Big corporates and cash-rich companies investing in Equity Mutual Funds

Source: ET

MUMBAI: Corporate treasuries with large cash reserves have started allocating money to equity funds as they expect stocks to perform well over the next two years, fund industry sources said. The past two months have seen several cash-rich companies increasing their exposure to stocks through investments in equity mutual funds.

Corporates such as ITC, Hindustan Zinc, Sesa Goa, Asian Paints, ACC, Reliance Industries , Larsen & Toubro , Emami , and several mid-cap IT firms have started making small investments in equity funds managed by leading asset management companies. Market correction in March and April, which resulted in Sensex declining over 16%, provided a good entry point for corporate treasuries to invest in equity mutual funds.

"Treasury managers are testing waters with small investments - say about 30-50 crore per fund. They invested a few thousand crore in February, March and May, when the market corrected by a few percentage points," said the CEO of a mid-sized fund house. "These companies have taken a valuation call. They have invested in funds as they feel markets will not fall any further and there is significant upside over the next 16-18 months," the CEO said.

Fund marketers are attributing the 1,546-crore worth of equity fund inflows in May to investments made by corporate treasuries. As on May 31, corporates have investments worth 21,088 crore (through 2.27 lakh unique investor folios) in equity mutual funds. This forms about 11% of overall equity fund asset base. About 40% of this money is invested for a period exceeding 24 months, as per data from Association of Mutual Fund in India.

Historically, corporates, as part of treasury and cash-flow management, invest 90% of their surpluses in short-term debt funds. It is only companies with large surpluses, a few mid-caps and some small and medium establishments that are taking opportunistic investment calls in equities market. "It's mostly SMEs and some listed companies (with specific investment mandates) that are investing in equity mutual funds currently," said Sundeep Sikka, chief executive officer, Reliance Mutual Fund.

"Companies with investment mandates prefer to invest in markets through equity mutual funds. Corporate treasuries, most of the time, have only two-three officials managing cash levels and investments. Corporate treasuries entrust their money with mutual funds as they do not have the expertise or research to manage equity investments," Mr Sikka said.

Companies like Hindustan Zinc (mutual fund investments worth 9,332 crore), Sesa Goa (mutual fund investments worth 8,799 crore), ACC (fund investments of 1,320 crore), Asian Paints (fund investments of 869 crore) and ITC (fund investment worth 3,282 crore) have invested in equity mutual funds at different points of time and market levels. An email sent to Hindustan Zinc, Sesa Goa, ACC, Asian Paints and ITC to understand their investment philosophy failed to elicit response.

"Most corporate treasuries have larger chunks of their investments in liquid debt funds. Only companies with large surpluses will take some risk and invest in equities. These investments are long-term in nature and they expect just about 14-15% return on their equity fund investments," said Tarun Bhatia, director (capital markets) Crisil Research. According to industry sources, corporate investments in equity funds will counter-balance redemption outflows from retail investor portfolios. Institutional investments in equity funds will also help fund houses to earn more asset management fees.

Big corporates and cash-rich companies investing in Equity Mutual Funds

Get better rates than FD - Invest in Shriram NCD at 11.60 Per Annum

Shriram Transport Finance NCD

Issue Highlights : 

• Issue opens on 27th June.
• Coupon Rate upto 11.6% Per annum.
• The issue is rated 'CARE AA+' by CARE and 'AA (Ind)' by Fitch where the ratings indicate high stability, high creditworthiness and timely servicing of debt obligations.
• The allotments would be on First come First serve basis.

·         Issue Details :

Options	1	2
Frequency of payment	Annual	Annual
Face value of NCD (Rs/NCD)	Rs 1000	Rs 1000
Issue Price (Rs/NCD)	Rs 1000	Rs 1000
Min Application	Rs 10000 (10 NCDs) (for all options NCDs, namely options 1 and 2 either taken individually or collectively)
In Multiples of	Rs 1000 (1 NCD)	Rs 1000 (1 NCD)
Coupon Rate
Individual with application amount upto Rs 5 lacs	11.6% per annum	11.35% per annum
Individual with application amount greater than Rs 5 lacs	11.35% per annum	11.1% per annum
For all other category (QIB and Corporates)	11.1% per annum	11% per annum
Tenor	60 Months*	36 Months
Put and call option	Exercisable at the end of 48 months from the Deemed Date of allotment	Nil
*Subject to the exercise of the put and / or call option

About the Company - Shriram Transport Finance Co Ltd. :

• The largest Indian asset financing NBFC *, with a primary focus on financing pre-owned commercial vehicles.
• *The D&B Research Report and the CRISIL Report had named our Company as the largest asset financing NBFC in
  terms of their research based on various financial and nonfinancial parameters.
• Among the leading financing institutions in the organized sector for the commercial vehicle industry in India for FTUs and SRTOs.
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Monetary Policy: Pause still 50bps away

India Economics: Monetary Policy

The 25bps policy rate hike by the RBI today is on expected lines. The tone of the mid-quarter monetary policy statement was also hawkish as expected. Our inflation and growth estimates remain unchanged – GDP growth at 8.2% and average inflation at 8% for FY12. The bias of monetary policy stance now is clearly anti-inflationary. We see another 50bps rate hike before the RBI can pause, contingent on the trajectory of global commodity prices and monsoon. 

Repo rates hiked by 25bps: RBI has hiked policy (repo) rate by 25bps, as widely expected by the market, bringing it to 7.5%. This automatically adjusts the reverse-repo rate and the marginal standing facility (MSF) rates to 6.5% and 8.5% respectively. All other policy rates (CRR, SLR, Bank rate) were left unchanged.

Hawkish tone as expected: The policy maker assumed a hawkish tone in the policy statement as expected. Given the revisions of March headline WPI inflation to 9.7, while May headline number at 9.1% had manufactured products' and core inflation at 7.3% and 7.2% respectively, the RBI maintained that "the monetary policy stance remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control."

Thus, concerns over inflation clearly outweigh concerns over growth moderation. Aggregate demand in the economy has slowed down, but still remain strong vis-à-vis output, as fresh capacity additions have fallen short in the last few quarters. As a result, despite some moderation in input prices of late, thanks to softening commodities, manufacturers have increased prices (with a lag) now to protect their margins, indicating persistence of still strong pricing power.

Our outlook on inflation, growth and policy rate: Our outlook for average inflation in FY12 remains at 8%, while the peak is now unlikely to overshoot 10.5% now (our earlier estimate was 11%), even with a fuel price hike (Indian Brent basket unlikely to hold strong for long; now ~$114). The revisions are likely to be capped at 30bps from April'12 onwards. Our FY12 GDP growth estimate remains at 8.2%. We believe that the RBI will need to hike rates by 50bps more before pausing. Global commodity prices along with the progress of the monsoon remain the key determinant now, besides fiscal policy stance.

Tata Power Company Perpetual debentures June 2011

CRISIL has assigned its 'AA/Positive' rating to The Tata Power Company Limited's (Tata Power's) issue of Rs.15 billion unsecured, listed, subordinated, perpetual debentures. Perpetual debentures, a kind of hybrid instrument, combine features of both debt and equity – CRISIL has accorded 50 per cent equity content to this instrument. It implies that CRISIL, in its analysis of Tata Power's capital structure and financial ratios, will treat 50 per cent of the principal amount as equity and the other half as debt. CRISIL has also reaffirmed its ratings on the company's existing debt instruments and bank facilities at 'AA/Positive/P1+'.

Says Mr. Pawan Agrawal, Director, CRISIL Ratings, "The rating of this instrument is based on an expectation that the embedded flexibility to defer distribution payments is unlikely to be used by the issuer." This expectation is based on an analysis of the key features of the instrument, as well as CRISIL's understanding of the management's intent. Therefore, this perpetual instrument is rated at the same level as other traditional long-term bonds issued by Tata Power. "The 50 per cent equity-content treatment to this instrument emanates from the presence of a strong replacement capital covenant and the instrument's deeply subordinated position in issuer's capital structure", adds Mr. Agrawal.

Such perpetual hybrid instruments provide several benefits to issuers. They allow a better balancing of capital structure, enhance financial flexibility, expand the choice of instruments that can be issued to access debt markets, and enable diversification in the investor base. For investors, such instruments offer a relatively higher return to compensate for the highly complex nature, a subordinated position, and a potential uncertainty over timing of maturity and risk of distribution deferral.

Considering the emerging interest in such newer instruments by Indian debt market participants, CRISIL has released its detailed criteria for rating of perpetual securities issued by corporate sector entities. Says Mr. Arun Panicker, Chief Analytical Officer, CRISIL Ratings, "CRISIL has become the first Indian rating agency to publish its comprehensive analytical framework for rating such securities in the public domain. This highlights CRISIL's commitment towards enabling innovation in Indian market, enhancing transparency in the market place by providing participants with an opinion on risks in newer domains, building investor confidence in our risk assessment capabilities, and facilitating development of Indian debt markets." The detailed criteria document is available at our website www.crisil.com.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

RBI Monetary Policy Preview

RBI Monetary Policy Preview.

Expect a 50bp hike

In the forthcoming Reserve Bank of India (RBI) Monetary Policy Review on May 3, 2011, we expect the central bank to come out of the gradual monetary tightening and hike both repo and reverse repo rates by 50bp each to 7.25% and 6.25%, respectively,
as inflationary pressures have consistently refused to abate. We expect the RBI to keep the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) unchanged at 24.0% and 6.0%, respectively.

Inflation remains sticky with upside risks

Wholesale price index (WPI) inflation has consistently remained well above the RBI's upwardly revised comfort levels. Even for March 2011, for which RBI had raised its projection by a full 250bp from 5.5% projected in November 2010 Monetary Policy Review to 8.0% in its March 2011 Monetary Policy Review, actual WPI inflation came in 100bp higher at 9.0%. In fact, this number could rise closer to 10% once provisional figures are revised (considering the recent trend in revisions).

Growth momentum moderating

Growth momentum of the Indian economy has moderated considerably over the past few months, as evident from IIP growth averaging 5.0% during October 2010–February 2011 compared to 10.4% during 1HFY2011 and GDP growth easing to 8.2% during 3QFY2011 from 8.9% in 1HFY2011.

Even though growth momentum has eased off post the gradual calibrated monetary tightening by the RBI, inflation has remained sticky (above the 8.0% level for the last 15 months). Hence, we believe the RBI is likely to resort to a bolder step and hike repo and reverse repo rates by 50bp each.

Bank of Baroda - RU4QFY2011 - Buy

Result Update on Bank of Baroda for 4QFY2011 with a Buy recommendation and a Target Price of `1,096 (12 months).

 

For 4QFY2011, Bank of Baroda posted healthy net profit growth of 31.0% yoy (21.1% qoq) to `1,294cr. The bank received interest of `252cr on income tax refund and its effective tax rate for the quarter was only 4.5% (compared to 30.9% in 3QFY2011), leading to strong sequential growth in profitability. Asset quality concerns were visible during the quarter, while pension expenses led to higher employee costs. Strong sequential growth in business and non-interest income were the key positives from the results. We recommend a Buy rating on the stock.

Strong sequential business growth, but with higher slippages. For 4QFY2011, the bank's overall net advances grew by healthy 30.6% yoy to `2,28,676cr, while overall deposits also showed strong growth of 26.7% yoy to 3,05,439cr.
Domestic CASA ratio at the end of 4QFY2011 stood at 34.4%, while global CASA ratio stood at 28.7%. Reported NIM of the bank increased by 25bp to healthy 3.45%. Domestic NIM of the bank declined by 12bp to 3.70, while overseas NIM remained stable at 1.41%. During 4QFY2011, the bank witnessed asset-quality concerns with slippages considerably increasing by `390cr sequentially to `667cr. Consequently, annualised slippage ratio increased from 0.6% in 3QFY2011 to 1.5% in 4QFY2011.

Outlook and valuation: At the CMP, the stock is trading at P/ABV multiple of 1.2x FY2013E ABV of `731cr. Historically, the stock has traded at 0.8x–1.3x one-year forward P/ABV multiple, with a five-year median of 1.0x, but has been rerated over the past two years to a 1.5x average. This is because of the bank's consistent improvement in profitability, underpinned by fruitful investments in channel modernisation, healthy CASA and balance sheet growth and declining operating expenses (1.5% of avg. assets in FY2011). We have assigned a target FY2012E P/ABV multiple of 1.5x, implying an upside of 20.2%; hence, we recommend a Buy rating on the stock with a target price of `1,096.

Oriental Bank of Commerce - 4QFY2011 Results Flash

Oriental Bank of Commerce - 4QFY2011 Results Flash

For 4QFY2011, Oriental Bank of Commerce (OBC) delivered muted performance with net profit declining by 18.3% sequentially and growth of just 5.2% on a yoy basis to Rs334cr. The results were below our estimates of Rs359cr, in spite of Rs51cr write back towards tax liability for the quarter, due to higher-than-estimated provisioning expenses.

Key highlights:

·         Business growth momentum was healthy with advances and deposits growth of 5.6% qoq and 7.5% qoq, respectively. On a yoy basis, advances and deposits grew at slower pace of  13.9% and 15.6%, respectively.

·         Net Interest Income was flat both sequentially as well as on a year on year basis in spite of moderate business growth. Calculated NIM declined by ~20bp due to the rising cost of funds in the system as a whole and the bank's relatively weak liability profile. Non-interest income growth was strong sequentially, registering a growth of 29.6% qoq, while on a year on year basis it grew by 13.0%.

·         Operating expenses were kept in control. Operating expenses de-grew by 1.6% yoy on the back of 15.4% decline in employee expenses. Other operating expenses rose by 8.6% qoq and 19.0% yoy to Rs228cr. During FY2011, the bank fully recognized the provision for enhancement in gratuity limits of Rs138cr in spite of an option to amortize the same over a five year period. It also took a hit of Rs171cr towards 1/5^th of the additional liability for serving employees under the second pension option and Rs151cr towards liability for retired employees. Balance liability carried forward for Pension stands at Rs684cr. As a result of decline in operating expenses compared to growth in operating income the cost-to-income ratio of the bank improved to 35.8% from 38.6% in 3QFY2011 and 38.1% in 4QFY2010.

·         The asset quality of the bank deteriorated during 4QFY2011 with the absolute Gross NPAs increasing by 8.9% qoq and Net NPAs rising by 15.0% qoq. Gross and Net NPA ratios also deteriorated to 2.0% and 1.0%, respectively. The provision coverage ratio stood at 76.8% (77.4% in 3QFY2011) including technical write-offs. Provisioning expenses were substantially higher, rising by 192.3% qoq and 34.3% yoy to Rs560cr (at ~1.4% of average assets vs ~0.6% of average assets during 9MFY2011)

·         The bank's CAR improved to 14.2% from 12.4% in 3QFY2011 on the back of capital infusion by the government.

At the CMP, the stock is trading at 0.8x FY2013E ABV. We maintain our Buy recommendation on the stock, as we believe that the negatives are largely factored into the current valuations (of 0.76x as compared to last five year median of 0.94x). We may revise our estimates post interaction with the management.

 

Exhibit 1: 4QFY2011 Actual vs. Estimates
(Rs cr)	Actual	Estimates	Var (%)
Net interest income	1,013	1,034	(2.0)
Non-interest income	300	256	17.0
Operating income	1,313	1,291	1.8
Operating expenses	470	495	(5.0)
Pre-prov. profit	843	796	5.9
Provisions & contingencies	560	236	137.5
PBT	282	560	(49.5)
Prov. for taxes	(51)	200	NA
PAT	334	359	(7.1)

  Source: Company, Angel Research

 

 

Exhibit 2: 4QFY2011 Performance summary

 

(Rs cr)	4QFY2011	3QFY2011	% chg (qoq)	4QFY2010	% chg  (yoy)
Interest earned	3,232	3,033	6.6	2,685	20.4
Interest expenses	2,219	2,003	10.8	1,696	30.8
Net interest income	1,013	1,030	(1.6)	989	2.4
Non-interest income	300	231	29.6	265	13.0
Operating income	1,313	1,261	4.1	1,255	4.7
Operating expenses	470	487	(3.5)	478	(1.6)
Pre-prov. profit	843	774	8.9	777	8.5
Provisions & contingencies	560	192	192.3	417	34.3
PBT	282	582	(51.5)	359	(21.4)
Prov. for taxes	(51)	174	NA	42

Result Flash - Wipro - 4QFY2011

Result Flash on Wipro for 4QFY2011.

 

Wipro reported its 4QFY2011 numbers which were slightly better than our expectations on revenue front but stood muted on operational front. The company reported IT services revenues at US $1,400mn (vs. our expectation of US $1,394mn), up 4.2% qoq. The volume growth for IT services was muted at 1.9% as onsite volume declined by 0.4% qoq while offshore volumes increased by 2.8% qoq. The company managed to garner better price points onsite and offshore with 1.8% and 1.2% qoq growth, respectively. In constant currency terms, revenues came in at US$1,391mn. In rupee terms the IT services revenue came in at `6,289cr (vs. our expectation of 6,258cr), a growth of 5.7% qoq. The overall consolidated revenues grew modestly by 6.0% qoq at `8,302cr (vs. our expectation of `8,190cr). The overall revenues were aided by 19.1% yoy growth in revenues of consumer care and lightening segment along with growth in IT services segment.

 

The overall EBIT margins declined by 52bp qoq to 17.8% (vs. our expectation of 19.3%) on the back of decline in EBIT margin in all the three business segments. The EBIT margin of IT services, IT products and Consumer care and lightening segment declined by  14bp, 100bp and 30bp qoq to 22.1%, 3.6% and 12.0%, respectively. In addition to this the company booked additional cost of `44.7cr in reconciling items as against `7.5cr in 3QFY2011. PAT came in at `1,375cr qoq, up 4.3% qoq.

 

4QFY2011: Result highlights (IFRS, consolidated):

 

 

(Rs cr)	4QFY11	4QFY11E	% Var	3QFY11	% chg (qoq)	4QFY10	% chg (yoy)
Net revenue	8,302	8,190	1.4	7,829	6.0	6,983	18.9
EBIT	1,479	1,583	(6.6)	1,435	3.0	1,336	10.6
EBIT margin (%)	17.8	19.3	(152)bp	18.3	(52)bp	19.1	(133)bp
PAT	1,375	1,433	(4.0)	1,319	4.3	1,209	13.8

 

Key highlights:

 

·         The net additions were decent at 2,894 employees taking the total employee base to 1,22,385.

 

·         The utilizations for Global IT inched up by 30bp qoq to 68.9%

 

·         Voluntary attritions (annualised) declined to 20.9% from 21.7% in 3QFY2011.

 

·         In constant currency terms, verticals like energy & utilities, retail & transportation, manufacturing, healthcare & services, technology and financial services grew by 7.4%, 4.9%, 3.9%, 2.7%, 1.9% and 1.4% qoq, respectively. The positive surprise came in from telecom vertical, which stood sluggish for all the tier-I IT companies, grew by whopping 9.0% qoq in constant currency terms for Wipro.

 

·         The IT products segment posted 2.3% yoy growth in revenues to `910.5cr, with EBIT margin at 3.6%, down 100bp qoq. 

 

·         Consumer care and lightening segment registered a strong growth of 19.1% yoy with revenues at `724.4crcr. EBIT margin of this segment stood at 12.0%, down 30bp qoq.

 

·         Client addition stood at robust at 68 (vs. 36 in 3QFY2011). Active client base of the company stood at 904 as against 880 in 3QFY2011.

 

·         The guidance for IT services for 1QFY2012 stands highly muted at US$1.394-1.422bn with merely 0.4-1.6% qoq growth.

 

The results were mixed bag and the guidance also looks muted considering the upbeat environment for IT spending. We wait for management's commentary on the outlook relating to client budgets and the internal restructuring going on. The stock is currently under review and we will be releasing a detailed result update shortly.