Trading at 1.1 times FY17E P/ABV, with RoA touching 1.4% plus and RoEs rising to 16%, the stock of Federal Bank has potential to trend towards 1.5x, implying >35% return potential. With tier-1 of 14.4%, the stock has the requisite fuel for growth as well.

We recently met Federal Bank’s management to gauge the performance on critical parameters. Key highlights were: (1) Credit growth: Confident of 15% plus surge in FY16 driven by SME and retail, corporate growth will be more opportunistic; (2) Margin: NIMs will largely be stable  as funding cost benefit flows in; (3) Though the elevated cost-income ratio does strike a sour note as past investments are yet to bear fruits, rising productivity riding improved revenue traction and controlled opex is bound to lower the ratio, which in turn will boost return ratios; and (4) Asset quality: confident that stress will be contained with no further addition to the watchlist, moreover >80% provision coverage lends comfort.

The stock has corrected and now trades at 1.1x FY17E ABV, which for a bank with tier-1 of 14.4% and estimated RoA/RoE of 1.4%/16% by FY17E lends comfort.

Foreign investors might pull out from emerging markets (EMs), anticipating further hikes by the US Fed in the days to come as the most important factor to look out ahead is further devaluation of yuan, says Saurabh Mukherjea, CEO, Institutional Equities at Ambit Capital, in an interview with  Pavan Burugula.

How do you think Indian markets would react in case of an interest rate hike by US Fed?

To begin with, there is a 30-60% chance that the US Fed will up the interest rate in the coming meet, but the quantum of hike is likely to be small. Hence, it is unlikely spook the Indian markets as such. However, foreign investors might pull out from the emerging markets, anticipating further hikes by the US Fed in the days to come. The most important factor to look out for in such scenario would be the reaction of China.

The Central bank of China might go ahead and devalue the yuan again. Such a devaluation will hit the Indian
markets.

What would be the impact of slowdown in China on Indian markets?

The rise of EM equity as an asset class around 12-13 years ago was on the back of a rising China. Most emerging markets have witnessed good inflows from foreign investors over the last 10-12 years. It follows, therefore, that concerns about China can impact the perception of investors about the very concept of EM equity as an asset class.
Most emerging markets have started to witness outflow of foreign funds already. This trend is expected to continue in the days to come and India is unlikely to ride this out without getting affected.

However, the macro economic environment in the country seems to be positive; hence, India has a chance to bounce back over the medium-long run but such process will take time.  Meanwhile, India will continue to be under the pressure of the selling by FPIs in EMs.

What are the concerns of your foreign clients about India?

If we look at our market’s history, FPIs didn’t invest in India due to the “overweight” status that numerous brokerages had conferred India or due to the country’s GDP growth rate.

Foreign investors are more concerned about stock-specific investment opportunities than about our macro-economic positioning. Our clients these days are concerned about issues like overcapacity in most sectors of the Indian economy, about the state of the Indian banking system and about the lack of aggregate demand in India. There is also disappointment that the land-acquisition amendment did not see the light of day — instead, states will pass their own laws, which are unlikely to be as effective as a union law.

What do you think are the major challenges for Indian economy in the near term?

Our biggest worry is about the health of the Indian banks. The proportion of stressed assets is already more than 11%. Further, the capital required to recapitalise the banks is by our estimation at least five times the quantum recently promised by the government. Another important factor is the slump in the real estate sector. The sector accounts to 30% of India’s capital expenditure. As per NSSO data, real estate accounts to one-third of non-agricultural jobs in the country… hence, any decline in the sector would affect the economy and rural demand.

Overcapacity is yet another challenge. The problem is prevalent in almost all the sectors. Further, revival of our economy is linked with improvement in capital expenditure.  Our economy is right now in a transition phase. Till a year ago, we were a subsidy driven demand economy. Post the emergence of the NDA government, subsidies have been cut. Whilst this would certainly help the economy in the long run, in the near-term it would hit demand.

What would be the role of domestic investors in such a scenario?

Domestic institution investors (DIIs) have been actively investing the markets over the past year even at times when FPIs were selling their stakes. However, this is unlikely to go on for a long time as any downturn in the market would also impact the domestic investors.

But there is no doubt that DIIs have started to play a more important role in the Indian markets than they did in the years from 2010 to 2014.  In the years to come, domestic institutions are likely to grow in size and India might turn into a domestic investor driven economy. For now, domestic investors don’t have enough muscle to absorb the FPI selling.

Government has permitted foreign investments through partly paid shares and warrants in a move to facilitate FDI in India.

“The government has reviewed the provisions of the extant FDI policy…and it has been decided to allow partly paid shares and warrants as eligible capital instruments for the purposes of FDI policy,” the Department of Industrial Policy and Promotion (DIPP) said in a notification.

An official said that the nature of these instruments are also of equity and the move would help in attracting FDI.

In a separate note, the DIPP has clarified that the facility sharing agreements within two group companies will not be treated as real estate business provided the arrangements are at arm’s length price.

“Facility sharing agreements between group companies through leasing/sub-leasing arrangements for the larger interest of business will not be treated as ‘real estate business’ within the provisions of the Consolidated FDI policy circular of 2015,” it said.

These would be subject to the condition that “such arrangements are at arm’s length price in accordance with relevant provisions of Income Tax Act 1961 and annual lease rent earned by the lessor company does not exceed 5 per cent of its total revenue,” it added.

The government is taking several steps to boost FDI. It has relaxed FDI norms for sectors such as medical devices, defence and construction activities.

During April-June quarter of this fiscal, foreign direct investment into the country grew by 31 per cent to USD 9.50 billion.

Corporation Bank shares gained as much as 4 per cent on Tuesday after the bank informed stock exchanges that LIC has expressed its intention to infuse Rs 143 crore capital in the bank. (Photo: PTI)

Corporation Bank shares gained as much as 4 per cent on Tuesday after the bank informed stock exchanges that Life insurance Corporation (LIC) has expressed its intention to infuse Rs 143 crore capital in the bank.

At 12.28 pm, Corporation Bank shares were trading 2.03 per cent higher at Rs 47.75. It opened at Rs 47.85 and had touched a high and low of Rs 48.70 and Rs 47.65, in trade so far. Sensex was down 111.26 points at 25,745.44.

In a BSE filing, the Bank said,”The Company have received a letter dated September 11, 2015 from Life insurance Corporation of India expressing their intention to infuse capital to the extent of Rs 143 crore into the capital funds of the Bank, by way of issue of equity shares on preferential basis to Life Insurance Corporation of India and to place the same in the ensuing extraordinary general meeting.”

Corporation Bank will hold an extraordinary general meeting on September 28 to decide on the same.

The state-run lender’s stock has fallen 28 per cent this year along with other state-run banks on concerns of increasing bad loans.

For the quarter ended June 2015, the bank posted net profit of Rs 204.26 crore, down 11.75 per cent, against Rs 231.47 crore in the corresponding quarter a year ago.

Sebi has decided to conduct a nation-wide investor survey to understand investment habits of individuals and households in different parts of the country. (Reuters)

Capital markets regulator Sebi has decided to conduct a nation-wide investor survey to understand investment habits of individuals and households in different parts of the country.

The regulator has commissioned the survey to Nielsen India Pvt Ltd, which would collect information from residents in different states and Union territories.

“This is a major exercise taken up at the national level and requires to be completed in a short period. All households are requested to cooperate whole-heartedly in this exercise.

“Any information supplied by the individual respondent shall be kept strictly confidential,” the Securities and Exchange Board of India (Sebi) said in a public announcement.

The Sebi Investor Survey 2015 follows three other surveys Sebi had commissioned earlier on how households save and invest. The last such survey, by NCAER, was released in January 2012.

An earlier survey found that 32 per cent of households, who were making investments in markets, depended on the informal advice of their family and friends.

The survey had also shown that 35 per cent of investors made their investments because they read something in newspapers or they saw something elsewhere in media.

Collectively, 67 per cent investors in the country were following informal advice system while only one-third were following formal advice system.

Sebi Chairman U K Sinha recently said this situation needs to change while there was a need for a greater share of household savings to come into the financial markets.

Sinha had said just about 3 per cent of savings were getting into securities markets and the country had only around 3.50 crore beneficiary owner demat accounts.

Giving the context of the stock market having given an average annual return of over 15 per cent in a longer period time horizon of 15-20 years, Sinha said a large population was losing out on such high returns as they were parking their funds in non-financial products.