Macronomics: Indian Credit Growth Alarmingly Low, US Taper Nears Full Stop

No Comments » Written on September 18th, 2014 by
Categories: Premium


A quick post to let you know about two things.

The Fed Tapers More and Will Full Stop Next Time

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Ramky Infrastructure To Sell 3 Projects: Share Price Jumps

No Comments » Written on September 17th, 2014 by
Categories: Stocks

Shares of Ramky Infrastructure (BSE: 533262; NSE: RAMKY), saw a surge in their prices today (17th September).


The stock closed yesterday at Rs. 54.05. At 09:24 a.m. today, it touched an intra-day high of Rs. 63.60. That is a jump of 16.37%! The share was trading between a low of Rs. 56.80 and a high of Rs. 63.60. The rise in their share price comes on the back of a drop in prices during the previous trading day.

Why did it see the sudden jump?

Earlier today, rumors of The Ajay Piramal Group being in pole position to purchase 3 of Ramky’s infrastructure projects surfaced. The 3 projects in question are:

  1. Ramky Eslamex Hyderabad Ring Road;
  2. Sehore Kosmi Tollways, and
  3. NAM Expressway

Ramky entirely owns Ramky Eslamex and Sehore Kosmi, and has a 50% stake in NAM Expressway.

Having a look at Ramky’s Balance Sheet,


We can expect that the money raised from the sale of these assets, will likely be used to pare a portion of Ramky’s debt.

At 2:30 p.m. today, Ramky Infrastructure made a clarification to the BSE regarding the rumor. They state that they had informed the BSE through prior intimations, of their intentions to sell their road assets. The sale would be to "ease their operational concerns"; we can take that to mean that proceeds from the sale would very likely be used to reduce their debts. The company also vehemently states that any discussions regarding sale of the assets, are at a preliminary stage, and that no decisions have been made yet.

As of end-of-day 17th September, shares of Ramky Infrastructure closed at Rs. 57.60, 6.57% up from the previous day’s closing price.


We do not hold any positions on Ramky Infrastructure.

LIC owns about 20% of the Indian Stock Market, Mostly Public Sector

3 comments Written on September 17th, 2014 by
Categories: ChartOfTheDay

Update: Something is seriously wrong with this data. It makes no sense that LIC is 20% of the Sensex Market Cap, to be honest. At best, it's likely to be 10% or so. We'll leave the post as is, but beware of coming to conclusions!

From a tweet by the good @monikahalan I decided to chart LIC investments (total) in different companies:


Source: RBI Annual Statistics Handbook.

The bottom chart shows you the percentage in public versus private sector companies. (These are total investments, either as loans or as equity, though loans account for only 400 billion in FY 2014)

The total investment is Rs. 15 trillion, which is a massive thing for a single investor!

Most of the investment is in the public sector (11.9 trillion), which was above 80% of the total till 2007, and has dropped consistently since. And in the last year, LIC's purchase of public companies went up.

We assume this is the total value of the investment (not just the amount of money paid). If you plot that against the total Market Cap of the Exchange, as a percentage, here's how it looks:


It's almost like when LIC buys and becomes more than 20% of the market, it's a good time to buy. And when they are too low as a percentage, it's probably not such a great time to buy.

We don't have current data, but it would be interesting to see how much of the current market is owned by LIC.

Note: This data does look a little strange, as @VetriSmv points out. Promoters are 50%, FII 24%. So how can LIC be 20%? Either the data is wrong, or the interpretation that "investments = market value of holding" is wrong. We'll investigate.

The Curious Case of Venus Remedies – Potential CDR?

2 comments Written on September 16th, 2014 by
Categories: Stocks

A curious story emerged earlier today.

Venus Remedies, a pharmaceuticals company listed on the BSE and NSE, saw their shares plummet nearly 20% from yesterday's close of Rs. 378.50 to Rs. 302.80 (as we write this). Charting the stock over the last few months:


 And that after a stellar run saw its share price touch Rs. 381.75, a 52-week high, on the 15th of September. The spurt in their share price can be attributed to 2 major announcements:

  1. Agreement with TEVA for development and sale of a cancer drug in Canada;
  1. Agreement with Mylan to market an anti-biotic Meropenem in Europe;

Why did the share price fall then?

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Earlier today (16th September), Crisil downgraded their ratings on the bank facilities of Venus Remedies down to a "D". As per Crisil definitions,

                "Instruments with this rating are in default or are expected to be in default soon."

Crisil expects the company to default imminently, if it hasn't already. We looked at Crisil's report to ascertain the reasons behind the downgrade. Strangely, they say:

“The ratings continue to reflect VRL's comfortable financial risk profile, marked by a healthy net worth and strong debt protection metrics. The ratings also factor in the company's strong presence in the high-value critical care segment and the healthy growth in its domestic and export sales. These rating strengths are partially offset by VRL's working-capital-intensive and small scale of operations in the overall formulations market.”

How does this work? They are going to default, but they have “healthy growth”? (We are not enamoured by rating agencies, as you might have guessed)

The downgrade was applicable to all the bank facilities that VRL availed, and amounts to a total of Rs. 265 cr. The rating implies Rs. 265 cr. is under serious threat of not being repaid. To break-down their debt:


According to the report, the downgrade was due to,

                "Delays in repayment of term loan by the company driven by a stretched liquidity. VRL's stretched liquidity is on account of the significant increase in total cost of the large debt-funded capital expenditure over the past one year and high working capital requirements. The company is undertaking capex towards setting up marketing office. The total cost of this capex is estimated to have increased by about Rs.100 to 150 million. In addition to the above company's liquidity has also deteriorated on account of the high working capital requirements reflected by inventory of about 131 days as on March 31, 2014."

Having a look at their income statement, we see that their interest coverage ratio has been varying:



Things do look bad. Their Interest Coverage Ratio (Profit before Interest & Taxes divided by Interest charges) has reduced sharply from last quarter. At 2.23 they pay 44% of their pre-tax income as interest. 

Venus has been in trouble earlier, having hedge funds really ticked off with them for not paying up on Foreign Currency Convertible Bonds. (FCCBs). They settled part of that claim but still have $4.59 million worth FCCBs convertible at Rs. 364 per share by Feb 2015. Basically if the share price less than Rs. 364, Foreign investors are unlikely to convert and will demand their money back - which would add another Rs. 27 cr. to their payables. 

Interestingly, they made an EPS of Rs. 54 last year, which would make the share a fairly cheap one. But what is cheap often hides things you don't really know - so is it really so that the company is in trouble?

The official response of Venus Remedies is that their loans were for research which have long gestation periods, and that they have asked for a postponement for repayment of principal for 2 years without any sacrifice (i.e. the bank loses nothing). (Thanks to commenter Krish for a more detailed link)

Update: From their annual report, they have four banks: SBI, IDBI Bank, Allahabad Bank and HDFC Bank. We don't know how much they owe to whom.

We might have another candidate for Corporate Debt Restructuring.

Disclosure: We have no holding in the stock at any time in the past 30 days and do not plan to purchase this stock in the immediate future.

Premium: Market Shows Cracks, CAPM20 Reverses Weakly

No Comments » Written on September 16th, 2014 by
Categories: Premium


Our proprietary indicator, the CAPM 20, has reversed again. Unfortunately, it remains a weak reversal, since it has reversed from below 30. But's it's been a long time - over a year now - since it hit the -30 level. (This is the longest such term since 2007)

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RBI Wants To Cut Sector-Based Incentives When Banks Give Loans

No Comments » Written on September 16th, 2014 by
Categories: RBI

My last point on the Rajan's recent presentation is about how they view financial inclusion in the concept of spreading Credit.image

Does this probably indicate:

  • RBI will do away with the concept of a "priority sector" which banks must lend to? (40% of all loans)
  • RBI cutting through the concept of interest rate subventions where someone else pays a portion of the interest (usually the government?)
  • RBI will demand that the government please not waive loans by ponying up the money?
  • Even better, removing the lower risk weight for loans in certain sectors like housing? Come on, we need this housing bubble to burst.

A problem in credit today is that these "schemes" are underutilized by those who really need it, and overutilized by those who don't. A farmer that can pay back a loan does not because he expects a waiver. A student who deserves a loan struggles due to lack of a "guarantor", but those who don't need the money but would like a loan at a lower rate get themselves education loans.

I'd like to see the RBI and the government reduce such sectoral credit focus, and to keep things more even.

Okay, I'll stop about the RBI.

Should Banks Think of ATMs as A Profitable Business Separately?

3 comments Written on September 16th, 2014 by
Categories: RBI

From more slides that released today, as part of Raghuram Rajan's speech at the FICCI-IBA Annual Conference:

imageWhile its true that banks aren't required to charge customers, and it's only that they are now free to charge customers rather than restrict them by RBI rules, remember that banks can't charge you for clearing incoming cheques (from the same city) even though it costs banks money.

The bigger problem in that regulation was not that banks can charge their customers to use other banks's ATMs, which was only applicable to such usage in the top 6 cities. It was that banks can charge you to use their own ATMs. (more than 5 times a month, no matter which location)

While I'm all for opening up regulation, I think this is not well thought through and listens only to bankers. Let me explain.

Banking: Not A Sum Of Profitable Parts

The banking system does not operate in silos. It's not like every single action is to be profitably on its own. You can't be productive every hour of the 24 hours of a day, it's the sleeping in the 8 hours that lets you be productive in the remaining 16.

In the same way, it cannot be - and should not be - that the ATM or cheque clearing charges should be paid directly by customers to make those operations "profitable". These operations are part of the reason why people trust banks - so that when it's time to take my money out, I can do it without a fee.

ATMs may cost banks, but it's because they have ATMs that we keep our money with them at 4% interest when we can get 9% elsewhere. That 5% difference or spread, system wide, should allow banks to subsidize the cost of ATMs, no matter where they are used. And indeed, after looking at the ludicrous profits banks make, this is true.

Today people have become banked because of this freedom. And now, to allow them to charge people will push people to distrust banks again. That means more people will just keep cash with themselves rather than in banks. And this is undesirable.

Why Non Financial Transactions Limited?

It doesn't cost banks much to get a non-financial transaction (read: no money exchanged) through an ATM. The interchange costs are piddly, so we should not be charging anyone anything for something that's been largely setup and managed by the NPCI for a cost that's a fraction of a rupee per transaction.

Yet, it's RBI's folly that they have decided that interchange fees between banks cannot be less than Rs. 8 (or around that) for a non-financial transaction. To allow white-label ATMs they mandate that much as the minimum. This makes no sense whatsoever - a non-financial transaction should not have to be charged at all and should simply be the cost of not having a teller around.

(Imagine if your bank decided to charge you for it's server hosting costs when you use netbanking!)

And Where's the Competition?

If RBI were to ease this regulation they should have five hundred banks vying for customers to bank with them. Where are these banks? Nowhere, because the RBI won't allow new banks to happen.

Yes, they've said they will happen and granted one bloody miniscule license after months of prodding around. Come on.

We need more banks. If you want to open up these regulation, you have to introduce competition, and you have to introduce it first. Let a hundred banks bloom and then, let them duke it out. If you do it in reverse you're just fattening the existing banks.

Does it Add Up?

Let's look at the figures:

  • The average number of transactions per ATM in the country are around 3453 per month. (Source: RBI ATM transaction data). These are based on ONLY financial transactions.
  • We can guess that average costs per ATM are of the order of Rs. 30,000 to 50,000 per month.
  • We can assume that the number of transactions can only go up per ATM, as more people get banked. (At least for the near future)
  • This has the ability to reduce costs to less than Rs. 10 per transaction (while keeping non financial transactions free)
  • And yet, we should consider that banks earn tremendously from having our money in SB accounts at lower interest rates. Let me use the same "silo" logic that banks use when they bullshit us about how much it costs them.
  • Current "demand deposits" (on which banks pay very low interest) in the system are about 7.3 lakh crore (Rs. 7.3 trillion)
  • Assume that the banks earns a spread of 5% (that is, it pays 5% less for such deposits) - that's a sum of 36,500 cr. , or Rs. 3041 cr. per month of "profit".
  • For all the ATMs in the country (around 165,000), that would be a profit of Rs. 1.8 lakh per ATM per month just to have money in "demand deposits"
  • For an average of 3453 transactions per ATM (financial) that's a profit of Rs. 52 per transaction. (using similar "silo" logic to what banks use when they tell you it costs them to run ATMs)
  • If banks begin to charge for transactions on ATMs, you can bet that the profit would fall as people will yank money out of SB accounts and keep it as cash instead - banks will end up losing substantial amounts.

These are just base figures. If you do the math, you find the spreads are larger. And the amount in savings bank accounts is much greater than the "demand deposits" figure mentioned (as banks attempt to calculate only amounts that are likely to be withdrawn from SB accounts as the demand part of the SB account; the rest is a "time deposit". So, your minimum balance isn't counted as a demand deposit). Thus, the profit per ATM is even higher.

Thus, banks aren't losing money per transaction - their profit is Rs. 50+ per transaction while the cost is just Rs. 15. They should indeed make all ATM transactions free!

Such silo thinking will refute whatever logic RBI is being given by bankers to justify their itch to charge customers just about anything.

What Should The RBI Do?

Get More Banks.

Understand the non-silo part of the overall banking equation and how this will create mistrust.

Reduce friction in card based payments and make such things more trustworthy so we don't need ATMs, rather than ask banks to charge for usage.

Bring back regulation that requires banks to keep own-ATM transactions free, unlimited until they have fostered competition.

RBI May Allow Small Value Transactions Without Two Factor; Merchants To Take Abuse Risk

7 comments Written on September 16th, 2014 by
Categories: RBI

I'm going soft on the RBI.

I really, really, really like Rajan's presentation - I mean just the slides, since I wasn't actually there - that were released today, as part of his speech at the FICCI-IBA Annual Conference. The clarity of thought is appealing, and that he sought to clear misconceptions about regulation, even more. (I'm not the kind of guy given to superlatives, especially not when it comes to the RBI, so I'll just stop here)

I'll highlight three parts of his presentation that I found quite interesting, in three quick posts. Firstly, two slides on the two-factor authentication issue that's plagued the Indian startup space recently about how RBI is being a dick. (I have argued that what companies like Uber are doing is "cheating" the regulation, which has a good solid reason.)


The case for regulation is obvious - if everyone else in India has to do this, then no one should be able to by-pass it. But yes, there's a need to ease the issue for faster processing, especially where the value of a service is not known at the time of booking (like in a taxi ride).

The RBI process of "doing better" is interesting because:

  • It will allow companies like Uber to operate if they bear the costs of misuse!
  • The small payment (like Uber which is likely to be less than 1000 rupees) is going to have some kind of exemption. This is also good news.

I do not want any company to be able to use just card information to charge me even if it's just Rs. 10. Let me tell you why.

This still invites abuse in the sense that I need to call up my bank for each such abusive transaction, even if it's small value. If my credit card information is read and a merchant were to charge a Rs. 10 fee, then he might be willing to take the risk that he has to pay it back if I refute it, but I still must spend the time trying to refute the charge!

If anyone has tried to call up their bank and refute transactions they will not have spent less than half an hour on hold or without having to type at least 10 different numbers and 6 IVR levels and pressed 9,0,# or anything in frustration. I would rather pull my hair out one by one than have to do this kind of thing for every abusive transaction. And that's for those of us that are educated; if it frustrates us, how does it work for those that don't have such knowledge?

Exactly ZERO of all the cards I own has a toll free number - all support numbers are charged and half an hour to a landline is an expensive proposition. Paying Rs. 30 on a phone bill to refute a Rs. 10 transaction is, honestly, silly. (Heck, phone companies could charge you Rs. 10 each time and then pay you back the refuted charge after you've paid them the money to make the call...wait, let me not put ideas in their head)

I would suggest to the RBI that a small value transaction system without 2-factor must require banks to have toll free and very quick resolution frameworks for all cards, including by phone, SMS, email and the web. That means I should be able to dispute a transaction by just sending an SMS back with a unique transaction ID (which they generate when they send me an SMS of every transaction in the first place).

As an extension, the RBI should require all banks to adhere to a common "refute and report" protocol, which every credit card holder can access to refute non-two-factor authenticated charges. Every bank must be required to accept requests to refute such transactions in a common format, and have to respond with an okay (must allow refute unequivocally, as risk is with the merchant). So private parties can write apps to ease the dispute process further, because we can no longer trust our banks to do anything useful without beating them on the head with regulation.

Oh yes, easy "refute" can hurt the merchant but the merchant took the no-two-factor risk, remember?

With enforced quick refute/resolution in place, some merchants should be able to take the risk on smaller value transactions (say below Rs. 1000, or better, leave it to the banks to figure the lower limit per account). We could finally get:

  • a Uber or Ola style taxi ride with no need to pay at the end, credit card automatically charged
  • a prepaid recharge with automatic "reuse my credit card with rs. 330 when balance goes below 10"
  • a subscription of say Rs. 100 per month (newspapers, magazines)
  • a grocery charge that's automatically charged to your account after delivery (instead of paying cash to the delivery guy)
  • renting small things (books, cycles, gear) leaving just your credit card information, which is charged on a daily/weekly basis.

And so much more - all of these are small payments which are currently done with cash or the more painful two-factor auth card system, which can be eased and made substantially more attractive.

The implications of the RBI rule change will be massive. We would love to have customers pay monthly for Capital Mind Premium, for instance, with an auto-billing service they can cancel when they like. (We are happy to bear the costs of any refutes - we will not charge customers for what they no longer want)