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#Linkfest – Insurers Bleed on ADAG Companies Ratings Downgrade, Indian Government’s Global ETF, Amrapali Probe Reaches End Game, Brazilian Chickens, Berkshire Hathaway Buys Amazon Stake, and more

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At Capitalmind Premium, we have a very active Slack channel where we discuss a lot of interesting topics. In there,  a number of interesting links come our way. Here’s the most interesting of such links shared by our members in recent days.

Ratings Cut of Two ADAG Companies Leaves Insurers Bleeding

Last week, Care Ratings and Brickworks downgraded Reliance Home Finance and Reliance Commercial Finance, citing delays in debt repayment and stressed liquidity. The event caused a ‘passive breach’ in some schemes of insurance companies who hold these companies’ securities. A passive breach occurs when a security at a higher investment grade at the time of investment, is downgraded later. In such cases, the IRDA requires insurance companies to address the problem within 3 days. Now, the companies have asked the IRDA for more time to come up with a solution. Link

Central Bonds Suffer as Mutual Funds Make a Beeline for State Development Loans

When IL&FS defaulted late last year, several mutual funds that held its securities wrote off its debt. This and a spate of defaults by a few non-banking financial companies have left many mutual funds with gaping holes in their corpus. Consequently, mutual fund investments into state development funds have increased, to the detriment of central bonds. Like G-Secs, state development bonds are also backed by a sovereign guarantee but there is usually a nice spread between them and G-Secs, which might explain the higher inflow into SDLs. Link

Reliance Capital Urgently Needs $2 Billions to Keep the Barbarians from the Gate

Reliance Capital is the crown jewel in Anil Ambani’s group companies. But due to recent events, even that last bastion may be on the verge of toppling. A liquidity crisis has made it next to impossible for Reliance Capital to access market funds, to reduce its short-term debts. Meanwhile, CARE Ratings has noted that the company’s reserves dipped to a mere 11 crores in March, 2019. Now, Reliance Capital has no choice but to sell its stakes in other ADAG companies to collect the money, which could be in the range of $2 billion. Link

After Local Experiment, Finance Ministry Wants to Launch Global ETF

After listing two ETFs (CPSE ETF and Bharat-22 ETF) on local bourses, the government is now eyeing the international market. According to sources in the Finance Ministry, the government wants to capitalize on the hunger for highly rated, high-return securities in overseas markets, by launching a global ETF comprising of CPSE companies. The Department of Investment and Public Asset Management has already begun the process of identifying fund managers to help it develop the ETF. The government hopes to target international pension funds with the new ETF. Link

Vanguard and its Patent on How to Avoid Taxes on Mutual Funds

Vanguard, the pioneer of low-cost ETFs and mutual funds has invented a way to avoid taxes on mutual funds. And to ensure that competitors don’t copy the technique, Vanguard has even patented it! Since 2001, at least 15 Vanguard funds have used the technique to escape paying capital gains tax on billions of dollars worth of capital gains. The method is quite ingenious actually. The method involves using an ETF to remove appreciated stocks from a regular mutual fund, using a trading technique called a ‘heartbeat trade’. Read about it here. Link

No, the NSE is Not Barred from Facilitating Trades for Six Months

Some days back, there was a news report that the National Stock Exchange was barred from accessing the securities market for six months. It left a lot of people confused, even panicked, because NSE is India’s premier stock market and facilitates trading in crores of rupees every day. But it turned out to be a simple misreading of the news. The fact is, NSE wanted to go for an IPO and SEBI had only said that NSE has to wait for six months to do it. Link

Foreign Investors in NSE Don’t Want Bourse to Challenge SEBI Fine

NSE’s foreign investors have urged NSE, one of India’s premier stock exchanges not to challenge SEBI’s recent Rs. 450 crore fine for failing to ensure that all members receive equal access to the stock exchange. Instead, they want NSE to concentrate on its upcoming initial public offering, which will probably be held once NSE finishes serving its six month IPO ban. The investors fear that if NSE appeals the order, it can delay the IPO further which is expected to raise close to $1 billion. For its part, NSE has said that it is studying the order and will decide on a future course soon. Link

Amrapali Probe Unearths Shocking Truths About Funds Received by Company

Forensic investigations into the Amrapali Group’s financial transactions have uncovered shocking truths about how investors’ money was diverted by the firm’s management for their personal use. The company’s management allegedly siphoned off a large amount of the money it got from home buyers and put the money into expensive cars, stocks, jewelry, weddings, and more. Readers will note that the Amrapali Group defaulted on delivery on houses to its customers early last year, post which the Supreme Court stepped in and ordered the arrest of the firm’s promoter and a forensic audit of its book. Link

China’s CTrip Pulls a Coup: Now Owns Nearly Half of MakeMyTrip

Following a share swap agreement with South Africa’s Naspers, China’s CTrip has acquired 49% in India’s marque online travel facilitator MakeMyTrip. In return, Naspers will receive 5.6% in Ctrip. MakeMyTrip is valued at $2.69 billion while Ctrip is listed on the NASDAQ and has a market cap of close to $23.5 billion. The deal is a win-win for Naspers because it allows it to liquidate its holding in MakeMyTrip, while also giving it a slice of CTrip, the world’s second largest online travel service provider. Link

E-bike Sales See Drastic Drop as Second Phase of FAME-II Kicks In

In the second phase of FAME-II (Faster Adoption and Manufacturing of Electric Vehicles), the government will no longer subsidize e-bikes that don’t have a lithium-ion battery. The new rule saw the sales of e-bikes plummet in the country from 6000 units a month, to a trickle. According to the Society of Manufacturers of Electric Vehicles, April was a washout month for the e-bike industry. Only three bikes were certified under FAME-II in April. Moreover, no FAME-II compliant e-bikes were sold in April. Link

Brazilian Chickens to Dress Indian Tables Soon

When India banned the imports of certain chicken products from the U.S, like eggs and chicken legs, on fears of transmission of bird flu, the U.S took India to the WTO and India lost the case. India had to subsequently allow the imports of chicken legs into India, which are not consumed in the west. Now, JBS, Brazil’s largest meat processor, is all set to export chicken products, like chicken legs into India. This puts the fate of domestic chicken producers in question, who have complained that they can’t compete against the low-cost imported chicken products. Link

Hawkins Cookers CEO and Factory Manager are Canned by Jalandhar Court for Flouting Workplace Rules

Under the Factories Act, any workplace which has over 500 workers should be equipped with an ambulance. But when government inspectors visited the Hoshiarpur factory of Hawkins Cookers, which employs over 700 workers, they found that the premise didn’t have an ambulance. Consequently, the government moved the court. Now, a local court in Jalandhar has punished the company’s CEO Subhadip Datta Choudhury, and plant manager Sandip Singh Toor with a fine of Rs. 25,000 and six-months imprisonment, for the lapse. Link

Income Tax Filings Fall for the First Time After Demonetization

Income tax filings have fallen to 79.1% in 2018-19, compared to 91.6% in 2017-18. This is the first time this has happened in over four years since 2014’s demonetization, when the government saw a windfall in tax compliance. Analysts have blamed this on the government’s lax attitude due to the upcoming elections. Middle-class voters, who constitute the majority of income tax filers, are considered the main voter base of the NDA government. The rumour is, the NDA wants to appease them before the elections and has therefore, not been tough on compliance. Link

GIC and KKR To Pump in Rs. 2064 crore into Sterlite InVIt

Sterlite Power Transmission’s InVIT, India Grid Trust has just received a promise of credit infusion by GIC Holdings and KKR, worth Rs. 2064. Of this money, GIC Infra Holdings will put in Rs. 980 crores while KKR will pump in Rs. 1084 crores. Sterlite Power Transmission will also chip in with Rs. 200 crore so that it doesn’t run foul of SEBI norms. The deal will give KKR a controlling stake in Sterlite Investment Managers, the company that manages the InVIT. The InVIT currently has an AUM of Rs. 5200 crore and it is targeting an AUM of Rs. 30,000 by 2020. Link

Reserve Bank of India: Jack of all Trades, Master of None

Two economists have accused the RBI of playing with fire by using currency swaps to generate monies for the government. According to them, currency swaps are an indirect tool, for pursuing a loose monetary policy. Recently, the RBI has bought dollars worth $10 billion on a premium using rupees, with a promise to return the dollars back three years later, at a predetermined price. The question is, why is the RBI intervening in the forex markets, and not exploring conventional means like open market operations on a larger scale. Link

Max India Offers the Peace Pipe to Public Shareholders

Analjit Singh-run Max India is on the verge of selling a 51% stake in its life insurance business, Max Bupa to True North, a U.S based private equity trust. It also has plans to demerge its healthcare business into two entities. One of the entities which currently runs the company’s hospitals will be merged with KKR backed Radiant Life Care, while the other part, Advaita, will continue to run Max India’s retirement homes business. Advaita will also manage the Rs. 500 crore corpus it will receive from the sale of company assets. In light of this, Max India has offered to buy out public shareholders who may not want to be part of the company’s journey. Link

L&T Kicks off Bid to Acquire Mindtree by Buying 20% in Company

L&T has kicked off a bid to acquire a majority shareholding in Bengaluru-based Mindtree by purchasing V. G. Siddhartha’s 20% stake in the latter. The deal was engineering through the stock exchange as a block deal and saw 32.7 million shares in Mindtree change hands, for Rs. 980 each. All in all, L&T paid V. G. Siddhartha Rs. 3269 crores for the stake. If L&T acquires a further 5% in Mindtree, it can mount an open bid for the remaining 26% share required to reach a majority. Link

Airtel Africa Puts on a Good Show in Africa

Bharti Airtel’s Africa arm operates in 15 African countries and as of March 31st, 2019, caters to a customer base of 98.9 million people. A growing customer base, coupled with the delivery of value-added services like Airtel Money have helped Airtel grow its customer base by a good number. Consequently, the company posted a profit of $412 million from its Africa operations in 2018-19, compared to a loss of $138 million in 2017-18. Africa is turning out to be an outlier for Airtel, which is currently facing problems in its home market of India, due to aggressive market penetration by Jio Infocomm. Link

Yes Bank’s Woes Have Just Begun, says Moody’s

When Yes Bank came out with its results recently, and posted a Rs. 1506 crore loss for Q4 2018-19, not many people were surprised. Analysts had warned that Yes Bank was window dressing its loan book for a long time and it was only a matter of time before it was exposed. Moody’s Analytics has also said that the private bank’s NPA could be as high as 8% of total loans, adding that the clean-up initiated by new CEO Ravnit Gill may take up to 18 months to show results. According to Yes Bank’s recent results, the bank’s gross NPAs have gone up to 3.2%, while the bank has also declared Rs. 10,000 crore in loans as potentially stressed. Link

B. M Khaitan Group Companies Slide on Bourses After Ratings Downgrade

Consequent to India Ratings and Research downgrading the long-term credit rating of Eveready Ltd. to ‘negative outlook’, shares of the company fell steeply on the stock exchange. Earlier, another Khaitan Group company, McLeod Russel had also been downgraded to ‘negative outlook’. In fact, McLeod Russel recently sold some of its tea estates in Bengal to reduce its debt. Meanwhile, Eveready Industries is in the dock for extending substantial inter-corporate deposits to group companies, which have negatively affected its leverage. Link

Saurabh Mukherjea, Marcellus Investments in Discussion with Sankaran Naren, ICICI Prudential Mutual

Saurabh Mukherjea is the founder of Marcellus Investments. In the inaugural episode of Coffee Can Investing Series, he sits down with Sankaran Naren of ICICI Prudential Mutual to discuss the latter’s approach to picking stocks, his journey in the financial markets, and the people he looks up to in the business of investing. Link

ONGC Coffers Empty as Government Uses Company as Cash Cow

Last year, the Oil and Natural Gas Corporation bought Hindustan Petroleum Corporation Ltd. from the government by shelling out Rs. 36,915 crores. The company had to borrow at least Rs. 20,000 from the market to pay for HPCL, even as it dug into its reserves for the rest. For years, the government has been using ONGC as a cash cow and has milked it for dividends. The final straw was HPCL’s acquisition in September 2018, which reduced the company’s reserves to a meagre Rs. 167 crores, leaving it in a precarious situation. Link

Buffett’s Berkshire Hathaway Acquires Stake in Amazon

Warren Buffett is called the ‘Oracle of Omaha’, but even this Oracle is only human. After dilly dallying for a long time, Berkshire Hathaway has finally acquired an undisclosed stake in Jeff Bezos’s Amazon Inc. Speaking about the purchase at Berkshire’s annual AGM, Buffett said he likes Amazon and regrets not buying the company’s stock in the past. But he also said, the purchase was made by one of his fund managers, which may allude to Ted Weschler and Todd Combs. Link

Jet Airways’ Future in Question as Bids Fail to Fructify

According to government sources, Jet Airways, the once marque airline, is staring at a bleak future because the bidders who had expressed interest in acquiring the airline earlier have developed cold feet and have failed to submit concrete bids to save the airline. Unless a bidder comes forward, it is now only a matter of time before Jet Airways is dragged to the NCLAT by one of its lenders to recover dues, which will probably seal the airline’s fate for good. Link

Car Dealers Down Their Shutters as Car Dealerships Become Unprofitable

According to ET Auto, two car dealerships have shut shop in India every week, for the last two years. The Indian automobile retail sector has suffered an estimated loss of Rs. 2000 crore during this period, forcing 205 dealers to shut 300 outlets. About 3000 people have also lost their jobs in the process. Car dealerships have been affected by a slump in vehicle sales due to rising fuel costs, falling margins from finance and insurance companies, increase in shop rentals and salaries, and liquidity crunch in the aftermath of GST. Link