Monday, September 20, 2010

Is banking crisis very near in India?

Markets are more insane at two times, near the top and near the bottom. Right now the markets does not look like near the bottom. So we can conclude that the former is a more likely scenario. The recent run-up in Sensex and Nifty has mostly been fueled by two sectors having a big weight in both the indices, Banks and IT. Since IT is something difficult to analyze, I am trying to find the insanity of Mr Market in valuing banks. Consider following companies from BSE500

CompanyDebt March 2010Networth March 2010EBITDA (TTM)Interest Payment (TTM)
3i Infotech1608.1895.1274.0698.97
Aban Offshore3153.152172.93868.96336.85
ABG Shipyard2897.441122503.55158.96
Adhunik Metallic1218.49615.5273.09121.61
Adani Enterprises3471.311970.1489.3177.57
Alok Industries8509.682716.021372.9606.39
Amtek Auto3352.512592.7491.24113.6
Bajaj Hindusthan3075.152293.67630.16207.38
Bharti Shipyard2292.8850.83329.15125.38
Dalmia Cement2850.411377.65417.64196.13
Era Infra2482.031456.59708.13271.01
Essar Oil10353.734673.6515061193
Ispat Industries7351.052031.881616.951017.87
Jaiprakash Associates17908.718500.722985.641161.84
Jet Airways13896.982641.981638.521023.88
Kingfisher Airlines5665.56-2125.34-462.731247.33
Mercator Lines1473.471053.94183.0391.97
Moser Baer2183.431692.02508.3183.92

and there are many more like Videocon, SKumars, Rei Agro, Shiv Vani, which makes my fingers tired. We are talking about debts to the tune of more than 2 lakh Crore, which are at stake here. Most of the above companies' net worth are below their debt. All are running highly leveraged business. Interest cover (EBITDA/Interest) has fallen below 4 for most of the companies and are near 2-3 in the latest quarter. This at a time when interest rates in India are at historically low. Just 50% hike in interest rates (i.e. from 7% to say 10.5%) would make it difficult many of the companies to pay their interest. This combined with a hit to profit margins may result a big blow to Indian companies and finally to Indian banks. Be ready for a jolt.

Security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish that the value is considerably higher or considerably lower than the market price. - Benjamin Graham
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1 comment:

Unusually Uncertain said...

Theoretically I agree to you but the Credit expansion in US after 2000 and possibility of further Quantitative Easing will help these companies to restructure their loans.

So I think some PE player are going to rescue if any untoward thing happens ( They can get money on very cheap rates.

-Unusually Uncertain

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