Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap.

*Better Bottom-line Doesn’t Tell Entire Story: State Bank of India (SBIN.IN) [SBI] reported FY 3Q21 results of INR 55.8 bn, increasing INR 10.1 bn (22.1%) linked quarter. On top of a significant (albeit completely unwarranted) INR 55.0 bn (58.1%) decline in loss provisions, results were also highlighted by a turnaround in SBI’s operating jaws which are now positive; and*Reserve Challenge Should Lead To Capital Raise: While we note a net recovery of INR 48.4 bn (likely a non-recurring event given the exorbitant credit risk), we still find that net new NPLs increased INR 145.7 bn for an annualized increase of 41.6%.  By our calculation, we find that SBI’s reserves are short INR 1.2 bn - nearly four years of pre-tax results or 61% of market-cap. 

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

The <a href="https://www.smartkarma.com/entities/nifty-index" target="_blank" data-smartkarma-citation="entities:23617:1" rel="noopener">NIFTY Index (NIFTY INDEX)</a> is the flagship index of the National Stock Exchange of India (NSE). The index has 50 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 25 March and the announcement of the changes will be done four weeks prior to the effective date.We are now almost at the end of the review period. There are 3 stocks that meet the criteria for inclusion in the <a href="https://www.smartkarma.com/entities/nifty-index" target="_blank" data-smartkarma-citation="entities:23617:1" rel="noopener">NIFTY Index (NIFTY INDEX)</a>: <a href="https://www.smartkarma.com/entities/tata-consumer-products" target="_blank" data-smartkarma-citation="entities:258:1" rel="noopener">Tata Consumer Products (TATACONS IN)</a>, <a href="https://www.smartkarma.com/entities/icici-lombard-general-insura" target="_blank" data-smartkarma-citation="entities:25882:1" rel="noopener">Icici Lombard General Insurance Company (ICICIGI IN)</a> and <a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a>. The three lowest ranked stocks in the index are <a href="https://www.smartkarma.com/entities/gail-india-ltd" target="_blank" data-smartkarma-citation="entities:15263:1" rel="noopener">Gail India Ltd (GAIL IN)</a>, <a href="https://www.smartkarma.com/entities/indian-oil-corp-ltd" target="_blank" data-smartkarma-citation="entities:7781:1" rel="noopener">Indian Oil Corp (IOCL IN)</a> and <a href="https://www.smartkarma.com/entities/upl-ltd" target="_blank" data-smartkarma-citation="entities:20776:1" rel="noopener">UPL Ltd (UPLL IN)</a>.We see a high probability of <a href="https://www.smartkarma.com/entities/tata-consumer-products" target="_blank" data-smartkarma-citation="entities:258:1" rel="noopener">Tata Consumer Products (TATACONS IN)</a> being included and <a href="https://www.smartkarma.com/entities/gail-india-ltd" target="_blank" data-smartkarma-citation="entities:15263:1" rel="noopener">Gail India Ltd (GAIL IN)</a> being excluded, and a lower probability of <a href="https://www.smartkarma.com/entities/icici-lombard-general-insura" target="_blank" data-smartkarma-citation="entities:25882:1" rel="noopener">Icici Lombard General Insurance Company (ICICIGI IN)</a> being included and <a href="https://www.smartkarma.com/entities/indian-oil-corp-ltd" target="_blank" data-smartkarma-citation="entities:7781:1" rel="noopener">Indian Oil Corp (IOCL IN)</a> being excluded.<a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a>'s average free float market cap is less than 1% lower than <a href="https://www.smartkarma.com/entities/icici-lombard-general-insura" target="_blank" data-smartkarma-citation="entities:25882:1" rel="noopener">Icici Lombard General Insurance Company (ICICIGI IN)</a> - can get close going into the tail end of the review period.The index committee has a wide berth when choosing the number of changes to be made and it is highly unlikely that there will be more than 2 changes, especially since a maximum of 5 changes can be made in a year.<a href="https://www.smartkarma.com/entities/dmart" target="_blank" data-smartkarma-citation="entities:23656:1" rel="noopener">Avenue Supermarts (DMART IN)</a> has the highest market cap among non index constituents but is not eligible for index inclusion since there are no listed Futures and Options on the stock, a prerequisite for index inclusion.

The NIFTY Index (NIFTY INDEX) is the flagship index of the National Stock Exchange of India (NSE). The index has 50 stocks and is a free float weighted market cap index. The next rebalance will be effective after the close of trading on 25 March and the announcement of the changes will be done four weeks prior to the effective date.We are now almost at the end of the review period. There are 3 stocks that meet the criteria for inclusion in the NIFTY Index (NIFTY INDEX): Tata Consumer Products (TATACONS IN), Icici Lombard General Insurance Company (ICICIGI IN) and Info Edge India (INFOE IN). The three lowest ranked stocks in the index are Gail India Ltd (GAIL IN), Indian Oil Corp (IOCL IN) and UPL Ltd (UPLL IN).We see a high probability of Tata Consumer Products (TATACONS IN) being included and Gail India Ltd (GAIL IN) being excluded, and a lower probability of Icici Lombard General Insurance Company (ICICIGI IN) being included and Indian Oil Corp (IOCL IN) being excluded.Info Edge India (INFOE IN)'s average free float market cap is less than 1% lower than Icici Lombard General Insurance Company (ICICIGI IN) - can get close going into the tail end of the review period.The index committee has a wide berth when choosing the number of changes to be made and it is highly unlikely that there will be more than 2 changes, especially since a maximum of 5 changes can be made in a year.Avenue Supermarts (DMART IN) has the highest market cap among non index constituents but is not eligible for index inclusion since there are no listed Futures and Options on the stock, a prerequisite for index inclusion.

NIFTY50 Index Rebalance Preview - Nearing The End of the Review Period

* Poor Results At A Better Bank: ICICI Bank (ICICIBC.IB) [ICICI] reported a terrible FY 4Q20 result of INR 12.2 bn – declining INR 29.3 bn or 70.5% linked quarter. Credit weakness has come early to ICICI. However, in fairness ICICI was already operating with a high base of NPLs pre-COVID-19. As alluded to, ICICI’s FY 4Q20 troubles begin and end with its loss provision which increased INR 38.8 bn (186.5%) linked quarter led by higher than anticipated loan slippage. A secondary factor during the period was the INR 2.9 bn (15.1% ) increase in employee expenses; and*Credit Is A Franchise Killer: At FY 4Q20, however, gross NPLs declined INR 20.4 bn or 4.7%, and still represent a very high 4.87% of total loans. Unfortunately, this doesn’t tell the entire story. During the quarter, NCOs amounted to INR 75.2 bn  - intimating that net new NPLs increased INR 59.7 bn or 55% on a annualized basis, despite not accounting for those credits (now 30% of lending) under the COVID-19-related moratorium.

* Poor Results At A Better Bank: ICICI Bank (ICICIBC.IB) [ICICI] reported a terrible FY 4Q20 result of INR 12.2 bn – declining INR 29.3 bn or 70.5% linked quarter. Credit weakness has come early to ICICI. However, in fairness ICICI was already operating with a high base of NPLs pre-COVID-19. As alluded to, ICICI’s FY 4Q20 troubles begin and end with its loss provision which increased INR 38.8 bn (186.5%) linked quarter led by higher than anticipated loan slippage. A secondary factor during the period was the INR 2.9 bn (15.1% ) increase in employee expenses; and*Credit Is A Franchise Killer: At FY 4Q20, however, gross NPLs declined INR 20.4 bn or 4.7%, and still represent a very high 4.87% of total loans. Unfortunately, this doesn’t tell the entire story. During the quarter, NCOs amounted to INR 75.2 bn  - intimating that net new NPLs increased INR 59.7 bn or 55% on a annualized basis, despite not accounting for those credits (now 30% of lending) under the COVID-19-related moratorium. 

Event-Driven

India has one of the most liquid single stock futures markets in the world and is the <a href="https://www.bloomberg.com/news/articles/2020-01-21/india-now-has-world-s-largest-derivatives-exchange-by-volume" target="_blank" rel="noopener">largest derivatives exchange in the world by volume</a>. Volumes are driven mainly by company promoters, arbitrageurs, and speculators. With a large retail presence, inclusion in the derivatives market gives these stocks a 'halo effect'.Historically, inclusion in the Futures and Options (F&amp;O) segment has led to a rally in stock prices, while exclusion names have been sold off. Post the event, liquidity has shrunk on the names excluded from the F&amp;O segment.In this Insight, we look at the criteria that stocks need to satisfy to be included in the F&amp;O segment in India, the impact of exclusions on the stock price, at a list of possible inclusions and exclusions in the near future and some possible trades, and the implications of inclusion on <a href="https://www.smartkarma.com/entities/dmart" target="_blank" rel="noopener" data-smartkarma-citation="entities:23656:1">Avenue Supermarts (DMART IN)</a>.

India has one of the most liquid single stock futures markets in the world and is the largest derivatives exchange in the world by volume. Volumes are driven mainly by company promoters, arbitrageurs, and speculators. With a large retail presence, inclusion in the derivatives market gives these stocks a 'halo effect'.Historically, inclusion in the Futures and Options (F&amp;O) segment has led to a rally in stock prices, while exclusion names have been sold off. Post the event, liquidity has shrunk on the names excluded from the F&amp;O segment.In this Insight, we look at the criteria that stocks need to satisfy to be included in the F&amp;O segment in India, the impact of exclusions on the stock price, at a list of possible inclusions and exclusions in the near future and some possible trades, and the implications of inclusion on Avenue Supermarts (DMART IN).

India - Possible F&O Inclusions, Exclusions and Implications

Senior investment analyst

Pallavi Deshpande

ICICI Lombard General Insurance / Equity Bottom-Up

ICICI Lombard General Insurance (ICICIGI IN)

We believe the regulator's proposal to reduce third-party motor insurance premiums for cars below 1000cc by 10% will be an overhang for <a href="https://www.smartkarma.com/entities/25882" target="_blank" data-smartkarma-citation="entities:25882:1">ICICI Lombard General Insurance Company (ICICIGI IN)</a> (Ilom) share price performance and we expect the stock to move lower as underwriting margins in the health and property insurance business come under pressure. We believe India’s crop insurance market is yet to evolve with the issue of delay in the release of subsidies (premiums) by the state governments likely to take longer to be resolved.We expect Ilom's non-motor insurance premium growth to be inline with the industry in FY19 as it completes the restructuring of its product portfolio in FY18. We believe valuations at 30x FY2020 earnings do not factor in a regulator keen on increasing motor insurance penetration through lower pricing. Our 2019 and 2020 estimates are below consensus estimates.

We believe the regulator's proposal to reduce third-party motor insurance premiums for cars below 1000cc by 10% will be an overhang for ICICI Lombard General Insurance Company (ICICIGI IN) (Ilom) share price performance and we expect the stock to move lower as underwriting margins in the health and property insurance business come under pressure. We believe India’s crop insurance market is yet to evolve with the issue of delay in the release of subsidies (premiums) by the state governments likely to take longer to be resolved.We expect Ilom's non-motor insurance premium growth to be inline with the industry in FY19 as it completes the restructuring of its product portfolio in FY18. We believe valuations at 30x FY2020 earnings do not factor in a regulator keen on increasing motor insurance penetration through lower pricing. Our 2019 and 2020 estimates are below consensus estimates.  

ICICI Lombard - Likely Reduction in Third-Party Premiums Plays Spoilsport

India

ICICI Lombard General Insurance Company Limited is a leading private sector non-life insurer in India, offering a comprehensive range of products including motor, health, travel, home, and business insurance. The company also provides reinsurance, insurance claims management, and investment management services. It was founded in 2001 and is headquartered in Mumbai, Maharashtra, India.

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ICICI Lombard General Insurance (ICICIGI IN)

State Bank of India – Bad Credit

STATE BANK OF INDIA: SBI reported FY 3Q21 result increase of 22.1%) linked quarter led by a completely unwarranted 58.1% decline in provisions and...

Thomas J. Monaco

NIFTY50 Index Rebalance Preview - Nearing The End of the Review Period

There is just over a week remaining in the review period. We expect TATACONS to replace GAIL, and see a low probability of ICICIGI replacing IOCL....

Brian Freitas

ICICI Bank – Sinking Not Swimming

* Poor Results At A Better Bank: ICICI Bank (ICICIBC.IB) [ICICI] reported a terrible FY 4Q20 result of INR 12.2 bn – declining INR 29.3 bn or 70.5%...

Thomas J. Monaco

India - Possible F&O Inclusions, Exclusions and Implications

India has one of the most liquid single stock futures markets in the world and is the largest derivatives exchange in the world by volume. Volumes...

Brian Freitas

ICICI Lombard - Likely Reduction in Third-Party Premiums Plays Spoilsport

We believe the regulator's proposal to reduce third-party motor insurance premiums for cars below 1000cc by 10% will be an overhang for ICICI...

Pallavi Deshpande

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