Budget 2019 – 1.34 lakh crore lifeline to NBFC sector

Government promising to bear the first loss of up to 10% of high rated pooled assets purchased by state run banks brings the much expected lifeline support to the NBFC sector, whereas banks will only be funding high quality NBFC’s. Big players who already have a good clout in the industry have continued to have good business growth.

Like Bajaj Finance, Bajaj Finserve kind of companies already have good growth and more over they are not much dependent on domestic borrowings. Most of the top NBFC’s have moved to foreign borrowings which gives them added cushion of lower interest rates.

Even considering currency risk, they are still at a good advantage when compared to their smaller counterparts who have to borrow at higher rates both due to their own performance issues on ratings as well as due to local borrowings.

The current move of lifeline by the FM, is not going to give a boost to the industry as a whole. It will make the big or quality players more bigger. In fact, this is what is required. “If you are genuine, I will help you get more rich.” This kind of approach by the government, for a shorter period may be against the economy as bad players will be left to die their own death. In the long run, it is going to be a huge positive to the industry and our country.

Liquidity issues in the market is likely to ease at a slower pace because the lifeline is less than half of what is required. And expecting government to bail out all kinds of corporate mess-up is not a good thought too. Let the industry figure a way out, through some support from the government.

Quality NBFC’s which are already enjoying very high valuations in the market will continue to attract capital from investor. So, if you are holding Bajaj Finance, Chola Finance kind of stocks, continue to hold, it will continue to go up for a long time.

Budget 2019 – More public ownership of listed companies

In the Budget 2018-19, FM, Nirmala Sitaraman announced a very profound decision. To increase public holdings in listed companies to 35% from the existing 25%. After this announcement, market turned down due to fears that many corporates will now be forced to offload promoter stake to meet the requirements.

Added to the decision was a 20% tax on buy backs, which means that, it is going to be costlier for companies to buy back their own shares.

I would say this to be one of the landmark decisions in the recent past. Market’s reaction though was pessimistic, whereas it was a very good decision. If companies use profits to buy back equity and reduce capital, it is in no way going to be beneficial to the country. If capital is not deployed or put to best use, economic activity slows down, employment takes a hit.

Western world is sinking today because of this reason, most of their companies are not investing to add capacities, they are buying back shares and killing the economy. If we don’t learn from their mistake, we will also face the same condition. At least for them, they have capital, which the governments are investing into other economies and give social security to their citizens.

In our country we are yet to come out of deficit financing to run our economy, where is the possibility of deploying capital in other economies. And we are country with huge population, if employment dwindles economy will die.

In our country we have many promoters who were hell bent, not to bring down their holdings in their company’s even to the previous requirement of 25%. Examples were big names like Uday Kotak of Kotak Bank, RK Damani of DMart, Wipro, TCS, HDFC Life etc. Now they face even more challenge. Markets turned negative after the announcement because there will be more supply of shares in the market which can dampen demand.

It will only be a small time challenge, in the long run it is actually good. Today our Mutual Fund market has matured. People are moving to financial saving in a big way. Monthly SIP’s are at 8000 plus crores, which means 1 lakh crores of investments are coming into the market every year. What to buy with this money?

Fund managers keep adding the same stocks more and more to their portfolios. We don’t have many listings happening in our country even though India is the heaven of start-ups. Listing issue can be because most of them are yet to earn any revenue and those who are having revenues are not yet profitable.

If supply of good stocks is less, PE expands and then comes valuation issue.

We need more shares in circulation to absorb the funds that are hitting the markets, else we will get into a bubble and burst killing all of them in one go. In our country any thing good is done, it is always welcomed on a bad note. All because of short term thinking. We are more worried about today’s meals not bothered whether we are living tomorrow.

This comes due to poor confidence on our own selves, which is a big topic to discuss.

Why are promoters are willing to dilute? The only reason is ‘selfish’, that they want a big pie of the riches their companies are going to generate. On one side world is talking big giveaways in the name of philanthropy, in our country we are still hoarding.

IN fact we should not encourage these kind of promoters to do business, they get business from the citizens of the country whereas reluctant to share wherever possible.

Buy into these stocks that will liquidate promoter holdings if they are fundamentally strong and have a close watch on them, as there can be other possibilities where these promoters can short change due to their greed.


BUDGET 2019 – Auto industry to change fast

With the increase in excise duty on petrol and diesel and the GST cut on Electric Vehicles will is going to be a big blow to the Auto sector, which is already reeling under huge pressure of declining sales.

The message is getting out clear that, manufacturers have to speed up with EV launches, else they perish. Tight cash flows in the market due to closing of funding tap of the NBFC’s, has impacted Auto sales to a very large extent.

In the last 3 months, almost all the companies in this space have registered continuous decline in sales numbers. Many of the big names have shut down their facilities for short period to adjust for the inventory build up at the distributor level.

Now the next step will be offering discounts to clear off inventories. It will be a better decision for the manufacturers which will reduce cost of funding these unsold inventory. Buyers will enjoy getting their favorite vehicles at a discount.

Yet, as the message from the government is getting more clear about the fast pace expectation to switch to EV’s. Buyers will prefer to delay their purchases, though not on a big scale, it will impact sales.

The biggest threat will be to Auto anciliary businesses. EV’s don’t require all the parts that are presently used in an automobile. Either they fast pace their production to include products required for EV’s or perish.

Auto stocks are already down to their bottoms, now it will go down even further. If you hold any auto stocks in your portfolio or find exposure to auto in your Mutual Fund portfolio, take exit. It will deteriorate further.