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

*Ford Deal Vanishes: Ford Motor Company (F.US) [Ford] and Mahindra &amp; Mahindra (MM.IN) [M&amp;M] entered into a definitive agreement to establish a joint venture (JV) in October 2019 to develop, market, and distribute Ford-branded vehicles in India and other emerging markets. Unfortunately for M&amp;M, Ford has decided to end the relationship on December 31, 2021 - prior to it even getting off the ground; and   *Ssangyong Bankruptcy Likely Cause Of JV Collapse: Purchased by M&amp;M in 2011, the 74.7%-owned SsangYong Motor Company (003620.KS) [Ssangyong] in South Korea filed an application for commencement of the rehabilitation procedure with the Seoul Bankruptcy Court. The agreement between M&amp;M and Ford appears to have legally expired in October yet the actual decision to terminate precariously comes on the heals of the Ssangyong petition where M&amp;M is on the hook with a guarantee which likely will challenge it financially going forward.

*Ford Deal Vanishes: Ford Motor Company (F.US) [Ford] and Mahindra &amp; Mahindra (MM.IN) [M&amp;M] entered into a definitive agreement to establish a joint venture (JV) in October 2019 to develop, market, and distribute Ford-branded vehicles in India and other emerging markets. Unfortunately for M&amp;M, Ford has decided to end the relationship on December 31, 2021 - prior to it even getting off the ground; and   *Ssangyong Bankruptcy Likely Cause Of JV Collapse: Purchased by M&amp;M in 2011, the 74.7%-owned SsangYong Motor Company (003620.KS) [Ssangyong] in South Korea filed an application for commencement of the rehabilitation procedure with the Seoul Bankruptcy Court. The agreement between M&amp;M and Ford appears to have legally expired in October yet the actual decision to terminate precariously comes on the heals of the Ssangyong petition where M&amp;M is on the hook with a guarantee which likely will challenge it financially going forward.

Mahindra & Mahindra – Found On Road Dead

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

India offers new manufacturing units an effective corporate tax rate of 17%, a completely flexible labour market (with new employees taken on fixed-term contracts that needn't be renewed upon expiry), and production-linked incentives to encourage export-oriented industry, which will induce a strong investment revival. Base effects will help growth (with real GDP likely growing over 12% YoY) in FY2021/22 and inflation (likely falling below 4% YoY in Apr-Jun 2021), allowing further RBI rate cuts that help strengthen growth, with privatization (including large-ticket strategic sales) substantially boosting the fiscal balance.  Real GDP growth should average 10% annually in the decade ahead. Stay Overweight India, as growth will boost EPS and hence improve valuations.The  BoP current account surplus (2.1% of GDP in Jan-Sep 2020, after the latest surplus for the Jul-Sep 2020 quarter of 2.4% of GDP) provides ample room to boost domestic demand in 2021 without significantly affecting the external balances. Although the fiscal deficit soared by 40.3% YoY in April-September (the first half of FY2020/21) while the economy was largely shut down and revenues slumped, public expenditure also was restrained (declining 0.6% YoY in Apr-Sep20, and still up only 4.7% YoY in Apr-Nov20 after a good recovery in Oct-Nov20). In October 2020, gross tax revenue expanded 16.9% YoY, accelerating to 23% YoY in November 2020, and the fiscal deficit for April-November 2020 was up a more modest 33.1% YoY. Despite the improved revenue in the second half of the fiscal year, there will be scant room for fiscal manoeuvre in FY2021/22. But this year's economic reforms will provide a massive medium-term boost to the economy. The most significant are the labour reforms, which have simplified 44 codes into four simple ones (easing compliance) and allowed all new employees to be taken on fixed-term contracts. This neatly gets around the biggest problem in India's labour market (the difficulty of firing workers, which inhibits hiring), and makes India's labour market incredibly flexible. When combined with a corporate tax rate of 17% for new manufacturing units (as low as any in Asia), and production-linked incentives (PLI) for specific export-oriented sectors, India is likely to attract large inflows of FDI and domestic investment into manufacturing in 2021, as global value chains also begin shifting to India (as ASEAN and India already have an FTA, as does India have with neighbours Bangladesh, Sri Lanka and Nepal). Real GDP growth is likely to be +3% YoY in the current quarter, +7% in Jan-Mar 2021, +25% YoY in Apr-Jun 2021 (still leaving that quarter's GDP 4% below Apr-Jun 2019), 10% YoY in Jul-Sep 2021, and 8% YoY in Oct21-Mar22 -- enabling real GDP to grow over 12.5% YoY in FY2021/22. This year's structural reforms (including a diluted version of the farm reforms) will provide a medium-term boost to productivity and employment across a broad swathe of the economy, enabling real GDP to sustainably move toward 10% annual growth for the decade.  Stay Overweight India, despite the seemingly stretched valuations (which will result in a short-term correction early in 2021).

India offers new manufacturing units an effective corporate tax rate of 17%, a completely flexible labour market (with new employees taken on fixed-term contracts that needn't be renewed upon expiry), and production-linked incentives to encourage export-oriented industry, which will induce a strong investment revival. Base effects will help growth (with real GDP likely growing over 12% YoY) in FY2021/22 and inflation (likely falling below 4% YoY in Apr-Jun 2021), allowing further RBI rate cuts that help strengthen growth, with privatization (including large-ticket strategic sales) substantially boosting the fiscal balance.  Real GDP growth should average 10% annually in the decade ahead. Stay Overweight India, as growth will boost EPS and hence improve valuations.The  BoP current account surplus (2.1% of GDP in Jan-Sep 2020, after the latest surplus for the Jul-Sep 2020 quarter of 2.4% of GDP) provides ample room to boost domestic demand in 2021 without significantly affecting the external balances. Although the fiscal deficit soared by 40.3% YoY in April-September (the first half of FY2020/21) while the economy was largely shut down and revenues slumped, public expenditure also was restrained (declining 0.6% YoY in Apr-Sep20, and still up only 4.7% YoY in Apr-Nov20 after a good recovery in Oct-Nov20). In October 2020, gross tax revenue expanded 16.9% YoY, accelerating to 23% YoY in November 2020, and the fiscal deficit for April-November 2020 was up a more modest 33.1% YoY. Despite the improved revenue in the second half of the fiscal year, there will be scant room for fiscal manoeuvre in FY2021/22. But this year's economic reforms will provide a massive medium-term boost to the economy. The most significant are the labour reforms, which have simplified 44 codes into four simple ones (easing compliance) and allowed all new employees to be taken on fixed-term contracts. This neatly gets around the biggest problem in India's labour market (the difficulty of firing workers, which inhibits hiring), and makes India's labour market incredibly flexible. When combined with a corporate tax rate of 17% for new manufacturing units (as low as any in Asia), and production-linked incentives (PLI) for specific export-oriented sectors, India is likely to attract large inflows of FDI and domestic investment into manufacturing in 2021, as global value chains also begin shifting to India (as ASEAN and India already have an FTA, as does India have with neighbours Bangladesh, Sri Lanka and Nepal). Real GDP growth is likely to be +3% YoY in the current quarter, +7% in Jan-Mar 2021, +25% YoY in Apr-Jun 2021 (still leaving that quarter's GDP 4% below Apr-Jun 2019), 10% YoY in Jul-Sep 2021, and 8% YoY in Oct21-Mar22 -- enabling real GDP to grow over 12.5% YoY in FY2021/22. This year's structural reforms (including a diluted version of the farm reforms) will provide a medium-term boost to productivity and employment across a broad swathe of the economy, enabling real GDP to sustainably move toward 10% annual growth for the decade.  Stay Overweight India, despite the seemingly stretched valuations (which will result in a short-term correction early in 2021). 

India's 2020 Reforms Will Usher in a Decade of Spectacular Growth from 2021 On

*Ssangyong Declares Bankruptcy: Purchased by Mahindra &amp; Mahindra (MM.IN) [M&amp;M] in 2011, the 74.7%-owned SsangYong Motor Company (003620.KS) [Ssangyong] in South Korea filed an application for commencement of the rehabilitation procedure with the Seoul Bankruptcy Court; and*M&amp;M Guarantee: Unfortunately for M&amp;M, it has provided a corporate guarantee on behalf of Ssangyong on loans up to IN 6.8bn. If no new investor steps in, M&amp;M will be required to pay the guarantee.

*Ssangyong Declares Bankruptcy: Purchased by Mahindra &amp; Mahindra (MM.IN) [M&amp;M] in 2011, the 74.7%-owned SsangYong Motor Company (003620.KS) [Ssangyong] in South Korea filed an application for commencement of the rehabilitation procedure with the Seoul Bankruptcy Court; and*M&amp;M Guarantee: Unfortunately for M&amp;M, it has provided a corporate guarantee on behalf of Ssangyong on loans up to IN 6.8bn. If no new investor steps in, M&amp;M will be required to pay the guarantee.

Mahindra & Mahindra – Ssanyong Goes Plotz

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

*Alleging Questionable Lending: On December 14, 2020, Australian news agency International Media Corporation’s Scams Breaking reported that Axis Bank (AXSB.IN) [Axis] etc. has provided loans to the questionable SREI Infrastructure and Finance Limited (SREI.IN) [SREI] to the tune of INR 440.0 bn without any due diligence and verification of end use of the loan amount; and*Axis Position: Axis has stated that “the report is grossly inaccurate and baseless insofar as Axis Bank Limited’s outstanding to SREI entities or underwriting practices and processes are concerned." Provided Axis is correct in its assertion, we’d anticipate the organization taking legal action against International Media Corporation in Australia.

SBI (State Bank of India) / Equity Bottom-Up

*Management Call Doesn’t Allay Fears: FY 2Q21 results were significantly driven a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics.  We find that reserves were light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. The recent virtual call held by a competitor unfortunately did not allay our concern; and*Other Items Discussed: State Bank of India (SBIN.IN) [SBI] did reiterate its guidance for problem loan formation (slippages and restructuring) at 2.5% of loans outstanding in FY21. While SBI’s CET 1 ratio stood at 10.5% as of FY 2Q21,our calculated loss reserve shortfall would suggest that SBI has further wood to chop in this area.In addition, SBI is confident that it will be able to enhance its digital platform YONO into a more robust and scalable platform.

*Management Call Doesn’t Allay Fears: FY 2Q21 results were significantly driven a loan loss provision decline of INR 18.1 bn (16.0%) despite much weaker credit metrics.  We find that reserves were light in the neighborbood of INR 1.1 tn  - nearly four years of pre-tax results or 61% of market-cap. The recent virtual call held by a competitor unfortunately did not allay our concern; and*Other Items Discussed: State Bank of India (SBIN.IN) [SBI] did reiterate its guidance for problem loan formation (slippages and restructuring) at 2.5% of loans outstanding in FY21. While SBI’s CET 1 ratio stood at 10.5% as of FY 2Q21,our calculated loss reserve shortfall would suggest that SBI has further wood to chop in this area.In addition, SBI is confident that it will be able to enhance its digital platform YONO into a more robust and scalable platform.

State Bank of India – Reserve Shortfall Needs To Be Addressed

India

iShares MSCI India ETF is an exchange-traded fund incorporated in the USA. The ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI India Index.

iShares MSCI India ETF (INDA US)

Mahindra & Mahindra – Found On Road Dead

MAHINDRA & MAHINDRA: Ford and M&M entered into a JV in 2019. Unfortunately Ford has decided to end the relationship. The Ssangyong bankruptcy and...

Thomas J. Monaco

India's 2020 Reforms Will Usher in a Decade of Spectacular Growth from 2021 On

17% corporate tax rate, an ultra-flexible labour market and performance-linked incentives to exporters will give a big fillip to investment & boost...

Prasenjit K. Basu

Mahindra & Mahindra – Ssanyong Goes Plotz

MAHINDRA & MAHINDRA: 75% Owned Ssangyong Motors Declares Bankruptcy, and M&M Is Likely On The Hook For The Credit Guarantees.

Thomas J. Monaco

Axis Bank – Denying Evil

AXIS BANK: Allegations Of Exorbitant Lending To The Questionable SREI Without Verification Lead To Aggressive Denials Of Wrongdoing By Axis.

Thomas J. Monaco

State Bank of India – Reserve Shortfall Needs To Be Addressed

STATE BANK OF INDIA: Recent Call Suggests No Real Progress On Significant Reserve Shortfall, And That Another Capital Raise Not Out Of Question

Thomas J. Monaco