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JP Morgan’s 1% cap on redemption sparks off debate on liquidity commitments of MFs (02-09-2015)

JP Morgan, mutual fund

Last week, JP Morgan AMC in India had imposed the limit on redemption from two of its debt schemes — Short Term Income Fund and India Treasury Fund at 1 per cent of the total number of units outstanding on any day. (Reuters)

The scheme information document of JP Morgan India Treasury fund, which capped redemption in the scheme last week at 1 per cent of units outstanding in a day, did extend an unequivocal commitment of liquidity to the investors in its scheme.

“Units may be purchased or redeemed at net asset value (NAV) subject to applicable loads (if any) on every Business Day on an ongoing basis. The Fund will endeavour to dispatch the Redemption proceeds within 3 Business Days from the acceptance of the Redemption request,” the document promised. A careful reading of the fineprint, though, reveals the clause that the fund seems to have leveraged to impose the cap after the NAVs of two of its schemes fell by around 4 per cent: “Trustee has the right, in its sole discretion, to limit Redemptions (including suspending Redemption) under certain circumstances.”

Last week, JP Morgan AMC in India had imposed the limit on redemption from two of its debt schemes — Short Term Income Fund and India Treasury Fund at 1 per cent of the total number of units outstanding on any day. This was done after the NAVs of the two schemes fell following the liquidity crisis in Amtek Auto, where the two schemes had sizeable exposure of around Rs 200 crore out of their aggregate AUM of around Rs 2,950 crore. While it is the first time since the 2008 financial crisis when a mutual fund has imposed such a restriction, the issue has sparked off a debate over the justification of such a decision.

While there are those who justify the decision as being in the interest of the investors, with a flurry of redemptions having the potential to lead to further losses on account of the mark-to-market issue, others believe that by placing a cap, the fund house is turning back on its commitment to offer liquidity.

“We are of the view that both the schemes were open ended in nature and that means that an investor would be paid the money with or without the exit clause as and when he chooses to exit and so the investor needs liquidity. On the other hand an investor who does not need liquidity would go into fixed maturity plans. So, such restriction goes against the initial assurance,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

Another investment advisor, Surya Bhatia, however, said that the decision is in the interest of investors because if all the investors start redeeming their holding then because of the mark-to-market nature of investments, the value of the investment and therefore the NAV goes down and leads to more losses for investors.

There are some who question if the firm had exhausted other options such as existing cash or credit line with banks to meet the redemption before deciding to restrict the redemptions.

Messages sent to senior officials of the fund house asking the same did not elicit any response. Questions are also being raised over the ratings offered by research organisations or data aggregating agencies and industry insiders say such ratings have also come under scanner.

While valueresearchonline.com had provided a 4-star rating to JP Morgan India Treasury Fund and a 3-star rating to the short-term income, now there are question marks over the rationale of such ratings. “The regulator is looking into such ratings being offered. There is a possibility that the capital markets regulator may come out with guidelines on such ratings as they are only based on the past performance,” said a source close to the development.

The rating methodology of Value Research notes that: “It (the rating) only gives a quick summary of how a fund has performed historically relative to its peers… For debt funds, the Fund Ratings are based on 18-month weekly risk-adjusted performance, relative to the other funds in category.”

While there is concern among investors over the liquidity of their investment in mutual funds, industry insiders say that the issue is limited to the two schemes of a fund house and is in no way affecting other schemes or fund houses.

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China concerns trigger a fall in equities globally (01-09-2015)

Sensex

Indian stocks fell more than 2% as foreign institutions continued to pull money out of the market;they have sold in 21 of the last 26 sessions. (Express Photo)

Equities around the world took a big tumble on Tuesday as growing evidence of a prolonged slowdown in China possibly spilling over to other parts of the globe rattled investors. Christine Lagarde, the head of the International Monetary Fund (IMF), on Tuesday warned global growth would be weaker than previously expected and that emerging economies should be alert to potential shockwaves from China’s slowdown.

Lagarde fears ‘bumpy’ ride and warned global growth could be weaker than hoped, as China’s manufacturing shrinks at fastest rate since 2012. The IMF chief told an audience in Indonesia that Asian economies could continue to lose momentum following recent turmoil on global markets, which have been shaken by fears over China’s economic outlook.

Indian stocks fell more than 2% as foreign institutions continued to pull money out of the market;they have sold in 21 of the last 26 sessions. Bloomberg data showed that PSU banks saw their valuations dip to new lows.

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On the back of a 4.5% fall in the CNX PSU Bank index, the price-to-book-value ratio (PBV) of the index declined to its lowest since February 2013.The Sensex ended to its lowest level in more than one year closing 25696.44, down 586.65 points or 2.23%.

In Asia, Japanese main stock average – the Nikkei 225 – ended down nearly 4% after data showed Japanese investments in new plant and equipment dropped because of concerns about demand from China.

Shares in mainland China fell 1.3%. In Hong Kong, stocks fell more than 2% after Chinese manufacturing showed further signs of weakness, adding to evidence of a massive slowdown in the world’s second biggest economy. Stocks in other Asian economies like South Korea, Indonesia, Singapore, Taiwan, and Thailand fell 1-2% each.

Major European indices were down 2-3% following the double-whammy from slowdown in China’s and Europe’s manufacturing growth. Manufacturing PMI growth in major western Europe such as Spain, Germany, Italy, Austria, France, Netherlands, Ireland, and Greece fell to multi-month lows. US futures were down 2%, extending losses in what is the worst months since 2012.

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Market volatility pushes up short-term yields by 11 bps (01-09-2015)

Yields on short-tenure bonds have risen by at least 11 basis points over the last few weeks led by a devaluation in rupee, sell-offs in the domestic market and uncertainties persisting on the global front.

Power Finance Corporation (PFC) is planning to issue three-year bonds at a coupon rate of 8.28% and five-year bonds at a coupon rate of 8.36%, according to information provided by sources.

“So far the company has received commitments worth Rs 2,400 crore for its three and five-year bonds together. The issue will be open till Wednesday. Considering the current volatility in the market, this can be considered a good response,” a bond arranger close to the development said on Tuesday.

Yields on short-tenure bonds dropped considerably in August led by a fall in the consumer price index (CPI). A few weeks ago, PFC had priced its three-year bonds at 8.17%. This was way lower than 8.40% that the company paid for a similar-tenure bond issue in June, according to Bloomberg data.

However, over the last several days, a host of factors including Rupee depreciation, a massive sell-off in the domestic equity market along with fears of a rate hike by the US Federal Reserve in September has changed investor sentiment. The rupee has depreciated more than 3% over the last three weeks while economic data coming out of the US suggest that a rate hike cannot be ruled out.

Ajay Manglunia, executive vice-president, fixed income at Edelweiss Securities observes in a volatile market, people tend to hold on to their cash rather than investing it while in a stable market, people would like to invest as much as possible and hold on to minimum cash.

“There have been a lot of global events that has spiked the volatility. You are also seeing the currency depreciating over the last few weeks. The outlook of investors towards the market has changed a bit compared with what was trending some time back. People now tend to be with highly liquid instruments like the government securities,” he added.

This is supported by the fact that the 10-year benchmark government bond yield has not risen as much as the corporate bond yields over the past few weeks. The ten-year yield is currently trending at 7.75% levels which is just 4-5 bps higher than what was seen in mid-August.

Ashish Jalan, assistant vice-president at SPA Securities, also supports the view. “The market has seen volatility due to the massive sell-off in the equity market, rupee depreciation and global turmoils. Times like this always plant some sort of doubts in the minds of investors and eventually we could see that reflect in the yields on corporate bonds,” he said.

Another reason that the yields on government securities have not risen is the expectations of a repo rate cut on September 29 policy.

“The market expectation of a rate cut is still there. If you look at the government securities they have rallied a bit which is indicative of what the market outlook is,” Manglunia said.

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Upgrade Zee to outperform, target Rs 469: IDFC (01-09-2015)

Upgrade Zee to outperform with a target price of Rs 469. We have upgraded our earnings estimates for FY16E/ FY17E by 6.7%/ 3.9% as we build in lower losses from &TV,at Rs 200 crore vs Rs 260 crore earlier. We also introduce FY18E financials. We are now building in a CAGR of 18.4% in Zee’s  consolidated advertising revenues and a CAGR of 16.3% in its domestic subscription revenues over FY15- 18E.

This  will result in a CAGR of 19.3% in consolidated Ebitda and 19.5% in earnings. We note that FY16-18E earnings CAGR would be even better, at 28%. Given high earnings visibility over the next two years, we have rolled forward our target valuation to 30x FY18E core EPS and arrive at a target of Rs 469 after deducting DCF value of preference shares.

Broadcasters are a better play on digitisation as they do not have to invest much directly but benefit tremendously from increasing digital penetration  in terms of higher subscription revenues. However, the broadcasters do need to invest in content as digitization brings with it fragmentation. Accordingly, Zee has upped the ante in terms of  content investment over the past two years. However, large investment (such as for &TV) are now behind for the company, and incremental investments can be easily funded with the ensuing benefits of digitisation.

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Initiate buy on Emami, target Rs 1,500: HSBC (01-09-2015)

Initiate ‘buy’ on Emami  with a target price of Rs 1,500 a share. The stock trades at a FY17e PE of 34 times (excluding Kesh King acquisition-related amortisation), pricing in long-term earnings growth of c12%, which appears modest relative to Emami’s growth ambitions.

A rebound in growth driven by the recent acquisition of Kesh King, new healthcare product launches and sustained growth momentum in the core portfolio are key share price catalysts. Conversely, a lack of progress on the integration of Kesh King, lower-than-expected growth, sustained macro weakness impacting demand and destructive price competition are key downside risks.

Emami aspires to deliver an operating performance in the next five years that would triple its market value, implying a 24% annualised return. This is ambitious, but not unrealistic, considering its strong execution record, in our view
We forecast earnings to grow at a CAGR of c20% in the next five years, or 25% if we exclude the impact of amortising expenses relating to the Kesh King acquisition. Our Ebitda forecast for FY17e is 8% above consensus.

Emami is a home-grown leader in personal care and health care products. Its core brands — Navratna (cooling oil), Zandu (pain relief balms and healthcare), Fair & Handsome (whitening cream for men) and Boroplus (antiseptic cream) — dominate their market segments.  In the last decade, its revenue, profits and share price have risen at CAGRs of 21% and 32% and 45%, respectively.  While its share price has almost doubled in the past 12 months, its growth story still isn’t fully priced in, in our view.

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Sebi passed 670 cease-and-desist orders in FY15 (01-09-2015)

Securities and Exchange Board of India (Sebi) chairman UK Sinha on Tuesday said the regulator is cracking down on illegal schemes floated by companies to raise money from retail investors.  He was speaking at the launch of an investor education programme here.

Sinha said, in the last two years, the capital market regulator has issued 225 orders against entities collecting money illegally from investors. Sebi, according to Sinha, has also issued 670 cease-and-desist orders against entities in 2014-15 , up 223.6% from 2013-14.

“We are getting into the enforcement area much more seriously,” said Sinha.

A cease-and-desist order prohibits a person or entity from entering the securities market. Sinha said Sebi is also focusing on creating awareness among investors.

In the last three years Sebi has launched 25,000 investor awareness programmes and has sent around 400 resource persons to schools and colleges in smaller towns of the country to educate investors.

“By the end of this year, our target is that, in each and every district of this country, we will have one resource person. This is the direction in which we are moving,” said Sinha.

Allaying fears of low investor participation in the Indian market, Sinha said with Employees’ Provident Fund Organisation investing workers’ money in the market, more pension funds are likely to begin investing in the market this year.

“Once the institutional money where the combined lifelong savings of workers start coming into the market, we will make a lot of progress. If you look around the world, you will find that even in the developed world, the industry has progressed only when the retirement savings have started coming into the market. So, I regard 2015 as a very important year for pension money to come in the markets,” said Sinha.

Sebi orders freezing of bank and demat accounts of 11 companies

Sebi has ordered attachment of bank as well as demat accounts of 11 companies and seven individuals to recover dues worth over R2 crore for violations of norms.

The firms against which Sebi has passed attachment orders are Trident India, Hindustan Creamics, Lakshya Securities & Credit Holding, SGI Research & Analysis, UP Mineral Products, Mahadev Corp, Mahadev Agro Industries, Chinar Exports, Intecon, Marnite Polycast and Basi Investments.

The pending dues include fines imposed on the companies along with interest and other costs.

Similarly, the regulator has directed depositories — NSDL and CDSL — to attach all demat accounts of the defaulters.

(with agency inputs)

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India’s share of global grief (01-09-2015)

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The Sensex ended at its lowest level in more than a year, led by banking stocks. (PTI)

Indian stocks fell more than 2% on Tuesday as foreign institutions continued to pull out amid growing evidence of a slowdown in China and warnings bells over global economic growth this year.

IMF chief Christine Lagarde warned that global growth will be weaker than previously expected and that emerging economies should be alert to potential shockwaves from China’s slowdown.

Lagarde said she feared a ‘bumpy’ ride and warned that global growth was weaker than hoped, as China’s manufacturing shrinks at fastest rate since 2012. The IMF chief also told an audience in Indonesia that Asian economies could continue to lose momentum following recent turmoil on global markets, which have been shaken by fears over China’s economic outlook.

The Sensex ended at its lowest level in more than a year, led by banking stocks. The gauge of top-30 companies ended at 25,696.44, down 586.65 points or 2.23%. The Nifty lost 185.45 points, or 2.33%, to settle at 7,785.85.

Saurabh Mukherjea, CEO, institutional equities, Ambit Capital, said Indian stock markets stand exposed amid a high likelihood of the Chinese central bank embarking on a continued devaluation of the yuan.

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“Indian products losing their competitiveness to their Chinese counterparts; and rising risks to India’s $0.5 trillion of foreign currency debt. Such a scenario could be a catalyst for more pullbacks in the Sensex with the trailing P/E multiple likely to drop to 14x (as seen in the Lehman crises), implying a Sensex level of 22,000,” Mukherjea added.

Foreign portfolio investors (FPIs) sold equities of $102 million on Tuesday, provisional data from the stock exchanges showed. FPIs have sold in the last 21 out of 26 sessions as foreigners pulled out record quantum of money in August since October 2008.

Morgan Stanley trimmed its year-end Sensex target, following similar moves by other Indian and foreign firms last week. The American investment bank on Tuesday reduced its Sensex target to 28,800, with risks of a further decline to 22,800.

In Asia, Japanese main stock average – the Nikkei 225 – ended down nearly 4% after data showed Japanese investments in new plant and equipment dropped because of concerns about demand from China.

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Shares in mainland China fell 1.3%. In Hong Kong, stocks fell more than 2% after Chinese manufacturing showed further signs of weakness, adding to evidence of a massive slowdown in the world’s second biggest economy. Stocks in other Asian economies like South Korea, Indonesia, Singapore, Taiwan, and Thailand fell 1-2% each.

Major European indices were down 2-3% following the double-whammy from slowdown in China’s and Europe’s manufacturing growth. Manufacturing PMI growth in major western Europe such as Spain, Germany, Italy, Austria, France, Netherlands, Ireland, and Greece fell to multi-month lows. US futures were down 2%, extending losses in what is the worst months since 2012.

Back home, all sectoral indices ended with deep cuts on the back of domestic and global factors. Market breadth was weak as 29 of the 30 Sensex companies declined. In all, 2,122 shares ended weak against 574 stocks that ended positive on the BSE. Economists are still perplexed by India’s GDP, as economic growth in Asia’s third-biggest economy slowed to 7% in April-June, down from 7.5% the previous quarter.

Banking stocks were the biggest losers. Analysts linked the selloff in banking stocks to the sharp 35-bps base rate cut announced by HDFC Bank on Monday, which could hurt net interest margins of other lenders. HDFC Bank has the lowest base rate among big lenders after Monday’s cut.

HDFC Bank shares fell 3%, while Axis Bank fell more than 5%. SBI, the country’s largest lender lost 3.25%, while state-owned Punjab National Bank plunged more than 7%.

Bloomberg data showed that PSU banks saw their valuations dip to new lows. On the back of a 4.5% fall in the CNX PSU Bank index, the price-to-book-value ratio (PBV) of the index declined to its lowest since February 2013.

Bank of India, Canara Bank and Oriental bank of Commerce, which lost 5%-7% of their value on Tuesday, traded at their lowest PBV in seven years in the range of 0.27 to 0.34. Even Indian Overseas Bank, IDBI bank and Allahabad Bank that traded at 0.26 to 0.32 times their book values stood near their August 2013 lows.

Private sector banks, meanwhile, continue to do better with majors like HDFC Bank, Indusind Bank and Kotak Mahindra Bank nearly four times their respective book values despite falling 5%-8% of their share values since market peak of January 2015.

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Most firms lack adequate risk cover, finds survey (01-09-2015)

Despite being aware of the option, most companies opt for insurance cover for only a few types of risks. Cyber liability risk coverage is also yet to see huge penetration, finds a business risk survey by ICICI Lombard General Insurance Company.

The survey —  across 292 companies, spanning technology, banking, financials services and insurance, steel, cement, pharma, petro & energy, engineering & manufacturing — revealed that many industries that have high exposure to certain risks do not have adequate cover.

The survey said: “Penetration of general insurance products is limited to coverage of a few key risks while there is a predominance of direct purchase from insurance companies.” General insurance cover is perceived as critical across sectors, including service-oriented and emerging sectors.

Sanjay Datta, chief-underwriting, reinsurance and claims, ICICI Lombard General Insurance, said: “The business environment is changing and so are the risks associated with running operations. It is important that companies realise they need to cover their operations against various risks even as they pursue growth through incremental as well as disruptive modes. This survey is an initiative to help companies realise the importance and impact of risk management in operations.”

The study revealed that while high impact-high propensity risk is more for smaller firms, larger ones consider employee health and accident-related risks as high impact-high propensity.

Only 44% auto and auto ancillary companies opted for product liability covers while only 27%of FMCG companies went for commercial general liability insurance.  “While most companies have group medical insurance, accidental insurance and insurance against damage to their asset or machinery, they have limited protection against liability related high-impact risks. In fact, new-age risks such as cyber liability as well as director & officers liability have been opted for by few firms,” said the survey.

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Prabhat IPO extended by three days (01-09-2015)

The IPO of Prabhat Dairy was extended by three days as the issue failed to get fully subscribed on Tuesday — the final day of offering.

The issue will now close on September 4 and the price band has been revised to R115-126  — from R140-147. The total issue size has been revised to R485.22 crore from R516 crore. However, the size of fresh issue — R300 crore — has not been changed.

The issue was subscribed 0.28 times at 5 pm IST, stock exchange data showed. The non-institutional category comprising high HNIs gave it a miss. The HNI book was subscribed less than 0.01 times. HNIs bid about 6,120 shares against 54.61 lakh reserved.

Qualified institutional buyers bid for 67.85 lakh shares against 182.061 lakh reserved. Retail investors, whose investment should not exceed a total R2 lakh as per Sebi rules bid for 32.93 lakh shares against 1.27 crore on offer.

The retail book was subscribed 0.26 times.

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The company plans to use R185 crore out of the IPO proceeds to repay existing debts.

Incorporated in 1998 as a liquid milk marketing company, Prabhat has graduated into a full-fledged dairy company.

The company has two production facilities in Maharashtra, at Shrirampur and Navi Mumbai, with a total milk processing capacity of 1.5 million litre and caters to customers in Maharashtra, Gujarat and Madhya Pradesh.
Sadbhav subscribed 0.2 times on day 2

Sadbhav Infrastructure’s public offering was subscribed 0.2 times on day two of the three-day IPO, stock exchanges data showed on Tuesday.

HNIs  subscribed 31.57 lakh shares against 69.71 lakh reserved for the category whereas qualified institutional buyers bid for 9.71 lakh shares against 1.44 crore reserved for them.

On Friday, the company had raised R210 crore in a pre-IPO placement to anchor investors.

It issued a little more than 2 crore shares to anchor investors, including Nomura, Morgan Stanley,HDFC Mutual Fund, Tata Mutual Fund,  Amansa and Tata AIA Life.

The company plans to raise R425 crore through a fresh issue of equity shares and an offer for sale of up to 32.36 lakh equity shares by existing investors, including the anchor investor portion.

The price band has been fixed at R100-103.

The IPO proceeds will be utilised for repayment of loans, equity investment and advancing of subordinate debt to its subsidiary Shreenathji Udaipur Tollway (SUTPL) and part-financing of the SUTPL project.

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DLF gets shareholders nod to raise up to Rs 7,500 cr (01-09-2015)

DLF shares

Shareholders also approved another special resolution to lease and/or create charge, lien, mortgage, hypothecation, etc exceeding 20 per cent of the assets of these three subsidiaries, DLF said in a filing to the BSE.

Realty major DLF today said its shareholders have approved the resolution to create charge, lien or pledge on its over 50 per cent shares in three subsidiaries, holding rental commercial assets, for raising up to Rs 7,500 crore.

Shareholders also approved another special resolution to lease and/or create charge, lien, mortgage, hypothecation, etc exceeding 20 per cent of the assets of these three subsidiaries, DLF said in a filing to the BSE.

These resolutions were approved by the shareholders at the company’s annual general meeting held on August 28.

Through a notice to the AGM, DLF had sought shareholders’ nod “to create charge, lien, pledge and other encumbrances of any nature/kind, exceeding 50 per cent of the company’s shareholding in the material subsidiaries — DLF Cyber City Developers Ltd, Caraf Builders & Constructions Pvt Ltd and DLF Assets Pvt Ltd.”

DLF holds 100 per cent equity shareholding in these three subsidiaries, which are in the business of developing and leasing of office space, IT Park/SEZ and retail properties.

Its rental business, with leasable area of about 29.4 million sq ft, yielded annuity income of about Rs 2,200 crore during last fiscal.

The creation of charge, lien and pledge could be in one or more tranches “to secure the amount raised by the company and/or such material subsidiaries… from the lenders provided that the amount borrowed and outstanding at any point of time shall not exceed Rs 7,500 crore”, the notice had said.

DLF had also sought shareholders approval to lease and/or create charge, lien, mortgage, hypothecation, etc exceeding 20 per cent of the assets of these three subsidiaries.

The company’s net debt stood at Rs 20,965 crore at the end of the last fiscal, of which about Rs 14,000 crore pertained to rental business (RentCo) and the rest to development arm (DevCo).

Its net profit declined by 16 per cent to Rs 540.24 crore in 2014-15 from Rs 646.21 crore in the previous year. Total revenue fell by 17 per cent at Rs 8,168 crore in 2014-15 fiscal from Rs 9,790 crore in the previous year.

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