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Saturday, September 15, 2012
>FY 12 - Z SCORE ANALYSIS - The story so far
What is Z score?
Z score is a financial model developed by Dr. Altman to represent the probability of a company entering bankruptcy within the next two years. It is the sum of five financial ratios each multiplied by a predetermined weight. The Z score formula is:
To read report in detail: Z SCORE ANALYSIS
>INDIA STRATEGY: Peak of NPA cycle still not behind us
We revisit our banking theme “Slippage not the only thing, new risks are emerging, May 2012” to assess the endurance of the rising NPA cycle and conclude that structural (and also cyclical) factors that sustained decline in NPA ratio during 1994-2008 are now receding, leading way for longer and structurally higher GNPA ratios. Inclusive of GNPAs and restructured asset, the stressed assets for the banking system have risen to 9% of total lending or equivalent to GNPA ratio seen during early 2000s. We see the ballooning GNPA cycle rooted to an overleveraged banking system and weak macro conditions. Sustenance of higher elasticity of GNPA/Credit
growth at 3.4x post 2008 and decline in credit growth in response to credit risk concerns will imply GNPA growth sustaining at 40% implying
GNPA/Advance rising to 4-6.5% in the next two years.
Ballooning NPAs rooted to the lack of countercyclical buffer
In our view, the fulcrum of the current NPA upsurge, steeper than in the late 1990s, can be
attributed to overleveraged banking system reflected in renewed weakening of counter
cyclical buffer which reversed the readjustment for the credit boom during FY04-07
instilled by decline in credit growth during FY08-FY10. The deleveraging process was cut
short by the lagged impact of liberal credit restructuring and fiscal & monetary expansion
in FY10. Phases of overleveraged banking is followed by multi-year moderation in credit
growth and cyclical upsurge in GNPA (FY86-FY89, FY97-FY00, FY008-FY10 and FY12).
Rising NPA also reflect weakening in macro conditions
The linkage of the macro economic conditions to the elevated leveraging in the banking
system is embodied in multiple variables including decline in domestic saving rate (public,
household and private), impairment of productivity growth due to persistently high inflation,
commodity prices & revenue deficit and decline potential GDP growth.
Post 2008 inverse GNPA/Credit elasticity has risen sharply
GNPA/Credit elasticity has risen to 18-year peak with six year rolling elasticity rising to (-)
3.1. As current level of GNPA excludes restructured assets, expected moderation in credit
growth will imply further and substantial rise in GNPA going forward.
To read report in detail: INDIA STRATEGY
>GREED & FEAR: China’s technical signal
Verbier
The Eurozone newsflow has not deteriorated dramatically as yet even though the holiday
season is formally ending. Still GREED & fear remains suspicious of further substantive equity
market advances from here. Stock markets want to see the ECB buying periphery sovereign
bonds now. But it looks like they will have to wait, with the latest news reports that the ECB will
defer any announcement until after the German Constitutional Court ruling on 12 September.
Still so long as hopes of the ECB bond buying programme are not dashed completely, markets
can remain hopeful which should prevent a significant decline. It is also likely that Eurozone
leaders will cut some slack to the pleas of Greek leader Antonis Samaras for more time in
meeting its fiscal deficit target. Such a development will in turn reduce near term fears of a
Greek exit. In GREED & fear’s view it remains the case that the German political establishment
does not want to risk a Greek exit for fear of opening Pandora’s Box.
To read report in detail: GREED & FEAR
RISH TRADER
>SESA GOA: Iron ore mining suspended in Goa
Goa government suspends iron ore mining in the state …
The state government of Goa has suspended iron ore mining in Goa, as recommended by the Justice Shah committee constituted earlier to probe the allegations of mining irregularities. Please note that the government has allowed movements of iron ore already produced and stored at ports or in transit.
Little impact on steel production in India – majority of iron ore was exported
Goa produced close to 50mn tonnes of iron ore in FY11, of which 40-45mn tonnes were exported, as per industry sources. Not more than 2-2.5mn tonnes of iron ore produced in Goa are for domestic use (largely
for sponge iron).
Therefore we believe the impact of mining ban in Goa will be different from that in Karnataka, as domestic steel production would be largely unaffected by this. Indeed, seeing the global iron ore scenario we believe the event could help to provide temporary support to global iron ore prices which in turn may help steel prices.
Closure of mines in Goa may be short lived unlike Karnataka
Our interactions with industry sources suggest that iron ore mining suspension in Goa is likely to be short lived and mining should start in the next 1-2 months. The key reasons for the above belief are: 1) mining irregularities reported are not as severe as in Karnataka; and 2) iron ore mining is much more important for Goa compared to Karnataka.
Goa has total GDP of close to USD6.5bn and iron ore exports tend to contribute near 50% of it. At the same time the ban has been imposed by the current government which will be affected more by popular sentiment (which supports mining).
Negative SESA GOA, but no major value impact
In our opinion, the news is certainly negative for SESA GOA, given that the company will not have any operational iron ore mine now under the new directive and its Karnataka mines are yet to restart production.
The iron ore business, which is close to 15% of total EBITDA and 19% of total profit of the merged SESA Sterlite, will now cease to contribute to earnings.
Since we don’t expect the ban to continue for long and thing are improving in Karnataka, we believe value impact from the above would not be significant. Our interactions with traders in Goa suggest that SESA GOA’s mines would not be involved in any major irregularity and hence we don’t expect any loss of reserves for the company.
The iron ore business contributed INR40/share to our target price of INR220/share (of the merged entity SESA Sterlite).
To read report in detail: SESA GOA
RISH TRADER
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