USD/INR: Why rupee may not weaken substantially even when Fed begins tapering
The Indian rupee will likely trade in a stable range over the next year and is unlikely to depreciate substantially against the dollar even when the US Federal Reserve begins to wind down its monetary stimulus, a CLSA report says.
The rupee has gained in recent months to trade around 73.7 to a dollar last week after falling past 75 in April when India was in the grip of a brutal second wave of the Covid-19 pandemic. But talk of the Fed beginning to taper the stimulus it gave to revive the US economy if the pandemic subsides has raised concerns of its adverse impact on emerging economies, similar to the effect the 2013 ‘taper tantrum’ had on many countries including India.
However, CLSA analyst Indranil Sen Gupta said in a report titled ‘A virtuous INR cycle’ that India’s high foreign exchange reserves will guard against any speculative attacks on the rupee this time around.
The brokerage expectsthe rupee to trade in a range of Rs73-76.50 to one dollar in 2022-23 and says large depreciation, as seen in 2011, 2013 and 2018, is unlikely even if the Fed tapers.The brokerage expects rupee depreciation slowing to an average 2% a year from 5.2% in 2013-20.
A stable currency is important for foreign investment flows, both into equities and debt, as investors want to ensure their capital is not eroded by high depreciation. This is where high forex reserves become critical.
Why forex reserves are important to stabilise rupee
The rupee is vulnerable to speculative attacks because of India’s chronic and often large current account deficit. High forex reserves provide the comfort that the RBI will be able to fund any outflow without any runaway depreciation.
Traditionally, RBI has maintained that it intervenes in the forex market only to smoothen volatility. However, RBI governor Shaktikanta Das has shifted to an explicit policy of building forex reserves.
Indeed, the RBI has been building high forex reserves to stabilise rupee expectations. It has seized the opportunity offered by the surge in global liquidity, fall in oil prices and collapse in domestic import demand due to the Covid-19 shock. According to CLSA, the RBI has bought an estimated $180 billion in spot markets as well as in forwards since March 2020. India had forex reserves of about $641 billion as of last week.
“Under uncertain global economic environment, EMEs (emerging market economies) typically remain at the receiving end. In order to mitigate global spill-overs, they have no recourse but to build their own forex reserve buffers, even though at the cost of being included in currency manipulators list or monitoring list of the US Treasury,” Das said recently.
CLSA, however, says that while the US has put India on the currency manipulator watch list, it is unlikely the RBI will ever meet the three criteria for being actually marked as a currency manipulator. These parameters are: one, a bilateral trade surplus with the US of more than $20 billion; two, a current account surplus of at least 3% of gross domestic product (GDP); and three, net purchases of foreign currency of 2% of GDP over 12 months.
India has a trade surplus with the US, though not enough to meet the parameter cited above. Also, India has had traditionally a current account deficit, largely because of a high trade deficit, though the country had a surplus in 2020-21 as imports nosedived due to low crude oil prices and pandemic-related restrictions.
CLSA projects India’s current account deficit at -0.8% of GDP in 2021-22 and -1.2% in 2022-23 from a surplus of 0.9% in 2020-21 with the normalization of economic activity.
What will RBI do?
CLSA says it expects the RBI to keep buying dollars when the greenback weakens, but says forex reserves of around $600 billion are adequate for India as this would suffice for 10 months of imports. “We expect RBI Governor Das to continue to build FX reserves to guard against contagion in an uncertain world. The RBI should continue to buy FX reserves when the USD weakens. It will let the INR weaken when the USD strengthens,” the brokerage says.
According to CLSA, the RBI wouldn’t want rupee appreciation even though any appreciation will attract capital flows. This is because the rupee’s appreciation will lead to mark-to-market hits on the RBI balance sheet. Also, a weaker currency supports India’s exports.
However, the RBI wouldn’t want large-scale depreciation either. “We think that the RBI will not favour large-scale depreciation as that will hurt capital flows that are the mainstay of funding a chronic current account deficit,” CLSA says.
How Aditya Birla Sun Life MF stacks up against peers as IPO opens next week
Aditya Birla Sun Life Asset Management Co Ltd will open its initial public offering for subscription next week, seeking to become the fourth mutual fund house in India to list its shares on stock exchanges.
The company said the red herring prospectus that it filed with the Registrar of Companies has been approved, paving its way to hit the stock market.
The mutual fund house is a subsidiary of publicly listed Aditya Birla Capital Ltd, the financial services holding company of the diversified Aditya Birla Group led by billionaire Kumar Mangalam Birla.
Aditya Birla Capital’s board had approved taking the unit public on April 14 this year. The MF house filed its draft red herring prospectus with the Securities and Exchange Board of India five days later.
Opening date: September 29
Closing date: October 1
Anchor allotment date: September 28
Price band: Rs 695-712
Lot size: Minimum 20 shares, and multiples of 20 thereafter
Minimum investment required: Rs 13,900-14,240
Number of fresh shares to be issued: 28,50,880
Offer for sale by existing shareholders: 3,60,29,120 shares
Equity dilution: 13.5%
Total IPO size: Up to Rs 2,768.25 crore
Aditya Birla Sun Life AMC
The company is India’s fourth-largest mutual fund house by assets. It is a joint venture of Aditya Birla Capital and Canada’s Sun Life.
Aditya Birla Capital owns 51% of the AMC while Sun Life holds 49%. Their respective stake will fall to 50.01% and 36.49% after the IPO.
Aditya Birla AMC has hired 11 merchant banks to arrange the IPO. Kotak Mahindra Capital, BofA Securities and Citigroup Global Markets India are the lead bankers. The other bankers include IIFL Securities and Axis Capital.
Valuation, AUM comparison
Aditya Birla AMC will join three other mutual fund companies on the bourses—Nippon Life India MF (formerly Reliance Mutual Fund), HDFC MF, and UTI MF.
Nippon Life floated its IPO in October 2017, HDFC MF in July 2018 and UTI AMC last September. HDFC AMC is the largest with a market value of Rs 69,036.49 crore. Nippon Life AMC is valued at Rs 27,435 crore and UTI AMC at Rs 14,098 crore.
Aditya Birla AMC is targeting a valuation of Rs 20,500 crore at the upper end of its price band. However, market sources say it is likely to list at a premium and close the gap with Nippon Life.
Overall, India has almost three dozen mutual fund companies. The biggest MF is SBI Mutual Fund, with assets under management (AUM) of Rs 5.24 trillion at the end of June 2021. ICICI MF and HDFC MF are neck and neck, with an AUM of about Rs 4.3 trillion and Rs 4.2 trillion, respectively.
Aditya Birla AMC is ranked fourth and reported an AUM of Rs 2.75 trillion. In addition, it had also Rs 450 crore in assets under domestic fund of funds, according to the Association of Mutual Funds in India.
Nippon Life has an AUM of Rs 2.4 trillion as of June 30 and Rs 1,737 crore under local fund of funds. Kotak Mahindra MF and Axis MF are the other large asset managers in India with AUM of Rs 2.46 trillion and Rs 2.1 trillion, respectively, excluding fund of funds. UTI MF had an AUM of Rs 1.87 trillion at the end of June.
Budget hospitality chain Oyo plans IPO. Here’s all we know so far
India was always known for its great hospitality and cuisine, but never really for its hotels, at latest not in the budget segment.
Eight years ago, a startup disrupted and effectively transformed the face of the Indian hotel landscape, though not necessarily always for the better.
And now, budget hospitality chain Oyo Hotels and Homes is reportedly going public. The company is said to be planning to raise $1 billion via an initial public offering (IPO), and could soon file its draft prospectus with the Indian stock market regulator, a report in The Economic Times has said.
The development comes at a time when the hospitality sector is gradually recovering after being hit hard by the Covid-19 pandemic, which restricted business travel and hammered leisure tourism.
What has Oyo done to prepare for the IPO?
The news of a likely IPO comes even as the shareholders of Oyo’s parent company Oravel Stays okayed its conversion from a private limited company to a public limited company.
The company also increased its authorised share capital to Rs 901 crore earlier this month from Rs 1.17 crore. Oyo expanded its paid-up share capital through a stock split and a bonus issue.
The stock’s face value has been split into a 1:10 ratio for all equity and preference shares. The company has also allotted 3,999 bonus shares for each share held.
For preference shareholders, the conversion ratio to equity shares has been changed to 1:4,000 from 1:1 earlier.
How big will the Oyo IPO really be?
As mentioned, the IPO could raise $1-1.2 billion (Rs 7,400-8,800 crore) from the market. This will make it among the largest IPOs in the Indian stock market this year.
Oyo joins a number of tech-oriented Indian companies that are going public. Zomato’s Rs 9,375 crore blockbuster offering is the largest IPO in India this year. Automobile marketplace CarTrade mopped up Rs 3,000 crore. And then there is software-as-a-service company Freshworks, which went public on the Nasdaq with a $1-billion IPO.
In addition, payments app Paytm has also filed its draft red herring prospectus and plans to raise Rs 16,600 crore via an IPO at home. Others like Nykaa, Mobikwik and Policybazaar, too, are in line to list on Indian bourses.
What are the objectives of Oyo IPO?
The IPO is likely to be a mix of fresh issue of shares as well as an offer for sale (OFS). While the company can use the fresh capital for expansion and other purposes, the OFS will allow some of its shareholders partial or complete exit.
“The IPO papers are ready, and bankers are waiting for final approval from the company before filing it with the Securities and Exchange Board of India (SEBI),” the report said. “Most probably, the DRHP will be filed before September 30,” it added.
Who are Oyo’s key shareholders?
Apart from founder Ritesh Agarwal, the company is owned by at least 15 other shareholders. These include Japanese tech investment giant SoftBank, Lightspeed Venture Partners and Sequoia Capital.
Technology giant Microsoft, vacation rental company Airbnb and Singapore-based superapp Grab are among its other shareholders. The Oravel Employee Welfare Trust also owns the company’s shares.
What is Oyo’s revenue mix by geography?
Apart from India, Oyo operates its properties across 35 countries. Around 43% of its revenue comes from India and Southeast Asia while 28% is from Europe, according to the report.
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.