Banking outlook positive as loan growth to revive, margins to stabilise
As India’s Covid-19 vaccination count nears the 85-crore mark, and the country looks set to put a series of disruptive lockdowns behind, its economic trajectory could finally be looking up, bankers say.
Top bankers are upbeat on the prospects of credit growth, as government spending appears set for an upswing and risk appetite and demand in the economy come back to pre-Covid levels, according to a report by IIFL Securities.
Senior executives at Axis Bank, HDFC Bank, ICICI Bank and IndusInd Bank say that in the near future, the banking sector could witness four major trends, the report said.
An uptick in loan growth
First, credit offtake or loan growth could pick up by the second half of 2022. This, banking industry executives say, will be driven by an increase in government spending mainly in the infrastructure segment, with private sector capital expenditure following close behind.
Even as their loan books begin to look healthier, banks are unlikely to take undue risks and lend to businesses, and will focus on companies with good credit ratings. Going forward, the accent is likely to be on client-level profitability, as opposed to merely shoring up loan disbursement numbers.
Bankers feel that excess liquidity will persist for a few quarters, according to the report. This will mean that interest rates could bottom out, before they begin to go up again.
In the next couple of quarters, banks would keep margins stable as they keep getting weighed down by excess liquidity. But beyond that, as credit offtake picks up, especially toward the riskier medium and small enterprise segment, margins will begin to rise, as interest rates begin to inch up again.
Tech spends will drive up costs
In the near term, banks would have to continue to spend on their technology backbones, to compete with new-age fintech players who have not only made it much easier but also a who lot cheaper for the customer to move money and to invest in the stock market, mutual funds, buy insurance, debt instruments and other financial products.
This increased spending on technology would mean a spike in costs, at least in the near term, till they are offset by higher operating efficiencies and revenues from cross-selling of products.
Asset quality improving
Bankers say that while efficiencies in collections have continued to improve, there could be slippages, which would go down meaningfully only by the second half of 2022.
While loan restructuring could see an adverse impact on the emergency credit line guarantee scheme book, most big banks should be able to whether this, given their high levels of provisioning coverage ratios.
Axis Bank says it will look to grow loans at 5-6 percentage points higher than the industry (which is expected to grow at about 6.5% in FY22).
HDFC Bank says that its retail loan segment is seeing healthy demand and that inquiries are already at pre-Covid levels.
ICICI Bank says margins are likely to remain at the current level of about 3.9% in the near term, as benefit on the cost of funds is negated by pressure on lending yields. The bank is hopeful of margin improvement over a medium term.
IndusInd Bank is looking to grow its loans in the mid-teens over the next two years from about 6.5% currently. Retail loan growth for the bank could remain weak for the next one-two quarters. Hence, loan growth would be driven by the corporate segment in the near term, the IIFL Securities report says.
Merger with Sony to rerate Zee stock, address governance issues: IIFL Securities report
The proposed merger of Zee Entertainment Enterprises Ltd with Sony India will not only largely address Zee’s corporate governance issues but also improve its reach and scale, according to an IIFL Securities report.
Moreover, the merged company’s $1.8 billion cash balance after the equity infusion from Sony Group—which will own a majority stake in the combined entity—will be used to step up investments, the report said.
“With the significant rerating that the consummation of the deal is likely to entail, we see a reasonable chance of the deal getting shareholder approval,” IIFL Securities said, putting a buy call on the stock.
Indeed, the biggest merger and acquisition (M&A) deal in India’s media sector brings cheer to the shareholders of Zee Entertainment, which has been facing shareholder activism and concerns over its corporate governance.
Zee Entertainment’s share price has shot up nearly 80% in the last two weeks. This has given some respite to its shareholders, who had seen the stock suffer for the past several months after the debt-laden promoters, Essel Group, all but lost control of the company. This had even prompted Zee’s institutional investors to call for removal of the CEO Punit Goenka, son of Essel Group head Subhash Chandra.
IIFL Securities said the merger may take six to eight months to consummate. It pegged a 50% probability of the deal going through. Based on that, it has set a new target price of Rs 406 a share, almost a fifth higher than Zee’s current market price. Its actual equity valuation of the merged company is even higher.
The target price means there could be still some steam left in the stock even after the sharp run-up over the past couple of weeks.
“We estimate +10% EPS accretion in FY24 on synergies and, based on 25x target PER, Sep-2022 equity value per share could be about Rs 490,” the report said.
The brokerage also said there are significant synergy benefits from the merger as Sony has considerable strength in sports, the kids’ genre and English content while Zee is strong in regional content and movies.
Risk elements for the Zee and Sony deal
To be sure, there is no surety that the deal would be executed as there are several factors that needs to be there for it to see the light of the day. Besides regulatory approval, 75% of the voting shareholders need to give their nod to the proposal that has been structured in a way that doesn’t give them the benefit of a mandatory open offer. The securities norms give exemption to deals struck via amalgamation or mergers.
On the flip side, the deal envisages special or differential treatment to Essel group with Sony giving a non-compete fee to Essel through stake that would allow it to retain 4% stake. This may raise concerns at the table of the authorities.
Then again, the deal envisages continuation of Punit Goenka as chief of the merged company. Key shareholders have been calling for removal of Goenka and it is not clear how the deal would progress if large institutional investors stick to their stand that they want him out.
Nifty 50 PE ratio still below 5-year average, despite index climbing new highs
The Indian equity markets are scaling new highs on the back of expected faster economic recovery and accelerated vaccination drive. However, as the Nifty and Sensex today breach new highs every day, many stock market participants debate on whether it is over-valued or not. Nifty price-to-earnings (PE) ratio is one indicator to calculate market valuation, even though there are multiple factors to be considered to reach at an ideal conclusion.
Statistically, the Nifty price-to-earnings (PE) ratio today stands at 27.34 multiples even as the Nifty 50 share index is trading near its all-time high of 17,853.20. Many market commentators believe that the Nifty 50 index is over valued at 17500 levels and a crash is impending, but the PE ratio seems to suggest something else. Let us understand more.
Nifty 50 PE ratio still below 5-year average
Nifty PE ratio at 27.34 is still significantly lower than the 5-year high of 42 multiples and slightly lower than the 5-year average of 27.45. The Nifty PE ratio is also lower than the 1-year average of 33.23 and 2-year average of 29.87. Nifty PE ratio is a key indicator to read while understanding the valuation of Indian stock market. PE is short for the ratio of a company's share price to its per-share earnings. To calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS). P/E Ratio = Market Value per Share/Earnings per Share (EPS). Nifty PE ratio moved between a high of 42 and low of 25.21 during the past one year. While on a 5-year basis, Nifty 50 PE ratio moved between a high of 42 and low of 17.15, data from Trendlyne showed.
Does Nifty 50 PE ratio indicate just valuation?
Many market watchers use the Nifty PE ratio to decide on whether the market is overvalued, cheaper or just right. In that sense we have seen a high Nifty PE ratio of 42 in February 2021 when the index reached 15000 levels for the first time. Since then, Indian companies have seen good growth on earnings, and we see the Nifty PE ratio more reasonable around 26 multiples. There is also a methodology change in the calculation. Now Nifty PE ratio is calculated based on consolidated earnings of companies from standalone EPS earlier.
At this stage the market watchers are divided on whether Nifty PE ratio indicates just valuation. Many believe, accelerated economic recovery and ample global liquidity will help both markets and companies to see positive upside. The other camp believes that from now onwards there will be moderate returns from Indian markets and in case of any global risk off event liquidity will dry up.
Investors should not consider Nifty PE ratio as the only indicator to calculate market valuation but rather look at multiple factors and ratios while deciding on Nifty 50 valuation.
Many old timers quote historical chart and say that Nifty is in the oversold zone when Nifty PE ratio is below 14, while it is overvalued when PE ratio crosses 22. However, in the last 17 months the markets have rallied in a different circumstance and a higher sustained PE remained acceptable on hopes of economic recovery and company earnings besides healthy capital inflows.
But, Nifty PB ratio is near 5-year high
Another indicator Nifty price-to-book (PB) ratio at 4.47 however near all-time high of 4.48. In the last 5 years it moved between a range of 2.17 and 4.48. The Nifty price to book or Nifty PB value measures the enterprise value of the company. Many consider Nifty PB value to be more stable than Nifty PE ratio when the market is volatile. Higher PB ratio also indicates that one is paying more in case the value goes down. From a historical perspective Nifty is seen to be in the oversold zone when Nifty PB is below 2.5 and overvalued range when PB ratio is over 4.
Top swing trading ideas you should not miss!
Price and volume are two of the most prominent inputs used by traders across the world while swing trading. When used in isolation, they reveal very little but when used in conjunction, they help us to sort the wheat from the chaff. So, this swing trading system is based on the deadly combination of price and volume percentage surge, which helps us to discover high probability swing-trading candidates.
So, here is the list of stocks that fulfil the criteria of volume and price surge and as a result, they flash in our swing-trading system:
HDFC Bank: Banking heavyweight HDFC Bank was the top-performing stock from the banking index and it was also the top contributor in the Nifty index on Friday. The stock opened with a gap-up and it traded in a range for the first couple of hours. But it picked up pace in the second half of the trading session along with a surge in volume, which indicates the enthusiasm of the buyers. Moreover, the volume for the day was greater than the 10 and 30-days average volume, which resulted in meeting the norms of the swing trading system. The stock has the potential to touch an all-time high of Rs 1641 in the near term with immediate support placed at Rs 1572.
JB Chemical & Pharmaceuticals: The stock of JB Chemical & Pharmaceuticals has jumped nearly 5% on Friday and with this, the stock recorded its highest single-day gain in the near term. Moreover, the stocks' daily range on Friday was twice its 10-days average range. Additionally, the stock witnessed volume over 5-lakh shares which is greater than its 10 and 30-days average volume, so it meets the rules of our defined swing trading system. The stock has support placed around Rs 1740, while on the upside the resistance is seen around the zone of Rs 1930-1937.
Gujarat Alkalies & Chemicals: The stock of Gujarat Alkalies & Chemicals jumped more than 10% on Friday. The stock witnessed a perfect trend day as there was expansion in the daily trading range. Testimony of this is that the stock daily range was greater than its 10-days average range. Furthermore, the stock’s opening and closing are near opposite extremes. The second parameter which we analyze for swing trading is volume. The volume witnessed on Friday in the stock was greater than its 10 and 30-days average volume. Hence, swing traders can keep this stock on their radar and should not miss this stock as the stock has the potential to touch levels of Rs 648-660 in the near to medium term.
Does Bharti Airtel’s rights issue discount open an entry window for new investors?
Bharti Airtel Ltd, the country’s second-largest telecom operator, has set the pricing for its upcoming rights issue that aims to raise as much as Rs 21,000 crore ($2.85 billion).
The company said it is offering shares to its investors at a price of Rs 535 a share, a 26% discount to the market price of the stock on Thursday.
Rights issues are essentially a tool for publicly listed companies to raise funds by issuing fresh shares to existing shareholders at a discount. By agreeing to pick up the shares entitled to them, an existing investor can bring down the cost of ownership of shares.
At the same time, the company gets to raise equity capital in a manner that gives an option to the promoters to avoid stake dilution.
Bharti Airtel’s rights issue
Bharti Airtel has fixed September 28 as the record date for determining shareholders who would be eligible for subscribing to the rights issue. The right issue opens on October 5 and will end on October 21.
The rights issue announcement, originally made on August 29, has seen the company’s share price rise over 20% since its board decided on the fundraising plan.
The company is offering one share for every 14 shares held by an investor as on the record date. This means a person holding 140 shares as on September 28 will be entitled to buy 10 shares of Bharti Airtel at Rs 535 apiece.
As a result, if a person buys 140 shares of the company today at the current market price, spending around Rs 1.03 lakh (before accounting for fees and taxes), she/he would be able to bring down the average cost of purchase from around Rs 738 to Rs 692, or about 6% lower.
The company’s stock price has risen partly due to the right issue announcement but there have been a set of other positive triggers.
Telecom stocks at large got a booster call last week with a favourable move by the Indian government that approved a relief package for the cash-strapped sector, which included a four-year moratorium on adjusted gross revenue (AGR) dues.
Bharti Airtel’s stock also got a boost from a positive outlook by rating agencies earlier this month. Moody's affirmed Bharti Airtel’s Ba1 corporate family rating (CFR) and senior unsecured rating and changed the outlook to ‘stable’ from ‘negative’, citing better profitability at its Indian mobile business and staggered payment to clear AGR dues.
S&P also maintained Bharti Airtel's credit rating of ‘BBB-’, and upgraded the outlook to stable from negative, indicating the company’s better financial status and ability to pay back debt.
Some brokerage houses, including ICICI Securities, Motilal Oswal and Emkay, had previously pegged their price targets in the Rs 700-740 a share, which has already been breached.
Last week, global research firm CLSA had retained a buy call and raised the price target to Rs 825 per share. CLSA based its decision on a jump in data usage and rising average revenue per user (ARPU) that it expects to move even higher as inactive subscribers at key competitor Reliance Jio and reduced tariff discounts by the bigger peer has lowered the risk of disruption.
At this price target, an investor entering the stock now may still get to see a 20% upside after factoring in the rights issue discount.
PVR, Inox shine as theatres to open before Diwali, but picture ‘abhi baaki hai’
Publicly listed multiplex operators were among the hardest hit from the Covid-19 pandemic as lockdowns and social distancing virtually put an end to the business with the government forcing theatres to put down the shutters.
But the business was also significantly impacted as producers, who draw a large part of their revenues from theatrical releases, decided to postpone their releases as digital premiers need not make up for large production budgets of big starrers. The pipeline of releases was also shaken up as social distancing meant more staggered filming schedules in Bollywood as also for international flicks.
While several states had allowed opening of theatres over the last few months, the state of Maharashtra, the home of Bollywood, had continued with the temporary ban on cinema chains. The state government said during the weekend they would allow cinema operators to restart business from October 22. This would mean multiplex theatres would be open in the run up to the key festive season of Diwali in November first week.
Picture abhi baaki hai
Although detailed rules for the opening are yet to be made public but it is expected that to begin with the state is likely to allow cinema chains to open with only 50% capacity to maintain social distancing.
The pent-up demand from consumers mean that those slots are likely to be fully booked as fear of the pandemic slowly recedes with better vaccination drive.
Not surprisingly, stocks of two listed multiplex chains, PVR and Inox Leisure, soared on Monday on the back of the development. Both the stocks touched 52-week highs during intra-day trades.
Interestingly, both the stocks had hit their all-time highs in February 2020 and lost half their value in the subsequent month as the lockdown affected business.
The stocks have been trying to break out as the impact of the pandemic subsided after a brutal wave in north India in April-May. PVR is now up over 60% in the last four months and Inox has climbed over 40% in the same period.
The sharp run-up has made some analysts cautious and they feel that while momentum moves may help traders to still make money if they invest in the stocks, one may look at entering the stock if there is some correction.
For one, the multiplex operators are not going to get back to pre-pandemic business level anytime soon. Besides the expected limited opening of theatres, the concern about the pandemic wave re-emerging remains.
What experts say
According to Avinash Gorakshkar, head of research at Profitmart Securities, feels it is still two to three quarters more when these theatres will start operations at 100% strength.
He says that these stocks are available at discounted price and market is keeping this discount till FY23 so one should buy these stocks keeping long-term time horizon in mind.
However, since both PVR and Inox shares have soared, one should wait for profit-booking and then take fresh position in the counters, Gorakshkar added.
Sumeet Bagadia, executive director at Choice Broking thinks one can initiate momentum buy in PVR share at current market price for the short-term target of Rs 1,750 maintaining stop loss at Rs 1,480 apiece.
On Inox shares, he feels that one can buy and hold the counter at current market price for short-term target of Rs 400-425 apiece maintaining stop loss at Rs 350 levels.
Nirmal Bang Institutional Equities said that Hindi film producers are ready to release fresh big-budget films, though they were reluctant to release them when screens opened up in November 2020 after the first wave.
“Hindi content in a typical year delivers 60-70% of multiplex revenues. Disney in early September 2021 announced that all new movie releases in 2021 – no commitments beyond 2021—would go to the theatres first and then to other distribution platforms after a window of 30-45 days or more. This should assuage concerns around OTT eating into the theatrical business.”
The brokerage has lowered its estimates for FY22, as opening up of theatres has been delayed from its earlier expectations, leading to likely weaker-than-expected December quarter.
It has raised the target price for PVR from Rs 1,561 to Rs 1,934 while Inox Leisure’s target price has been raised from Rs 381 to Rs 492. “If the second half 3QFY22 sees solid recovery, we expect cash bleed of both the companies to come to a halt," Nirmal bang said.
Brokerage house Sharekhan expects a sharp increase in movie releases by large movie studios. "Given the huge content line-up, we believe PVR is well-placed to capitalise on the strong pent-up demand and is expected to report strong revenue growth for FY2023E,” it noted.