Positive Start to the Day

Thu, 18 Feb 09:30 am

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Major Asian stock markets have opened the day on an encouraging note with stock markets in Hong Kong and Japan trading higher by 2.1% and 2.3% respectively. Major indices in Europe ended their previous session on a positive note with benchmark indices in Germany ending as high as 2.7%. The rupee is trading at 68.42 per US$.

Indian stock markets have opened the day on a firm note. The BSE Sensex is trading higher by 311 points (up 1.3%) and NSE Nifty is trading higher by 95 points (up 1.3%). Both, BSE Mid Cap and BSE Small Cap are trading higher by 1.3% and 1.5% respectively. Sectoral indices have opened in the green with stocks from oil & gas, healthcare and capital goods sectors witnessing maximum buying interest.

Banking stocks have opened the day on a firm note with Union Bank and Bank of Baroda leading the gains. As per a leading financial daily, state-owned Punjab National Bank (PNB) is planning to sell up to Rs 30 billion bad loans to asset reconstruction companies (ARCs) in the fourth quarter. The bank has stated that it has lined up quite a good number of proposals for the same. This would be the first time in six years for the bank to tap the ARCs market.

Apart from the above, the bank is organising special camps for recovery at various places. The bank is looking at one-time settlement proposals and other measures to reduce its bad loans.

All of the above initiatives come as a part of the banks' balance sheet clean-up exercise. It should be noted that during the third quarter ended December 2015, PNB's asset quality deteriorated and gross non-performing assets (NPAs) rose to 8.5% of the gross advances as against 6% same quarter year ago. Similarly, net NPAs rose to 5.9% of the net advances in the third quarter as against 3.8% in the corresponding quarter a year ago. In absolute terms, the gross NPAs increased to Rs 343 billion as of December 2015, from Rs 222 billion. Net NPAs were at Rs 229 billion during the quarter, up from Rs 137 billion. On the back of this, the bank's provision against bad loans increased sharply to Rs 28 billion during the quarter as compared to Rs 19 billion in the same period a year ago.

On a separate note, the bank has declared Kingfisher Airlines a willful defaulter. The bank has an exposure of Rs 8 billion to Kingfisher Airlines.

It shall be noted that during the third quarter many leading state-owned banks, including Bank of India and IDBI Bank, reported their highest ever quarterly losses totaling over Rs 120 billion on the back of mounting bad loans. This came in after the Reserve Bank of India (RBI) asked banks to recognise select weak loans as non-performing loans over the quarters ending December 2015 and March 2016, and shore up provisioning.

PNB's earnings also witnessed sharp erosion on the back of the above exercise. If you are interested in the stock, do read our result analysis of the bank (subscription required). Presently the stock of PNB is trading up by 2.1%.

India has a bigger bad debt problem that is not in line with what is stated by the rather stable level of banks' official 'non-performing' loans. Vivek Kaul, Editor of Vivek Kaul's Diary has explained this in a detailed manner in one of his articles. You can read it here.

In another news, auto major Maruti Suzuki has stated that it is going to ramp up production at its existing plants in Gurgaon and Manesar in the National Capital Region (NCR) to meet rising demand. This comes as the company has been facing temporary shortage of capacity on the back of double-digit sales growth for the last three years. The management stated that Maruti Suzuki will end 2015-16 with sales of 1.45 million units, which is expected to rise by 8-9% to 1.55 million units next fiscal.

The company recently announced its results for the third quarter ended December 2015. Net sales during the quarter grew by 20% YoY led by the 15.5% YoY increase in volumes. Operating profits grew by an impressive 34% YoY as margins expand by 1.6% to 14.4% in 3QFY16. The same was due to lower raw material costs (as a percentage of sales). Further, net profits grew at a slightly lower rate of 27% YoY on account of higher tax expenses.

Going forward, Maruti Suzuki aims to reach sales volume target of 2 m units over the next five years and in this regard plans to launch 20 new models in the same period. The company has also outlined a capex of Rs 30 billion in FY16, which will be towards new product launches, R&D, marketing expenses and maintenance. To know our views on the company, you can read the detailed results analysis here (subscription required). Scrip of Maruti Suzuki is trading up by 1.1%.

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