Performance Linked Incentives in PSU Banks

Performance Linked Incentives for bank employees likely in the next fiscal. This is a dramatic shift to the way our bankers did business. Now, it will bring them at par with private. At first though it is talked that incentives will above the regular pay. Soon, good talent will begin to earn a fat salary and they will also help the banks compete efficiently among their peers.

When competition gets strong, quality comes in as a by-product. This shift will be one of the stepping stones for our banking sector that is struggling to catch pace with piled up NPA’s. Once the employees get drummed up, non-performers will get weeded out systematically, which otherwise will be a big pain to clean the system of un productive labour.

This change will bring the next one, hire the best, fire the rest. Though it will make many of the present staff jobless, the country and its citizens will be relieved on both their investments in the banks and taxpayer money not getting wasted to fund poor performance.

And this change will soon spread across other government enterprises, thereby making the country efficient in the way we do business. Though this change will take time to show its visibility in the economy, in few years from now, we will for sure see India at par with global peers.

And this kind of change is required, it would not have happened if not for the slowdown which we are having now. Everything happens for a good reason.

SFIO summon & 2 Lakh Crores wealth erosion

SFIO summons bank bosses and markets lose ground to continue with their fall. Banking stocks took a big hit. Mutual Funds did not have much of impact as very few fund houses have exposure to banking sector. Just on the same day, newspapers carried articles about MF’s having lesser exposure to PSU banks, which also confirmed the same.

As markets tanked, there were widespread news that, 2 lakh crores of investor wealth is lost in one day. BSE market cap goes to Rs.144 lakh crores from Rs.146 lakh crores. Only those investors who bought at high levels were actual losers, even for them, only if they sell and move out, there is a loss. Else it is only notional loss and over a period markets will recover.

With the kind of bad assets that banks have been building, some prominent fund managers are of the belief that the banking system will collapse and that will be the biggest disruption of this decade like the financial crisis that happened in the last decade.

Portfolios that are secure from such sectors that will vanish for the next generation are the ones people have to be invested in, to ride the biggest wave of financial growth that the world will witness in the coming decade.

SENSEX at 33000, our portfolio takes rest

Government announced 2.11 lakh crores of support to the PSB’s, market goes berserk. PSB stocks like SBI, PNB goes up more than 30%, PNB made 46% gains. Private banks took a hit, NBFC’s which were leaders lost big value. Broad indices move up a percent and our portfolio goes down a percent. After having had continuous out performance, which saw big alpha generation against the benchmarks and our portfolio. Now the reverse has began to happen.

NBFC stocks had big run up, which stretched their valuations, now probably the market is selling them to accumulate PSB’s. In my opinion, just infusing capital cannot take a business out of mess, unless the management is responsible. One more thought that I heard from the markets, banks get capital from Government and soon there is election and they will have to waive off farmer’s loans, which will eat up 61K crores.

Ultimately, Government is playing, using the banks as a tool. With the kind of moves that the banks had today, it brings concern on the future rally in the markets. Mutual Funds having exposure to banking stocks will show enormous gains tomorrow, while the same will not stay for long as what goes up has to come down too. And here, there is no real value, so the fall will also be drastic.

Liquidity from retail participation has been driving the markets where the earnings have been subtle, now the current move to breach 33000 on the SENSEX will bring in more investments. People who were waiting on sidelines will take a plunge, just to ensure that, they don’t lose even more opportunity. And this money is coming into the markets after seeing the gains of the past 12 months, expecting that the same will repeat. Even a slight unsteady move from here, the same retail money will become a pressure to the fund managers as they have to sell to meet redemption requests.

Then, they will go out and complain that Mutual funds are not good investments, it is a gamble.

We have been waiting for a correction since 7 months now, the markets have defied expectations and gone far away. Now, if it has to fall in place, the impact will be high too. Looking forward to some challenging times in the coming months.

NBFC leadership & our position in it…..

running-horse-black-white-2

Banking sector went into a turmoil following NPA’s and bad asset management. Public Sector Banks went out of investor favor. The Private Banks which always commanded rich premium among investors too began to lose attraction because of more and more regulations tightening their hands on growth. While all this was happening and keeping the financial sector at the razors edge, NBFC’s went to become leaders in the financial sector with phenomenal growth in their valuations.

The reasons behind NBFC’a gaining strength were –

  1. They are healthy on NPA’s.
  2. March quarter profit growth was 32%, while private banks had 23%.
  3. Home loan portfolio increased by 12%, all of it grabbed from the private banks.
  4. Focused approach made them best placed to grab opportunities arising from the base of the pyramid.
  5. Bountiful monsoon that is expected this year is likely to boost rural income, where NBFC’s are well placed.
  6. Most of them are positioned in the lower income segment, where the budget provision of more deduction on interest payment for the first time home buyers for loans upto 35 lakhs, came to their advantage.

Investors moved away from richly valued private banks to NBFC’s which shows in their stock growth in the last 1 year. NBFC’s had registered between 20 – 60% growth in the last 12 months. Toppers among them are Chola Finance, GIC Housing, Repco Home, Shriram Transport, Canfin Homes, Bajaj Finance etc.,

In our portfolio, 22% percent of the total equity exposure is in the financial sector and we do not have any banks in our portfolio. We hold all the top names along with stocks like SKS Micro, Edelweiss, which have shown good growth in their top line and bottom line. Our entry into these stocks was fairly early, giving us the edge to capitalize on their growth. Most of our investments have given above 15% growth since we have invested.

As an automatic process, our research identified the stocks in this sector for our investments.

Stock markets ready for its next euphoric rally

bravisatempletree-stockgrowth

Expectations….expectations. Expectations, towards the end of a Government term which did not have the confidence to decide on any plans that will allow the economy to grow. Expectation on the team that was coming to power, which was aggressive. Expectation on Narendra Modi, who was presumed to be a strong decision maker, as the next Prime Minister. Expectation that, the new government will clear all the infra projects awaiting clearance, which will drive the economy into a robust growth phase.  Indian economy staged a pretty strong recovery and went on to give a robust growth.

Favourable RBI policies, supported by Raghuram Rajan’s strong commitment to revive the Indian economy with his bold decisions on the interest front along with the cleaning up the banking system. His decision to impose curbs on Gold consumption, bring transparency into the Real Estate markets.

Almost all the external factors supported the expected growth. Crude Oil prices crashed, never to see the high’s that it went through. Favourable monsoon, good automobile sales followed by growth in profits of companies in competence. 2014 was a wonderful year for investors as the SENSEX surged more than 40%.

This expectation fizzled out earlier than it was to, things changed. As markets grew leaps and bounds, businesses did not see growth in sales. People began to complain that, “only the stock markets are moving up, money flow is not seen yet. No visible developments in the economy.”  Soon, it was followed by the historical crash of the Chinese markets. Volkswagen case and normal to flat growth from the businesses, markets turned down, went into a tailspin throughout 2015.

After the March quarter results, there are glimpses of change visible. One of the most important factors in the results announced so far is that, sales growth has been still at a slower pace, while profits are showing good growth numbers. Such number growth is possible only if operations are controlled. On one side it is a negative, as controlling operational expenses cannot give continuous growth, it can become counterproductive.

While, on the other side, there are green shoots visible, if the companies who have managed to bring down their expenses, continue to maintain the same tightness on their expenditure and along with that when the sales numbers improve, the profit margins are going to be phenomenal. And that would mean a euphoric rally in stock prices.

As many analysts say on the media, “we are in a cusp of a great bull market” the future looks very attractive for India. It is time to give more exposure to Equity investments. For those who have missed the 2014 rally, now there is an even bigger price move waiting to happen. Those who have maintained a wait and watch on their stock investments, now it is the right time to begin investing. One can even think of adding to their existing investments. Those of you who had stopped their SIP’s or had moved to the debt markets for safety of capital can now think of venturing into the Equities segment to have very good gains.

If things pan out well, we might witness a rally in stock prices, which we had not seen so far in the Indian Stock market history. The next 5 years are going to be a boon to all those investors who venture into the markets.

Take advantage of the markets next move; at the early stage itself, waiting for more confirmation will only result in lost opportunities.

Budget is behind us, who is selling…..

 

Businessman against black bear balancing on cliff with sky treesFor those who had expectations that the Budget will bring some respite from the fall in the markets, now, it is a disappointment. Markets are bearish now and the Finance Minister took it to his advantage, realized that any good will not bear a positive impact, markets will only discount it and go down after adjusting the positives. So, better leave it as it is and look at what needs to be done, was the decision of the FM.

There were fears that Long Term Capital Gains will get extended to 3 years which did not happen and the tax on dividends which was another fear, has come through, while in a smaller manner. Only those who have above 10 lakhs as dividend income have to pay a 10% tax.

There was big expectations that the government will bring in a big time support to PSU Banks, which though happened, was at a lower level, market expectation was an above 55K Crore recap, while it came in at 25K crores. In the actual sense, there is no requirement for the government to give this support, because there is no guarantee that these banks will not repeat the same act again. It is best to leave them to tend the issue, which in fact will become a lesson for them and the pain will make them realize and help them become more responsible. Whereas, support will only mean that, “It was not my mistake, what I am doing is right. It is the government which made the mistake and they have taken care off of their mistake.” And he will continue with the same quality of work, may be generating another lakh plus crores in losses.

Actually, it is the government that is making a mistake, even now. They are not realizing that the people whom they have employed to manage this money are the culprits, unless there is a realization and action taken, no amount of recap will help clean the banking system.

So bear market is to continue for some more time. The confusion that budget had created in the markets will take time to resolve and expecting the markets to turn around soon will be defeated.

Last week there was a meeting of all the top fund managers of our country in Mumbai seaside. There, on a discussion between Equity fund managers and the Debt fund managers this was the talk.

Equity Fund manager: People will make money if they invest in our Equity Fund.

Debt Fund Manager: people maybe investing in your Equity Fund, but almost all the equity fund managers are investing their personal money in debt funds.

Equity: Arre boss! What are you saying? All of us are fully invested in Equities. We’re quite bullish.

Debt: Bullish or foolish, only time will tell.

Prashant Jain is bullish, S Naren is not selling, Nilesh Shah is not selling, Neelkanth Mishra is not advising his clients to sell, Ridham Desai is bullish and S Nagnath has a same view.

Toh maal bech kon raha hai? Who is selling?

Good question, but no answer!

 

For our Equity clients at BTT, we are fully sold off, and have parked funds into debt. So, it clearly shows, smart people follow the market differently.

27 PSB’s lost 1.14 Lakh Crores in 4 years.

unsavercartoon_450x338.jpg

27 Public Sector Banks have written off 1.14 lakh crores of bad debts in the last 4 years. Here is the efficiency of the banking sector in the hands of the government management. It is disturbing to realize the poor condition our banks are being managed. On the other hand the private sector counterparts are doing good business. What does this mean? Very poor competency among the PSB management, next to zero responsibility in delivering results.

Couple of days back there was a question to me; SBI has come down to 200 from 320, can we buy? The reason behind this thought was that, the SBI stock had been at a higher price very recently, now it has fallen and hence it is cheap. The answer I gave was, the price was at 320 was for a reason and it is the same when it is at 200, now. It is not cheap. In a couple of days from this discussion, SBI stock price came to 160, and again there was the question, now that it is at 160 can we buy now?

What this indicates is, that people of India have developed so much confidence on this bank; it has been part and parcel of their life for generations. Little do they know that, what was in the early days is history, there was no competition, though the management did not have the competency or responsibility, they had the advantage of opportunity at their hands, they got some of the best and some that were useless too, on the whole they made money.

Now the situation is different, private banks are giving this irresponsible bank management a run for their money. All the quality assets have gone to the private players because of the quality and service they provide. Now, the left over business is crap and that is where these PSB’s are rolling their funds. Very soon all the confidence that the citizens of India have on SBI or the PSB’s on the whole will vanish into thin air.

In our portfolio, we don’t have banking exposure since 2013. It was very early for us to move away from banking investments, the reason we got out was because our system did not qualify banks for investment, and their growth was fairly lower in comparison to companies that were showing super strong growth. Hence, our investments moved to those quality assets and now, when the whole market is weak, our portfolio is even more safe as we have moved off from equity exposure to a fair extent, thus keeping the capital protected in times of turbulence.

Our portfolio is 30% in Equity and 70% in short term debt, making the capital safe when the markets are weak.

Arbitrage funds are more attractive.

bankslockerRBI reduced interest rates, banks were forced to follow, and now, arbitrage funds have become more attractive for various reasons. At this period, there are other tax free bond issues which have hit the markets, another attractive investment competing against the bank deposits. And due to this banks have lost more than 41000 crores of deposits.

Now, this opens up some concerns. Banks have suddenly hit a vacuum. Today bank rates hover around 8% and all the income from bank FD is taxable at the hands of the investor, which brings down the real returns to a little above 5.50% after taxes for a person who is in the highest tax slab. Compare this with about 7.50-7.60% tax free returns from bond issues and about 7.41-7.50% returns from the arbitrage funds. Tax free bonds are locked in and are very much illiquid when someone wants to sell their holdings, whereas Arbitrage funds are tax free after 365 days and carry zero risk. So the choice of the investment community has changed for good to Arbitrage Funds.

The banks on the other hand are put to some more new challenges due to the interest rate change. Banks normally used to have about 4% spread between the deposit rate and disbursal rate. That is, they borrow at 8% and lend at 12%. Making a cool 50% gain for themselves, for an effort which most of us know about the quality of assets the banks hold. Banking sector was enjoying a grand lifestyle by doing nothing. Now, things have changed, they cannot continue to be lethargic, there is a need for value addition, be more accountable and face the competition.

Corporate bonds give about 9-11%, so when corporates want funding for their businesses, they will not go to the banks as they get funds at a cheaper rate through direct bond issues. For some time now banks had large funds and were finding it difficult to find borrowers to lend their funds and earn, now, very soon fund inflows will dry up and help them do away with the difficulty to find borrowers for their funds. To that extent, they are free of work now. And, who will now want funds from the banks? Small business people, where credibility is a far bigger concern and with the way our banks do due diligence, more defaults are guaranteed.

IMG_2672Arbitrage funds are the best choice; it is liquid and has the tax free status after 365 days from investment. Far less risky, when compared to bank deposits. And how is this now? Off late we have had very big defaults n bank lending, cases like Deccan Chronicle, Kingfisher Air were examples. Banks have lost big time, no doubt government will pay back depositors money, while how long can the government support mistakes made by the banks. Soon, there will be a norm that they have to defend themselves and with that banks have two choices, either perform and deliver or close down. This may take time to come through, until then, invest in a place where you earn more and also enjoy the pain the banking system will go through in the coming years.

Post Diwali…..Market Rally

dhamaka_stocksOctober was perceived by the media to be a ghost month, while it turned out to be wrong with the SENSEX gaining about 1.50% after a peak of 4.30% gain. It proved that, not every year is a bad year in October, particularly for India in the next 5 years, it is a Golden period. Every correction is an opportunity to get into the Equity markets. And take advantage of the current World leader in Economic growth.

Our portfolio managed to close with a 2.30% gain for the month of October 2015, having an Alpha of above 50% against the benchmark. We had good performance from the House Hold goods, Travel and Leisure, Support Services along with Computer Hardware, FMCG & Financial Sector stocks. The losers were from the Pharma & Textile space, which had marginal impact on the performance.

Deep Industries, Cosmo Films, FDC & ITD Cementation gave us more than 20% profits in October. Cosmo Films was added into our portfolio in June 2015, in 5 months this stock has given us 150% profits.

Bravisa Templetree, portfolio has managed to outperform the benchmark even with the lower exposure due to a good amount of exits following the market correction. We are 20% in cash at present and still have managed to do well due to the strength of the businesses we own. The dynamic nature of our system to move out of weaker stocks and add up to stronger ones as they show strength was the reason for the outperformance.

Biscuit packaging went into a total design makeover along with new varieties of films used in their packaging. Cosmo Films is the leader in this segment and has had a major benefit. Along with film manufacturers, packaging companies like Paper Products, SRF too had good gains.

After the Chinese market crash and followed by the Volkswagen scandal, where markets went into a tailspin, markets are getting ready for the next big run which is likely to happen after the next wave of correction just about the Diwali and post Diwali, Indian stock markets are poised for the next strong rally.

The reality sector which is one of the weak sectors at the moment is dragging other support sectors along with it like metals, home construction along with banking. Banking stocks have taken a bigger hit and there are no signs of slowdown in their weakness. So, the next rally is likely to be in the industrial sector.

2nd quarter results so far has been bleak for the large cap stocks. Most of the public sector banks have shown more weakness on their earnings. Automobile stocks which were the leaders in the 2014 rally have begun to show tiredness in their earnings. In our portfolio, exposure to Auto stocks have got considerably reduced baring few stocks like Eicher Motors, which continues to have good growth numbers. Sales numbers of Royal Enfield has shown 73% increase in the second quarter, while the stock is showing correction which may result in its exit from the portfolio.

Coffee Day listing did what it has to, down more than 20% as per expectation. Indigo IPO which went through with over subscription too is likely to open weak and the issue was pricey.

Bihar elections and FED interest rate hike will put some pressure on the market for some days after which the markets are likely to go into rally mood. Our portfolio is all set with the right stocks to participate in the rally.

A very Happy Diwali to all our patrons, clients and well wishers.

Mid Cap stocks are stronger than their large cap peers.

FIISelling TableThe interest rate hike fear has come again this year after it had created a tantrum in 2013. A comparison of FII selling in our markets against what was in 2013 has been marginally higher. In 2013 they had sold to the tune of 22639 Crores, now it is 22693 Crores, just surpassed the previous numbers.

The situation now is entirely different from what it was in 2013. This time when FII’s were selling, we have had the Domestic Institutions (DII) buying, from 13K Crores in 2013; they have increased it to above 21K Crores in 2015. Domestic buying was possible because there was money available with the Mutual funds, which means there has been good retail participation in the markets. Indian public’s contribution to mutual funds.

Even though there were good amount of purchases made by the domestic institutions, the SENSEX has taken a bigger hit this time. The dynamics here was totally different. FII investments were mostly into the large cap stocks, while the domestic purchases were from the mid cap space.

Now, who is smart among the both?

I have been tracking MF purchases for the last 5 years, and all this while the domestic participation will always be on the wrong side. While, this time it is different here too. FII’s have been caught on the wrong foot. Their investments have largely been on the frontline stocks. There is a reason that the large cap stocks are not performing.  It is both they have a bigger base and growth from there is a challenge or there is de-growth visible in their balance sheet.

For example: Banking stocks do not have any kind of growth visible in them, this was more clearly known last year itself. Banking has hit the highest impact in the current downturn. FII’s splurged heavily by being invested in these stocks.

So, when they sold out, there was no saviour for large caps, hence the fall is 8.77% on the SENSEX this time when compared to 5.77% loss in 2013.

Have the MF’s become smarter on their own or the retail participation made them do it, we do not know. The inflows into mid cap mutual funds were higher compared to large caps and hence, the DII buying was concentrated on the Mid-Caps. It springs about good news; the retail investors of India have gone smart. This is news to celebrate.

I used to always think about, why foreigners are taking away all our wealth through stock market profits, while our people being the creators of this wealth are not enjoying it? Now, there is relief. People of India are enjoying the benefits of their growth.

The Rupee has also been strong when compared to 2013 Taper Tantrum, now it is down only 2.29% as compared to the 9.70% drop in 2013. Thanks to Raguram Rajan’s wonderful policy decisions.

All these data numbers throw out some predictable moves in the coming months.

  1. 1.       Currency is strong, so, the bounce back is going to be strong for India.
  2. 2.       Mid-caps show more strength, they are going to outperform in the next rally.
  3. 3.       Large Cap investments will take time to pay returns.
  4. 4.       FII’s cannot do much damage from here. They can only multiply the bullish effect.

If tapering of interest rate is happening in the US, FII’s will take time to come to India. There is no fear of big sell out, as they have already moved out considerable funds from our country.

In case the situation is opposite and the FED postpones tapering, the FII’s will rush back to our markets and this time they will buy more into Mid-caps as they have already burnt their hands on the large caps.

FII buying into Mid-caps will take the stock valuations to levels one cannot imagine off. The reason behind this is that Mid-caps don’t have the float that large caps have; which would simply mean that there will be very high demand for quality Mid-cap stocks while the supply is going to be minuscule. Unless the DII’s get into a selling spree, there cannot be much liquidity available for the FII’s to absorb. And it is unlikely because it is the public who have to decide on moving the funds out of the Mid-cap funds to provoke selling pressure.

What a beautiful situation we have come into?

Investors, sit tight with your mid-cap exposures, you will see astronomical valuations coming in a few months from now.

Out Bravisa Templetree portfolio is loaded with the best of quality Mid-cap stocks, which is likely to take us to the moon….. I suppose.

Let’s laugh all the way to the bank, enjoy our money growing in a super-fast manner. A speed that we have not experienced so far in our life.