Should You Invest in Muthoot Finance NCD?

Muthoot Finance's NCD is better suited for investors with high risk- appetite, who are looking for shorter tenures, and not falling within the highest tax bracket.

Muthoot Finance Ltd’s Non Convertible Debenture (NCD) Issue which is currently open for investment offers 11 options for investors.

Ten of them are secured options, ranging in maturity from as short as 400 days (around 13 months), to as long as 60 months.

The interest rates offered for these ten secured options vary between 11% to 12.55%. Other selectables include interest that is payable monthly, annually, or on completing the tenure.

The 11th and unsecured option has its maturity date at 72 months from the deemed date of allotment and the effective yield is 12.25 percent per annum.

These NCDs will be listed on exchanges post subscription, and might offer limited liquidity.

NBFCs like Muthoot Finance have been resorting to the NCD route due to two reasons. Firstly, banks, as per RBI directives, have been squeezing lending to them. Secondly, banks have been unwilling to lend at lower rates to these NBFCs.

Whether an ordinary investor should go for these NCDs solely depends on their risk appetite. Though Muthoot Finance has a stable track-record as far as NCDs goes, such instruments from other Indian corporates have shockingly failed in the past.

Can Wonderla IPO be a Multibagger Like V-Guard?

Can Wonderla be a 7X multibagger like V-Guard within the next 5 years? It is a complex question, as it would be the first time an amusement park business is going for listing in India. The highly capital intensive nature of this business is not lost on anyone. In short, it is not asset-light like V-Guard. On the other hand, Wonderla is more profitable and returns-generating than the flagship electrical appliance maker of the group. Promoters Kochouseph Chittilappilly and Arun Chittilappilly have so far delivered reasonably well with their two parks, with a third Wonderla Amusement Park in the offing at Hyderabad using the upcoming IPO proceeds. Rating agency CRISIL has rated Wonderla IPO at 4/5, indicating above average fundamentals. As usual, this IPO rating doesn’t take into consideration the potential asking price. On one side is the impressive metrics, and on the other is whether a too high valuation would be sought.

The upcoming IPO of Wonderla Holidays Ltd, an amusement park company, would be keenly watched by the investment community. The main reason for this investor interest, of course, will be that Wonderla Holidays is from the stable of V-Guard Group.

Also Read: Interview with Wonderla's Co-founder and MD, Arun Chittilappilly

Flagship V-Guard Industries Ltd (BSE: 532953, NSE: VGUARD) had gone for its IPO soon after Sensex started to fall massively from its 2008 peak of over 21,000 after the controversial and market-rattling mega public issue by Reliance Power. V-Guard went ahead unfazed with its relatively small issue to collect Rs. 70 crore from the market, despite the emerging gloom.

By the time it listed in mid March 2008 at around Rs. 85, markets were steadily going down, and in September 2008, the collapse of Lehman Brothers happened, sending the global capital markets into a tailspin. Smallcap stock V-Guard too was not spared, and it hit its nadir of Rs. 36.50 soon afterwards.

And from there gradually V-Guard started clawing back. The going was steady but slow in initial years, but by mid 2012, the electrical appliances stock started its vertical climb. By December 2012, it had scaled up dizzying heights, marking an all-time high of Rs. 590.50, making it a nearly 7X multibagger from its IPO level, and a 16X bagger from its all-time low, within as little as 4.5 years!

Jaypee Group - Can Stake Sales Save it From a Lethal Debt of Rs. 63,654 crore?

From humblest of beginnings in 1958, Jaiprakash Gaur built up the Jaypee Group which has successfully undertaken some of the largest and most prestigious projects in this country like Sardar Sarovar Dam, Yamuna Expressway, Buddh International Formula 1 Circuit, and Karcham Wangtoo Hydroelectric Project, overcoming seemingly insurmountable challenges. Today, a formidable team of 80,000 committed professionals led by Jaiprakash’s eldest son Manoj Gaur are working across 40 locations, spread across 14 states of India, to churn out an aggregate annual turnover of over Rs. 23,000 crore and build up on an asset base that is already above Rs. 73,000 crore, with a mandate to develop five townships worth Rs. 1,50,000 crore, even as it battles to overcome a lethal debt estimated recently by Credit Suisse at around Rs.63,654 crore. From once nothing to scaling Everest and down to plains again, can Jaypee climb back to glory? Manoj Gaur is sure that Jaypee Group can do it, as he has seen this company, founded by his father, doing even more formidable tasks in its long chequered history.

In the beginning there was nothing. Absolutely nothing, except for a young civil engineer’s plan to quit a short stint with UP Government to start a small contracting business.

The year was 1958. Jawaharlal Nehru was still India’s PM. Kapil Dev, Sanjay Dutt, & Anil Kapoor were yet to be born. Bajaj Auto was still to obtain a licence for making autos.

With not even a hint of economic liberalization visible on the horizon, and living deep inside a socialist and licence raj, not many young engineers would have resigned from a plum government job to get into business.

But then Jaiprakash Gaur was a bit different. He had obtained his Diploma in Civil Engineering from University of Roorkee (now IIT Roorkee) in 1950. An eight year long career with the UP Irrigation Department was enough to convince Jaiprakash that he could do much more if he ventured out on his own.

Since he had exposure in the hydroelectric sector, Jaiprakash naturally took on dam related works. Capital was tough to come by as he was already reeling from the death of his elder brother and failing health of his father.

So, Jaiprakash took on various partners, some of whom who stuck with him, and some who deserted him when he took on bigger and bigger projects beyond his capacity. Jaiprakash had his quirks like opting for a telegram address that read ‘IRONWILL’, to inspire his employees and send a message to associate companies that he would deliver whatever it takes.

By 1969, Jaiprakash Associates was formed as a partnership with six partners including his younger brother and brother-in-law, who all remained shareholders since then.

Late 70s proved to be the real game changing period for the contracting firm as it bagged some of the largest projects India has ever built, including the Sardar Sarovar Dam in Gujarat which is India’s largest, and Tehri Dam in Uttarakhand which is India’s tallest.

1979 saw Jaiprakash Associates Pvt Ltd being officially formed to undertake these works as well as the firm bagging its first overseas contract for $112 million - then a princely sum - in Iraq.

The going was not always smooth, and legend has it that Jaiprakash’s eldest son, Manoj Gaur, who was still a young boy, had to chip in to assist dad in pacifying a major strike at Sardar Sarovar site.

From dams and infrastructure, Jaiprakash ventured out into hotels, opening Hotel Siddharth and Hotel Vasant Continental, both in Delhi, just in time for the 1982 Asian Games held at the capital.

By 1986, Jaiprakash Gaur had taken his next major steps, of getting into cement manufacturing and going public by constituting Jaiprakash Industries Ltd (JIL). 1986 also saw Manoj Gaur joining the company soon after completing his civil engineering degree from BITS, Pilani.

But the 90s proved to be a very challenging period for JIL. An ambitious foray into private hydroelectric power, the Iraq-Kuwait War, and the cement price crash nearly finished off the group due to a severe cash crunch. But the Iron Will prevailed.

Jaiprakash Associates’ stock was valued at just Rs. 9.79 in June of 2004. Just an year back, in 2003, Jaiprakash Associates Ltd (JAL) was formed by the merger of Jaiprakash Industries Ltd (JIL) and Jaypee Cement Ltd.

JIL, the infrastructure and construction flagship of Jaypee Group had a listed history from 1986 onward. But the stock market crash of 2000-01 had taken its toll on every stock including JIL.

But the amalgamation in 2003 prepared the groundwork for impending magic. The merger, however, was just a return of offspring to parent, because it was in 2001 that the Group’s three cement plants under JIL were hived off to form Jaypee Cement Ltd. But this time, the reorganization worked its magic.

Within the next five years, everything worked for Jaypee like a charm. Manoj Gaur was steadily assuming the leadership role in the Group. In 2003, Jaypee landed the Yamuna Expressway, India's longest six-laned controlled-access expressway to be built at a total project cost of Rs. 12,839 crore, connecting Greater Noida to Agra.

The project has been unique in that Jaypee got development rights for five townships along the 165 km long route, which translates to a real estate value of Rs. 1,50,000 crore. Jaypee also commissioned several hydroelectric, thermal, & captive power plants during these five years.

In 2007, it landed the prestigious Formula One Indian Grand Prix by starting work for the Buddh International Circuit.

The magic worked on the stock prices too, and that is how Jaiprakash Gaur and Manoj Gaur, the wealth creators also became wealth sharers. From Rs. 9.79 in 2004, Jaiprakash Associates’ stock price shot up to Rs. 340 by 2008, making it a nearly 35X multibagger within as little as 5 years. Jaypee Power Ventures similarly shot up from Rs. 30 in 2005 to Rs. 144 in 2008, which was a nearly 5X appreciation within 3 years.

But that all are history now. Taking on larger and larger projects has been taking its toll on Jaypee for the second time. Accelerating the trouble was the 2008 global financial crisis that battered Indian infrastructure sector and its stocks, due to its heavy indebtedness. Jaiprakash Gaur who had resigned from executive role in 2008, however, pulled on till 2010 before resigning finally in 2010.

It goes to the credit of now 47-year old Manoj Gaur that despite the difficult situation since 2008, the Group could fulfil its core commitments like the Buddh International Circuit by 2011 and Yamuna Expressway by 2012 (though on a two year delay).

However, the Group is only a pale shadow of what it used to be. Jaiprakash Associates’ stock price and market capitalization has fallen by nearly 92% from the 2008 peak. Jaiprakash Power Ventures has fallen by 94% during the same period. And for Jaypee Infratech, the company in charge of Yamuna Expressway, it has always been a fall from the post-IPO high, shedding in value by over 85%.

The problem of course is mounting debt. The three firms put together has run up a lethal debt, estimated recently by Credit Suisse at around Rs. 63,654 crore.

But Manoj Gaur is unfazed. Like his father’s ’Iron Will’, his motto for Jaypee reads ’No Dream Too Big’. Putting aside the debt factor, Jaiprakash Associates’ EBITDA has grown by a CAGR of 14% from FY’09-FY’13. And both Jaiprakash Power Ventures’ and Jaypee Infratech’s EBITDA have grown by a CAGR of 47% each, which is very impressive indeed.

Despite the debt and despite the market fall, Jaypee has been steadily increasing in size. Across its three listed companies, their subsidiaries, and unlisted companies, the Group employs a committed workforce of 80,000 persons working at more than 40 locations, spread across 14 states of India. That is how, Jaypee Group as a whole has attained an aggregate turnover of over Rs. 23,000 crore and an asset base of around Rs. 73,000 crore. The real strength to note in the Group is that each of the three listed entities have been equally strong in growth performance during the last four years from FY‘09 to FY‘13.

Jaiprakash Associates Limited (JAL) has more than doubled its turnover from Rs. 6152 crore to Rs. 13512 crore at a CAGR of over 22%. JAL’s Net Worth has grown from Rs. 6352 crore to Rs. 13079 crore at a CAGR of 20%. JAL’s demonstrated expertise is second to none in their core engineering and construction field. The team which built Sardar Sarovar, Tehri, & Nathpa Jhakri, as well as the maximum number of mega projects by any company in Jammu & Kashmir, has completed 10,000 MW of Hydropower Projects between 2002 to 2011 in India and Bhutan. That is why JAL continues to attract and execute even larger projects and up gradations. This flagship firm of Jaypee is currently building two dams and two power houses in Bhutan, a 51 km tunnel in Andhra, a 450 MW Stage-II project in J&K, and a project to increase height of Sardar Sarovar from 122 metre to 146.5 metre. JAL’s Cement Division as well as of subsidiary companies, across 10 states, together add up to 33.3 MnTPA, which places it among the top-4 of cement manufacturers in the country. JAL’s realty division plans to complete 9.3 lakh sq.m over a period of five years, mainly in the NCR region.

Jaiprakash Power Ventures Limited (JPVL) is also on a strong footing. From FY’09 to FY’13, JPVL has achieved an over fivefold increase in turnover from Rs. 419 crore to  Rs. 2291 crore at a CAGR of over 53%. Networth has grown close to six times from Rs. 1088 crore to INR 6444 crore at a CAGR of 56%. Jaiprakash Power Ventures Limited is now India’s largest Hydropower producer in the private sector with a generation capacity of 2200 MW. Major projects include 1000 MW Karcham Wangtoo HEP which is India’s largest hydropower project. Upcoming commissioning of Super Critical Nigrie Thermal Power Plant (2 x 660 MW) and Super Critical Bara Thermal Power Plant (3x660 MW), the generation capacity will be 5500 MW. Vishnuprayag HEP and Baspa – II HEP have been earning VERs from 2007-08 and 2008-09 respectively. Karcham Wangtoo HEP is eligible for 3.35 million CERs. Amelia North Coal Block dedicated for Nigrie Thermal Power Plant is under development and coal production will commence in September 2013.

Jaypee Infratech Limited (JIL) is perhaps the most promising company. From FY’09 to FY’13, revenue of JIL has increased close to six times, from Rs. 556 crore to Rs. 3292 crore at a CAGR of 56%. Net Worth has grown close to five times from Rs. 1245 crore to Rs. 6180 crore at a CAGR of 49%. As part of JIL’s Real Estate revenue stream, over 280 towers are in various stages of completion in Wish Town, Noida, an Integrated City spread across 1150 acres, which today has over 30,000 customers. It’s a model integrated city showcasing how new cities shall come up in developed India for a healthy lifestyle, with myriad modern facilities including social infrastructure of schools, medical and sports centres besides commercial spaces. JIL is a unique infrastructure company in that it has two revenue streams - toll revenue for 36 years and real estate revenue from development of over 280 lakh sq.m over next 20 years.

But the debt won’t go away on growth momentum. So, Manoj Gaur has embarked Jaypee upon a focused plan of de-leveraging across businesses, which will yield results in the next few months. Talks with Ultra-Tech to sell 51 per cent equity in their 4.8 MT Gujarat Cement plant are at an advance stage. Similarly, talks for selling stake in some power plants are also progressing well.

As things stand now, no dream is too big for Jaypee. May be no big dream is too easy either. But then, neither does Manoj Gaur or Jaypee expect things to be easy. The performance from this team will be watched keenly by 10,00,000 shareholders across three listed firms.

Bank of India to Recruit More, Increase Profitability

Large sized PSU bank, Bank of India is maintaining its aggressive stance on fresh recruitments as it combats the ongoing decade which has been called the retirement-decade at all PSU banks, due to the large number of retirements that are scheduled to happen by 2020. Chairperson VR Iyer informed that in FY'14 alone, BoI would recruit around 4500 officers and clerks. Iyer's higher priority is, however, upping the profitability of the lender.

Bank of India has had a difficult Q4 like most of its peers. Quarterly net profit has fallen by over 20% on a year-on-year basis, and by nearly 6% on a sequential or quarter-on-quarter basis.

However, the performance is far from the nadir it hit in the last September quarter, when quarterly net profit was around 2.5 times lesser than the current level. The Mumbai based lender is definitely building on the turnaround it registered in the December quarter.

That quarter also saw the large-sized bank get a new Chairperson, VR Iyer. She was formerly Executive Director at Central Bank of India, and even before that assignment, has had a notable career spanning 33 years with Union Bank of India, where she last served as GM. That all these three banks are headquartered in Mumbai is sure to give an added edge to her turnaround plans for Bank of India as its Chairperson & Managing Director.

Despite Q4 being difficult, the public sector lender did achieve many milestones during the full fiscal of 2012-13. Total Business has touched Rs. 6.75 lakh crore, registering a rise of 18.5% on YoY basis. Non-Interest Income is up by 13.40% on the same basis. Operating Profit for the fiscal is up by 11.42%. Book value per share has improved from Rs. 326.52 in March 2012 to Rs. 362.37 in March 2013.

Rewarding its shareholders, including Government of India, Bank of India’s Director Board has also proposed a dividend of 100% as against last year’s 70%.

But the challenges facing the bank is not lost on Chairperson VR Iyer. Her biggest strength is the fact that she is a realistic leader. Iyer is candid enough to admit that Bank of India like most of its public sector peers faces an uphill task in both credit growth as well as in deposit mobilization.

While everyone is anticipating that credit uptake will improve, she frankly admits that from her talks with some of BoI’s largest clients, no one is talking about making fresh or massive investments, yet. At the same time, Iyer feels that mobilizing low-cost deposits would be a much bigger challenge for public sector banks including Bank of India. Obviously, understanding the challenge is half-way of solving the challenge.

Another of her strengths that Bank of India is utilizing is that she is not wary about taking a contrarian position. While everyone is harping on retail loans to be the next game-changer in public sector banking sphere, she forecasts that retail loans alone won’t be enough to replace the volumes of large corporate loans that PSBs like BoI are known for.

Chairperson VR Iyer has also proved that she can also take on difficult tasks that mean quite a bit of rework in the bank’s bureaucracy, if need be. Earlier, Bank of India had embarked on an ambitious program in which specialized branches were set up to address big-ticket corporate loans. Under this scheme, out of Bank of India’s 4290 branches, 10 were designated as corporate branches and 40 were designated as mid-corporate branches. But the move proved unpopular among clients, as many of them had to shift their accounts to these specialized branches.

Sensing that this earlier move was not yielding the intended results, VR Iyer has made sure that any branch can do any business. Earlier, the majority of the branches could do only retail and agriculture loans, and designate the rest to corporate branches. The move by Iyer has now brought in a more level playing field among all branches, and heightened the competition among them.

Bank of India has also created one of the most comprehensive recovery mechanisms for addressing defaulters. This includes appointing over 5000 Business Correspondents for communicating with and recovering from thousands of small rural defaulters, as well as more stringent methods for addressing wilful corporate defaulters. Under the leadership of Executive Directors, MS Raghavan and BP Sharma, the bank had set up Debt Recovery Branches, and is actively pursuing even written-off accounts. Like a few of its peers, BoI has indicated that it won’t leave no stone unturned in its pursuit of recovery from large wilful defaulters, including methods like name-and-shame strategies.

Bank of India is bullish on growing its international business too. BoI is now in operation across 20 countries with 51 offices outside the country. One more branch was opened in Tanzania during last fiscal, while the representative office in Johannesburg was upgraded to branch. The Bank now plans to open subsidiaries in Canada, Brazil, & Botswana, while a representative office will be set up in Myanmar.

The fiscal also saw many awards being bestowed on the bank. BoI has been awarded as ‘The Best Bank for Excellence in AADHAR Related UIDAI Programme of Government of India’, from the hands of Prime Minister Dr. Manmohan Singh. The Bank has been conferred with National Award for implementing PMEGP scheme in East Zone. Bank of India has also been ranked Second Best by Ministry of MSME, New Delhi, based on its performance in lending to Micro Enterprises.

Going forward, Chairperson VR Iyer’s strategies hinges on increasing the profitability of BoI. Towards this end, the credit/deposit ratio is going to be improved to an ambitious 78%. For those who think that such an aim is easily said than done, the top management of BoI led by VR Iyer has chalked out a six-prong strategy that includes emphasis on CASA growth, expansion of SME, Retail and Rural Businesses, focus on Credit Monitoring and Recovery, inclusive growth through Financial Inclusion, progress on IT Enabled Services for better customer satisfaction, and focused attention on Human Resources.

Such an integrated approach is why the market believes that Bank of India stock too might outperform in the long-term.

Can Bank of Baroda Enter Into a Growth Phase Soon?

Despite Finance Minister P Chidambaram urging banks to cut their base rates, and a couple of Mumbai headquartered banks like Bank of India and Union Bank cutting lending rates, Bank of Baroda's Chairman, SS Mundra, has opined that BoB will go for a rate cut only if deposit costs soften, and not because neighbour banks or peer banks are doing it.

When the winds of asset quality pressure started hitting Indian public sector banking sector almost two years back, there was only one public sector lender that withstood that pressure for the maximum time. It was ‘India’s International Bank’, Bank of Baroda. There were many reasons for BoB’s better asset quality.

Overseas operations accounted for nearly 30% of their total business. Bank of Baroda is present in 24 countries, including high-volume destinations like UK, UAE, USA, Singapore, Hong Kong, and Belgium. And majority of their overseas credit is in the form of syndicated loans, ECBs, and buyer‘s credit.

But the economic situation in India continued to worsen during these past two years, and the asset quality pressure ultimately affected BoB too, starting in Q3 of FY’13.

The huge responsibility of leading the bank through such difficult times fell on the shoulders of SS Mundra, who had taken over as CMD during that quarter. This veteran banker’s last assignment was as Executive Director of Union Bank of India.

But the longest part of his career - of over 3 decades - was spent at Bank of Baroda itself, and that has come in as a huge advantage for BoB as well as its new Chairman, in navigating these tough times. He has held key leadership positions in both the domestic and international operations of the Bank. For example, he has been the Zonal Head of BoB’s largest Maharashtra & Goa Zone as well as heading its largest overseas operations as the Chief Executive of UK operations for over 3 years.

The realistic banker that he is, Chairman Mundra correctly guided analysts during the Q3 results, that asset quality pressure would continue in Q4 and may be in Q1 of FY’14. The new CMD’s calculations were correct. One of the reasons of the jump in NPAs is due to the Bank’s proactive approach in treating the accounts as substandard even at the slightest sign of stress. 

But Mundra sees it as a one-off event due to a few reasons. Firstly, these NPAs didn’t come in from any large lumpy accounts. Secondly, the regulations are more stringent for international operations, as BoB has to adhere to both home country regulations and local regulations. So at the slightest sign of stress in the system, BoB tried to be proactive with declaring overseas NPAs.

What really happened is easy to explain. Nearly 70% of the bank’s overseas credit was to businesses related to Indian entities. And when the Indian situation became weaker and weaker, these overseas assets also started showing stress.

However, such operational pressures have not prevented Bank of Baroda from   generously rewarding its shareholders, by sharing from its still sizeable profits. The Bank’s Board has recommended a dividend of 215% or Rs. 21.50 a share for FY’13, which translates to a handsome yield of 3.30% at current prices.

Chairman SS Mundra has indicated that though the asset quality pains will continue for one or two quarters more, they are now shifting gears to be in growth mode again. There are reasons why Mundra’s assertion seems believable.

Around 70% of Bank of Baroda’s business is still domestic. And for the domestic NPAs, the gross NPA percentage has already come down on a quarter-on-quarter basis, even under these difficult economic situation prevailing in the country. What this means is that, if nothing unexpected happens, one can expect BoB’s NPAs to stabilize at the current levels during the first two quarters of this fiscal, and thereafter - from third quarter onward - the asset quality will start improving, leaving the bank free to pursue its growth trajectory, once again.

And when that happens, the market expects BoB to outperform its peers like in the past. More often than not, the bank has grown over 2% above the industry averages in both credit growth and deposit growth. CMD Mundra knows it will be a difficult challenge to repeat that great track record, but he has put in definitive plans to pursue that traditional outperformance model in these new times.

BoB’s new strategies revolve around an aggressive retail push that will eventually better the composition of the loan portfolio from a corporate dominated one to a retail dominated one. The bank’s recent offering of home loans at the base rate of 10.25% itself, irrespective of the ticket-size and tenure, is a step in this direction. Unlike similar offerings from its peers, BoB is even letting its existing customers migrate to this new interest regime with no extra cost. Focusing on home loans make immense sense for the bank, as its home loan portfolio is only 7% of its overall domestic portfolio, which means there is much room for improvement.

The bank’s international operations too will be strengthened. The new overseas strategy revolves around shunning geographical expansion to new unrepresented countries, but strengthening its presence in countries and regions where it is already doing well. Tanzania, for example, is all set to have five new BoB branches.

Such diverse strengths are the reason why most analysts feel that BoB stock might be the long-term outperformer among all public sector banking stocks. Even on its only weakness - asset quality - it is to be noted that it is the best performing PSU bank.

Why Canara Bank Faces an Uphill Task, Despite Rate Cut

Canara Bank's recent base rate cut from 10.25% to 9.95%, is a 0.30% cut in the lending rate for all loans. The move came within just hours of India's Finance Minister P Chidambaram urging PSU banks like Canara to not withhold RBI's rate-cut benefits from customers, but to pass on the same for better credit offtake. Though Canara Bank CMD, RK Dubey, has clarified recently that the move is a business decision, the timing obviously points to the fact that he was heeding FM's call. Dubey explains the "business decision" by stating that Canara's cost of funds have been brought down by 50-80 bps during the just concluded first quarter, due to a significant shedding of high-cost deposits during the past 5 months, which was a strategy he personally directed. But then the question is why couldn't the rate cut come earlier as RBI had cut rates in Jamuary and May. But Chairman Dubey is also right when he claims it is a business decision, but for another reason. During Q4, Canara Bank had one of the poorest credit growth rates in the industry at just 4%, even while its credit-to-deposit ratio is also one of the lowest at 65%.

While the current move is good for Canara's loan customers, the bank has also cut its fixed-deposit rate by up to 0.50% in some maturities, which will be adverse for deposit customers.

The bank needs to strengthen its operational rigour as it has been one of the PSU banks alleged to have done fraudulent KYC norms and money-laundering as per the Cobrapost expose. Alleged scamsters acrtress Leena Maria Paul and her partner Chandrashekhar had also cheated Canara Bank Chennai of Rs. 19 crore.

Canara Bank stock has also fallen by more than 36% from its 52-Week High of Rs. 550 recorded in January to Rs. 350 now.

That Canara Bank had a difficult Q4 as well as FY’13, need not be underscored. The Bangalore headquartered lender’s quarterly bottomline that hit a rock bottom during this past fiscal - precisely in Q2 - didn’t recover much in Q3, as well as now in Q4. Both sequential quarters showed YoY dips in net profit.

Like a few of its public sector peers, Canara Bank is bogged down by serious asset quality concerns. But while many PSU banks are at least showing a glimmer of hope beneath the headline numbers, Canara’s numbers and other operational stats show that nothing short of a miracle should happen in the economy as well as inside the bank, for it to climb back to a growth trajectory.

But before delving into it, here is a quick look at the headline numbers at this mid-sized PSB. Canara Bank's fourth quarter net profit fell nearly 13% at Rs 725 crore, on a YoY basis. Net Interest Income (NII) grew just 2.5% at Rs 2,091. Loans grew at what is perhaps the slowest pace among all banks in Q4, at just 4%.

Asset quality concerns were obvious with Gross Non Performing Assets (GNPA) ratio spiking to 2.57% from 1.73% percent a year back. Provisions and contingencies surged by nearly 63% to touch Rs. 752 crore from Rs 462 crore in the year-ago period. What was more alarming was that despite provisions surging, Net NPA ratio also went up sharply to 2.18% from 1.46%.

Though Canara Bank is in no way alone in posting such bad numbers this quarter, the performance should be noted for some extremes. Firstly, the extremely poor credit growth at 4%, as against RBI’s estimate which is nearly four times higher. Many of the poorly performing PSU banks in this quarter, on a bottomline basis, are however noted for keeping pace with RBI estimates for credit growth or going even higher in Q4.

This situation is particularly harmful to Canara Bank, as already it has been suffering from one of the lowest credit/deposit ratios in the industry. Counting in also the dismal performance on this front in Q4, the bank’s C/D ratio stands at just 65%. This dimension needs to be deeply introspected by Canbank, as upping the C/D ratio is one of the few fundamental ways in which any bank‘s profitability can be improved.

It has not been long since Chairman & Managing Director, RK Dubey, has assumed charge here. Dubey who moved in here from Central Bank as its Executive Director during early Q4, has identified the problem as a high risk-aversive nature prevailing in the public sector lender. While this is partly understandable as PSBs have been reeling under asset quality concerns, Canara seems to have taken this fear to unreasonable limits.

There are only two possibilities for such a fear, one being that the top management has turned unnecessarily cautious at the economic situation prevailing in the country. More chances are for the second possibility, which is that the rank and file of Canara Bank is expecting more asset-quality skeletons to tumble out from the closet in the coming quarters, and in case of such a scenario, don’t want to take more risks which would affect NPA ratios and provisioning requirements drastically.

Since assuming charge, and faced with this situation, CMD Dubey has created a new set of strategies to improve credit growth. He has introduced cash incentives to encourage growth in four fronts viz. retail loans, fee income, CASA, and recovery of dues. It remains to be seen whether the incentive scheme would be successful, especially on improving the C/D ratio.

Though Canara Bank has declared FY’14 as the ‘Year of Retail’, even if it succeeds, retail loans are not expected to have the potential to replace the volumes lost in corporate loans, which are the bread-and-butter of all PSBs, including Canara. The evidence for this is obvious in the Q4 numbers itself, as Canbank has relied on more infrastructure loans, despite being troubled by bad infra loans already.

Meanwhile, news from abroad hints that Canara’s $1 billion dollar denominated bond has run into rough weather, despite high profile road shows conducted in London, Singapore, & Hong Kong.

All eyes will anyway be on the new strategies of Chairman RK Dubey, who is one of India’s most experienced bankers, having a career spanning 33-years at PNB, behind him. Dubey has studied law, management, HR, English, & banking as part of his higher education and training, and has been exposed to all aspects of banking at the highest possible level.

Whether he can pull out Canbank from the trouble it is in, is the billion dollar question facing all stakeholders including shareholders, clients, & employees.

Why Wockhardt will Recover Soon

Wockhardt (BSE: 532300, NSE: WOCKPHARMA) stock continued its losing spree today, after USFDA issued an alert against the import of products from the pharma major’s injectables plant at Aurangabad. The company has already quantified the impact and confirmed that it is expecting a financial impact of $100 million this fiscal due to this ban. However, the million dollar question for investors is whether the stock has reacted too much already.

The stock has already corrected by over 50% from the 52-Week High of Rs. 2166 that was recorded during mid March. It looks like a clear case of over-reaction as, even during its 52-Week peak, most analysts were feeling that there was significant room left in valuations, compared to peers. Wockhardt was said to be relatively underperforming back then pending the full or formal resolution of their debt issues.

The 50% fall has come through during such a scenario, and that is one reason why it looks like an overreaction. Secondly, the same kind of issues was earlier faced by most Indian pharma majors, and most of them have come out of the crisis after making necessary modifications at their plants. The best recent example has been that of Claris Lifesciences.

But the most compelling reason why Wockhardt will recover from this slump is the management quality. The management has weathered bigger storms like the debt crisis which almost sunk the company, and they have displayed the capacity to practically reinvent the company thoroughly to emerge stronger.

Wockhardt’s dramatic turnaround through CDR has so often been cited these days that, it now runs the risk of being viewed too simplistically. Even worse, witnessing the dramatic turnaround in Wockhardt’s stock, at least some sections of the market have come to believe that getting admitted into the CDR cell is the magical switch that causes a free-falling stock to stop and go overdrive, full-throttle.

Though much of the pharma major’s turnaround from the brink is well-known, Seasonal Magazine decided to get the story straight from Chairman Dr. Habil Khorakiwala. What he shared with us is so profound that though it may be a bit dizzying for the faint-hearted, it will be inspiring for all who believe that success is never easy or automatic.

The crux of the story is not that the whole Wockhardt family - starting with the promoters - had to make great sacrifices and undergo great pains. There were sacrifices and there was unavoidable pain, of course, but that was not the main challenge.

But before mentioning the main test, it is important to understand that Dr. Habil still thinks that much of the Rs. 4325 crore debt was not aimlessly made, but that most if not all of it, later proved to be the real game-changers for Wockhardt.

The now good-looking journey really began in the year 2006 when the company embarked on an aggressive acquisition strategy to extend its presence in the Indian and international markets.

Of course, there were other losses too, like derivative losses.

Though there is no doubt that the company was overleveraged at that time - net debt / equity was at 5.7 times - what really upset Dr. Habil’s calculations was the global economic slump that started in 2008 and sustained for a couple of years.

In July of 2009, the company was referred to the CDR cell.

Though laden with a heavy debt burden, the fundamental business of the company remained strong. However, Dr. Habil’s genius lay in the fact that he realized a great truth - that much more than debt restructuring was needed to make good of the acquisitions that caused this debt, and thus elevate Wockhardt to a highly rewarding trajectory.

The result of this realization was the formulation and implementation of a 3-year strategic business plan. Wockhardt also coined a perfect mission statement to make all the stakeholders, especially its employees, understand this policy. This mission statement was ‘More and More with Less and Less’.

But that was easily said than done.

Then came Dr. Habil’s master strategy for getting it going. He started focusing on margins. In the pharma business, high margins primarily means high-margin markets and nothing much else. That is how Dr. Habil started shifting Wockhardt’s focus to the most lucrative market of them all - USA.

But even that was easily said than done.

To effectively deliver in this most advanced market, Dr. Habil knew that he would have to make Wockhardt spend more on one front - Research & Development. That is how, even amidst heavy cost-cutting on almost all other fronts, Wockhardt’s R&D spend steadily began to rise. From 3.6% of sales in FY’10, it jumped to 5.4% of sales in FY’12. It has again risen to 5.9% of sales in the first three quarters of FY’13.

And the results from this move came in as emphatically as good karma. Contribution of US markets in sales jumped from just 20% in FY’10 to 44% in FY’12 and 50% in the first three quarters of FY’13.

Needless to say, margins also jumped.

Operating Profit Margin rose from 17.6% in FY’10 to 31% in FY’12. Also aiding margins were a couple of product strategies like differentiated products with complex technologies, and niche products with small market size, that helped mitigate competitive risks.

But even these - R&D and product strategies - were not everything.

People were empowered, productivity was increased, and cost optimisation was vigorously pursued across all their activities. The result was pleasant to look at with operating expense as a percentage of sales falling from 37.7% to 32% during the same period.

And the greatest beauty of the whole strategic shift was that all these happened without sacrificing on the topline growth. Sales, in fact, surged from Rs. 3638 crores in FY’10 to Rs. 4614 crores in FY’12.

Meanwhile, the execution of the scheme for Corporate Debt Restructuring was being fully implemented, quarter after quarter.

Dr. Habil had bargained for a lucrative deal with his lenders, keeping in mind the long-term interests of all stakeholders, including all of Wockhardt’s equity holders who had been severely hurt during the free fall of the stock. Dilution of the core equity base was avoided, even while arrangements for preference shares were accommodated in lieu of interest-cuts and deferments.

Due to their co-operation and authentic dealing with their lenders Wockhardt was also successful in obtaining a really long lease of life for their remaining debt - extending up to 2018.

But the going was not very smooth always, as there were lenders who found value in Dr. Habil’s strategy as well as lenders who tried to extract more and immediate returns from Wockhardt. They even went on to file a winding up petition against Wockhardt at one stage. But Dr. Habil stayed on course, fighting all his battles with elan.

Promoters also brought in Rs. 80 crore as part of the CDR package, for which Dr. Habil had to make personal sacrifices like selling assets in unlisted operations like Wockhardt Hospitals.

The simultaneous strategies of re-focusing on high-margin businesses as well as complying fully with CDR process have had a magical effect on the balance sheet as well as the stock.

Today, Wockhardt’s Total Debt Outstanding on the books is just below Rs. 2000 crores with Cash-on-Hand of Rs. 1000 crores. Net Debt to Equity Ratio has fallen dramatically from 5.7 times in FY’10 to just 0.6 times by September 2012.

Even more dramatic was the surge in Wockhardt’s stock performance. From its all-time low of Rs. 68 during April 2009, it has appreciated to a recent all-time high of Rs. 2166 - which is an almost 32X wealth appreciation within as little as 4 years.

And analysts believed that Wockhardt stock was still not fully priced in, before the FDA alert came in recently.

On his part, Dr. Habil Khorakiwala is continuing to steer the company towards increasing its investment in R&D so that it will continue to be the growth engine for the future. All the while teaching Wockhardtians and all of us for that matter, that what really matters in business and life is doing ‘More and More with Less and Less’.

Such strategies and management quality is what would make investors believe that Wockhardt would ride out this storm too.

Justdial IPO - 10 Reasons to Invest

The bad thing about stock market is that good stocks never come cheap. Justdial’s IPO which has opened today, might just prove this painful yet fruitful truth once more. At the demanded price-earnings multiple of 52X to 60X, nobody disagrees that Justdial IPO is expensive. But as good stocks have often proven in the past, ‘expensive’ stocks have later appeared as ’was reasonable’ or even as ’was cheap’, in hindsight. So, here are 10 reasons why Justdial IPO is investment-grade despite a stiff-price on first looks.

1. High Return-on-Equity:
 

While most listed large-caps in the country are struggling to mark even a double-digit RoE, and while many mid-caps to small-caps are working hard to maintain a Return-on-Equity of over 20% or even 15%, Justdial’s performance in this crucial metric is nothing short of a surprise - 53.6%. Calling themselves as ’India’s No.1 Local Search Engine’, this voice and data based operation also has an impressive Return on Capital Employed (RoCE) of 59.3%. And both values have been steadily growing during the last 4-to-5 years. Such metrics and performance are found only in the best of the blue-chip stocks among India.

2. Zero Debt:
 

Again, while the debt contagion is spreading among India Inc., Justdial has managed to steer clear of the lure of easy money that proves to be costly later. Net Debt at the local search major of India is zero, and the debt/equity ratio has been zero, at least for the last five years. In fact, the high asking price of Justdial IPO is partly due to this zero-debt compliance.

3. Reasonable Margins:
 

Justdial’s core profitability margins have been steadily increasing since the past five years. So much so that, from an originally unattractive state, it has steadily crossed over to reasonable or even attractive territory for investors. EBITDA margins are at 25.7%, while Net Profit Margin is at 20%. The steadily improving margins signal that Justdial enjoys a leadership position in their segment, and that they are not facing any troublesome pricing pressure.

4. High Growth Rate:
 

Justdial has achieved rising profitability margins and high RoE, despite zero debt, by not compromising on their topline growth. Sales growth has been steady and impressive, with revenue growing by 3.8X times during the past five years. The high valuations of Justdial’s IPO is also a reflection on this growth pace. In fact, if the current growth momentum persists, analysts think that the offer is priced at 30 P/E on FY’14 estimates.

5. Fully an Offer for Sale:

Justdial is not issuing any new shares through this IPO. The full IPO consists of an Offer for Sale (OFS) by promoters and some existing investors. Some analysts have pointed out that this is a weak point of the IPO, as the entire IPO proceeds would go to the promoters and these early investors, and that nothing would come to the company. Though partly true, this argument is not without its flaws. Firstly, a full OFS issue avoids equity dilution which is a good thing for all shareholders - old and new. Secondly, it signals an aversion to the serial-dilution culture that has become the bane of many stocks in the Indian market. And lastly, as Founder and Managing Director VSS Mani says, “The company has enough money for its growth.”

6. Attractive Cash Conversion Cycle:

Even profitable companies might encounter serious issues with cash flows. And in the listed segment of India Inc, there are numerous examples with seemingly insurmountable free cash flow challenges. But Justdial has almost always generated significant free cash flows during its existence. The secret behind that is 100 percent pre-payment by advertisers as well as the low capex intensive nature of their business. Justdial’s FCF/EBITDA stands at a high 92%.

7. Early Investors’ Profile:

Some of the world’s most discerning long-term investors had found value in Justdial’s value proposition, as well as performance, years before the run-up to this IPO. SAIF became an investor in 2006, and became a repeat investor in 2007. That year also saw Tiger Global entering Justdial. 2009 was witness to the entry of none other than Sequoia (of Google-Apple-Yahoo fame), and second and third investments by Tiger Global and SAIF respectively. 2011 saw entry of SAPV and EGCS Investment Holdings, while 2012 was witness to repeat investments by Sequoia and SAPV.

8. High QIB Demand:

Justdial’s IPO is unique in that 75% of the total issue is reserved for Qualified Institutional Buyers (QIBs). That shows anticipation of strong institutional demand, which has been quite unlike in many earlier IPOs. While another 15% is reserved for High Networth Individuals (HNIs), only 10% has been reserved for Retail Investors. Still, Retail Investors will get the benefit of a 10% discount on price to others. Already the pre-IPO anchor-investor segment of Justdial’s issue got strong response with institutional investors like Goldman Sachs, HSBC, Deutsche Securities, DSP Blackrock, & Birla Sunlife subscribing for shares worth Rs. 208 crore at Rs. 530 a share.

9. CRISIL’s 5/5 Rating:

Though rating agencies are not immune to mistakes or inflated projections, CRISIL, a unit of S&P, is regarded as the most conservative among rating agencies in India. Also India’s largest rating agency, it is not common that CRISIL assigns even a 4/5 rating to an IPO. But Justdial IPO has obtained the highest 5/5 rating from CRISIL. Though CRISIL makes it clear that the rating is not a comment on the issue price, it does show that the fundamentals of the company are now strong.

10. Safety Net:

Justdial IPO is unique in that it is using SEBI’s new mechanism of providing a ’Safety Net’ for IPO investors. SEBI’s safety net is a scheme where the company’s promoters assure that they will buy back shares from the retail applicants at the IPO price, if its stock falls sharply during the first six months after listing. The buy back under safety net will trigger if volume-weighted average price of the share for the previous 60 days on completion of the safety net period of six months is below the allotment price for retail applicants. Though SEBI had not made it mandatory, Justdial has went for it voluntarily, showing confidence in their offer price.

Union Bank Bullish on Home Loans, Comes Runner-Up in MCHI Exhibition

Union Bank has been accelerating its focus on the retail segment, especially on the home loan front in recent weeks. The retail push among public sector banks was pioneered by this Mumbai-based bank, which started employing an innovative marketing strategy that strived to transform the image of the bank to a more customer-friendly one.

The focus on home loans - arguably the largest long-term retail segment - was evident in the recently concluded MCHI-CREDAI Property 2013 exhibition, in which Union Bank was awarded runner-up prize (among banks and housing finance institutions) for Excellence in Innovative Marketing.

Despite the exhibition coming up against a backdrop of sluggish home sales, Union Bank's stall was visited by thousands of prospective homebuyers. The bank's current base rate is 10.25% and it offers floating rate loans up to Rs. 75 lakhs at the base rate itself. For loans above Rs. 75 lakhs to a maximum of Rs. 5 crore, the floating rate is at 10.50%, with tenure for both categories going up to 25 years.

Union Bank also offers attractive fixed-rate home loans.

The bank's innovative stall at MCHI-CREDAI was also visited by Sachin Bhau Ahir, Housing Minister of Maharashtra, who was received by Pravin K Bansal, General Manager (Retail Banking) at Union Bank.

GM Bansal, as well as Chairman & MD, D Sarkar, and Executive Directors, Suresh Kumar Jain & K. Subrahmanyam, have been taking proactive steps to boost the home loan business.

Minister Sachin was appreciative of the bank's innovative efforts in serving homebuyers and the industry. The bank had supported the event by being a Platinum Partner for the exhibition which was staged at Mumbai BKC's MMRDA Grounds.

Between 12000 to 15000 properties were on exhibition at the event by over 100 developers, and covered areas like Mumbai Metropolitan Region (MMR), Thane, Navi Mumbai, and Pune, as well as from Bangalore, Ahmedabad, Hyderabad, Chennai, & Kerala.

Properties ranging from 1/2/3/4/5 BHK and studio apartments, duplex, penthouses, row houses, bungalows, second homes, holiday homes, plots, shops, and office premises were displayed. Though many developers were not willing to cut prices substantially to survive the sluggishness, there were smart ones who offered better rates during the exhibition which were lower by Rs. 500 to Rs. 1000 per square feet.

Making the best use of such exhibitions is important for Union Bank as it vigorously proceeds to create a better share for retail loans in its portfolio, compared with the traditionally larger share of corporate loans.

LIC's Capabilities High, But Now Challenges are Higher

LIC has been demonstrating higher and higher capabilities to weather the downtrend in the industry, even while keeping its equity investment business productive, both on the buy and sell side. Due to these high capabilities, significant opportunities like the default NPS annuity scheme have come knocking on its doors, but it can't be underestimated that LIC's challenges too are getting multi-fold higher, like its sluggish new business premiums as well as its leading role in the nation's divestment program. The state-run insurance major has been formulating new strategies on every business front to keep its large machinery agile to meet the new opportunities and challenges head on. Will it be successful in this exercise?

LIC has recently opened a new front in its battle to outpace sluggishness in the conventional policy space.

Its latest product, Jeevan Sugam, a single premium plan, offers risk cover of 10 times the premium paid for a fixed period of 10 years. At the end of 10 years, the policy will mature and be ready for redemption of guaranteed sum. Jeevan Sugam is open for children too, with those aged between 8 and 45 years, welcome.

On maturity, the survivor will be paid sum assured along with loyalty benefits. For example, to get the minimum maturity sum assured of around Rs 60,000, the single premium would be Rs. 33,759. The life cover, on death before policy expiry, is 10 times the single premium amount after deducting service tax.

In case of death after five years of the policy term, loyalty addition will also be paid, although that amount is not specified upfront.

For maturity sum assured of over Rs 1,50,000, an additional maturity sum assured of 3.5% is provided to the policyholder. For maturity sum of over Rs 4,00,000, higher additional maturity sum assured of 4.5% is provided.

This plan suits even those who don’t foresee a regular income in future but still want to protect themselves by taking a risk cover now with some money they have now. A single premium plan is also less cumbersome for those who want to avoid paying regular premium. Jeevan Sugam favours the young the most, as the policy’s maturity value is higher for people in the lower age groups.

The real value of the plan is hidden, as the real value will be if and when the interest rates come down significantly over the next 1-5 years, and doubling of money even by 10 years would appear difficult. In such a scenario, it can be seen that Jeevan Sugam’s life cover comes virtually for free.

The scheme which is closed-ended and open only till March 31st, has been garnering good subscriptions. LIC had to make this innovative scheme closed-ended as it provides assured rate of return, which mandates that the offer period should have a uniform interest rate in the country.

New products like Jeevan Sugam is critical for LIC as the insurance heavyweight’s best performing class of products continue to be single premium ones.

All insurance companies including LIC has seen new business premiums dipping in the April to January period. Though it can be argued that LIC’s new business dipped more than that of private insurers for the first time, not only is the relative underperformance small - 6.5% against 5% - but the absolute volumes speak for itself - with LIC still accounting for more than double of the business of all private insurers combined.

LIC continues to record this kind of performance based on their relatively superior honouring of life cover claims, as well as its unique sales model driven by a large pool of agents.

The lapsation rate with LIC is a low 9%, which is attributable to fair claim processing as well as the efficient servicing by agents. The penetration of LIC agents into the vast Indian population is legendary, with LIC and its agents reported to have covered every region were 1000 people were living with at least one agent, way back from 1969. Despite alternative distribution channels like bancassurance being mooted, LIC’s agent army remains one of its core strategic advantages.

Hints from the recruitment side also shows that LIC is not planning to lie low during this sluggish phase for the industry, but that it is actively preparing for the next growth phase. Life Insurance Corporation has recently invited online applications for filling up 750 vacancies for the post of Assistant Administrative Officer (AAO).

Candidates recruited will be able to work in different streams such as Marketing, Finance, Investment, IT, Customer Relations, Underwriting, Actuarial, HR and Legal. The total emoluments for the post is handsome, compared with say public sector banks, at Rs 33,418 per month in any ‘A’ class city.

LIC should indeed be preparing for the good times, as its unique capabilities are attracting massive new opportunities.

Recently, pension fund regulator PFRDA has chosen LIC as the default annuity service provider for subscribers exiting from New Pension System (NPS) and seeking withdrawal of accumulated pension wealth.

PFRDA had earlier empanelled seven Annuity Service Providers (ASPs) - LIC, SBI Life, ICICI Prudential Life, Bajaj Allianz Life, Star Union Dai-Ichi Life and Reliance Life Insurance - for providing annuity services to NPS subscribers.

While subscribers were earlier required to select an empanelled ASP along with an annuity scheme from those offered by the chosen ASP at the time of exiting from NPS, PFRDA has now decided to assist subscribers by providing a default option - LIC. While choosing LIC for the prestigious role, a top PFRDA official clarified that, “LIC has been chosen as the default ASP,and this default option is being provided in the subscribers' interest and to avoid any delay in claim processing.”

The opportunity is huge, even for LIC, as under the provisions of NPS, a maximum of 60% of corpus accumulated at the time of exit, which is normally on the attainment of 60 years of age, can be withdrawn but a minimum 40% of corpus has to be utilised for purchasing an annuity.

And the numbers are huge. Even while the NPS was only open for the new recruits who join government service on or after January 1, 2004, by the end of 2012, over 42 lakh subscriptions were enrolled with a corpus of over Rs 26,000 crore. And from May 2009, the floodgates were opened, when the NPS was opened up for all citizens in India to join on a voluntary basis.

The default scheme from LIC offers annuity - which is a kind of policy by an insurer designed to provide payments to the holder at specified intervals for life - with an additional provision of 100% of the annuity payable to spouse during his/her life after the death of the annuitant.

LIC is also going great guns in its other core area of operation - capital market investments. Though there might be critics of the way in which LIC is said to have ‘bailed out’ various disinvestments of the government like NALCO, NTPC, Oil India, Hindustan Copper, NMDC, RCF, & SAIL, only time will prove whether it is a bailing out or highly attractive investments for the insurer.

If LIC’s recent performance in profit-booking is any indication, LIC has that rare ability to make good on all these investments. Reportedly, LIC is set to end the current financial year with record profits from sale of equities, amounting to about Rs 24,000 crore, which is its highest ever. The state-run insurer smartly sold off massive quantities of long-held stocks into the recent FII led rally.

But as always, it has been not a mindless sell-off, but a prudent churn. For example, it cut it position in Federal Bank even as it emerged as the largest investor in Karnataka Bank.

On the longer horizon, another shot in the arm will come by way of LIC, when it gets into banking through its subsidiary LIC Housing Finance. Commenting on the recent RBI guidelines on new banking licences, LIC has openly come out with its ambition to float a bank.

LIC Chairman DK Mehrotra recently summed it all up to reporters, where the organization is standing with regard to its ambitious Vision 2020 Program. “Going by the enthusiasm and response, we hope that giving a policy to every insurable person by 2020 should be fulfilled. It includes any insurance product, depending on the person's ability to buy it. Each of these persons should have a cover of insurance with LIC. If he thinks about insurance, it should be LIC.”

Why ICICI Might Overtake HDFC Under Chanda Kochhar’s Leadership

ICICI Bank (BSE: 532174, NSE: ICICIBANK) records double the annual revenue and 50% more profits than HDFC Bank (BSE: 500180, NSE: HDFCBANK), but when it comes to market capitalization, HDFC Bank is way ahead by around Rs. 20,000 crore, making it the most valuable Indian private sector bank. Market has so far valued HDFC Bank ahead of ICICI Bank, due to its consistency and superior Return on Equity. On the consistency front, ICICI Bank is no match, as according to some reports, HDFC Bank has been registering 30% year-on-year quarterly net profit growth for the last 53 consecutive quarters. And on the RoE front, so far the strategies of the two banks have been quite different with HDFC Bank relying on a much smaller equity base. But the recent quarterly results for Q1, Q2, & Q3, as well as yearly charts are suggesting that fortunes are changing for ICICI Bank. And much of the credit for that goes to Chanda Kochhar who has almost completed a dramatic turnaround at the largest private sector lender, post the global financial crisis which had hit it badly. Going forward too, some of Chanda’s strategies like accommodating large scale project finance might come to ICICI Bank’s help as the power and infra sectors turn around.

Chanda Kochhar’s clarity of vision on the Indian growth story was recently evident at WEF Davos, when she met every negative question on India with irrefutable fundamentals of India.

Despite being afflicted by what is still a large corporate lending book, the ICICI Bank Chief reassured everyone that Indian banking’s projected weakness of overexposure to corporates is only a temporary phenomenon. According to her most of these large-scale lending has happened to pivotal sectors like power and infra, and there would soon be a time, when such sectors turn around.

While admitting that such sectors are currently appearing overleveraged, Chanda expressed confidence that it is only a matter of time before such projects turn cash-flow positive, making the leverage appear not only safe and manageable, but a tremendous growth opportunity for lenders too.

In fact, such exposure is one core area where India’s largest private sector lender has been in stark odds with the country’s most valuable lender, HDFC Bank, which has always been shy of large scale project finance.

At Davos, Chanda also articulated on why she remains bullish on the Indian banking and financial sector as a whole - India remains grossly under banked still, with banking sector growth being at 2.5-3 times of GDP growth.

She should know as Chanda Kochhar is Indian banking’s turnaround leader. She assumed the apex role in the aftermath of the global financial crisis when everyone was predicting doomsday for ICICI Bank due to its high global and corporate exposure. But Chanda, back then too, had only words of reassurance, as she knew that ICICI Bank could always rebound on correcting the strategy.

For the next couple of fiscals, she guided for flat growth to investors, even while internally she set the huge machinery of ICICI Bank to work to convert both the loan book and deposit base to a more retail oriented one.

Chanda was the perfect person to do that at ICICI Bank, as years earlier, despite being really a corporate banker, she was entrusted by the ICICI Board to jumpstart their retail business. Under her vision, the systems and products that ICICI introduced went on to become model products for every private and public bank to emulate later.

An extremely hardworking person, this globetrotter is known to fly to US after a day’s work, do back-to-back meetings in New York, and fly back that night to India, so that she loses only one day with her family, thanks to the time zone difference. Also a spiritual person in her own way, she is known to find peace by chanting her favourite hymns, once in car or air.

Anecdotes about Chanda’s enthusiasm and earnestness in every job that she undertakes are legendary, with some describing that she still remembers each and every question that KV Kamath and team asked her during her campus interview.

Her capabilities are also said to have been noticed instantly by the top management, when they visited a branch where she was working, and was surprised by a unique way in which she had reorganized the whole office, despite not being in charge of that duty.

Chanda Kochhar’s big test would come when ICICI Bank comes out of the consolidation phase that India is going through and it tries to grow further in competition with state-backed models like SBI and private models like HDFC and Axis.

Despite being an all around backer of the recent reforms by Government, Chanda also sounded a cautious note at Davos when she said that all projects should move forward constantly at the ground level, and that much more needs to be done by the policy makers and implementers to ensure that all necessary clearances and linkages are given in time.

Nobody knows better than Chanda that without that level of proactive attitude, all banks including ICICI won’t come out from the woods.

Her silver bullet for the Indian economy to rebound is household savings being encouraged to be invested in productive assets for the nation, and not non-productive assets like gold and land.

What is Troubling Punjab National Bank?

PNB has already wakened up to the realization that loans can be given much more prudently than earlier thought possible. It is quitting the rat race of growth for now, and trying to clean up its books. Reeling from bad loans in the power and infra sectors, India’s second largest public sector lender can no longer afford to hide behind the excuse that the root cause for their crisis is huge lending to the private power sector players on government’s behest for supposed nation building. Chairman KR Kamath and his core team is rolling up their sleeves and focusing on what matters most now - to rein in further slippages and maximise recovery efforts. But can PNB do an ICICI Bank in this regard? Only time will tell. PNB also has to start afresh on the crucial life insurance front through a JV with Metlife India, and the bank also needs to shore up its capital, by attracting up to Rs. 1250 crore from Government of India through a preferential issue.

Punjab National Bank (BSE: 532461, NSE: PNB) is rallying, together with the rest of the banks and financial stocks. The stock of the second-largest public sector lender by revenue has rallied from Rs. 659 during August end to Rs. 919.60 recently - which is almost 40% rise within 4 months flat.

And technical advisors in the market, who relies on nothing but technical indicators, are bullish on the PNB stock, as clearly there is a momentum play out there in the Indian market, buoyed further by a possible rate cut, an underperforming Chinese market, and the tiding over of US fiscal cliff.

But apart from such environmental factors and technicals, what is the ground situation at Punjab National Bank? For its long-term investors, it has been a grim story.

PNB needs to shore up its equity further, and the lender is expecting up to a Rs. 1250 crore equity infusion by the promoter, Government of India, on a preferential basis. The PNB management recently approved this move.

On the crucial subsidiary front of life insurance, where peer banks like SBI have made giant strides in recent years, PNB has to start afresh after nearly 3 years since parting ways with former overseas partner, Principal Financial Group. Recently, PNB obtained the last regulatory approval for picking up a 30% stake in Metlife India Insurance to start afresh, after almost 2 years after announcing the new JV.

And PNB is yet to recover back to its year-to-date high of Rs. 1091. The stock is way off from its 2-year high of Rs. 1237. And it looks like it will never scale its 3-year high of Rs. 1395 in the near term.

In other words, PNB stock has to appreciate by another 52% from this current ’high’ level for three-year old investments to reach a no-loss state i.e. if you don’t count the FD interest and don’t consider the opportunity cost.

And speaking about opportunity costs, a similar equity investment in HDFC Bank would have yielded a 50% return during these 3 years.

As an aside, the current ‘rally’ in public sector lenders are also an outcome of the P/BV valuations getting stretched beyond all norms at private sector lenders and market darlings like HDFC Bank. In simpler words, they can’t be jacked up further, at least in the near term.

But what on earth happened to the once high-flying Punjab National Bank during these past three years? Can this underperformance be attributed wholly to the infamous post-2008 global financial crisis and the resultant high-interest regime unleashed by RBI in India?

Rating agency Moody’s recently cut PNB’s Outlook to ‘Negative’ from the earlier ‘Stable‘ rating. It should come as no wonder as PNB’s Gross NPA stands at a whopping 4.66%, whereas its Tier-I Capital Adequacy Ratio stands at a troubling 8.72%.

PNB’s restructured loan portfolio too is on the rise. As the pressure on asset quality mounted, PNB lowered its provision coverage ratio over the past year. That compounded the problem, and the global rating agency has remarked that if monitorables like gross NPA, restructured portfolio, and low provisioning, deteriorate further, there would be further cut on the ratings.

Moody’s, on their part, doesn’t expect PNB’s situation to improve within the next 12-18 months.

In Q2, Punjab National Bank had recorded the highest jump in gross NPAs among all public sectors banks, by witnessing a spike of 60%.

What created this whole mess is anybody’s guess. And like a couple of its peers in the public and private space, PNB has already wakened up to the realization that loans can be given much more prudently than earlier thought possible.

To get out of this vicious cycle, PNB has no other way than the ICICI way. It has to stop chasing growth and get its house in order. In other words, clean up and consolidate its balance sheet, before it again gets on track with all other growth initiatives.

In fact, it seems that PNB has already started following this prudent track now. Recent interactions that research houses had with PNB management reveal that focus has shifted completely to rein in further slippages and maximise recovery efforts.

Of course, growth will have to be sacrificed when shifting the focus in such a fashion. Analysts tracking PNB have guided that credit growth will be muted at 15% levels for FY13 due to this balance sheet consolidation.

How effective will be PNB’s improved prudence at the loan sanctioning level? The bank claims that it has become extremely selective on sanctioning loans for infrastructure projects, with future sanctioning to the troubled sector granted only after the project developer has got all the regulatory clearances.

However, such steps concern only new loans, and is no solace to investors who are obviously troubled by the unhealthy state of the existing loan book at PNB. For example, in Q2, absolute GNPA accretion was at 40% QoQ while net NPA accretion was at 60% QoQ. And delinquency ratio at 6.1% has been at the highest level seen in the last 7-8 years in PNB. According to analysts, explanations provided by the management for this sort of dismal performance was not very convincing.

PNB’s exposure to infra sector is typically of large and complex deals, and as such carry much uncertainty. A typical example is the Delhi-Gurgaon e-Way where the project is a 3-way affair between the concessionaire (DGSCL), NHAI, and the lenders including IDFC, PNB, & BoI. Since the project has been stalled for considerable time now, Government is mulling the option of IDFC taking over 74% of the project as the promoter, which means the debt of PNB too may be converted to equity, and the lender will have to rely on toll collection to make good on its loan.

PNB has also been hit badly by the problems in the power sector, especially loans to power producers. It is one among the three lead banks who have lent considerably to power producers. PNB Chairman KR Kamath has recently admitted that there is real concern over the issue of power producer loans turning bad. Overall, private sector power producers have taken loans to the tune of Rs. 2.3 lakh crore from various banks.