How China’s Evergrande Could Create a Major Crisis?

Evergrande of China
by 5paisa Research Team 20/09/2021

Evergrande of China is in the news for all the wrong reasons. It is no ordinary company. It is the second largest Chinese real estate company and has been a big beneficiary of the real estate boom across China. With over 1,300 projects spread across 280 Chinese cities, Evergrande borrowed heavily to finance its growth. Today, Evergrande stands with insufficient cash to repay $305 billion in debt.

The problems for Evergrande came as it borrowed more aggressively to finance its projects. It sold properties with lower margins to raise enough cash to fund its next project. The problems just aggravated when the Chinese government tightened debt limits on companies. The first indications of trouble were visible when the stock price of Evergrande fell 80% and its bonds crashed 30% in a day before trading was frozen.

Obviously, a company as large as Evergrande is likely to have a ripple effect. A whole range of stakeholders including banks, suppliers, home buyers, investors, trusts and mutual funds are going to feel the heat if Evergrande files for bankruptcy. It is estimated that 128 banks and 121 shadow banks are exposed to Evergrande in some form. The impact could surely be far reaching; and experts are calling it China’s Lehman moment.

The good news is that Evergrande may not be as bad as Lehman. Firstly, Evergrande is a real estate company and not a bank, hence systemic risks are limited. Secondly, the Chinese government has already committed a $14 billion bailout package for Evergrande and has the muscle to bankroll a bigger bailout. Also, the international implications of Evergrande are not as serious as Lehman.

There are 2 key risks for India. Firstly, if this leads to a hard landing for China, the demand for a whole lot of commodities could suddenly evaporate. That is not great news for commodity stocks in India. Secondly, if China hard lands, the Yuan could weaken, pulling the rupee down to remain competitive. That is a worry for FPI flows into India.

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Kotak Bank Buys 10% Stake in Mutual Fund Registrar, KFIN Technologies

Kotak Bank buys stake in MF
by 5paisa Research Team 20/09/2021

It looks like Kotak Bank is on an inorganic growth spree. Just a week back, Kotak Bank had picked up the vehicle financing business of Volkswagen Finance. On 20th September, Kotak Bank announced another acquisition of stake in Hyderabad based KFIN Technologies. Kotak Bank will buy a total of 1,67,25,100 crore shares of KFIN Technologies at an average price of around Rs.185.35 per share. The total consideration paid is Rs.310 crore in cash.

This purchase will give Kotak Bank ownership of 9.98% in KFIN Technologies. KFIN Technologies was formerly called Karvy Computer share and has a major ownership by General Atlantic Partners. However, post the Karvy Group being banned from the capital markets due to the scam surrounding the sale of client shares, the global partners insisted on a change of name to highlight its independent arms-length ownership.

KFIN Technologies is one of India’s leading registrars and transfer agents for corporates, mutual funds, alternative investment funds (AIF), ETFs, insurance and pensions. KFIN is registrar to 25 out of the 44 AMCs in India, although in terms of AUM, listed entity CAMS is much bigger. It also provides central record-keeping for the National Pension System (NPS). KFIN has 13 crore folios in total, holds Rs.11 trillion in assets under custody and processes nearly 1 million transactions per day.

For Kotak Bank, this is in line with their policy of making focused minority investments in niche companies in the financial sector. Kotak will also look to leverage on the deep client entrenchment of KFIN as well as its fine-tuned processes and systems over last 30 years. For KFIN, the association gives them the backing of a much larger balance sheet. However, the deal is subject to regulatory approvals.

Interestingly, while KFIN Technologies is the registrar for the shares of Kotak Mahindra Bank, the official registrar for Kotak Mutual Fund is CAMS. It remains to be seen if the regulator is OK with a bank and a mutual fund owning a stake in a registrar.

Also Read:- Beginner's Guide to 80C Tax Saving Instruments

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DHFL Lenders to get payments this week

DHFL Lenders to get payments this week
by 5paisa Research Team 20/09/2021

Dewan Housing Finance Ltd, the first NBFC to be referred to NCLT by the RBI under a special provision, is expected to complete its resolution process in Sep-21. The process was likely to be completed in the first week of September but was held up for various technical reasons.

DHFL’s biggest lender, SBI, has already signed the transaction document while the other financial creditors like Union Bank, Bank of Baroda, Canara Bank and Bank of Baroda are also expected to sign the transaction document this week. Under the NCLT regulations, the resolution deal becomes effective only after 90% of the financial creditors endorse the transaction document.

Under the terms of the resolution, Piramal Capital will pay a total consideration of Rs.37,250 crore against total admitted claims of Rs.87,082 crore. That implies about 42.7% recovery for the banks or you can also call it a 57.3% haircut. Out of this sum, Rs.12,700 crore will be the upfront cash payment and an additional Rs.3,000 crore is the interest income earned by DHFL during the CIRP process, which is also being paid out.

Also Read :- Will DHFL Shares Be Delisted After Being Acquired by the Piramal Group?

In addition, the financial creditors will get Rs.19,550 crore by way of non-convertible debentures. These NCDs will mature after 10 years in 2031 but there will be a call back facility after 5 years under the terms of the resolution plan. This will be the second largest pay-out to lenders after the Rs.42,000 crore that Arcelor Mittal and Nippon Steel paid for Essar Steel owned by the Ruia brothers; Ravi Ruia and Shashi Ruia.

The NHB dues of Rs.2,300 crore are currently under dispute over preferential payment. However, the COC agreed to set aside the NHB claim of Rs.2,300 crore to expedite the process and complete it in this month. The acquisition will be funded by Piramal, partly through debt and partly through internal resources. Barclays will arrange a loan of Rs.4,500 crore while Standard Chartered has arranged a loan of Rs.9,000 crore for the deal.

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Vijay Kedia's Portfolio 2021

Vijay Kedia's Portfolio 2021
by 5paisa Research Team 20/09/2021

Vijay Kishanlal Kedia has been a relatively low-profile investors in the markets but has steadily built a high quality portfolio. As of June 2021, his portfolio consisted of 16 stocks with a current market value of Rs.785 crore. 

Vijay Kedia comes from a family of Marwari stockbrokers but was more interested in investing rather than in stock broking. He called the structural bull market perfectly in 2004 and that launched him into the big league.

Here is a quick look at the Vijay Kedia portfolio as of June 2021:
 

Stock Name

Number of Shares Held

Value of Holding

Vaibhav Global

30 lakh shares

Rs.216 crore

Tejas Networks

50 lakh shares

Rs.212 crore

Sudarshan Chemicals

10 lakh shares

Rs.66 crore

Cera Sanitaryware

1.35 lakh shares

Rs.61 crore

Repro India

9.02 lakh shares

Rs.48 crore

Mahindra Holidays

13.60 lakh shares

Rs.32 crore

Ramco Systems

5.56 lakh shares

Rs.28 crore

Heritage Foods

5.25 lakh shares

Rs.25 crore

Elecon Engineering

13.38 lakh shares

Rs.23 crore

Neuland Laboratories

1.30 lakh shares

Rs.21 crore

Other Stocks

 

Rs.53 crore

Total Value

 

Rs.785 crore

Data Source: Trendlyne

The above are the holdings as of Jun-21 but the valuations are the current valuations based on the closing stock price on the NSE as on 17th September.

Vijay Kedia’s approach to investing

Vijay Kedia has a portfolio that is largely tilted towards small and mid-cap stocks. In fact his entire investment approach is based on the SMILE approach. The SMILE approach basically consists of selecting companies That are Small in size, Medium in experience, Large in aspiration and Extra Large in market potential.

The Vijay Kedia approach is largely predicated on solid management that is honest and transparent. In his last 30 years, he has identified several 100-baggers like Cera Sanitaryware, Atul Auto and Aegis Logistics.

Stocks that Vijay Kedia added and reduced during Jun-21 quarter

Here are some key changes to his portfolio in the quarter.

1.    He added to his stake in Ramco Systems during the Jun-21 quarter enhancing his stake from 1.6% to 1.8% of capital.

2.    Vijay Kedia added two fresh stocks to his portfolio in the quarter. He added Mahindra Holidays and now holds 1% of capital. He also added Elecon Engineering and owns 1.2%.

3.    He reduced his stake in Neuland Laboratories from 1.6% to just 1% while he reduced his stake in Cheviot company from 1.5% to 1.3%.

4.    Vijay Kedia also cut his stake in Affordable Robotics and Innovative Façade Systems, although details on the actual amount of reduction is still awaited.

 

Also Check:

1. Big Bull Rakesh Jhunjhunwala's Portfolio 2021

2. Radhakishan Damani's Portfolio 2021

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Carlyle Fund to Sell Further Holdings in SBI Cards

Carlyle Fund to Sell Stake in SBI Cards
by 5paisa Research Team 20/09/2021

Carlyle Fund plans to sell the third tranche of SBI Cards stock. In the latest round of block sale, which will be managed by BOFA Securities and Citigroup Capital Markets, Carlyle will sell 3.4% stake in SBI Cards equivalent to 3.2 crore shares of the company in the price range of Rs.1,021 to Rs.1,072.30. This price band had resulted in the stock falling sharply over the last two days on excess supply concerns in the market.

There is an interesting chronology of how the Carlyle stake in SBI Cards has evolved over the years, which is captured in the table below.

 

Time Period

Stake in SBI Cards (%)

Buy/Sell of Stake (%)

Residual Stake (%)

December 2017

0.00%

+26% (from GE Capital)

26.00%

March 2020

26.00%

-10.11% (sold in OFS)

15.89%

March 2021

15.89%

-4.25% (block trade)

11.64%

June 2021

11.64%

-5.10% (block trade)

6.54%

September 2021

6.54%

-3.40% (block trade)

3.14%


The September 2021 block trade is expected to happen as of the time of writing. If you look at the stock price of SBI Cards, the stock price today is at around the same level as it was at the time of the IPO in March 2020. Hence, post IPO, the stock did not make much money for Carlyle.

However, the actual cost of acquisition was much lower at just Rs.2,000 crore for 26% stake in 2017. On that investment, Carlyle is making a 7-bagger, which is phenomenal returns for the PE fund.

Let us return to the latest proposed sale of 3.40% stake by Carlyle. At the lower price band of Rs.1,021, the sale will fetch Carlyle Rs.3,267 crore while at the upper band of Rs.1,072.30, the block deal will fetch Carlyle Rs.3,431 crore. SBI Cards had halved during the pandemic on fears of rising bad assets, but the price has recouped back to IPO levels.

However, investors are concerned with the spike in gross NPAs from 1.35% to 3.91% in the Jun-21 quarter. Carlyle, must anyways be laughing all the way to the bank.

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HDFC Bank to Launch Co-Branded Credit Cards with Paytm

HDFC Bank to Launch Credit Cards with Paytm
by 5paisa Research Team 20/09/2021

HDFC Bank may have lost 2% market share in the credit cards market to SBI, Axis and ICICI Bank in the last one year. But, that was largely due to the ban on issue of fresh cards by HDFC Bank, after customers had complained about repeated outages on their online app. However, with the ban lifted in Aug-21, HDFC Bank is going aggressive to recoup its market share. The latest move is the launch of co-branded credit card with Paytm.

Also Read: RBI allows HDFC Bank to issue Cards

HDFC Bank is India’s largest private sector bank in terms of total assets and the second largest bank overall after SBI. However, in terms of market cap, HDFC Bank has been head and shoulders above the other banks, with SBI market cap at just around half that of HDFC Bank. Paytm is the largest digital payment ecosystem in India with access to over 33 crore customers and around 2.30 crore small and medium size merchants.

The alliance makes business sense for a number of reasons. Firstly, it combines the banking and customer insights and service capabilities of HDFC Bank with the digital dominance of Paytm. The co-branded credit card will target merchants, small businesses and the millennial generation. The biggest benefit for HDFC Bank will be the rapid and focused access to Tier-2 and Tier-3 cities. Customers earn reward points on their HDFC Bank and Paytm usage.

The credit cards will be under the Visa franchise due to MasterCard currently facing RBI ban on issue of new cards due to non-compliance on local data storage. The timing of the launch has been set at Diwali, so that the full power of the festive season buying can be captured. As a result of this arrangement, Paytm merchants and customers get instant credit without too much of paperwork and documentation involved.

HDFC Banks remains India’s predominant credit card issuer with 1.48 crore cards issued followed by SBI at 1.20 crore and ICICI Bank at 1.10 crore cards issued.

 

Also Read

1. Paytm IPO Update

2. 8 Interesting facts about Paytm