Ajay Piramal targets distressed Indian assets

It’s a good time to be in the market, says Anand Piramal

Mumbai: Indian billionaire Ajay Piramal is a man on a shopping mission. His firms are training their sights on distressed assets discarded by indebted businesses and banks struggling with bad loans.

His unlisted real estate unit, recently flush with cash from Warburg Pincus and Co. and Goldman Sachs Group Inc., is looking to buy land parcels from distressed developers, a month after Piramal Enterprises Ltd announced a $893 million fund to buy soured loans. The group’s investment arm is financing builders, who in turn can buy or co-develop projects with their troubled peers.

“My father says we should be like a nimble gorilla so you are able to move quickly, but at the same time you should have the capital to move,” Anand Piramal, the group’s executive director and scion who manages the real estate business, said in an interview in Mumbai. “It’s a good time to be in the market.”

Rich pickings may come through for the Piramal conglomerate as Indian developers’ cash flow from operations fall short of their finance costs and lenders, desperate to recover dues, tighten screws demanding repayment. Saddled with distressed assets at a 14-year high, banks in Asia’s third-largest economy have reported record losses amid pressure from regulators to clean up.

Piramal Realty will “look at good, prime parcels of land with a clean title” from distressed developers and is already in talks for as many as five deals, Piramal said. Disputes over land ownership are common in India, with cases dragging because of litigation for decades.

Sellers are becoming “more amenable now” toward deals to overcome financial stress, which may continue for another year at least, Piramal said. “Capital is always a source of competitive advantage.”

Goldman Sachs acquired a minority stake in the company for $150 million in August, about a month after Warburg Pincus bought into it, pumping in Rs.1,800 crore ($268 million). The company has about 10 million square feet under development in Mumbai and plans to invest 160 billion rupees in the next four years.

Big boys

Builders are selling assets as they streamline operations driven by both strategy and distress, according to Shobhit Agarwal, managing director for capital markets at property broker Jones Lang LaSalle India. “Developers are turning to these big boys because they have both the money and the market trust to make sales plus command a premium,” Agarwal said.

As smaller local builders struggle with byzantine approvals processes, high cost of financing, dwindling sales and drying cash flows, moneyed-up investors such as KKR and Co. and Piramal Realty are swooping in, lured by the prospect of acquiring property at deep discounts from down-and-out developers.

Piramal Fund Management, the family’s real-estate funding vehicle, is distributing as much as Rs.15,000 crore to about 10 developers that are in a position to buy land or collaborate with struggling competitors.

Distress fund

The listed Piramal Enterprises announced setting up aRs.6,000 crore Piramal India Resurgent Fund with the specific mandate of acquiring soured loans, according to a post-earnings presentation in February. Piramal declined to share any details about the new fund or the sectors it’ll focus on.

Shares of Piramal Enterprises, which sells medicines to financial services, have risen 0.8% in the past year, compared with a 16% decline in the S&P BSE Sensex and the 3.9% drop in the 63-member S&P BSE Heathcare index.

The total cash flow from operations for six developers tracked by Moody’s Investors Service, was at Rs.300 crore in the year ended March 2015, dwindling from Rs.3,000 crore in 2011, while total interest costs rose to Rs.3,600 crore fromRs.2,900 crore over this period, the data showed.

Lenders struggling to recover loans that have soured has weighed on credit in the country. Reserve Bank of India governor Raghuram Rajan has set banks a March 2017 deadline to tidy their balance sheets while India’s top court directed the RBI last month to share a list of the country’s largest defaulters in the past five years.

Loans to commercial real estate segment grew 5.9% to Rs.1.7 trillion in 2015, less than half of the 14.8% growth the year earlier, data compiled by RBI show.

“The squeeze is also coming in because of the banks,” Piramal said. “If banks are able to push developers to accept more reasonable valuations, then groups like us can step in. I think it’s happening.” 

Private Equity

Piramal Realty plans to invest Rs 16,000 cr in 4 years

Piramal said that the company is looking to increase its commerical portfolio as well in the coming years.

Piramal Realty, the real estate arm of Ajay Piramal-owned Piramal Group, plans to invest Rs 16,000 crore in development of real estate projects and acquisition of land, over the next 4 years.

Anand Piramal, executive director, Piramal Group told FE that while the company already has a roughly 9 million square feet of residential projects pipeline to be executed till 2020, the company is open to acquiring fresh parcels of land and distressed assets.

The company is also in the midst of developing an office project in Kurla, near Bandra Kurla Complex (BKC) ad-measuring 2.5 million square feet.

The company launched a luxury project at Byculla called Piramal Aranya, which will entail an investment of R4,300 crore over the lifecycle of the project.

The sea-facing 70-storey high rise residential project will be spread across 7 acres and is in close proximity to the 60 acre botanical gardens on the west.

In 2015, Goldman Sachs and Waurburg Pincus had invested a total of $434 million in Piramal Realty, giving the company a strong bandwidth to invest in real estate projects.

Piramal said that the company is looking to increase its commerical portfolio as well in the coming years. “As of now we just have one project, but going forward we would like to have a combination of both residential and commercial real estate.

With the expectation of 7%-8% growth in the Indian economy, the focus on commercial real estate will come back and we would like to have a healthy mix of both segments”.

Sun Capital

10 Tips for the Successful Long-Term Investor

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Sell the Losers and Let the Winners Ride!

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

• Riding a Winner - Peter Lynch was famous for talking about "tenbaggers", or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.
• 
  
• Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

2. Don't Chase a "Hot Tip."

Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

3. Don't Sweat the Small Stuff.
As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.

Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't Overemphasize the P/E Ratio.

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

5. Resist the Lure of Penny Stocks.

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a Strategy and Stick With It.

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the Future.

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twenty-fold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made seven-fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a Long-Term Perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be Open-Minded.

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

10. Be Concerned About Taxes, but Don't Worry.

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision.

The Bottom Line

There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing. If you are looking for more information about long term investing, Investopedia's Ask an Advisor tackles the topic by answering one of our user questions.

Sun Capital

Dilip Buildcon bags Rs 545.4-cr contract in Goa

MUMBAI: Engineering firm Dilip Buildcon today said it has bagged Rs 545.4-crore contract from the Ministry of Road Transport and Highways to construct 640-km eight-lane cable-stayed bridge across the Zuari in Goa. 


The Bhopal-based company has partnered with Ukrainian firm Mostobudivelnyi Zahin (MBZ) for its technical expertise to construct the cable bridge, a statement here said. 

Dilip Buildcon will have a majority stake of 70 per cent in the joint venture firm while the remaining 30 per cent will be held by MBZ, it said. 

"This is our first project in Goa, and we hope to complete the project before time. Mostobudivelnyi Zahin, which has a vast experience in construction of cable suspension bridges, will be our technology partner," Dilip Buildcon Executive Director and CEO Devendra Jain said. 

This contract is part of the Rs 676.19-crore, 1.084-km-long project, which is expected to be completed in 36 months. 

"There are around 4-5 cable suspension bridges built on a large scale in India, and this would be the second-largest cable bridge length-wise in the country, after Vidyasagar Setu in Kolkata. With this contract, we are now present in 12 states," he said.

New RBI norms to help banks unlock Rs. 40,000 cr

Central bank eases norms governing treatment of certain balance sheet items

The Reserve Bank of India on Tuesday relaxed norms relating to the treatment of certain balance-sheet items, including property, which will help banks unlock capital aggregating about Rs.40,000 crore.

This capital relief comes at a time when the banks, especially those in the public sector, are struggling with bad loans, provisioning requirements and falling equity market valuations.

The revised norms will give PSBs access to additional capital of Rs. 35,000 crore, while it could be about Rs.5,000 crore for private sector banks.

The unlocking of capital follows a review carried by the RBI with the aim of further aligning the definition of regulatory capital with the globally adopted Basel III norms.

These standards aim to improve the banking sector’s ability to absorb shocks arising from financial stress and improve risk management and governance.

Banks have now been allowed to include some items, such as property value and foreign exchange, for calculation of Tier 1 capital (CET1), instead of Tier 2 capital.

Analysts say State Bank of India may benefit a great deal from the change in the carrying amount of a bank’s property as it has huge property holdings across the country.

As per RBI norms, CET1 capital, comprising paid-up equity capital, statutory reserves, capital reserves, other disclosed free reserves (if any), and balance in P&L Account at the end of the previous fiscal year, must be at least 5.5 per cent of risk-weighted assets.

By Sun Capital

IDBI Bank looking to double business by FY19

Will catch up with the industry average of 12-15% growth, says MD & CEO

Mr. Kishor Karat, MD & CEO 

As part of its three year medium term strategic business plan, IDBI Bank on Tuesday said it is planning to double its business, rebalance loan portfolio towards micro, small and medium enterprises, agriculture and retail credit, augment low-cost deposits and purge the balance sheet of bad loans.

The public sector lender has unveiled the plan in the backdrop of it posting a huge loss of Rs. 2,184 crore in the October-December 2016 quarter and the government announcing in the Budget that it will consider the option of reducing its stake in the bank to below 50 per cent.

Under the plan, IDBI Bank expects to double its business (deposits plus advances) to Rs. 10-lakh crore (deposits of Rs. 5.50 lakh crore and advances of Rs. 4.50 lakh crore) by FY19 from the estimated Rs.5 lakh crore (deposits: Rs. 2.85 lakh crore and advances: Rs. 2.35 lakh crore) in FY16.

IDBI Bank will rebalance its portfolio so that the share of loans to retail, micro, small and medium enterprises and agriculture segments increases to 41 per cent of total loans in three years from 33 per cent now.

Consequently, the share of corporate and infrastructure loans in the total loans will come down to 37 per cent (43 per cent now) and 2 per cent (24 per cent), respectively.

Kishor Kharat, MD and CEO, said his bank has overcome the limitations on balance sheet growth arising from it not being able to meet the priority sector lending targets and is now at an inflection point.

Observing that the bank has grown at 5-6 per cent over the last few years due to the limitations, he said it will catch up with the banking industry’s average business growth of 12-15 per cent.

To bring down the cost of deposits, the bank plans to augment low-cost current account and savings account deposits from 25 per cent to 35 per cent of total deposits and reduce dependence on bulk deposits from 44.6 per cent to 32.6 per cent during the three-year period. This will bring down the cost of deposits to 5.9 per cent from 7.4 per cent as at December-end 2015.

The bank will contain the gross non-performing assets to below 3 per cent from 8.94 per cent as at December-end 2015 by stepping up efforts for recovery/resolution of bad loans. It will bring down the net NPAs to near zero from 4.60 per cent through intensive recovery and upgradation of accounts.

Branch expansion

To support business expansion, IDBI Bank will add 2,000 branches over the next three years, including 500 branches and 1,500 low cost banking points, and add 6,000 employees to its present count of 15,500.

When asked about his opinion on consolidation among public sector banks, Kharat said the strengthening of his bank’s balance sheet could help it takeover a bank.

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IDBI Bank will rebalance its portfolio so that the share of loans to retail, MSMEs and agriculture segments increases to 41 per cent of total loans in three years from 33 per cent now

By Sun Capital

IDBI Bank unveils Rs 20,000-crore investment plan over three years

To raise Rs. 20,000-crore capital via equity route

MUMBAI: A day after Finance Minister Arun Jaitley said the government may consider bringing down its stake in state-run IDBI Bank to below 50 per cent, the lender today announced a "transformational" plan entailing an investment of about Rs 20,000 crore over a three-year period. 

The plan includes doubling the bank's business volumes and reducing gross NPA level below 3 per cent. 

"The plan rests on business growth and our approach will be to catch up with the industry. We will double our business from around Rs 5 lakh crore in FY16 to Rs 10 lakh crore in FY19, representing CAGR of over 20 per cent per annum," Managing Director and Chief Executive Kishor Kharat told reporters here. 

However, he was quick to add the "transformational plan" has nothing to do with the Government's move to reduce stake in the bank. 

"The plan has nothing to do with whether we remain a public sector or a private sector bank because it does not talk abut composition of ownership or holding. On a standalone basis we have made this plan for transforming the bank and therefore the thrust is more on business transformation." 

Kharat said bad loan will remain an issue for some more time but expressed confidence the bank will be entering the next fiscal with a lighter stress. "Our endeavour will be to bring down gross NPA to 3 per cent and net NPA to near 0 per cent." 

For the quarter ended December, the bank's gross NPAs jumped to 8.94 per cent from 5.94 per cent in the same period last year, while net NPA rose to 4.60 per cent. 

To meet the plan, the bank is looking at raising around Rs 19,000-20,000 crore over the next three years, he said. Besides, it will be raising Rs 4,000 crore from Tier I bonds and Rs 8,000-9,000 crore through Tier II bonds. 

The city-based lender has lined up around Rs 3,000 crore of assets for monetisation, of which it is expecting nearly Rs 1,200-1,500 crore to accrue this month. 

Kharat said he would like to list the bank's subsidiaries - IDBI Capital, IDBI AMC, IDBI Federal - but no final decision has been taken so far. "Right now, we will monetise to the extent of our need only." 

The bank has also put on hold its plan to raise Rs 3,771 crore through qualified institutional placement (QIP) route due to volatile market conditions. 

"We have put the QIP plans on hold for now because the price is not right at this point in time. The investor interest during our roadshow was very good but they wanted more clarity around the impact of AQR (asset quality review). Now that things are clearer, we will wait for the price to come back up," Kharat said.

RBI allows banks to expand capital base to meet Basel III norms

Sun Capital: RBI allows banks to expand capital base to meet Basel III norms

At a time when public sector banks (PSBs) have been struggling with a low capital base, the Reserve Bank of India (RBI) has allowed banks to beef up its capital adequacy by including certain items such as property value, foreign exchange for calculation of its Tier-I capital.

The new norms revealed by the regulator suggest that banks can now include the value of the property while calculating its Tier-I or core capital base. But not the entire value of the property would be included; instead only 45 per cent of the property value would be counted.

However, this comes with caveats. For instance, the regulator has stated that the property value would be counted only if the bank is able to sell the property readily at its own will and there is no legal impediment in selling the property. Apart from this it also mandates that the valuation should be obtained from two independent valuers, at least once in every three years.

Analysts with a credit rating agency said considering revalued assets (real estate) as part of common equity may only serve the purpose of regulatory capital requirement. That hardly improves the credit profile of banks. The asset has to be ready (available) to absorb loss in times of need.

Foreign exchange, another item that was not included while calculating the capital base, can also be included. “Foreign currency translation reserves arising due to translation of financial statements of a bank’s foreign operations to the reporting currency may be considered as CET1 (common equity tier-1) capital. These will be reckoned at a discount of 25 per cent,” said the regulator.

Apart from these two, gains arising out of setting off the losses at a later date can also be counted as Tier-1 capital, up to 10 per cent. This will be a breather for the lenders, especially PSBs, which have been grappling with the issue of mounting bad loans and depleting capital base.

According to RBI sources, this move would help in unlocking Rs 30,000-35,000 crore of capital for PSBs and up to Rs 5,000 crore for private banks.  

The government estimates that state-run lenders would require Rs 1.8 lakh crore over the next four years. Banks would have the onus to raise the balance Rs 1.1 lakh crore from the market. This is because the finance ministry has promised to pump into PSBs Rs 25,000 crore each in FY16 and FY17 and Rs 10,000 crore each in FY18 and FY19. RBI’s move on Tuesday will serve in meeting the capital requirements.

A PhillipCapital report believes this would be a big positive for PSBs as it would evade the risk of huge dilution of equity. “SBI can gain Rs 20,000 crore from revaluation of property, which can add 50 basis points to Tier-1 on account of revaluation reserves only,” it said.

According to new Basel-III norms, which kick in from March 2019, Indian banks need to maintain a minimum capital adequacy ratio (CAR) of nine per cent, in addition to a capital conservation buffer, which would be in the form of common equity at 2.5 per cent of the risk weighted assets. In other words, banks’ minimum CAR must be 11.5 per cent, which is higher than the 9.62 per cent banks are required to currently maintain.

Sun Capital Advisory Services

JP-UltraTech Cement deal: Stressed lenders to receive about Rs 4,000 crore

MUMBAI: In what could be the biggest recovery of loans from a struggling company, Indian banks will receive about Rs 4,000 crore from the sale of Jaiprakash Associates' cement units to UltraTech Cement, said three people familiar with details of the deal. 

Lenders such as State Bank of India, IDBI Bank and ICICI Bank played an active role in the sale of the cement plants at an enterprise value of Rs 16,500 crore, said the people cited above. 

Banks have agreed to transfer about Rs 12,000 crore of Jaiprakash Associates' loans to the Kumar Mangalam Birla-owned unit, they said. Indian lenders are tightening the screws on promoters who are behind schedule in loan repayments. 
The RBI has set a deadline of March 2017 to clean up banks' books. While Jaiprakash has not been declared a defaulter in the technical sense of the term, the company has been lagging behind in payments. 

"The company was not classified as NPA (non-performing asset) but their payments were not happening on due dates which shows that they were strapped for liquidity," said BK Batra, deputy managing director of IDBI Bank. "Therefore, we exerted pressure on the company to sell its entire cement unit to reduce debt. The company has been cooperating by putting up the best of assets on block to reduce debt." 

Banks are being pressed by the Raghuram Rajan-led RBI to clean up their books after stressed loans in the system touched a high of 11.3% of the total. More loans could be classified as rotten and the demand for capital from the government could rise. Analysts estimate that more than Rs 2 lakh crore may be needed in the next three fiscal years to capitalise banks. 

There was a significant increase in bank credit to Jaiprakash Associates in the last three years. Its share in the firm's total debt of more than Rs 29,000 crore at the end of March 2015 stood at 82%, up from 58% in 2012, according to a Morgan Stanley report. 

ICICI's total exposure to the group was at Rs 6,624.2 crore, or 32.8% of the total, at the end of FY15, up from Rs 3,615.3 crore three years earlier. Under the terms of the UltraTech transaction, lenders won't be taking any haircuts even as the deal has been struck at a time when corporates can push lenders to write off a part of their loans to arrive at better valuation. 

Transferring some of their debt to Ultra-Tech means that lenders now have exposure to a business group that's regarded as being financially more sound than many others, thereby reducing the risk of defaults. They can also assign lower capital on the loans as UltraTech is a better rated company. The riskier the borrower, the higher the capital assigned on the loan. 

Among the major financially stressed conglomerates, Jaiprakash Associates has been relatively more cooperative with banks. Others have been delaying asset sales in the hope of an economic recovery and increased cash flow to service debt or, in some cases, bargain for writeoffs. 

The central bank recently identified about 150 companies that are potentially defaulters but banks were yet to declare them as such. More companies could be putting their assets on the block as lenders go after bad loans.

By Sun Capital

Why Morgan Stanley’s action on Flipkart is bad news for Indian unicorns

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company.

Bengaluru/New Delhi: Late last month, Flipkart India Pvt. Ltd, the country’s largest and most valuable Internet company, got a taste of the exacting standards of US stock markets, where it hopes to list.

On Friday, Morgan Stanley Institutional Fund Trust, a minority investor in Flipkart, disclosed a write-down in the value of its holdings in the company by as much as 27%. The mutual fund reported the number in a filing with the Securities and Exchange Commission (SEC), the US stock markets regulator.

Flipkart was valued at $15 billion when it received $700 million from Tiger Global Management, Qatar Investment Authority and other investors in June.

That was its fourth round of fund-raising in a year. Its valuation shot up roughly fivefold from $2.5-3 billion in May 2014.

Morgan Stanley’s latest estimate implies the mutual fund now values Flipkart at $11 billion.

The markdown is significant not only because it proves that Flipkart’s valuation had run ahead of itself, but also because mutual funds comprise one of the largest institutional buyers of shares in stock markets.

At least two other mutual funds, T. Rowe Price and Baillie Gifford, are investors in Flipkart. T. Rowe Price hasn’t yet reported the latest estimated value of its stake in the company.

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company. Flipkart declined to comment for this story.

Flipkart is hardly the only unicorn, a term that is used to describe start-ups that are valued at more than $1 billion, to have its value marked down by mutual fund investors.

Along with cutting the value of its stake in Flipkart, Morgan Stanley also reduced the worth of its holdings in file storage company Dropbox Inc. and data analytics company Palantir Technologies Inc. Late last year, mutual funds owned by T. Rowe Price, Fidelity and BlackRock cut the worth of their holdings in US unicorns en masse.

BlackRock is also an investor in online marketplace Snapdeal (Jasper Infotech Pvt. Ltd), which raised roughly $50 million last month at a valuation of $6.5 billion. BlackRock’s next filing on Snapdeal will be closely watched to see if other Indian unicorns will be marked down, too.

Snapdeal’s $50 million fund-raising, which was accompanied by $150 million in share sales by existing Snapdeal investors to new shareholders, took more than six months to close, primarily because there are not too many takers for India’s top e-commerce firms at their current valuations. The $50 million fund-raising was also significantly smaller than what online retailers typically seek from investors.

Mint reported on 4 February that China’s Alibaba Group is in early talks to buy a stake in Flipkart and increase its holding in Snapdeal. The talks are at a very initial stage and the likelihood of a deal is a function of Flipkart’s willingness to offer a discount on its current valuation of $15 billion, Mint had reported then.

“Our valuation has grown steadily between our last two funding rounds,” a Snapdeal spokesperson said.

There are two broad concerns about the valuations of Flipkart and Snapdeal. One, whether they will ever be able to cut their ballooning losses without sacrificing sales growth. Two, whether they will lose out to the Indian unit of Amazon.com Inc., the world’s largest online retailer.

Over the course of 2015, Amazon gained market share in India at the expense of both Flipkart and Snapdeal, according to publicly available data and several company executives.

Future estimates by mutual funds of their holdings in Flipkart and Snapdeal—and these companies’ eventual IPOs—will depend a lot on these two factors.

“Growing at negative operating margins to raise money in quick succession is a destructive style of doing business,” said Kashyap Deorah, serial entrepreneur and author of The Golden Tap, a book on India’s hyper-funded start-up ecosystem. “It kills the ecosystem... to build a thriving long-term business environment, we need to get off the addiction of global funds buying market spaces in India like territory.”

Deorah predicts Flipkart’s valuation will eventually slump to the amount it has invested. Flipkart has raised anywhere between $3 billion and $3.5 billion. “The downward trend will continue until Flipkart’s valuation equals invested capital,” he said.

To be sure, Deorah’s prediction seems extreme.

Flipkart is still the largest e-commerce firm in the last remaining big e-commerce market in the world. It has a solid brand, a strong leadership team and deep-pocketed investors, among other strengths.

“Flipkart’s valuation may look stretched at $15 billion in this current environment, but you can’t take away the fact that the company still has a solid business,” a Flipkart investor said on condition of anonymity. “In the worst-case scenario, it may take the company a year or two to grow into that valuation. But it will definitely happen. And if the market sentiment becomes better, it will happen sooner.”

By Sun Capital

Effect of rising NPAs of banks on aam aadmi

The domino effect of rising NPAs of banks

With public sector banks having accumulated Rs 4.5 lakh-crore worth of nonperforming assets or loans in which repayments are not happening in time, there has been a lot of talk going around on the performance of the banks and how it reflects on the broader performance of the Indian economy.

With public sector banks having accumulated Rs 4.5 lakh-crore worth of nonperforming assets or loans in which repayments are not happening in time, there has been a lot of talk going around on the performance of the banks and how it reflects on the broader performance of the Indian economy.

While RBI has gone ahead with a 125 basis points rate cut, the 'aam aadmi' is yet to experience the full transmission. With banks further saddled with a huge NPA burden now, the customers are bound to feel the pinch

1. How do NPAs affect a bank's balance sheet?Accumulated bad loans severely dent a bank's interest income. As per regulatory norms, banks are expected to make provisions against bad loans. High provisioning figures further eat away from their profits. Banks such as Bank of Baroda, Bank of India and Punjab National Bank have all posted huge losses due to high provisioning this quarter.

2. Should investors be worried?With all public sector banks being listed entities, a bad quarterly result reflects strongly in the stock market. If a bank is suffering from mounting NPAs and does not give any positive forward looking statements then stock prices crash which in turn affects the bank's shareholders income. However, now with the RBI instructing banks to clean up their balance sheets over the last two quarters of FY16 it is left to be seen how the banks after recognising the bad accounts manage to recover them.

3. Does it impact your accounts with the bank?Yes. Banks already reeling under mounting losses will not offer any rate cut for the customers. Therefore, home loans and car loans will continue to pinch the pockets of the bank customers though the Reserve Bank of India has cut repo rates by 125 basis points.

4. What are the other constituents which are affected?The government which is the largest shareholder in public sector banks loses out on dividends from the banks. Moreover the government in its Economic Survey 2016 has mentioned that banks would require Rs 1.8 lakh crore which will be taxpayers' money at the end of the day. Another effect is that banks, being more worried about loan recovery fail to invest in latest technologies and digitization of banking. Thus, customer convenience is affected.

By Sun Capital

Publish list of loan defaulters, AIBEA asks Centre

Suncapital.co.in: All India Bank Employees Association today urged the government to publish a list of defaulters, who had failed to repay loans worth over Rs 100 crore.

Responding to a question on the expectations of bank employees from the general budget to be presented tomorrow, AIBEA General Secretary C H Venkatachalam told reporters here that the banking sector was awaiting implementation of reforms for the betterment of bank services.

The government should offer loans to farmers at lower interest rates, so that the sector could again contribute substantially to the GDP, he said.
The banks, which were lending money with small savings of Rs 90 lakh crore, should open five lakh branches in the rural areas, where there were no branches, Venkatachalam suggested.
As the government was attempting to waive NPAs, reportedly worth about Rs 2 lakh crore, it should come up with a defaulters' list who had failed to repay their loans and book a criminal case and initiate stringent action against them, he said while referring to the reports that business tycoon Vijay Mallya, who owed thousand of crores rupees to several banks, was allegedly planning to leave India.

By Suncapital.co.in

Budget 2016: Foreign investors can now establish ARCs in India

Sun Capital: Budget 2016: Foreign investors can now establish ARCs in India 

MUMBAI: The asset reconstruction companies got a huge leg up from the Union Budget
with relaxation in sponsor holding limit, 100 per cent foreign direct investment and a
complete passthrough of income tax. Finance Minister Arun Jaitley announced easing of
sponsor holding limit to 100 per cent from the current 49 per cent paving the way for foreign
investors to set up an ARC in India.

"I propose to make necessary amendments in the Sarfaesi Act to enable the Sponsorer of
an ARC to hold upto 100 per cent stake in an ARC and permit noninstitutional investors to invest in securitization receipts," Jaitley said.

Currently, no sponsor can hold more than 50 per cent of an ARC's shareholding either by
way of FDI or by routing it through foreign portfolio investor controlled by the single sponsor.

"It looks very clear now that a foreign entity can also come in and establish an ARC in
India," VP Shetty, Executive Chairman, JM Financial ARC told ET. "Easing of sponsor limit
would certainly help ARCs to strengthen their capital base."

"The easing of sponsor holding limit will resolve capital issue for the ARCs to a very large extent," Siby Antony, MD & CEO, Edelweiss ARC told ET. "It's a good thing that the budget has given a lot of importance to ARCs for NPA management."

The government also relaxed foreign direct investment rules for ARCs by permitting 100 per cent FDI through the automatic route. The investment basket of foreign portfolio investors will now be expanded to include securities issued by such special purpose vehicles.

"Earlier only QIBs defined by Sebi were allowed to subscribe now it has been expanded, though we need little more clarification on who all will be part of non institutional investors," Antony added.

The Finance Minister also announced a compete pass through of income tax for all securitization trusts. "I propose to provide a complete pass through of income tax to securitization trusts including trusts of ARCs," Jaitley added. "The income will be taxed at the hands of the investor instead of the trusts."

The measures announced by the FM is aimed at enabling banks to clean their balance sheet which is saddled with rising bad loans.

"We have been representing to the government and RBI to allow us to have more capital so that we can participate in the market more significantly," Shetty added. "All the ARCs together have Rs 4000 crore of capital invested, with this capital our capacity to invest in bank bids is limited."

Sun Capital Advisory Services