Government Sets Up “Bad Bank” To Clear Up The NPA Mess

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In today’s issue, we discuss;

Government sets up “bad bank” to clear up the NPA mess
Cabinet approves crucial relief package for the stressed telecom sector.
Ola starts with an (electric) bang!
And a technical analysis concept to widen your horizon (not saying otherwise 🙈) Read along!

Kotak Mahindra Bank: 2007.95 | +101.15 (+5.30%)

The script jumped over 5% and was the top index gainer today, Kotak Mahindra Group has acquired the vehicle financing portfolio of Volkswagen Finance

IIFL Finance: 280.50 | -14.70 (-4.98%)

The stock was down 5% after CDC Group sold a stake in the company. UK-based development finance institution CDC Group Plc sold a 3.95% equity stake in financial services company IIFL Finance via open market transactions today

The government has had enough of the growing NPA problem. Here’s what it has proposed – benefits and hurdles included: 😪

The growing NPA problem plaguing the PSBs (Public sector Banks like SBI) has forced the government (finally!!) to propose the formation of National Asset Reconstruction Company Ltd. (NARCL) or a ‘bad bank’ to help clean up the mess.
Initial estimates suggest the bad bank is likely to take over INR 80,000+ crores in the first phase itself
The government has approved a 5 Yr guarantee of up to INR 306 Bn against the security receipts issued by the NARCL (addressing banks / RBI’s concerns on incremental provisioning when the NPAs are transferred)
NARCL will be incorporated under the Companies Act, with 51% ownership by PSBs, with the remainder owned by the newly formed AMC, India Debt Resolution Co Ltd

Okayyy hold up, too much jargon already.. Explain! 😏

An Asset Reconstruction company (or ARC) is a financial institution that basically helps a bank clean up its balance sheet. Banks loan out money to a huge pool of people & corporates, and often (:P) there are defaults. That’s where an ARC steps in. It buys this ‘bad debt’ at a mutually agreed price and takes the onus of trying to recover it – including taking the legal route – or sell it further.
While there are a few private players in this space (think: Edelweiss ARC, JM Financial ARC), the government thought it best to centralize the process and proposed the NARCL
This was done to speed up the process since the bankers of these private institutions were often questioned, delaying the decision-making process; NARCL will have a different legal and operational structure, and its government-backing would help unclog the pipeline (hopefully)
Another hurdle faced by the PSBs was the slow and often contended valuation process; going forward NARCL will buy the debt at their net book value thus removing the process of price discovery.
Additionally, the buyers of these kinds of debt will find it easier to deal with one institution – the NARCL – rather than multiple of them under the previous fragmented process.

Great, so is it a done deal then? 🤔

Not really, there are a few hurdles left. Slowing down IBC resolutions remains a concern due to court interventions, and thus the government needs to work on removing the hurdles.
And none of this will be possible unless the NARCL manages to attract competent and passionate talent along with transparent regulatory oversight, given that ARCs have been active in the country since 2004, with hits & misses

Is the whole process worth it tho, can we get some numbers please!! 🤨

The NARCL is believed to remove sizable NPAs (to the tune of Rs. 2 trillion, which is a whooping 1.9% of overall systemic loans) and have a net realization rate of ~18%
It will lead to cash recovery of around Rs. 54 billion for the PSBs – a huge surge in their profitability.
This removal of legacy stress from the banks will enable the management of these PSBs to focus more on growth and raising capital with a relatively cleaner balance sheet, and facilitate the privatization of a few banks as per the government’s bigger agenda (nice!!)

Ok ok too much gyaan, give me something actionable!! (you got it)😅

Prima facie, PSBs are the major beneficiaries, with a cleaner balance sheet & adequate growth capital; names like SBI, PNB, BOI, Union Bank of India are few beneficiaries and will be on the radar
In addition to a cleaner balance sheet, for PSBs to achieve consistent high growth performance, with limited surprises (defaults), radical institutionalisation and enhanced governance reforms will have to be initiated, to thrive on an equal footing with private players
SBI however, given the size & scale it operates at is likely to benefit the most with such an initiative (in our opinion)

Telecom Sector finally gets that much-needed respite; What’s up & who will be major beneficiaries (stocks wise :PP) 😌

What’s up?

The government has approved a relief package for the Telecom Sector by offering a moratorium (defined as a temporary prohibition of an activity) on Spectrum & AGR Payments (more on the below) up to 4 years, starting October’21
The package, with a focus towards annual cash flow deferral for the telecoms (think: struggling VIL), is aimed at providing short-term relief with a view towards preserving the sanctity of the sector, and preventing it from turning into a duopolistic market (think: Jio business tactics)
Key contours of the package include –
- Deferral of annual payments towards AGR Penalties (a fee sharing mechanism between the telcos & government) & spectrum purchase for a period of 4 years
- AGR definition will not exclude non-telecom revenues (this was a huge bone of contention between the government & telcos, with multiple Supreme Court hearings)
- The government now has the equity conversion option, allowing them to convert to equity in return on non-payment of dues at the end of the moratorium period
- 100% FDI under the automatic route is permitted in the sector

Nice!! Who does this benefit? Give me some names pleasee (ofccc my man) 🤨

The package provides a huge relief for VIL (reflecting in the stock price, which has already surged >20% since the announcement), with annual cash outgo towards government dues reducing from INR 253 Bn (Yess!!) starting in FY23E to INR 31 Bn – 233 Bn over FY23 – 26E
These are significant measures, aimed at ensuring the company does not become a going concern, with the option of the government converting the debt to equity at the end of the period, an added benefit
The company is primed to take tariff hikes in the near term (15-18%) which should add to the bottom line, while giving the company adequate ammunition to arrest the current subscriber loss and invest in technology up-gradation required
From a longer-term perspective, whether this translates into the company kicking on and providing that much-needed competition to Jio & Bharti, will depend on the next moves – does Mr. Birla rejoin the board? Is there further equity infusion by the Birla Group?

Interesting! What about Airtel?

Bharti Airtel’s growth, including the >35% rally in stock price was the basis the assumption that VIL would become a going concern soon enough, resulting in the subsequent subscriber & revenue loss, with some of it percolating to Airtel
This package, which is everything that Mr. Birla asked for (& more) in his letter to the ministry, ensures VIL’s survival for longer (& limiting the transfer of subscribers to Airtel)
Although tariff hikes are expected across the board, the longer-term plan on Airtel still remains. We covered Bharti’s results & more in detail in one of our earlier issues. Check it out here

Nice! In Summary? What’s the final take? (Goood q bro)

This one’s huge, not only for telcos (who now have a clear pathway ahead) but also for the banking ecosystem, who have a large enough quantum of exposure to Telcos (IDFC First Bank crossed INR 50 after far too long)
Government intervention to this regard is unheard of, with messaging from such actions key – this opens up the possibility of banks assuming eventual sovereign ownership in case of large business under-performance
VIL has that much-needed push, and will be key to see its business performance in the near term, and whether the company is able to kick on and leverage the reform entirely

What else caught our eye? 👀

Ola starts with an (electric) bang!

On its first day of sale, Ola Electric sold scooters worth over Rs. 600 crore (with around 4 scooters per second at its peak)
For context that is more than what the entire two-wheeler industry sells in a day – evidence of the huge pent up demand for electric vehicles.
The company launched its Ola S1 electric scooter in the two variants – S1 and S1 Pro – at Rs 99,999 and Rs 1,29,999, respectively. Its huge manufacturing unit in Tamil Nadu would be 15% of the world’s entire total two-wheeler production when completed.

Sebi forces Poonawalla MD out

Poonawalla Fincorp’s Managing Director Ajay Bhutada has resigned after him and seven others were banned from trading in the markets having been found guilty in an insider trading case.
The trade-in question relates to the Adar Poonawalla’s Rising Sun Holdings’ proposed takeover of Magma Fincorp where Bhutada shared this price-sensitive information with seven individuals who then purchased the stock before the public disclosure.
The total extent of the liability is ~14cr