India Infoline Weekly Newsletter - April 18, 2013

The price tumble of gold and more so the pace and quantum of the fall has not only jolted but also made even the most ardent proponents of the "gold bull market" to reconsider their stance on gold prices, at least for the near term.

April 18, 2013 4:48 IST | India Infoline News Service

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TCS Q4 PAT at Rs 3597cr, IIFL maintains mkt performer rating

FY13 net profit came in at Rs 13,941 crore, up 30.9% YoY. Revenues of the country's largest software company came in up 2.24% QoQ and 23.9% YoY at Rs 16,430 crore versus IIFL's expectation of Rs 16,451 crore. The revenue figure is as per International Financial Reporting Standards. It reported a 28.8% YoY rise in FY13 revenues at Rs 62,989 crore. Q4 earnings before interest and tax or EBIT margins came in at 26.5%. Volume growth for the period stood 4.4% QoQ.  Other income surged 100% at Rs 442 crore as compared to Rs 221 crore in Q3.

The company said it bagged orders from customers including Nokia and BNP Paribas in the quarter gone by. The board has announced a dividend of Rs 13 per share. Commenting on the year gone by, N. Chandrasekaran, its CEO and MD, said: "TCS has delivered a year of strong growth with all markets and industry segments growing in double-digits. Our ability to co-create with customers, remain relevant to their business and our investments in digital technologies are delivering tangible value as customers optimise, transform and grow." Chief Financial Officer Rajesh Gopinathan said the IT major has tried to maintain profitability despite stiff headwinds and increased volatility through the year. "We continue to ensure cost discipline at an operational level while supporting diversified business growth," he stated. Looking ahead to FY14, Chandrasekaran said, "We remain confident that FY14 will bring greater opportunities as technology plays an increasing role in reimagining business globally. We continue to identify new growth engines and are investing ahead of the curve in products, platforms and intellectual property that is of great relevance to our customers and their business growth. As an industry leader, we remain focused on sustaining our momentum."

Stock Strategy:

Aniruddha Mehta, Research Analyst - IT, IIFL, maintains his positive stance on TCS. Speaking on the earnings, he said the results were marginally ahead of expectation both on dollar revenues and operating margin front. "The management commentary continues to be bullish. We are impressed on the sustained all-round performance and maintain our market performer view on the company."

TCS to hire 45,000 employees in FY14

What is happening to gold?

How has gold been behaving?

The price tumble of gold and more so the pace and quantum of the fall has not only jolted but also made even the most ardent proponents of the "gold bull market" to reconsider their stance on gold prices, at least for the near term.

The price of gold has been very volatile in the month of April normally considered to be a safe haven with a long term tendency to rise. Gold saw its biggest ever daily drop in prices of $140/oz or 9% on 15 April. The London Bullion Market Association (LBMA) benchmark gold prices have moved from $1536/oz to $1380/oz in the 2 trading sessions since 12 April’13

Gold has been in the "price moderation" phase since early October’12, after a decade of continuously increasing and outperforming nearly every other asset class. Prices declined steadily from an average $1747/oz in October’12 to $1593/oz in March’13 and $1534/oz in April’13(avg till 16 April)- a 12% decline in prices in the last 6 months.

Gold’s price tendencies in recent times, especially since the start of 2013 has been confusing/misleading as seen from the analysis of the volatility in gold prices - for January the average daily annualized volatility was 12.2%, which declined to 10.9% in February. It further declined to 6.83% in March and just when it looked like gold was stabilising given the decline in volatility, the sharp decline in prices on April 15 saw volatility surge to 44%.

The domestic prices too have been moving largely in tandem (although less severe on account of the weakness in the Indian Rupee) with the international prices and have been enduring a decline since December’12, after touching record highs in November’12. Gold has dropped from an average Rs. 31,567/10 gms in November’12 to Rs. 28,939/10 gms in the current month (avg till 16 April)- a 8% decline in 5 months.

Why has the price of gold become volatile?

A combination of factors have aided the recent sharp decline in gold prices. Many of these would have normally been triggers for a price rise in the metal.

The foremost is the change in investor sentiments, triggered by recent lowered price forecasts for the metal. Large liquidation in gold exchange traded funds further supported the bearish outlook in the metal.

Markets are being gripped with fears that troubled Cyprus would be required to offload its gold reserves (Totalling Euro 400 mn) to aid in correcting its financial imbalances and if this were to happen as a fallout markets fear other euro nation which are in financial trouble could follow suit, leading to excess supply conditions. The names of some of the countries doing the rounds in this regard are Portugal, Spain, Italy, Slovenia, Greece and Hungary. Such actions on the part of central banks could in turn prompt investors to reduce their gold holdings and cash in on the price rise of recent years. It need be however noted that there is still no clarity on Cyprus gold sales with contrary statements coming from official sources...Read More

Gold loan portfolios approach tipping point: India Ratings

India Ratings & Research (Ind-Ra) believes that falling gold prices, if sustained, can significantly impair the asset quality of the gold loan portfolios of non-banking finance companies (NBFCs) and banks. While the impact of a sharp fall in gold prices in the last few weeks could be absorbed by high profitability, an incremental softening of domestic gold prices will make a larger part of the portfolio vulnerable. Companies with significant exposure to gold loans could thus be impacted severely.   Loan to value (LTV) ratios are high due to intense competition to gain market share; a long, sustained bull run in gold prices leading to a sense of infallible high collateral cover and a liberal interpretation of regulatory guidelines on LTV ratio (capped at 60% for gold loan companies). In some cases, LTVs have moved over 80% of the gold value through the inclusion of ‘making charges’. High LTVs, together with largely bullet repayment structures (both principal and interest paid together) in the industry, leave limited cushion for correction in the value of security.   Ind-Ra’s assessment is that a sizeable proportion of gold loans outstanding (principal + accrued interest) may already be close to the realizable value of the collateral and further accrual of interest on them, without cash inflows, may not be prudent given a fair possibility of ultimate reversals. An additional 10% correction in gold prices in the near future could result in a majority of outstanding loan amounts being higher than the realizable value of collaterals, resulting in increased possibility of losses.

The fall in gold prices in the last week will also significantly curtail ‘refinancing’ in the industry, a practice during rising gold loan prices, when additional amounts are borrowed against the same collateral, resulting in higher delinquencies. Lenders’ comfort from viewing making charges as additional ‘borrowers’ equity’ was found to be misplaced in some delinquent cases in Q3FY13. While the impact of falling gold prices could be felt across the industry, the gold loan portfolio of NBFCs is more vulnerable than banks’, despite similar LTVs at the time of disbursal. The differential impact is attributed to the higher interest rate charged by NBFCs which reduces margin cushion as well as to the weaker credit profiles of their borrowers resulting in higher delinquencies. Among banks, south India based private sector banks are likely to be more impacted, primarily due to the higher proportion of gold loans in their books. Ind-Ra is reviewing the gold loan portfolios of rated banks and NBFCs to evaluate the impact on profitability.  Sharply low gold prices together with a sharp rise in delinquencies could also result in a realignment of gold loan products. NBFCs with high gold loan portfolios could also witness some liquidity pressures if their lenders were to become cautious, which may also have implications for business growth. However, these concerns may not materialise if gold prices were to bounce back in a short period. That being said, the current slide has exposed the vulnerability of loan portfolios which are disbursed primarily based on collateral values, with limited consideration for underlying cash flows. Ind-Ra believes that for such portfolios, the ability to liquidate collateral in a timely and profitable manner remains of primary importance.

Gold prices to fall further to $1,250/ounce in next 10 months

India will grow at 5.7% in 2013: IMF

Improved external demand and recently implemented pro-growth measures will see India grow at 5.7% in 2013 and 6.2% in 2014, the International Monetary Fund has forecast. This is as against 4% growth seen in 2012. "We expect growth accelerating from 4% to 5.7% in 2013 towards 7% over medium term. So what needs to be done is improving supply side of the economy through various reforms like infrastructure, power, transportation, labour skills," Jorg Decressin, deputy director, research development, IMF was quoted as saying. IMF said that policymakers "must carefully consider the risks of policies falling behind the curve and becoming pro-cyclical".

BofA-ML's watch list for Indian investors

Vedanta can mine in Odisha's Niyamgiri Hills: SC

The Gram Sabha holds the key in the Niyamgiri Hills in Kalahandi district of Odisha. Vedanta will be allowed to mine only if the Gram Sabha allows, the Supreme Court has said, according to reports. The Supreme Court had given Phase II clearance to Vedanta to mine at Niyamgiri in 2008, but later the Ministry of Environment and Forests cancelled the clearance in August 2010. The project got cancelled after reports highlighted various environmental threats and the endangering of the Niyamgiri's Dongria Kondh tribe. Vedanta and the Odisha Mining Co-operation, had then moved the Supreme Court challenging the cancellation.

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