The Bitter Pill that Will Lay the Foundation for Sensex 100,000 - The 5 Minute WrapUp by Equitymaster
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The Bitter Pill that Will Lay the Foundation for Sensex 100,000

May 14, 2019

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Tanushree Banerjee, Editor, The 5 Minute Wrapup

It took the Sensex just four years to double from 10,000 in 2009 to 20,000 in 2013.

However, over the next five years, every time the index raced ahead, there is one concern that could hold it back.

I'm talking about the rise of bad quality loans in the Indian banking and financial sector.

There is no denying that Indian financial entities have earned a terrible reputation in recent years. India holds the dubious distinction of the worst NPA ratio among the world's major economies.

We surpassed Italy's US$ 200 bn in bad loans recently.

That's not all.

I expect the RBI's latest NPA recognition norms to spike the accumulation of bad loans this year as well.

then there are schemes like the Universal Debt Waiver.

It could only delay the process of tightening India's NPA recognition system.

So, could the crises like PNB and IL&FS continue to haunt Indian stock markets in the coming decade?

The truth is, the quality of loans in the Non-Banking Finance Company (NBFC) sector is far from acceptable.

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After the IL&FS debacle, the NBFC sector is in a liquidity crisis. The housing finance regulator, National Housing Bank, has also restrained some entities from lending.

So, the quantum of funds as well as the cost of loans have both shot up.

Smaller public sector banks are struggling to keep themselves afloat.

The few good quality private sector banks are only lending to retail clients, most cautiously.

Banks are Lending Only to the Aam Aadmi

No wonder funding to corporates for capex has come to a standstill.

Amid this it is difficult to expect Indian companies to increase their capacities. Thus, their earnings may not grow at a fast clip.

And sooner than later their valuations will also succumb to a reality check.

But there is a silver lining to this cloud.

  • The stricter credit norms are making corporates less dependent on bank lending for their capex.
  • The new NPA recognition norms and insolvency process could put an end to willful defaults.

The cleanup of India's financial sector may be long drawn.

But it will, once and for all, rid the economy of a big growth hurdle.

It won't matter if oil prices keep spooking India's consumer inflation.

It won't matter if domestic interest rates remain steep.

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Indian companies will be in a position to manage their cash flows and debt obligations across cycles.

The leaner, well capitalised financial entities will benefit the most.

They could fund the fastest growing companies to Sensex 100,000.

At the heart of all this, is the transformation I call - Rebirth of India.

Companies that are able to latch on to this trend will create multibagger opportunities for investors.

The good news is that you don't need to wait to act on the Rebirth of India.

I've identified seven actionable stocks you could consider buying right away!

For details, join me and Rahul Goel, CEO of Equitymaster on Thursday, 16 May, at 5 P.M for the Rebirth of India MEGA summit.

I look forward to sharing all my research with you.

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Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor and Research Analyst, The 5 Minute WrapUp

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