Explained: How serious is Evergrande crisis and how it can affect India
The world could be in the midst of a new full-blown financial crisis, and this one, is made in China.
In the past couple of days, global financial markets have been roiled by the implosion of China’s second-biggest real estate company Evergrande, which till recently was considered too big to fail.
Emerging markets including India, too, have been at the receiving end of the mini-market meltdown of sorts, with the BSE Sensex taking a 525-point tumble on Monday and down by another 215 points by noon on Tuesday before recovering most of the losses.
The Sensex’s fall was in line with the losses in global markets. The S&P 500 Index closed 1.7% in the red, the Dow was down 1.78% and the Nasdaq Composite shed more than 2.1% on Monday.
What is the Evergrande debt crisis all about?
Evergrande is China’s second-largest real estate company, and it owes a lot of money to its creditors—more than $300 billion to be precise. To be sure, most immediately, it needs to pay $8.5 billion in interest payouts, by Thursday, although it does have a 30-day grace period in which to do that.
While there is nothing unusual about big companies owing big monies to creditors, Evergrande has no money left to pay and is set to default on its bond payments.
This, as many analysts now say, had been the non-COVID, non-inflation risk that had been hiding in the shadows all along, which many people saw but either chose to ignore or did not talk about as loudly as they should have.
On September 16, Evergrande suspended trading on its onshore bonds after a ratings downgrade.
Just how big is Evergrande?
Very big. It owns more than 1,300 projects across 280 Chinese cities and towns and singularly controls 2% of the country’s real estate market. As many as 1.5 million people in China are reportedly waiting for their homes to be delivered. This is an inventory worth a staggering $1 trillion.
So, who holds Evergrande’s bonds?
Evergrande’s bonds are held in passive exchange-traded funds (ETFs) across emerging markets. They are also held by several US and European money management companies that hold them in separate accounts.
Some marquee money managers that have a significant exposure to Evergrande’s bonds are the Zurich-based UBS Group, New York’s BlackRock and London-based HSBC Holdings and Ashmore Group, which have all taken a tumble on the stock markets. Fidelity, PIMCO and Goldman Sachs also have significant exposure to the company’s debt.
These investors were attracted by the high positive bond yields being offered by the Chinese real estate companies on their debt instruments, when most of the rest of the geographies and sectors across the world are offering negative yields, with bonds worth more than $165 trillion reportedly in negative yield territory.
Can this contagion spread?
It can, and perhaps will, if the Chinese authorities do nothing about it. Global markets are waiting for the Chinese central bank to inject some liquidity, to effectively bail the real estate giant out, at least for now.
The real estate industry makes up for nearly 29% of the Chinese economic output. If Evergrande goes down, it could exacerbate a slowdown in the country’s residential property market, which was down by 20% in August from last year.
In fact, China is currently sitting on an unsold inventory of 60-65 million residential units.
How has it impacted Indian companies?
Stocks of several top Indian steel, mining and chemical companies including some of the index’s best-performing stocks like Tata Steel, Jindal Steel, SAIL, JSW Steel, Tata Chemicals, NMDC and DCW have gone down by 10-15% in the last five trading sessions.
All these companies would have had receivables from or linked to the Chinese real estate firm. This could now be in jeopardy, if Evergrande goes down.
Commodity exporting companies will continue to take a hit if this crisis is not sorted out in time and if the contagion does indeed spread.
Which small cap stocks have attracted FIIs the most?
Foreign institutional investors and foreign portfolio investors have historically dictated the movement of Indian stock markets. However, with the rising flow of domestic money in the local bourses, especially after the 2016 demonetisation drive and asset prices getting punctured in the real estate market, this is slowly changing.
Indeed, a lot of the current froth in the market where the top benchmark indices are trading near their all-time highs is attributed to the domestic investors—both mutual funds and retail investors.
One segment of the stock market that is usually seen as a haven for punters looking to make a quick buck with trading opportunities and retail investors who get attracted by lower per share price is the small cap space. These are companies with a market capitalisation of less than Rs 5,000 crore.
This segment tends to have a high beta and usually swings much more in a volatile market condition.
Offshore investors usually don’t play in this segment as most of these stocks tend to be below their investment mandate radar. But that doesn’t exclude FII/FPI participation wholly from such stocks.
In fact, many investors and analysts try to fish for hidden gems that can be a mid-cap or even a large cap over the medium to long term.
We dived into the data for the April-June quarter and spotted over 100 small-cap stocks where FIIs or FPIs increased their stake by at least 0.6 percentage points during the three months.
Top small caps
FIIs increased their stake in ten small cap stocks by at least four percentage points last quarter. Barring two stocks, all the others command a market cap of Rs 500 crore or more.
At the top of the heap is Sakar Healthcare, a drugmaker based in Ahmedabad that saw FIIs pull up their stake by as much as 8.8%. However, this wasn’t because of a horde of portfolio investors buying the stock but due to a single FPI, Cobra India (Mauritius), buying a stake via a preferential allotment. This entity is associated with Swiss healthcare investor HBM.
Stock brokerage firm 5Paisa Capital, the parent of this website, is another notable name that attracted FII interest with their holding rising 7.6%. During the quarter the company attracted two more FII shareholders to take the number of such investors to eight. Of the existing four key FPIs, WF Asian Reconnaissance Fund Ltd, in particular, pulled up its holding. An entity associated with Canada’s Fairfax also bought additional shares.
Chemical producer Kiri Industries, tech firm Newgen Software, construction company Capacit’e Infraprojects and power solutions company SE Power were the other firms where the FII stake went up 4% or more last quarter.
The financial services sector, in particular, was a hot draw with four companies making the cut in this list.
These were Ashika Credit, Choice International, financial and remittance services firm Finkurve, which operates under the Arvog brand, and lender Paisalo Digital, which is trying to reinvent itself as a fintech firm.
Other small caps on FII radar
In addition, FIIs or FPIs were stoked about a bunch of other small-cap stocks and hiked their stake by 2-4% in around 20 such companies.
These include some well-known companies such as JK Tyre & Industries, Dhampur Sugar Mills, Rupa & Company, Bajaj Consumer Care, Raymond, Shalby, Hind Rectifiers, Hathway Cable, JSW Ispat and NRB Bearings.
Other small caps in this list include Ritesh Properties, Hindustan Everest, Karda Constructions, Dhanvarsha Finvest, Orient Cement, Seamec, PTC India, Visaka Industries, Gujarat State Fertilizers and Shakti Pumps.
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.