In this briefing:
- Morning Views Asia: JSW Steel Ltd, Modern Land China
- Edelweiss Financial Services – Train Wreck
- The Guerrilla War Against The PBOC
- Glenmark Pharmaceuticals – Earnings Flash – Q3 FY 2019-20 Results – Lucror Analytics
- Defy Regulator, Win $3.3 Bn: Kotak Laughs All the Way to the Bank
Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.
Weak Edelweiss Result:Edelweiss Financial Services (EDEL.IN) [Edelweiss] reported earnings of INR 170 mn for FY 3Q20, a 67% and 92% linked quarter and YOY decline. Loan loss provisions were substantially higher, the agency business exhibited lower profits, and larger insurance and BMU losses all contributed to this disastrous result.
FY 4Q20 Should Be Special As Well: Edelweiss intends to complete a detailed review of its corporate loan book in FY 4Q20 and will update its Expected Credit Loss (ECL) model. If the organization is honest with itself, we’d anticipate a far greater level of NPLs next quarter.
In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.
However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.
While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.
This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.
If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.
Glenmark Pharmaceuticals’ Q3/19-20? results were again disappointing. Growth was more sluggish than expected, especially with the sharp slowdown in the US only partly offset by stronger-than-expected sales in India. Furthermore, not all was positive in India, where the consumer care business decelerated significantly, perhaps due to the weak economy. We note that Glenmark has consistently missed guidance in key areas since its USD ’21 bond issuance: revenue growth, profitability and deleveraging, despite a two-decade-long record of growth. Positively, the financial risk profile remains stable, with stable earnings and a small decrease in debt. Liquidity is weak, as the company will face large debt maturities in the next 1.5 years. This would improve if the company is successful in issuing new USD 200 mn Notes to refinance the existing USD 200 mn 2021 Notes (maturing August 2021).
In a surprise capitulation, the Reserve Bank of India (RBI) has relaxed its rules regarding the ceiling on the percentage of shares held by founders of a private bank. But it has carved out this exception for just one bank, Kotak Mahindra Bank (KMB IN) (KMB), which has been permitted to reduce the founders’ stake to 26% (from the existing 30%) within 6 months from the date of final approval of the RBI. Thereafter no timeline has been set by the banking regulator for the founders’ stake to be reduced to 15%. Prior to this decision, KMB had agreed to the RBI’s decision of reducing the founders’ stake to 15% by March 31, 2020; even this timeline was a major regulatory forbearance, as the original February 22, 2013 notification required the founders’ stake to be reduced to 15% by March 31, 2015. In late 2018, KMB had filed a case against the RBI to permit preference capital (essentially debt) to be included in paid-up capital, so as to reduce the founders’ stake in the bank. As part of the ‘settlement’ with the regulator, KMB will withdraw the case against the RBI.
This major relaxation, given to only one bank, has seriously undermined the credibility of the banking regulator. To date, it has led to a staggering gain estimated at US$ 3.3 bn (Rs 233 bn) to the founders of KMB (essentially one individual, Uday Kotak) by allowing the original March 31, 2015 deadline to be ignored. In contrast, the RBI took stringent action against Bandhan Bank in September 2018; when the bank did not reduce the founders’ stake, the RBI restricted its business by barring the opening of new branches. That the RBI has been partial only to one bank with regard to complying with the RBI’s guidelines on reducing founders’ ownership stakes in private sector banks has not resulted in any media outcry. Nor have the 44 sell-side analysts who cover KMB highlighted the huge potential loss to non-founder shareholders in KMB from this special treatment meted out by the banking regulator. In the normal course, the business media and sell-side analysts should have been in favour of the non-founder shareholder (majority) interests in KMB, but strangely, even when KMB filed a case against the RBI, the media by and large supported KMB. This writer has been the sole exception in highlighting (here and here) how the RBI has been extra-partial to KMB; how it has given KMB an extended time line not given to other banks to reduce the founder stake; and how the bank did not even comply with that extended time line, and had the temerity to take the regulator to court.