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#Linkfest – World Bank Withdraws Amaravati Funding, IL&FS Forensic Audit Revelations, FMCG Companies Lose Steam, US FDA Dings Strides Pharma, 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.

Mutual Funds Balk At Banks’ Plan to Resolve DHFL Debt

Mutual funds have reportedly refused to sign a bank-led DHFL debt resolution plan that will give preference to unsecured creditors over secured creditors like mutual funds. In internal meetings, mutual fund honchos told the bankers that if unsecured creditors are given preference over secured creditors during debt resolution, it will violate a basic tenet of law where secured creditors have greater rights than unsecured creditors. They said that instead of forcing mutual funds to take haircuts on their loans, the banks should have threatened to change DHFL’s management and also probe its books. DHFL owes close to Rs. 5000 crores to 10 mutual funds. Link

World Bank Shuts Door on Andhra Pradesh on $300 Million Funding for Amaravati Project

In the latest blow to former Andhra Pradesh Chief Minister Chandrababu Naidu’s Amaravati Project, the World Bank has dropped its plan to give a $300 million soft loan to the state government for the project. Since its inception, the project has seen a spate of problems. The state government had applied for the loan in 2016 and it was accepted by the World Bank. But protests by activists and farmers from the affected region put the World Bank’s plans, on hold. After the YSRCP government came to power recently, one of the first decisions it took was to put the Amaravati project on hold, until the government reviewed its finances and brought suitable modifications to the project. Link

Grant Thornton Forensic Audit Reveals Manipulation in Credit Ratings of IL&FS Group

The forensic audit of IL&FS and its group companies (before the group went bust) by Grant Thornton has revealed several instances of quid pro quo between the IL&FS group and the senior management of credit rating agencies. For instance, it was found that IL&FS Financial Services officials helped a senior official at Brickworks procure tickets to a premier football match in Madrid. Another senior official at Fitch Ratings received assistance in buying a villa at a discounted price. IL&FS also made a donation to Sameeksha Trust, which publishes the popular ‘Economic & Political Weekly’ magazine. D N Ghosh, the former chairperson of ICRA is associated with this trust. Link

Rural Electrification Corporation Raises $650 million Via Offshore Bond Issue

Rural Electrification Corporation has managed to raise $650 million by selling its bonds abroad. The company, which primarily finances power projects, will use the proceeds to expand capacity and refinance existing loans. The success of the bond sale is good news because it indicates a strong demand for Indian-government linked debt. The government of India is planning to issue $10 billion in sovereign bonds to foreign investors later this year. Meanwhile, bond yields have been falling at a global level, making it easier for companies and countries like India to get foreign loans. Link

India Ratings and Research Demotes IDFC First Bank ‘Outlook’ to ‘Negative’

Anticipating an increase in credit costs, India Ratings and Research has revised the outlook on IDFC First Bank’s Rs. 33642 crore worth of AA+ rated NDCs (corporate bonds) to ‘negative’, from stable. The agency said, IDFC First Bank will likely see higher credit costs, due to downgrades in some of its investments, coupled with higher provisions for legacy stressed assets. However, the bank’s credit rating remains stable at ‘AA+’ due to its robust capital buffers, stable liquidity position, and rise in retail book after its merger with Capital First. The bank’s credit rating was downgraded to ‘AA+’ from ‘AAA’, last year. Link

Edelweiss Selling Family Silver: To Sell 20% Stake in Wealth Business to Par Debt

Edelweiss Financial Services is preparing to sell up to 20% in its wealth business to Kora Management, a U.S based company for Rs. 2000 crore. If the deal goes through, Edelweiss Wealth Management will be valued at Rs. 10000 crores. The company’s parent Edelweiss Financial Services has upcoming debt repayments of Rs. 6500 crores till September 30th, 2019, against expected inflows of Rs. 3600 crores, not including undrawn bank lines of Rs. 1300 crores. Many NBFCs are facing prolonged stress from the last 9 months, caused by exposure to a stressed real estate market along with a liquidity crunch. This has forced them to monetize assets to pay off debt obligations. Link

Basmati Rice Prices Crack by 10% as Exports Face Uncertain Future

The price of basmati rice in India fell by 10% in India last month on the back of reduced exports to Iran due to delayed payment and loss of some European business due to high pesticide content. Iran is the largest market for Indian basmati rice exports, importing a quarter of India’s annual production of 4-4.5 million tonnes. According to the All Indian Rice Exporters Association, Iran owes India nearly Rs. 1200 for imported basmati rice. The mandi price of basmati rice in India stands at Rs. 3900 per quintal, while it sells for Rs. 4100 on the NCDEX. Link

Coffee Growers Down in the Dumps as Coffee Growing Turns Non Remunerative

One coffee latte, with accompanying foam art, currently retails for around $5 in the U.S. Meanwhile, the average coffee grower receives close to Rs. 61 for half a kg of coffee beans, which barely even covers the production cost. This sad state of affairs has forced many coffee growers, especially in poor countries, to abandon coffee growing for more lucrative crops. Around 21 million people around the world are dependent on coffee production for their living. However, bumper coffee harvests in Brazil from the last two years, flooding of the market by cheap coffee, and the increasingly higher costs associated with coffee growing, has left many coffee growing families on the brink of starvation. Link

Indian Cotton Yarn Exports Slump in Q12019

Exports of cotton yarn from India crashed by 22% in the first quarter, due to weakening demand for the country’s yarn in the major markets of China, Pakistan, Bangladesh, South Korea, and Vietnam. Higher domestic prices for cotton yarn have not helped either, as domestic garment producers grapple with cheap garment exports from Bangladesh (it exported garments worth $365 million to India in 2018-19). This has forced many Indian cotton mills to partially shut shop, leading to inventory build up. China accounts for close to a third of the cotton exports from India, but China’s access to duty-free markets in Pakistan and Vietnam is a threat. Link

Secondary Market Deals for Bad Loans Freezes Due to Regulatory Haze

Recently, the NCLAT had ruled that financial and operational creditors of a company would receive the same treatment under the IBC in case of resolution. The case refers to Essar Steel’s acquisition by ArcelorMittal. The Supreme Court has already put a stay on the judgement but it has nevertheless acted as a damper on deals for bad loans in the secondary market. The argument is, if financial (secured) and operational (unsecured) creditors are treated the same, debt valuations will become difficult. Companies that were looking to acquire bad assets in the secondary market don’t want to wade into that quagmire until the issue is resolved. The Indian distressed assets market is currently worth around Rs. 10 lakh crore. Link

FMCG Companies Lose Steam for Third Quarter in a Row

Market researcher AC Nielsen has said that FMCG companies have been seeing slowing growth for the third quarter in a row. The firm blamed the lackluster performance on a slowdown in rural demand and lower spending in urban areas. In April-June 2019, growth in the FMCG sector slowed down to 10%, compared to a growth of 16.2% during the same time last year. Consumer spending in the FMCG sector has also been affected by elections in various states, including the general elections, reduction in government spending, GST impact on small retailers and untimely rains which have affected crops in North India. Link

Government May Sell Stake in GAIL Pipeline Business, After Hiving off Unit

State-run GAIL is India’s largest distributor and trader of natural gas, owning around 2/3rd of the 16,234 km gas transportation network in the country. Now, there are rumors that the government wants to monetize GAIL’s gas transportation network by separating it from the main company and selling it off to strategic investors. Canada’s Brookfield recently acquired Reliance Industries’ 1480 km gas pipeline, so there is a precedence if the government wants to go the same way. Currently, natural gas contributes just 6.2% to the energy mix in the country, and the government wants to increase it to 15% by 2030. Privatizing GAIL’s natural gas network will help in that direction. Link

Bombay High Court Puts Brakes on Mumbai Coastal Road Project

The Bombay High Court has squashed the Coastal Regulation Zone clearances given to the Mumbai Coastal Road Project, putting the fate of the project in limbo. The stop will affect the fortunes of HCC and L&T, who had orders worth Rs. 7500 crores and Rs. 2126 crores, pertaining to the project respectively. The project aims to connect South Mumbai’s Marine Drive with North Mumbai’s Borivilli, effectively reducing traffic on the congested Western Express Highway. The project has been facing protests from environmentalists, citizen groups, and fishermen communities, residing in Worli Koliwada, who have argued that the project will destroy the environment. Link

DHFL Wants Rs. 1500 crores in Loans Every Month for One Year to Get Back on Track

Dewan Housing Finance Ltd. which had been asked by its lenders to prepare a debt resolution plan, has reportedly requested its lenders to give it Rs. 1200-1500 crores in loans every month, for a year, to help it resume lending operations. The loans will be securitized after a year. DHFL owes its lenders Rs. 80,000 crores of which Rs. 40,000 crore is owed to just banks. The plan will force the DHFL promoters to reduce their stake in the company, while a new investor will be brought in. But the mutual funds, to whom the company also owes money, are not buying it. So there is every chance that the banks will be forced to pick up the tab for the monthly loans, once again. Link

DCB Bank Stock Tanks by 16.4% on Weak Quarter

DCB Bank has been acclaimed for its success with small business lending. But the bank’s recent performance in Q1 caught the market off guard, which promptly reacted by sending the bank’s stock 16.4% lower. Bad corporate loans, stressed farm loans, and heightened exposure to real estate loans, were the bank’s Achilles Heel, causing gross bad loans to balloon to 1.96% of the loan book. If you add restructured loans, the gross bad loans will rise to 2.1%. Fresh loans grew by just 13% in the quarter, compared to 30% growth during the same period, a year ago. Analysts believe that the bank is trading at expensive valuations, with RoA at just 1%. Link

Yes Bank Returns to Profitability After Bad Last Quarter

Yes Bank declared a net profit of Rs. 114 crore in Q12019-2020, after a terrible last quarter, during which the bank registered a loss of Rs. 1506 crores. Incidentally, the bank had recorded Rs. 1260 crores in profit in the same quarter last year. The bank’s net interest income rose by just 2.8%, to Rs. 2281 crores. Yes Bank MD said that this quarter, the bank was trying to consolidate its business. He said, the bank was assured that it had put its house in order during the quarter, and can now look forward to renewed growth in the coming quarters. The bank’s shares are trading 44.5% lower this year, even as the Bank NIFTY has risen by 13%. Link

US FDA Dings Strides Pharma for Attempting to Destroy Quality Control Records

The Indian pharma sector has been in the eye of a storm for quite a while, with several drug makers currently being investigated by the U.S FDA for violations in drug production and quality norms. The latest company to face the FDA’s wrath is Strides Pharma Science. During a routine inspection of the company’s Puducherry plant, FDA officials apparently found discarded CGMP (current good manufacturing practices) documents, and saw evidence of uncontrolled document shredding. Consequently, in an official letter since made public, the FDA said these actions cast doubts on the effectiveness of the company’s quality control unit, and the accuracy and integrity of its data. The company’s stock cracked by 5% on this news. Link

Analysts Drop Coverage of Out-of-Favor Mid and Small Cap Companies

Brokerages have stopped covering around 335 companies in the last one year, while fewer analysts are covering 225 more companies. Investors have been staying away from these companies due to governance issues and a series of loan defaults. And if investors are not interested in a company, it makes little sense to analyse it because nobody wants to pay for it. Some of the companies are UFO Moviez India, PC Jewelers, Manpasand Beverages, Infrasoft Technologies, RPP Infra Projects, and others. The CNX Small-cap index has dropped 38%, and the Mid-cap index by 24% respectively, from their peak in January, 2018. Link

NHAI May Tap LIC For Long-term Bond Funding Worth Rs. 30,000 Crore

The National Highways Authority (NHAI) is reportedly knocking on the doors of state-owned LIC, for funding worth Rs. 30,000 crore. The debt will be issued as 30 year bonds (the coupon rate has not been decided yet). This is good for NHAI because road projects usually have a long-gestation period and insurance funds are also given for the long term. Recently, N N Sinha, NHAI Chairman had announced that the PSU will raise Rs. 75,000 crore from the market this fiscal year. With funding from banks and other private lenders hard to come, NHAI has had to approach PSUs like LIC for loans. Link

Government Passes IBC Amendments to Overturn NCLAT Order in Essar Steel Case

The Union government passed a series of amendments to the Insolvency and Bankruptcy Act, to ensure that the NCLAT order that gave financial and operational creditors equal rights in the distribution of recovery amount from a resolved case, was overturned. Now, financial creditors have been restored to their earlier position of precedence in share of proceeds after recovery of dues. After approving ArcelorMittal’s Rs. 42000 crore offer for Essar Steel, the NCLAT ruled that financial lenders will receive only 60.7% of their dues, with the rest going to the operational lenders. The order was immediately challenged in the Supreme Court. But the government acted proactively and amended the Act to reverse the judgement. Link

Reliance Jio Infratel to Sell Rs. 25215 Crore Stake in Tower Business to Brookfield-led Investors

A group of foreign investors led by an affiliate of Brookfield Asset Management have entered into a deal to acquire a stake in Reliance Jio Infratel for Rs. 25215 crores. Reliance Jio Infratel will use the money to reduce its debts and to acquire Reliance Industries’ 49% stake in the company. Reliance Industries, through its wholly-owned subsidiary Reliance Industrial Investments and Infrastructure Ltd. currently owns 51% in Reliance Jio Infratel. Link