Why are all the banks looking at raising capital? Is it an indication that they expect the write offs or NPAs to come in and they are going to be much more than what we can see right now?
A large majority of banks are looking to shore up their balance sheet. Some of the banks which have raised capital possibly did not really require that additional capital. But remember, we are in a scenario where uncertainty still prevails. Even while markets have moved up, you really do not know how the next few months or the next year will pan out. Therefore, the degree or element of uncertainty remains.
Secondly, remember we have had two rounds of moratorium and this current moratorium ends in August. Therefore, the customer behaviour in terms of repayment of loans and the delinquencies if at all will actually start reflecting only by December end or January. Therefore, NPLs on the books of the banks will be known only with the lag and at this point in time, most of the capital raise is possibly being done in order to shore up the balance sheet in anticipation of something going wrong. Whether it will go wrong or not and whether you will have the need to provide even further than what has already been provided will be known only by the third quarter of FY21. So I think banks and managements are just being prudent in terms of shoring up their balance sheet and their capital position.
For a bank, clearly capital is the most important ingredient in terms of maintaining overall profitability and also ensuring that there is no disruption in terms of business as a result of which we have seen a number of these banks go in and raise capital. Growth as you mentioned has been anaemic. Credit growth numbers are there and it seems credit growth languishing at around 6% and it is unlikely that credit growth will pick up in a meaningful manner at least for some foreseeable future. Therefore this capital raise is more strengthening of the balance sheet. I think among the larger private sector banks, balance sheets were already strengthened with a significant amount of excess capital on their books and this adds to their strength in terms of their capital position.
What is your take when it comes to pockets like cement and construction?
Cement as a sector has been an opportunity for us. We believe that the sector is actually fairly well placed. Now while there are concerns about near-term volume growth, clearly there are signs of recovery. Also, remember that we are entering into the monsoon season where activity overall remains subdued. So volume growth pickup does happen post the monsoons. But if you look at the sector from few other perspectives; one is pricing and the second is on the cost front.
Now cement is a sector where profitability has a very close linkage to pricing. This is a sector which has gone through a significant amount of consolidation and the players are now more focussed on profitability. Hence unlike previous times when volume growth was muted, there was no price competition and in fact on a year-on-year basis, prices actually went up. And that bodes well for overall cement profitability.
The second is that this sector also benefits from the cost side because of fuel and power costs overall which contribute to a significant part of their overall cost structure that has been subdued. Therefore even while volume growth has been muted, they have been able to control costs. Our belief is that as domestic activity comes back towards a normalised run rate, we will start seeing a pickup in volume growth. This is a sector which has gone through significant consolidation and the benefit of that is also visible. From our overall portfolio, cement continues to be one of the large overweights that we run from a sector perspective.
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