#A budget for the banking sector. ##Overall, estimated capital requirement for the banking system is between Rs2.5 trillion and Rs3 trillion over the next four years compared with the government’s promise of Rs70,000 crore. An investment recovery and the health of the banking system are inextricably linked. The banking industry needs cash. Bloated with bad loans, state-owned banks require Rs.1 trillion in the near term, estimate brokerage firms and rating agencies. The government, on the other hand, has allotted only Rs.25,000 crore for this year under its so-called Indradhanush programme. Consider this statistic: In the December quarter alone, banks posted a cumulative loss of Rs.10,911 crore, which is slightly over two-fifths of government’s proposed capital infusion. Credit Suisse estimates that unprovided problem loans are now at 65-200% of public sector banks’ capital.The capital requirement will grow further as most banks are yet to recognize some more bad loans. The chart shows how badly banks need capital. Overall, estimated capital requirement for the banking system is between Rs.2.5 trillion and Rs.3 trillion over the next four years compared with the government’s promise of Rs.70,000 crore. #GAIL stock: good results priced in ##Investors will require more than one good quarter from GAIL to alter their view on the stock Investors will require more than one good quarter from GAIL (India) Ltd to alter their view on the stock, partly because the stock has gone up by almost a fourth in the last three months.
One reason for this outperformance is the renegotiation of Qatar’s RasGas liquefied natural gas (LNG) contract announced at the end of December, which is expected to reduce input costs in GAIL’s petrochemicals business. But with petrochemical prices coming down, one will have to see whether the segment’s profit improves meaningfully. For the December quarter, the loss before interest and tax for the petrochemicals business dropped to Rs.161 crore from Rs.237 crore seen in the September quarter. The performance could have been better if it were not for stabilization issues faced at the new petrochemicals plant. As Jefferies Equity Research notes, given management commentary that GAIL almost entirely used spot LNG in the third quarter versus mainly RasGas in the second quarter (which was costlier), earnings improvement in petrochemicals was below par.
Nevertheless, GAIL’s overall results did beat expectations. Its gas trading business exceeded expectations, reporting earnings before interest and tax of Rs.483 crore against Rs.51 crore for the year-ago period and Rs.193 crore in the September quarter. Gas pooling for the power sector fetched additional trading volumes sequentially. The company’s transmission business too performed well.
The upshot: net profit increased 10% year-on-year to Rs.664 crore despite a 10% decline in revenues. Strong other income growth helped.
What next? Gas volumes can go up once the increased LNG supplies from RasGas start and once power pooling is implemented in certain states like Andhra Pradesh (still pending due to taxation issues), point out JM Financial analysts.
Currently, GAIL trades at 12.5 times estimated earnings for the next fiscal year. Given the rally in the stock over the last three months, most catalysts such as higher crude oil price, positive impact of lower gas price, transmission tariff revision and pickup in transmission volumes seem to be priced in, says Jefferies.