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Realty Stocks Out of Favour
Fri, 20 May 01:30 pm

Indian indices have continued to trade on a flat note in the post-noon trading session. Sectoral indices are trading mixed with stocks from the realty and healthcare sectors leading the losses. FMCG and power stocks are trading in the green.

The BSE Sensex is trading up by 46 points (0.2%) and the NSE Nifty is trading up by 8 points (0.1%). The BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap is trading down by 0.2%. Gold prices, per 10 grams, are trading at Rs 29,785 levels. Silver price, per kilogram, is trading at Rs 39,940 levels. Crude oil is trading at Rs 3,324 per barrel. The rupee is trading at 67.49 to the US$.

PSU banking stocks are trading on a mixed note with Canara Bank and Central Bank leading the gains. As per an article in Economic Times, nearly 50,000 employees of five associate banks of State Bank of India (SBI) have gone on a one-day nationwide strike today to protest the proposed merger with their parent bank. It was note that the employees of all the associate banks of SBI are protesting under the banner of All India Bank Employees Association.

One shall note that State Bank of India (SBI) is going to merge its five associate banks, along with Bharatiya Mahila Bank, with itself. The bank recently announced that its board has given in-principle approval for the bank to discuss the possibility of acquiring its associate banks.

The five associate banks are State Bank of Travancore, State Bank of Hyderabad, State Bank of Mysore, State Bank of Bikaner and Jaipur, and State Bank of Patiala.

However, the bank's release stated that the discussion is purely exploratory at this stage and not certain. Government officials said that no legislative changes will be required for this merger and that the process may get completed within this fiscal.

The government has been pushing SBI to actively consider merging its five associate banks. This is because the government expects that the merger of SBI group banks into one entity will create a suitable environment for consolidation among other public sector banks.

It shall be noted that two of the five associate banks of the SBI - namely State Bank of Patiala and State Bank of Hyderabad - are still unlisted. Further, Mumbai-based SBI holds a 75% stake in State Bank of Bikaner & Jaipur, 90% in State Bank of Mysore and 79% in State Bank of Travancore. There has been no consolidation since State Bank of Indore was merged with SBI in 2010.

All of the above developments comes as some state-run banks have evinced interest to take on smaller entities. Finance Minister Arun Jaitley had said in March that the bankers' themselves have supported the proposal of consolidation of banks in order to have strong banks rather than having numerically large number of banks.

Further, R Gandhi, deputy governor of the RBI, summarised this situation in a speech earlier this month. As he said: "Most PSBs follow roughly similar business models and many of them are also competing with each other in most market segments they are active in. Further, PSBs have broadly similar organisational structure and human resource policies. It has been argued that India has too many PSBs with similar characteristics and a consolidation among PSBs can result in reaping rich benefits of economies of scale and scope."

However, does it really make sense to merge public sector banks? Why are these PSUs willing to consolidate their operations? Will this be a successful move knowing that public sector banks are facing huge bad loan problems? Vivek Kaul answers all of these questions in one of the articles from the Vivek Kaul's Diary. He is of the opinion that the merger of two public sector banks, will give us a bigger inefficient bank.

In another news update it was reported that Indian Hotels is going to pursue an asset-light model as a part of its strategy to pare its debt while continuing to increase the footprint of their brands in India and overseas markets.

The company has stated that its current focus markets are India, Gulf Cooperation Council (GCC) countries and South East Asia where it will aggressively look for management contracts. Some of the countries that the company is planning to enter in the next few years include Thailand, Vietnam, Cambodia, and Singapore. In India, the company plans to increase its footprint in gateway cities such as Mumbai, Delhi, Hyderabad and Bengaluru while exploring locations like the North-Eastern part of the country. It plans to open 10 new hotels with over 900 rooms in total both in India and abroad in the next one year.

The company recently reported its results for the quarter ended March 2016. The company reported a standalone net profit of Rs 0.9 billion as compared to a net loss of Rs 1.2 billion a year ago.

The net sales grew by 12% YoY to Rs 6.8 billion. The topline witnessed a healthy growth on account of increased domestic and business travelling.

Further, the management stated that the company intends to sell the Taj hotel in Boston for the base price of US$ 125 million (about Rs 8.4 billion). Reportedly, the company had acquired Taj Boston hotel in 2006 from Millennium Partners for US$ 170 million.

The company stated that the strategy to divest the Boston-based hotel is part of its plan to evaluate the relevance of some of its existing assets in the portfolio to reduce leverage and focus on growth in high margin markets. The company is in the process of exiting non-profitable properties across geographies.

This restructuring process will help the company to improve its operating profitability. Further, the strategy will also help in cost rationalization.

Going forward, increase in tourism and economic activity will be the key things to watch out for in order to assess an improvement in the hotel industry.

Presently the stock of the company is trading down by nearly 1%.

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Mar 22, 2018 11:41 AM