RBI Tweaks ECB + Other Norms to Strengthen Rupee

Dear All,

The RBI has yesterday made some important announcements that could result in a strengthening of Indian rupee and prevent the present turmoil in the currency markets:

1. Reserve Bank of India (RBI) in an effort to support the falling INR has directed Indian companies to bring back offshore funds, raised through external commercial borrowings (ECBs) for the purpose of domestic business expenditure. Those funds need to be parked with Indian banks. This measure is likely hold rupee's depreciation to an extent since over the last few months it has being observed that some exporters and project finance companies seem to be holding back their money raised through ECB in anticipation of further rupee depreciation, however now they have to bring bank the raised ECB into the Indian Banking system.

Thus, as the Rupee-dollar movement is a function of demand-supply. This measure is likely to strengthen rupee against the dollar. Bringing back of money raised from abroad will create demand for rupee against the dollar, which in turn, will help the rupee to rise against the greenback.

2. RBI has hiked the ceiling of ECB rate. Companies can now borrow foreign funds at a higher rate at six month London Interbank Offered Rate (LIBOR) + 350 basis points compared to LIBOR + 300 basis points earlier, for an average maturity period of three to five years. For maturity period of more than five years, rates remain unchanged at 6 month LIBOR + 500 bps. The enhancement in ceiling will be applicable up to March 31, 2012.

The rate hike is aimed at encouraging companies to raise more funds through ECBs. Therefore bring back that money back home in India. In turn, it will prompt dollar selling against the rupee.

3. The Reserve Bank of India (RBI) also decided to remove the upper limit of US$100 million placed on Foreign Currency – INR swaps transactions that the Indian banks enter into as intermediaries for matching the requirement of their corporate clients.

This move will also result in swapping of more dollar exposure by the corporate and allow them to hedge their risk arising form the rising dollar.

Thus, it makes sense not to go with the market speculation and short INR, levels of 52.8 which is the life time high for USD-INR should be considered as a good support level for INR.

Regards,

--------------------------------------
Rahul Sonthalia

Problems with Raising ECB in Current Scenario

Below is the synopsis of an article published in Business Line. Seems very a very pragmatic solution to the difficulty the India Inc. is facing (other than the Tata’s and the Reliance’s of the world) in raising ECB in the current global economic scenario.

RBI’s latest rationalisation and liberalisation of ECB norms, announced on Sunday does provides emphasis on monitoring ECBs to keep the country's external sector in good stead, however it is shying away from revising all-in-costs ceilings (‘trees') for contracting ECBs, nevertheless, defies reason.

It is not less than 18 months since the RBI last revised the all-in-cost ceilings — referring to the maximum spreads over the six-month London Interbank Offered Rate (LIBOR) at which Indian corporate are allowed to contract ECBs.

· Spreads over six-months LIBOR of 200 bps for trade credit,

· 300 bps for 3-5 year loans, and

· 500 bps for five years and above

These all in cost ceiling spreads against the backdrop of the ongoing turmoil in global markets, particularly following the European sovereign debt woes and downgrading of some big European banks and US sovereign downgrade are making the lending inherently unviable from a lenders' standpoint and are guaranteed to keep out dollar inflows through the ECB route. Among other things, it has led to a huge shortage of dollars, which, despite the S&P downgrade of US sovereign debt, remains the lone safe haven currency that all investors are scurrying to.

True, the situation now is not as grim as in 2008, when banks refused to lend at all, holding on to cash for their dear life. But reports from foreign banks and the foreign offices of Indian banks indicate that dollar funds are hard to come by. Even if available, they are at much higher spreads over LIBOR than what the existing all-in-cost ceilings permit.

This has implications for the ability of Indian corporate – barring perhaps the Reliances or the Tatas – to access the ECB route to fund their trade finance and capex requirements and alleviate to some extent the problems on account of spiralling rupee interest rates.

There is an urgent need to raise the all-in-cost ceilings, especially given the rapid slide in the rupee, which has negative implications for oil companies already grappling with stubborn crude prices. Policy ‘stasis' on this front makes no sense in a volatile rupee-dollar exchange rate environment. On the contrary, the all-in-cost ceiling could potentially be used as a dynamic tool to turn the ECB tap on and off whenever the regulator requires – the ceiling being raised when we want forex inflows and vice versa.

Doubters would, of course, worry about the possible inflationary impact of huge foreign fund inflows in to the system resulting from a hike in the all-in-cost ceiling. However, one must understand that there is already a $30 billion annual cap for the quantum of ECBs to take care of this. Besides this overall cap – which, one trusts, would have been factored in domestic money supply growth calculations – there are sectoral/purpose-tied restrictions on the utilisation of ECBs, which can also address any attendant inflationary consequences.

Moreover, we strongly believe that the money supply based concerns related to inflationary pressures are irrelevant in the present Indian macroeconomic scenarios as the inflation is more a resultant of the supply side pressure and constraints, higher crude and Agri prices and not fuelled by the demand-side because of excess liquidity into the system.

Thus, we believe that given the opinion of the experts and also a demand from the industry for this, RBI might consider raising the ceiling and hence making way for the non blue chip India Inc. to

India's Fantastic Four Stocks: Suzlon

Suzlon is the second of the 4 stocks in my series of India’s Fantastic Four Stocks

It is among the four stocks that are probably most widely held by retail/HNI investors from the days of previous Bull Run in anticipation that they will at least come back to the price at which they have invested in them.

However, I strongly believe that given its extremely weak business model the chances of Suzlon coming back to its 2007 high of around Rs. 470 and rising around 850% is quite remote.

It is perhaps one of the most talked about stocks across all the business news channels and there exists a support and resistance theory at every Rs 5-10 level just trapping investors at every fall and compelling them to average more and more. Moreover, a lot of institutions, fund managers and analysts rate the company as one of the Gen-X stocks in the sunshine sector and thus trapping the investors even further with the glittering story.

Why Suzlon is a Fantastic Stock?

• Despite being in the SUNSHINE wind energy segment its standalone net sales has fallen from something around Rs. 7000 crs in FY08 to Rs. 3500 crs in FY10
• PAT has fallen form a level of around Rs. 1200 crs to a LOSS of around Rs. 1400 crs
• The reason for this fall in sales coupled with even more fall in profits is the faulty blades which Suzlon produces and moreover spends huge sums to repair the same.

[A very interesting Google search with the key words “Suzlon, Blade and Problems” will highlight the core problem in Suzlon’s business and reason for its continuous stream of losses and poor performance]

• Total Debt has increased from around Rs. 9000 crs in to around Rs. 13,000 crs in order to execute expense acquisitions of international subsidiaries and paying hefty goodwill
• Total Goodwill in FY10 has increased to a level of around Rs. 6100 crs from the levels of Rs. 1400 crs in FY08, in fact there has being no addition in its gross block for plant and machinery, a capital intensive company is actually not adding real capital
• For FY10 for Suzlon around 100% of its Networth is Goodwill, so its tangible Networth is actually negative
• Current Higher interest rate scenario in India would hurt the margins further and added to already existing losses
• Its corporate governance policies given even more reason for an investor to disown this stock because in the past it has announced series of rights issues, QIPs, other equity raising instruments, precisely at the times its stock price had taken a major hit because of a bad market conditions
• A negative trailing 4Q EPS of Rs. (8.15) gives the stock a meaning less P/E and hence no compassion could be made for its valuations

To summarize I would say that Suzlon is like a fancy stock in a fancy industry which is just playing with the investors and continuously eroding their wealth. It’s better to avoid such a stock since market offers far better investment opportunities at the current levels rather than buying or even continuing to hold Suzlon.

In this Fantastic Four series you already know the first two i.e. DLF and Suzlon. The other 2 members of this team of Fantastic Four will follow soon…

Happy Investing…!!!

Union Budget 2011 Expectations...

Dear All...

Hope you are doing fine.

As mentioned in our credit policy report and also the China housing report, markets have being on a downward slide with some of the stocks being completely battered.

The last hope for the markets as the experts believe is the crucial 5150-5200 levels of Nifty, which if it breaks could lead to a possible blood bath. The event on Monday, the Union Budget for 2011-12 could be the last fight back from the markets to gain its pride.

Please use this link find our report on the key street budget expectations form the market and their possible impact on individual stocks/sectors.

Happy Investing...!!!

India's Fantastic Four Stocks: DLF

These four stocks are probably most widely held by retail/HNI investors from the days of previous Bull Run in anticipation that they will at least come back to the price at which they have invested in them. However, I strongly believe that given their extremely weak fundamentals the chances of them coming back to their 2007 highs are quite remote and market offers better investment opportunity than holding on to these Fantastic Fours (pun intended).

They also suffer a phenomenon called BASE EFFECT. DLF was around Rs. 1000 in January 2008 and now is at Rs 225, thus it’s a fall of around 77.5% in value. However, if I assume DLF to go back to the levels of Rs. 1000, then it has to rise by over 350% and given its fundamentals and valuations the chances of DLF rising by over 350% even in 3-4 years time frame is quite remote.

Moreover, these four stocks are most talked about 90% of analysts on all TV Channels and there exists a support and resistance theory at every Rs 20-30 just trapping investors at every fall and compelling them to average more and more.

DLF is the first of the 4 stocks in my series of India’s Fantastic Four Stocks.

Why DLF is a Fantastic Stock?

• · Consolidated Sales have fallen from around Rs 14,500 crores in FY08 to Rs 7500 crores in FY10

• · PAT has fallen from around Rs. 7,800 crs in FY08 to Rs. 1800 crs in FY10

• · Despite Rs 7500 crs of Sales and Rs 1800 crs of PAT there has being a net cash outflow of Rs. 260 crores in FY10

• · Total Debt has increased from Rs. 12000 crs to Rs. 21,000 crs

• · Total Share Capital has increased from around Rs. 1300 crs in FY08 to Rs. 6300 crs in FY10 despite an IPO in FY2008

o Rs. 5000 crs of new share capital have being given to preference share holders thus, further reducing the rights of common equity holders

o Investments have gone up from Rs 900 crs to Rs 5000 crs of which around Rs 4000 crores is invested in money market and other mutual funds

o Loans and advances to subsidiaries and associates have increased substantially

• · A BUY back announced in falling markets @ the price of Rs.500/share in falling markets to support the stock price followed by a QIP 3-4 months later

· Over 215 subsidiaries spread across India and high number of inter company transactions (including capital and borrowings) and a regional auditor

• · Stock Price Down from over Rs 1000/share in January 2008, to current levels of Rs 225/share and even below its IPO price

• · A sluggish real estate market in India both in terms of pricing and volume

• · Higher interest rates would hurt the margins further and also impact the real estate demand in India

• · A trailing twelve months P/E of around 23 with sluggish growth and increasing debt

In this Fantastic Four series you already know the first one i.e. DLF. Check out this space regularly to know the other 3 members of this team of Fantastic Four.

Happy Investing...!!!

China: Tax on Purchase of Second Home

In order to cool the over heated Chinese economy in general and property prices in specific the Chinese Government has levied a property tax applicable to local residents for the purchase of a second home or more, and also non‐local residents for any new home purchase, starting with the cities of Chongqing and Shanghai.

The tax structure in Chongqing for homes with selling price 2‐3 times higher than the city average, the tax rate will be 0.5% and will increase to 1% for homes with price between 3‐4 times the city average, and further to 1.2% for homes with price above 4 times the city average.

The taxable value will initially be based on the purchase price, and may switch to be based on appraisal value in 3‐5 years' time. The property tax will also be applied to existing and newly purchased villas.

This move by the Chinese authorities which may also follow to the other cities in China has a dual implication on the global markets.

On one hand it sells a strong signal that the China is in a desperate situation to control its housing bubble and prevent a US like situation and will introduce further such measures as well as rate hikes in near future to cool down its economy. This could have serious implications for the global commodity and metal markets and could lead to a correction in the shares of Indian metal and mining companies.

On other hand the optimists could take this move as a good long term safeguard for the economy despite having negative short term implications. This would mean that China will not burst like US as a bubble because if this happens then the implications for the global economy could be much severe compared to the US burst. This will send signals to the commodity and real estate speculators in China regarding the government's stance against rising prices and hence would give a breather to the already high Chinese Inflation and hence result in slower rise in the interest rates in China.

Thus, I would take this move as a positive one for the Chinese economy and hence for the global commodity and capital markets.

Happy Investing...!!!

Rate Hike Likely in Q3 RBI Policy

IMF Yesterday in a statement said that the RBI must increase its key policy rates in order to control inflation which is rising beyond its control. The food price inflation released yesterday was at its year high of around 18.3% and way above RBI’s comfort zone.

Thus I strongly believe that in its Q3 policy review RBI is most likely to increase its key rates to tame the inflation which would be negative for the banking and real estate sector in particular and overall markets in general because of an increase cost of funds.

Moreover, most of the banks are also increasing their deposit rates which will lead to a higher base rate and eventually a higher borrowing costs for India Inc. leading to a hurt in their bottom line.

The rising crude and commodity prices (especially copper) are already hurting the profits which with increase in borrowing costs will make things only worse.

Any new long position in the markets if taken should be after 14^th or 15^th of February to join the budget expectation rally, till then chances of a near term upside remains extremely unlikely, however one can take short positions in Nifty with a stop loss above 6050 with a target of around 5700.