South Indian Bank’s Outlook Negative if QIP Gets Through

VA Joseph, MD & CEO, South Indian Bank Ltd

Investors in South Indian Bank (BSE: 532218, NSE: SOUTHBANK) stock counter may be in for a rough ride if the private sector lender’s plan for a Rs. 1000 crore Qualified Institutional Placement gets through.

At the same time, SIB badly needs the fund infusion if it is to meet the next three-years’ growth targets. The Thrissur based traditional private sector bank’s Capital Adequacy Ratio is now only 14%.

According to market sources the issue is expected to be of 40 crore additional shares, which means the issue will be priced at around Rs. 25. An alternate view doing the rounds is that the QIP will be priced at Rs. 29 a share, which means that the issue will feature only 34.50 crore shares.

Anyway, for existing and prospective investors, the QIP signals at a massive dilution, as the current equity base is only Rs. 113 crore made up of 113 crore shares of Face Value Rs. 1.

The dilution involved is more than 35%, which means the EPS will go down by that much.

It is not clear why this relatively small-sized private sector bank wants to go such a large issue at one go that involves this kind of significant dilution. VA Joseph, CEO of SIB was unavailable for comments when contacted for this story.

A much more prudent strategy seems to be to go in for a capital raise in tranches like its 2007 QIP for Rs. 326 crore, which will give the bank enough time to grow its earnings, thus offsetting the negative impact of dilution to an extent.

Though the bank is growing at a reasonable pace, bottomline growth is getting sluggish on a QoQ basis.

Though the bank wanted to hive-off its gold loan business into a subsidiary, RBI had not allowed it. Almost 10% of SIB’s business is gold loans, which is a segment witnessing tumultuous regulatory changes these days. In many of SIB’s branches, gold loans is almost the sole business.

It will be interesting to watch the stand taken by large investors in the bank, as this QIP is detrimental to their interests in the short to intermediate term.

South Indian Bank’s largest investors are India Capital Fund, Fidelity, LIC of India, and Morgan Stanley.

Like most private sector banks, South Indian Bank doesn’t have a promoter group, and is supposedly professionally managed. And like most private banks, its largest investors are Foreign Institutional Investors (FIIs) and NRIs who together hold close to 49%, the maximum permissible under Indian regulations.

South Indian Bank scrip which is prone to high volatility, had a lacklustre year in the year-to-date period, but had recently soared with the market.

Now along with other bank scrips it has started correcting, and is likely to correct more as it is very expensive now with a TTM P/E of 8.15 and P/BV of 1.74.

Karnataka Bank, a comparable player by way of revenue and assets, is trading at a P/E of 7.47 and a P/BV of just 0.78, despite a run-up there.

Usually, in the run up to a QIP, stocks appreciate, but soon fall steeply as the impact of the dilution sinks in and large institutional investors trim their positions.

"No Financial Impact on Manapuram Finance Ltd:" VP Nandakumar, Chairman

Manappuram Finance Ltd (BSE: 531213, NSE: MANAPPURAM) has been going through a difficult patch after the RBI directive that its group companies should stop taking deposits. Close on heels came speculations that RBI will regulate gold loan players like Manappuram Finance and Muthoot Finance. 

Seasonal Magazine caught up with Chairman VP Nandakumar to clarify various points regarding both developments. Looking at the clarifications any market watcher would be concerned whether RBI had gone in for an overkill with Manappuram. While nobody will have any doubt that wrong-doers should be warned, the relevant question is who bears the brunt of such regulatory actions. 

A close look at recent bulk deals post the RBI order reveals that most long-only FIIS and DIIs in Manappuram has remained with them, or at least haven't done large exits. What that also reveals is that much of the exits were by panicked retail investors, many of whom might not be in profit due to the sharp market correction during recent quarters. 

Also of concern is whether the speculated action against gold loan lenders is to protect the interests of public and private sector banks. Though no one would doubt that extremely high interest rates shouldnt be charged, it is an undeniable fact that people go to gold loans lenders mainly because banks are not processing such loans speedily or in a customer-friendly way. 

In its recent Board Meeting, Manappuram Finance has constituted an independent Board Commitee under the Chairmanship of Jagdish Capoor (former Deputy Governor of RBI and former Chairman of HFDC Bank) to improve corporate governance. The committee will be assisted by leading accounting firm, KPMG, and leading law firm Amarchand Mangaldas. 

Off to the interview with VP Nandakumar:      

Have Manappuram Finance or Manappuram Agro Farms accepted and/or renewed deposits from public, after March 22nd 2011, when it was converted into a non-deposit taking NBFC? If yes, what is your justification for it?

There are two parts to your question. Firstly, let’s be clear that Manappuram Finance Ltd. has not accepted or renewed deposits from the public after March 22, 2011. However, as we clarified in our recent press releases, we accept investments from the public into our NCDs and bonds which do not fall within the definition of public deposits.  Secondly, about Manappuram Agro Farms. This is a proprietary firm that belongs to me that has accepted deposits from the public, mainly from my circle of friends and acquaintances in and around Thrissur. Now, RBI has said that under Section 45-S of the RBI act, unincorporated bodies are prohibited from accepting deposits from the public. However, the legal advice we had been given was that when this section is read along with Section 45-I, there is an exemption for unincorporated bodies dealing in agriculture and related activities. Anyway, now that the RBI has clarified, I have stopped accepting deposits in Manappuram Agro Farms and I am also refunding the same as and when the claims are made. 

When Manappuram Finance became a non-deposit taking NBFC, does it imply that other group firms also have to follow suit?

No, there is no such implication.

Manappuram Agro Farms Ltd is said to have deposits and liabilities involving Rs. 140 crore. Are you repaying the whole amount and in what time-frame?

Yes, I am repaying the whole amount at the earliest, in any case not later than the maturity of the deposits. Moreover, we are also giving depositors the option to withdraw prematurely as well.

Why did you opt to roll over some deposits, as being alleged?

Deposits were not rolled over in Manappuram Finance, in fact, they were repaid on maturity. Some of the depositors shifted their money to Manappuram Agro Farms of their own accord. Besides, as I said before, at the time we believed it was permissible.

Can you approximately quantify the impact of RBI order on your financial projections?

There will be no financial impact on Manappuram Finance Ltd.

You have clarified that there are no balance sheet linkages between Manappuram Finance and the other companies. But even unconnectedly, is there any strain on your balance sheet as some sections of the media claim?

Yes, there are no balance sheet linkages between Manappuram Finance Ltd. and other Manappuram Group companies. And there is no strain on me whatsoever. In fact, in the past few days, we have met the claims of all the depositors who wanted to withdraw prematurely without any hitch.

Is there any restriction on you to accept investments through secured NCDs and subordinate bonds? What is the issue, if any, regarding NCDs?

As things stand now, there is absolutely no restriction on us accepting investments through NCDs and subordinated bonds and I don’t think there Is any issue regarding NCDs.

What all constitute your regular ways of raising money for lending, and is any of those routes affected now?

We raise money for lending mostly through borrowings from Banks. We also tap the money market through CPs and there is a relatively small portion of debt raised from the retail segment (NCDs and subordinated bonds). All these routes continue to be available as before.

Are you talking with institutional investors already on this issue? Do you expect large exits by FIIs, considering last two days’ massive price and volume action? Or is it just a knee-jerk reaction?

We have been in regular touch with our institutional investors. Initially, like everyone else, they were also concerned but once they were fully briefed about the situation, they have been supportive. In fact, we had a Board Meeting on February 10 and many constructive measures are being taken based on the inputs received during the meeting.

Do you think that the issue that RBI alleges on you is done by other gold loan companies or NBFCs?

No, I don’t think that is the case at all.

According to you, what led to this kind of situation, and how do you expect prevention of such issues through better corporate governance?

I accepted deposits in Manappuram Agro Farms believing that no violations were involved and that was an error of judgment. The other point that was brought out was about Manappuram Agro Farms having used a few branches of Manappuram Finance Ltd. to book deposits. At the Board meeting of February 10, it was decided to ring fence the operations of Manappuram Finance from other Manappuram Group concerns and this will prevent a recurrence.

Rating agencies like CRISIL & ICRA have put Manappuram on a ratings watch. In what time-frame do you plan to alleviate the concern of such agencies?

I think it’s very clear that there are no financial implications for Manappuram Finance Ltd. and I’m sure the rating agencies will, in due course, factor that into their ratings. Besides, the measures we have initiated since the Board meeting of February 10 will fully alleviate their concerns.

You had disclosed that an ongoing family feud is behind this development. Can you explain this in detail?

Well, yes, I did mention that, but it’s better that I don’t add to what I’ve already said.

How do you view RBI's speculated move to curtail gold loan companies like Manappuram & Muthoot by putting interest limits as well as loan-to-value limits?

As of now, it is only a speculation. But even otherwise, I don't think there will be any serious impact from this on Manappuram Finance as such a move will cause volumes to surge.

7 Ways Indian Priorities are Quite Wrong

The budget season is fast approaching, the fiscal will soon end, and our rulers are sitting glum thinking that taming inflation and managing 7% growth are the greatest achievements that would have been possible in this year. When will politicians learn to face facts? Admit that their priorities have often been wrong? Here is just a sampling:

Wrong No. 1:

Putting Stock Market Interests First:

Every three months, comes a quarterly result. Companies private and public are perspiring by that time to deliver good numbers. To satisfy whom? Shareholders? They are still not 1% of our population. Or FIIs? Why should we satisfy them? Nations that thought that shareholder interest is the main national interest is today in economic shambles. US, UK, France, Germany, … the list goes on. They are just riding the proverbial tiger that Ramalinga Raju found difficulty in getting down. The tiger of manipulated numbers, self-printed money, and colossal debts. Why should we have a Vision 2050 to reach that very trap? Let us call the bluff. Profits are not everything. Sustainable and equitable growth for all are far more important. Only that would work to the welfare of the remaining 99% of Indians.

Wrong No 2:

Putting Growth of Human Capital Last:

Almost every Western luxury brand has reached our shores. From Audi to iPad. Both are flawed models for India. iPad works not because of Steve Jobs’ vision, but because of the sweatshops and forced labour in China. And how many jobs have these luxury car majors created in India vis-à-vis what they take out from this country? Today, everything from banks to cars excel in not using human capital. Car factories invest huge in robotic assembly lines, while private banks go to limits of absurdity to reduce staff with no limits at all. What for? To boost per-employee revenues and profit? Again, what for? Let us not idolize the Facebook model of doing business - employing 3000 guys n’ gals and getting obnoxious valuations like $100 billion. That is the American style, the socially failed American style.

Wrong No 3:
State Getting Out of Healthcare:

We can agree that India is not rich to afford social security for all. But what prompted successive governments to get out of healthcare? More often than not, disaster strikes as diseases, not job losses or accidents. Then all of us realize that only health is wealth, but where is that fair aid from taxpayer money? All one can do is go to a posh private hospital and get a nice round hole burned in your pocket. That is, if you are lucky. More likely is that just a critical disease is enough to leave a lasting financial impression on the next generation too. It is high-time that India stopped whatever it has been doing, take a deep breath of introspection, and reverse this number one social malady.

Wrong No 4:
State Getting Out of Education:

For argument’s sake, the state can even get out of healthcare. Provided, the per capita GDP can afford it. But what prompted successive Governments to get out of education? When everyone agrees that education and only education is the great leveller between the classes and between the castes, this deserting has been the most mortal body blow to the Indian society. Instead, we are thinking of when to rollout the red-carpet for some of this globe’s costliest Universities. All should be welcome, provided at least 50% of all admissions, right from Kindergarten to PhD is reserved free of cost to the most deserving sections of the society.

Wrong No 5:
Land Grabs Without Compensation:

Land is not equal to money. Otherwise the most prudent investors wouldn’t have invested in land, and land alone as a priority. But even a democratic state like India has no qualms about usurping a poor man’s land. For the rich it is an investment, but for the poor it his means of livelihood and his only insurance in this uncertain world. Money can’t compensate for taking over land. Landowners should be given even better land after development. Not only that, they should be made special shareholders in any project brought up on taken over land. That single step will kill the tendency to hoard land in the name of SEZ etc, as well as facilitate fruitful projects.

Wrong No 6:
Equating FII with FDI:

From the Great Indian Experiment in stock market, one thing  is clear. The day any nation starts boasting about its FII inflows, something rotten is set in motion. Most FIIs are just traders, who bring in tsunami like money, multiply it here at the expense of domestic investors, and take it back entirely with them, leaving a huge hollow in the finances of our companies. A case in point is the huge upcoming FCCB redemptions facing many listed companies, who took hybrid equity-convertible loans at high valuations. FII money is not foreign direct investment. If the nation wants to put FII money to good use, let them come in with a lock-in, or let them come through the GDR route. This country has had enough of anonymous P-Notes.

Wrong No 7:
Facilitating Hoarding of Assets:

What we need is not just taxing the income. Only relying on that flawed system has resulted in this enormous hoarding of assets that we see in India. The kind of wealth locked-in unproductive assets like gold and real estate is obnoxious. What would discourage such hoarding? We need to have an annual tax on unproductive assets above a reasonable level. That will prompt the wealthy to liquidate such assets and put it to productive use by investing the same in bonds, equities, banks etc.

What is preventing any Government from taking such commonsense steps? Just because, the middle-class and upper-class have come to dominate the policy decisions at every sphere. The fact that media is also highly biased towards its readers/viewers, who are all basically not from the lower-class, doesn’t help either. Let no one forget that the relatively well-off sections of the society don’t constitute even 35% of what is India. The key to India’s future will be in the hands of leaders who don’t forget this fundamental premise.