Is Manappuram’s Maiden NCD Issue Attractive for Investors?

Manappuram Finance Ltd (BSE: 531213, NSE: MANAPPURAM), one of Indian stock market’s most wealth creating mid-cap companies for retail investors, is back with a public issue of a different kind. Manappuram’s Rs. 750 crore non convertible debenture issue offers an industry-leading 12% interest for 13 months, and is a powerful solution for all those who are disappointed with the current equity markets, but who would prefer something better than bank fixed deposits. The risk profile of this AA- rated bond is also quite good, due to Manappuram’s robust business model as well as healthy corporate governance standards, that has always ensured participation by some of the world’s most discerning funds like Sequoia, CLSA, Copthall, Wellington, Hudson, and many more.

Leading NBFC in the loan-against-gold segment, Manappuram Finance Ltd’s maiden public issue of Non Convertible Debentures (NCD) is set to open on 18th of August. The issue carries an attractive interest rate of 12% for 400 days or approximately 13 months tenure. For a 24 month tenure the rate is slightly more attractive, at 12.20%.

The rate is attractive for investors as it is around 1.5-1.6% higher than the highest paying fixed deposits of similar tenure from the country’s banks. Manappuram’s NCD is also more lucrative than another comparable NCD that is set to open shortly, that of Shriram City Union Finance Ltd (BSE: 532498 , NSE: SHRIRAMCIT), which offers 11.6-11.85%, that too for a 3-year tenure. 

 

Muthoot Finance Ltd's (BSE: 533398, NSE: MUTHOOTFIN) upcoming NCD offers 12.25%, but the tenure is longer at 3 & 5 years. For 2 years, Muthoot offers 12% against Manappuram's 12.20%.

Manappuram is able to provide better rates for a shorter duration, as the tenure of the NCD reflects the shorter tenure of this NBFC’s retail gold loans.

Manappuram Finance is headed by its Executive Chairman VP Nandakumar who has been a professional banker, before taking over the family business in gold loans which now has a track-record of over 50 years. Nandakumar is acknowledged in the Indian stock market as a significant wealth creator who took Manappuram’s Rs. 10 valued stock to Rs. 3560 last year, when its scrip enjoyed peak valuation. A Rs. 1 lakh investment in Manappuram in 1995 had surged to Rs. 3.56 crore during the FY’10.

Manappuram is a 13000 people strong, professionally managed company, with its Managing Director, I Unnikrishnan, coming from outside the family, and is a qualified and experienced Chartered Accountant, as well as considered as an authority in the NBFC business.

The present investment climate in the country is clearly favouring finance companies raising cash through NCDs as against other instruments like QIPs or private placements. The recent regulatory change that prevents NBFCs from availing priority sector funds from banks, as well as the higher interest regime have made relying only on banks an unattractive option for players like Manappuram.

Manappuram which has successful QIPs to its credit, is however not opting for the same as the current valuations are not conducive to raise further equity without effecting significant dilution.

Retail investors on the other hand have been struggling to make money from equities for the past one year. They were looking for something with better returns than fixed deposits, but with much better risk profiles.

One of the largest NBFCs in the country, Shriram Transport Finance  Ltd (BSE: 511218, NSE: SRTRANSFIN), had recently concluded its Rs. 1000 crore NCD issue with an overwhelming response from retail investors, with the issue witnessing 5 times oversubscription. Manappuram’s NCD is also likely to follow suit for several reasons.

Manappuram’s core business of loans-against-gold continues to witness robust growth. During the first quarter of this financial year, net profit rose by 133.6% year-on-year, while operating income recorded a jump of nearly 165%. The jump in loan book or assets-under-management (AUM) was even more impressive - soaring to Rs. 8951 crore from Rs 3310 crore, a jump of more than 170%.

The margins and other metrics also continue to be healthy. The interest spread is quite high at 16%. Net NPAs is quite low at 0.30%. And the loan book is highly secured as 99.2% of the book is made up of loans against gold. Manappuram’s Capital Adequacy Ratio is also extremely robust at 21.8%. Reflecting these strengths, Manappuram NCD has a rating of AA- from CARE.

The company’s gold loans are relatively risk-free as their average ticket-size is just Rs. 33,500, and is mainly taken by individuals and micro & small businesses by pledging personal gold ornaments. The company doesn’t offer loans against bullion, sovereign etc, nor the latest trend of loans against Gold Exchange Traded Funds (ETFs), as the company believes that those assets carry significantly higher risks.

Even the maximum loan-to-value (LTV) offered by Manappuram will have a 15% cushioning to offset any short-term downtrend in gold prices. For example, to avail Rs. 33,500 as loan from Manappuram, the customer pledges Rs. 38,525 worth of gold excluding making charges. Secondly, the pledging of personal jewellery ensures that customers, especially female members of the household, are more keen to get back their own jewellery rather than retain the loan amount, even if gold prices fall.

Growth prospects at Manappuram are also promising. The current NCD for Rs. 750 crore (including an oversubscription clause for Rs. 350 crore) is part of a wider NCD plan for Rs. 2000 crore. The remaining funds would be mopped up through two subsequent issues, but which may carry lower rates, if the interest regime has already peaked in the country.

Even the Rs. 2000 crore fund raising is part of a bigger plan to raise Rs. 6000 crores by different means, which will see the loan book soaring to Rs. 15,000 crore by the end of this financial year. The strategy is clearly to diversify away from bank loans as the prime source of funds, which currently accounts for 50% of the funds. The company is also now in the process of raising Rs. 620 crore by way of private placement.

Manappuram has been the first gold loan company to get listed in India’s stock market, and is noted for its better corporate governance standards and transparency than most of its peer group companies. Owing to this, Manappuram Finance has almost always enjoyed excellent patronage from foreign institutional investors, with FII participation in Manappuram’s equity being 30.62% now. 

 

FIIs holding more than 1% of Manappuram include heavyweights like CLSA, Sloane Robinson, Swiss Finance, Wellington Management, Federated Kaufmann, Columbia Acorn, Copthall, Hudson Equity etc. Manappuram also has a track-record of generating more than 5X returns for celebrity PE fund Sequoia Capital of Google-Yahoo-Apple fame.

Manappuram's NCD will close on or before 5th September depending upon the subscription response, and will be listed on both BSE and NSE to ensure liquidity.

S&P’s Downgrade of US Debt - 5 Reasons Why it is Wrong and Markets will Rebound

While Standard & Poor’s downgrade of US debt is sending shockwaves across the US and world economic system, criticism about the downgrade is also mounting from investors like Warren Buffett to economists like Paul Krugman. Here are 5 reasons why S&P’s action may be intrinsically flawed or even malicious, and why the world markets are poised for a quick rebound.

1) Political Motivations:

S&P has declared that the reason for the downgrade is more political than economic. Ostensibly, they were more concerned about the political deadlock between Obama’s Democratic Party and the Republicans who control the US Congress. Ironically, nothing could be nearer to the truth than the ‘political motivation‘. S&P is a division of McGraw-Hill, currently headed by Harold W McGraw III, who over the last ten years, has funded Republican National Committee, and the campaigns of prominent Republican leaders like George W Bush, Rudy Guiliani, and most importantly, Mitt Romney, who is now the lead contender for Republican nomination to challenge Barack Obama in next year’s presidential election. The hard-line Tea Party backing Mitt Romney, which got a setback following the recent agreement between Obama and Congress is already getting a boost from S&P’s controversial decision.

2) Poor Arithmetic or Malicious Intent:

S&P had made an error of $2 trillion in its calculations that led to the current downgrade, which was promptly pointed out by the US administration. Still, S&P didn’t budge from their intention to downgrade, which reveals an agenda with clear vested interest. Now, if the $2 trillion error was intentional, it calls for a in-depth probe by US SEC. If the error was inadvertent, it speaks a lot about the competence of the analysts preparing these reports and their team leaders who edit and oversee the process before publishing.

3) S&P’s Business Model:

S&P’s business model for the debt rating activity relies heavily on payments by the debt issuers, that is the companies. So, the objectivity and impartiality of S&P’s ratings has always been under question. In the case of governments, there is no such revenue model - at least officially or apparently - and that makes rating agencies like S&P susceptible to be exploring alternate revenue models which may include sharing upcoming sovereign downgrades like the recent US one with friendly investment banks, brokerages, and institutional investors, who stand to gain massive profits from shorting numerous stocks and indices across the globe. The fact that many leading institutional brokerages had confidentially warned their clients about this S&P downgrade, even after Obama and Congress stitched up a workable short-term plan, raises suspicions. This is something that should be probed not only by US SEC, but authorities like India’s SEBI, as countries including India, Australia, Canada, & Italy have their main indices maintained and sponsored by S&P, for example India’s S&P CNX Nifty.

4) S&P’s Professional Incompetence:

S&P’s professional competence in ratings has been questioned numerous times in the past. In 2002, S&P had cut Japan’s credit rating to AA-, but even now Japan has no trouble in borrowing by ‘offering’ a yield of 1.02% for 10-year notes, while German bonds - rated by S&P as AAA - has to ‘offer’ a yield of 2.35% to borrow money. In fact, this anomaly is not restricted to Germany alone, among S&P’s portfolio. Out of the 18 nations still with AAA rating from S&P, many come across as high risks compared with US. The best example is UK, where the debt-to-GDP ratio is 80%, but which still enjoys AAA. In contrast, US is much safer at 74%. S&P’s analysis has often been criticised for not being based on any original research but on just compilations of publicly available data. In the case of companies, S&P may sometimes benefit from insider knowledge, but in the case of nations like US, nothing is secret as almost all economic data is public and debated widely between not only political parties but by some of the best academic and economic brains. But even in assessing companies, S&P has made grave errors in the past, the most infamous being S&P’s AAA reaffirmation of Lehman Brothers, just 3 days before the bank collapsed. Similarly, S&P had goofed upon Iceland, giving it a A- rating indicating ‘strong capacity to meet financial commitments…’, until the very day on which Iceland announced virtual bankruptcy.

5) A Recent History of Defrauding Investors:

Whether S&P’s ratings performance goes beyond mere incompetence or goof-ups, to malicious intent to misinform and defraud investors has been a matter of serious debate. S&P’s role in the run-up to the 2008 housing and stock-market bubble in US and elsewhere, and the subsequent bust in which millions of investors and homebuyers lost everything they had, has been a subject of enquiries. While the Financial Crisis Inquiry Commission called “S&P a key enabler of the financial meltdown in 2008“, a Senate Panel on the subject implicated S&P of sacrificing even core ethics to win fees from banks. For example, S&P had given AAA ratings to several Collateralized Debt Obligations (CDOs) by major banks, that were sold to investors, but which were secretly made up of junk sub-prime mortgages, that later collapsed or turned un-sellable, thus causing the financial meltdown.    

Even with all these factors, it is a major win for S&P that their downgrade carried weight and markets responded by massive selling. That is likely to be because S&P has played to the audience - disgruntled public in US and elsewhere - this time around, unlike in their earlier goof-ups like Lehman and Iceland. Citizens around the globe are disgruntled with financial mismanagement by politicians, and this is where S&P’s downgrade has hit a chord. But the glory is likely to be short-lived, as growth fuelled by domestic consumption remains a strong undercurrent in China, India, and elsewhere, and it is only a matter of weeks, if not days, before it causes a rebound in world stock markets including in USA.

Axis Bank - Buy, Sell, or Hold, Based on Q1 & the Steep Fall?

Axis Bank Ltd (BSE: 532215, NSE: AXISBANK), India’s third largest private sector bank by revenue, has delivered good returns to investors during some time-frames. Anyway, what is the outlook now after first quarter results and the steep correction in the market as well as the stock?

Axis Bank’s Q1 revenue has soared year-on-year from Rs. 4326.37 crore to Rs. 6049.27 crore, which is a robust 39.82% jump. The quarter-on-quarter growth is from Rs. 5817.06 crore, which is a modest 4% increase.

The year-on-year Q1 net profit at Axis Bank has jumped from Rs. 741.88 crore to Rs. 942.35 crore, which is a healthy 27% jump. However, sequential profit has dipped from Rs. 1020.11 by 8.25%, exposing strong ongoing headwinds.

Axis Bank's net profit margin (NPM) of the core business slipped on an year-on-year basis, dipping from 22.31% to 19.30% now, but which is still better than most peers.

Other income of Axis Bank which also maintained YoY growth, relates to gains from securities transactions, commission earned from guarantees/letters of credit, fees earned from providing services to customers, selling of third party products, and ATM sharing fees.

Axis Bank's Net NPAs degraded marginally to 0.31%, from 0.26% in the previous quarter.

Axis Bank's Return on Assets slipped from 1.81% to 1.61% sequentially, and marginally from 1.63% on an year-on-year basis. Return on Equity for FY’11 was 17.84%, which is healthy.

Current valuations of Axis Bank at 2.65 times the book-value is not very safe, and new investors should wait for the current deep correction in banking sector stocks to complete, to enter this scrip, carefully watching out for slippages in its core strengths of RoA, NPAs and NPM.

For existing investors of Axis Bank, it is a ‘sell’ or ’hold’, depending on the entry price, as the current valuations are high.

Union Bank - Buy, Sell, or Hold Now, Based on Q1 Results?

Union Bank of India, India’s sixth largest public sector bank by revenue, has delivered good returns to investors during several time-frames in its listed history. But what is the outlook now after first quarter results?

Union Bank’s Q1 revenue has soared year-on-year from Rs. 4120.66 crore to Rs. 5399.68 crore, which is a 31.04% robust jump. The quarter-on-quarter growth is from Rs. 5215.81 crore, which is a modest 3.53% increase.

The year-on-year Q1 net profit of Union Bank dipped from Rs. 601.42 crore to Rs. 464.42 crore, which is a troubling 22.78% dip. Sequential profit has also dipped from Rs. 597.57 crore, which is also a disappointing 22.28% dip.

Union Bank's (BSE: 532477, NSE: UNIONBANK) net profit margin (NPM) of the core business has taken a hit on an year-on-year basis, from 16.32% to 9.45% now.

Exceptional items at Union Bank that affected profits this time include provisioning for NPAs,  pensions, gratuity etc, with indication that pressure from such items would continue.

Union Bank of India's Net NPAs stood at 1.32%, up from 1.19% in the previous quarter.

Return on Assets fell from 1.05% to 0.86% sequentially, and from 1.22% year-on-year. Return on Equity at Union Bank for FY’11 was 16.31%, which is quite healthy if not outstanding.

Since Union Bank's current valuation is at 1.70 times the book-value, new investors should wait for the upcoming quarters to see whether the strong performance in revenue eventually permeates to a turnaround in profit.

For existing investors of Union Bank, it is a ’hold’ or ’sell’ depending upon the entry price, and considering the tough interest regime.

HDFC Bank - Buy, Sell, or Hold Now, Based on Q1 Results?

HDFC Bank (BSE: 500180, NSE: HDFCBANK), India’s second largest private sector bank by revenue, has delivered excellent returns to investors during most time-frames in its listed history. Anyway, what is the outlook now after first quarter results and the ongoing correction in markets?

HDFC Bank’s Q1 revenue has soared year-on-year from Rs. 5360.03 crore to Rs. 7098 crore, which is a robust 32.42% jump. The quarter-on-quarter growth is from Rs. 6724.31 crore, which is a modest 5.56% increase.

The year-on-year Q1 net profit of HDFC Bank has surged from Rs. 811.71 crore to Rs. 1084.98 crore, which is an impressive 33.67% jump. However, sequential profit has dipped by 2.67%, exposing current headwinds.

The net profit margin (NPM) of HDFC Bank's core business almost stood its ground on an year-on-year basis, dipping only marginally from 18.36% to 18.15% now.

Other income at HDFC Bank, which also maintained YoY growth, relates to income from non-fund based banking activities including commission, fees, foreign exchange earnings, earnings from derivative transactions and profit and loss from investments including revaluation.

HDFC Bank's Net NPAs stood at 0.20%, unchanged from the previous quarter.

Return on Assets of HDFC Bank remained stationary at 0.40% sequentially as well as year-on-year, which is not outstanding. Return on Equity for FY’11 was 15.47%, which is healthy.

However, current valuations of HDFC Bank at 4.3 times the book-value is not safe, and new investors should wait for deep corrections in banking sector stocks to enter this scrip, carefully watching out for slippages in its core strengths of NPAs and NPM.

For existing investors, HDFC Bank is now a ‘sell’ or ’hold’, depending on the entry price, as the current valuations are very high.

Bank of India - Buy, Sell, or Hold, Based on Q1 Results?

Bank of India (BSE: 532149, NSE: BANKINDIA), country’s fifth largest public sector bank by revenue, has delivered exceptional returns to investors during a couple of time-frames in its listed history. But what is the outlook now after first quarter results?

Bank of India's Q1 revenue has soared year-on-year from Rs. 5407.62 crore to Rs. 7293.68 crore, which is a 34.88% robust jump. The quarter-on-quarter growth is from Rs. 7130.07 crore, which is a modest 2.29% increase.

The year-on-year Q1 net profit of Bank of India dipped from Rs. 725.13 crore to Rs. 517.53 crore, which is a troubling 28.63% dip. However, the sequential profit grew from Rs. 493.64 crore, which is a modest 4.84% growth.

The net profit margin (NPM) of Bank of India's core business has taken a hit on an year-on-year basis, almost halving from 15.04% to 7.80% now.

Exceptional items that affected Bank of India's profits this time include employee benefits, pension option, and gratuity limits, with indication that pressure from such items would continue.

Net NPAs of Bank of India stood at 1.27%, up from 0.91% in the previous quarter.

Return on Assets at Bank of India fell marginally from 0.61% to 0.59% sequentially, and significantly from 1.05% year-on-year. Return on Equity for FY’11 was 14.39%, which is healthy if not outstanding.

Since current valuation of Bank of India is at 1.35 times the book-value, new investors should wait for the upcoming quarters to see whether the strong performance in revenue eventually permeates to a turnaround in profit. 

For existing investors, it is a 'hold' or 'sell' depending upon the entry price, and considering the tough interest regime.

What Anna Hazare can Learn from the US Debt Crisis by Tea Party

On the last day of July 2011, India had come closer than ever before to the killing of a promising anti-corruption movement with grassroots support.

On the same day, the world had come closer than ever before to an unprecedented financial crisis, thanks to another grassroots movement in the USA. 

Indian Parliament’s crucial monsoon session began on August 1st, whose prime agenda is to pass an alternate Lokpal Bill than the anti-corruption movement’s Jan Lokpal Bill that aimed to give sweeping powers to the proposed people’s ombudsman.

US Congress has passed a resolution on August 1st, overcoming hardline Republicans, without which the country’s treasury would have defaulted on its payment obligations, that would have cut American debt’s famed AAA rating, and caused a global debacle that would have shamed the Lehman crisis and its aftermath.

Both the Indian and US crises were driven by the so-called grassroots movements. But there ends the comparison.

While the Anna Hazare led ‘India Against Corruption’ movement stands for the masses, the infamous ’Tea Party’ - the hardline Republican faction that caused the US standoff - stands for a hardline economic policy that will effectively crush the American middleclass and poor even more.

But that is only about ideology, philosophy, or concepts like fairness and unfairness.

What about operational tactics or strategy? Sadly for the Indian movement, the comparison with its US counterpart shouldn’t have stopped there, at being a grassroots movement.

Because, even while it wasn’t for a noble cause, there was much to learn from the US Tea Party, not only for India, but for any democracy, and for any grassroots movement in democracies.

The strategic edge of Tea Party as against Hazare’s IAC, is that it penetrated the ‘system‘, worked with the system, hijacked the system and then defeated the system. India Against Corruption, on the other hand shunned the ‘system’, and the system used that avoidance to its advantage in killing off IAC.

But to fully understand how Anna Hazare and his team would have benefited from the strategies of Tea Party, it needs a quick recap of the stunning growth in influence of this radical US movement.

Today, it would be difficult to believe that Tea Party started off from a web chat forum. Yet, that is precisely how it started - soon after Obama was sworn in, on an influential stock market discussion forum called MarketTicker, which was one among a few prominent sites hosting discussions on the new government’s policies.

The site owner was upset by the kind of people Obama had chosen to head his finances - Larry Summers and Tim Geithner - who had allegedly followed the kind of economic policies that led to the 2008 financial crisis.  Sensing that many of his forum members were of his opinion, he started a discussion thread on what could be done in protest. An anonymous poster suggested that each of them sent tea bags to their legislators.

The idea clicked instantaneously, due to the recall of Boston Tea Party, the iconic and influential event in 1773, in which colonists (forefathers of Americans) protested the huge tea taxes by the then ruling British Government, by getting into their tea carrying ships and throwing the tea to Boston Harbour.

An influential forum member backed the tea-bag mailing idea, and on her support, the movement gathered some momentum. It soon caught the fancy of influential CNBC commentator Rick Santelli, and in a now infamous rant televised from the floor of the Chicago Mercantile Exchange, the ultra right-wing Santelli brought the issue before the attention of the whole nation, and it launched the Tea Party movement into a massive country-wide momentum.

Tea Party’s policies were popular among the upper middle-class and upper-class Americans. The movement identified successive governments as the chief culprits behind the economic debacle, and sought to strictly curb government funding especially for corporate bailouts like AIG, GM, Citigroup etc,  as well as to social-support programs like in healthcare and education, and to cut taxes payable by individuals and corporations, and to put a definite ceiling on government debt to control fiscal deficit (which was incidentally the cause for the recent crisis).

With a significant portion of US debt being held by China, the movement also garnered a patriotic fervour.

Does India lack web forums? We have plenty, most of them more populous than US ones, and the kind of unequivocal support Anna Hazare is getting in Internet space is second to none in India. But why hasn’t it translated to anything substantial?

That brings us to the striking difference in strategies employed by the Tea Party.

Going by the principles it advocate, Tea Party can neither be Republican or Democrat, America’s only two mainstream parties. Simply put, they are rightist than the most right-wing of Republicans. They were advocating a third line that almost made the Republicans look like as though they were standing at the centre.

Yet the brains behind Tea Party were prudent enough to realize that they didn’t stand a chance against the formidable Democrats or Republicans. So, even as they spread their voice through tech-driven, non-political forums that spoke directly to the grassroots, their candidates silently penetrated Republican ranks. What made things easier was that some of them were already second-tier leaders in the Republican Party or former Party affiliates.

By the 2010 mid-term elections to the Congress, things had come to such a stand that the Republican Party which was reeling under President Obama’s charisma, had to accept the support of Tea Party in lieu of several of their nominees getting candidature. And the support was not without results. Republicans routed Democrats to wrest control of Congress.

And then they receded somewhat from the political landscape, but not from the public landscape. The Tea Party caucus members continued to work on their individual capacities in reaching out to the public, and during the recent debt crisis, this around 50-member party-within-the-party could hijack not only its parent Republicans, but hold to ransom Obama and the entire US, if not the global economy.

How was it possible? Though they are only 50 in number, they had built up influence in almost all constituencies, and most Republican Congressmen and Senators were plain afraid to stand radically against Tea Party’s declared policies on a subject put up to vote.

Too bad that it was not for a noble cause, as most of the sensible economists, including Paul Krugman, rubbish Tea Party’s policies as voodoo economics. But for a moment imagine what would have been Tea Party’s momentum if it were for a rational, noble cause?

Anna Hazare badly needed to do that. If he was reluctant to learn from Tea Party, he could have learned from VP Singh, who did something like that, not too long back, in this country itself. Maybe Anna was worried at VP’s Janata Dal also going by the drain eventually. But is that an excuse? Nobody can expect to prevail as the one and final option in this complex, difficult world.

Another striking difference Tea Party has with Team Anna is that it has never been a one man show, or even a one organization show. Just like the free market theories on which it is based, Tea Party itself is a movement of free market organizations and leaders, that support, learn from, and compete with each other, with no central leader or organization. The track-record, profit motives, and integrity of many of these leaders, as well as the corporate funding on which many of these organizations thrive are questionable, but together they have proved a point on how to organize a grass-roots level movement in a formidable democratic system in the new millennium.

Leaders working on nobler causes, like Anna Hazare, have much to learn from their strategies.