What Could Impact Fiscal 2017 Earnings More than GST?
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Rishi Chourasia
Dec 16, 2015, 12:58:50 PM12/16/15
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GST is an acronym that hardly any news media, blog or expert, has failed to mention in the past few months. This acronym, once law, will massively impact corporate earnings.
I hate three-letter acronyms. They make the ignorant reader feel like a fool. Moreover, one has a tendency to read them positively without knowing the meaning, let alone the full form.
Probably that is what happened between 2005 and 2008 on Wall Street. Investors were in awe of the firms' ability to churn out complex derivative instruments, referred to by their three-letter acronyms.
These never-heard-of investment products attracted investors by the hordes, aided by the promised unthinkable returns. Investors never realised that their bankers were packaging and repackaging an asset worth US$10 to sell them at US$100.
It was only by mid-2008 that few came to know the full form of the fancy investment they held. CDS in full form is Collateralised Debt Securities. In simple English, this means that the mortgage on houses was packaged and repackaged from one bank to the other and finally sold to investors as attractive investment products. But the mortgages were actually subprime loans with the borrowers more likely to default than service the loan.
By the time the subprime bubble burst, not just small investors but even big banks such as Lehman Brothers and Goldman Sachs were at brink of bankruptcy. The fancy CDS turned out to be the nail in the coffin of Lehman as well as thousands of retail investors.
The Indian economy avoided such a crisis. The RBI has done a brilliant job of keeping banks' risk appetite in check. Subprime loans such as the teaser home loans were rejected before they became dangerous. Even if a bank ever came to the brink of solvency, its depositors' interest was always safeguarded.
However, yet another three-letter acronym has the potential to malign the RBI's reputation and halt all the good that GST would bring to India's GDP. Possibly by March 2017, investors will be dreading its impact on corporate earnings rather than counting any GST goodies.
SDR, or Strategic Debt Restructuring, was a scheme meant to help banks swap unpaid debt for majority control in a company. But banks in India have used it to their advantage to camouflage unrecoverable debt.
The first SDR was offered to Electrosteel Steels to tackle Rs 106 billion of debt, more than 11 times its market capitalization! Since then, such ridiculous SDRs have been the norm. All SDR accounts put together amount to Rs 641 billion of loans. This is a little more than 1% of total loans in the banking sector and close to 1% of India's GDP.
The RBI has set a deadline of March 2017 for banks to acknowledge such bad loans and provide for losses. This means several companies will lose their controlling stake to their bankers, and the banks will have to take a big cut in profits.
So one could look forward to GST, anticipating India's GDP growth to go up by a percentage or two. By 2017, GST could certainly boost corporate earnings. But, for all we know, it could be SDR rather than GST impacting 2017 earnings more than we can imagine.
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I hate three-letter acronyms. They make the ignorant reader feel like a fool. Moreover, one has a tendency to read them positively without knowing the meaning, let alone the full form.
Probably that is what happened between 2005 and 2008 on Wall Street. Investors were in awe of the firms' ability to churn out complex derivative instruments, referred to by their three-letter acronyms.
These never-heard-of investment products attracted investors by the hordes, aided by the promised unthinkable returns. Investors never realised that their bankers were packaging and repackaging an asset worth US$10 to sell them at US$100.
It was only by mid-2008 that few came to know the full form of the fancy investment they held. CDS in full form is Collateralised Debt Securities. In simple English, this means that the mortgage on houses was packaged and repackaged from one bank to the other and finally sold to investors as attractive investment products. But the mortgages were actually subprime loans with the borrowers more likely to default than service the loan.
By the time the subprime bubble burst, not just small investors but even big banks such as Lehman Brothers and Goldman Sachs were at brink of bankruptcy. The fancy CDS turned out to be the nail in the coffin of Lehman as well as thousands of retail investors.
The Indian economy avoided such a crisis. The RBI has done a brilliant job of keeping banks' risk appetite in check. Subprime loans such as the teaser home loans were rejected before they became dangerous. Even if a bank ever came to the brink of solvency, its depositors' interest was always safeguarded.
However, yet another three-letter acronym has the potential to malign the RBI's reputation and halt all the good that GST would bring to India's GDP. Possibly by March 2017, investors will be dreading its impact on corporate earnings rather than counting any GST goodies.
SDR, or Strategic Debt Restructuring, was a scheme meant to help banks swap unpaid debt for majority control in a company. But banks in India have used it to their advantage to camouflage unrecoverable debt.
The first SDR was offered to Electrosteel Steels to tackle Rs 106 billion of debt, more than 11 times its market capitalization! Since then, such ridiculous SDRs have been the norm. All SDR accounts put together amount to Rs 641 billion of loans. This is a little more than 1% of total loans in the banking sector and close to 1% of India's GDP.
The RBI has set a deadline of March 2017 for banks to acknowledge such bad loans and provide for losses. This means several companies will lose their controlling stake to their bankers, and the banks will have to take a big cut in profits.
So one could look forward to GST, anticipating India's GDP growth to go up by a percentage or two. By 2017, GST could certainly boost corporate earnings. But, for all we know, it could be SDR rather than GST impacting 2017 earnings more than we can imagine.
Thanks & Regards,
Rishi Chourasia
(Founder Director)
Vikalp Education
Refine Your Talent
Nagpur | Pune | Mumbai
Website: http://onlinevikalp.com/
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