can rise rapidly only when fundraising takes place actively. But, due to constriction in demand and companies postponing their capital expenditure, the primary market in the country has not been too strong.

The Indian IPO market also went through a lean phase since 2010. Between 2005 and 2010, the number of new initial public offerings was 345, nearly three times the offers made between 2011 and 2016.

Foreign Fund Flows also have an impact on Market Cap. While foreign portfolio investors have mostly been pumping money into the Indian equity market, there have been periods when they have turned net sellers, due to global upheavals, influencing market capitalization. Between 2011-12 and 2014-15, FPIs net purchased 3,74,813 crore of stocks. But, in 2015-16, FPIs pulled out 14,172 crores, leading to falling in stock prices.

Inconsistency

The lower ratio could also be a result of a difference in their constituents. For instance, companies within the agriculture sector contribute close to 2 percent of the total market capitalization of BSE-listed companies. The contribution of agriculture to the GDP is much higher at 17 per cent.

Similarly, in the GDP estimates for 2015-16, banking, finance and business services contribute close to 20.6 per cent. But banking, financial and information technology companies account for close to 24 per cent of BSE’s market cap. Such variations make the comparison across market cap and GDP very difficult.

Aditi Nayar, Senior Economist, ICRA, says, “The correlation between GDP and market cap growth rates is not direct. Moreover, the growth in various indexes also reflects the possible political, geopolitical and sector-specific risks. Besides, the unlisted companies are many. In some sectors, their component is very high.”