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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Given liquidity pressures and heightened capital requirements, EU
banks are reducing exposure to Asia, including India, creating an
opportunity for Indian banks to capitalise on. Our top plays on this
being Bank of Baroda and SBI. Moreover, in a year with a $5.2bn
wall of FCCB redemptions, we think there are likely to be
opportunities appearing from FCCB mispricing. The FCCB’s of
companies such as Educomp, Rolta and Suzlon look like interesting
opportunities.
The objective
The stage is set for another round of liquidity infusion by the major global central
banks, at a time when domestically bank credit growth is showing signs of
significant moderation (16% YoY vs. 24% last year). This note analyses the extent
to which changes in global liquidity have impacted the availability of resources to
the domestic commercial sector, especially at a time when a) European banks are
expected to deleverage ahead of the EBA core Tier 1 capital requirement and b)
huge FCCB refinancing/restructuring needs have arisen for Indian corporates.
The impact of EU banks deleveraging on Asia
Continental European (ex UK) banks account for approximately USD 70bn of
bank claims in India, and if including the UK, then European banks in total
account for 45% of the total claims on India. While no significant deleveraging
was noted by the UK in Q3’11, other European banks have reduced exposure by
USD 5bn from Q1’11 to Q3’11. Given their robust liquidity and capital and strong
presence in Asia, both HSBC (Buy) and Standard Chartered (Buy) are well
positioned to capitalize on the deleveraging of European banks, as our banking
analyst Shailesh Raikundlia explains in his report of 6 February 2012: “HSBC,
Standard Chartered: Opportunities in Adversity”.
Indian banks exposed to this opportunity
We think PSU Banks are best placed to gain access to critical dollar funding to
exploit this opportunity given quasi sovereign guarantees. Among the PSU banks
under our coverage we recommend Bank of Baroda (BOB IN, BUY) as our top
pick to play this theme, given its international loan book constitutes 26% of
advances, and its 15% QoQ international growth in Q3FY12. Our second choice to
play this theme would be State Bank of India (SBIN IN, BUY), with its
international loan book of Rs. 1.3tn.
Is India facing a foreign funding crunch?
The data suggests that despite fears of a contraction in foreign funding, actually
foreign funding (notably ECBs and FDI) has played an important role at a time
when domestic sources have contracted. The biggest test this year in terms of
foreign funding of corporate India will be the USD 5.2bn of Indian FCCB
redemption coming up, pretty much all of them underwater, so requiring
restructuring, refinancing or replacement with other forms of borrowing, such as
ECBs.
How much risk do the FCCB redemptions pose?
Whilst the FCCB redemptions pose a challenge, the fears around the issue means
that opportunities are likely to arise in FCCB mispricing. We review examples
from historical price/yield movements of these instruments and present FCCBs of
companies that provide high YTMs (yield to maturity), as well as relative safety of
principal.
The FCCBs of companies such as Educomp, Rolta look like interesting
opportunities to us, and even the Suzlon situation with multiple tranches on
very high YTMs is worth us monitoring. First Source, Tulip IT, REI Agro,
Jaiprakash Power, Videocon Ind., Sintex, JP Associates, Welspun Gujarat, Bharat
Forge are all trading at high YTMs with relatively low probability of default given
leverage, higher interest coverage and respectable credit ratings implying easier
access to international and domestic funds. We think GTL Infra and Suzlon look
like candidates for restructuring with haircuts, and 3i Infotech looks to us to be
the most likely candidate for default given its weak core business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Given liquidity pressures and heightened capital requirements, EU
banks are reducing exposure to Asia, including India, creating an
opportunity for Indian banks to capitalise on. Our top plays on this
being Bank of Baroda and SBI. Moreover, in a year with a $5.2bn
wall of FCCB redemptions, we think there are likely to be
opportunities appearing from FCCB mispricing. The FCCB’s of
companies such as Educomp, Rolta and Suzlon look like interesting
opportunities.
The objective
The stage is set for another round of liquidity infusion by the major global central
banks, at a time when domestically bank credit growth is showing signs of
significant moderation (16% YoY vs. 24% last year). This note analyses the extent
to which changes in global liquidity have impacted the availability of resources to
the domestic commercial sector, especially at a time when a) European banks are
expected to deleverage ahead of the EBA core Tier 1 capital requirement and b)
huge FCCB refinancing/restructuring needs have arisen for Indian corporates.
The impact of EU banks deleveraging on Asia
Continental European (ex UK) banks account for approximately USD 70bn of
bank claims in India, and if including the UK, then European banks in total
account for 45% of the total claims on India. While no significant deleveraging
was noted by the UK in Q3’11, other European banks have reduced exposure by
USD 5bn from Q1’11 to Q3’11. Given their robust liquidity and capital and strong
presence in Asia, both HSBC (Buy) and Standard Chartered (Buy) are well
positioned to capitalize on the deleveraging of European banks, as our banking
analyst Shailesh Raikundlia explains in his report of 6 February 2012: “HSBC,
Standard Chartered: Opportunities in Adversity”.
Indian banks exposed to this opportunity
We think PSU Banks are best placed to gain access to critical dollar funding to
exploit this opportunity given quasi sovereign guarantees. Among the PSU banks
under our coverage we recommend Bank of Baroda (BOB IN, BUY) as our top
pick to play this theme, given its international loan book constitutes 26% of
advances, and its 15% QoQ international growth in Q3FY12. Our second choice to
play this theme would be State Bank of India (SBIN IN, BUY), with its
international loan book of Rs. 1.3tn.
Is India facing a foreign funding crunch?
The data suggests that despite fears of a contraction in foreign funding, actually
foreign funding (notably ECBs and FDI) has played an important role at a time
when domestic sources have contracted. The biggest test this year in terms of
foreign funding of corporate India will be the USD 5.2bn of Indian FCCB
redemption coming up, pretty much all of them underwater, so requiring
restructuring, refinancing or replacement with other forms of borrowing, such as
ECBs.
How much risk do the FCCB redemptions pose?
Whilst the FCCB redemptions pose a challenge, the fears around the issue means
that opportunities are likely to arise in FCCB mispricing. We review examples
from historical price/yield movements of these instruments and present FCCBs of
companies that provide high YTMs (yield to maturity), as well as relative safety of
principal.
The FCCBs of companies such as Educomp, Rolta look like interesting
opportunities to us, and even the Suzlon situation with multiple tranches on
very high YTMs is worth us monitoring. First Source, Tulip IT, REI Agro,
Jaiprakash Power, Videocon Ind., Sintex, JP Associates, Welspun Gujarat, Bharat
Forge are all trading at high YTMs with relatively low probability of default given
leverage, higher interest coverage and respectable credit ratings implying easier
access to international and domestic funds. We think GTL Infra and Suzlon look
like candidates for restructuring with haircuts, and 3i Infotech looks to us to be
the most likely candidate for default given its weak core business.
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