The investors were in a profit booking mood in the last one week given the range bound global market, general elections, hike in oil prices and weak Q4. Global market was mixed on account of concern over slowdown in Chinese central bank’s stimulus packages. The end of US waiver on oil imports from Iran has led to rise in oil prices, a key issue for the domestic market in the last two months. Oil prices have increased from a low of $60 to a high of $75, and is currently trading lower at $72 in expectation of rise in OPEC output with prospective risk.
This consolidation has been broad based in nature with underperformance from sectors like auto and financials. Auto sales has been weak, total volume on QoQ basis are -3% and -6% on YoY basis in Q4. The trend is expected to be muted for one or two quarters due to high inventory, financing issue, higher prices, change in technology and insurance cost, and cyclical slowdown during national election as per history.
For banks the NPA issues are persisting, the weak numbers from Yes Bank has put a question in the mind of the investors whether the NPA issue still continues, as it was believed to be resolved given the restructuring in the last one to two years. The market was hoping that banks would be the key beneficiary in the market given the reduction in NPA rate, start of credit growth and receding interest rate. On a negative surprise, Yes Bank reported a big loss of Rs1,507cr for Q4 on account of nine times spike in provisioning and contingencies of Rs3,662cr. This includes a contingent provision of Rs2,100cr provided against potential stressed assets in real estate, media, entertainment and infrastructure sectors to a total tune of Rs10,000cr. Besides the Gross Non-Performing Assets / Net Non-Performing Assets have increased to 3.22%/1.86% in Q4FY19, on account of slippages from an airline company and stressed infrastructure conglomerate. It’s highly concerning that the bank’s exposure to “BB and Below” rated corporate portfolio has increased to 8.3% compared to 2.2% in March 2018. The bankex is underperforming as concerns on NPA resolution persists and whether it will be replicated in other stocks. We understand that this is a stock specific issue, in the industry each bank has its own problems of which many have been identified while some are in the process, a good portion of which is factored by the market. In the past two years, growth of loans and advances by Yes Bank was one of the highest in the banking space, with 34.7% and 53.9% growth in FY17 and FY18 respectively. We believe that banking industry has seen a setback in the last one to two years, but many its problems have been resolved so far.
About 13 companies have given Q4 results as on 29th April. It’s bit early to assume the overall earnings performance, but provides a glimpse of the likely outcomes. The weak performers are auto with results marginally below estimate, and financial which was expected to be the best performer, but till now both private banks and NBFC, are much below the expectations. The best performers till date are cement and IT sector.
Posted: May 2019