Capital Inflows, European Banks – Stress Tests and EPS dilution in India

Here are some interesting readings for the week

http://economictimes.indiatimes.com/articleshow/6221703.cms

Chetan Ahya of Morgan Stanley speaks about the importance of Capital Inflows for India in ET. Capital Inflows via FII,FDI, ECB’s are very crucial for the Indian economy. If we see the trajectory of growth in India from 2005-2008, there is a strong correlation with increased capital inflows. The sharp fall in asset prices was also correlated to the huge FII outflows in 2008.

There are some good insights on how capital flows affect the Indian economy and how their reversal could throw up a whole bunch of problems for India.

http://www.dnaindia.com/money/interview_nowhere-to-run-nowhere-to-hide-in-europe_1415660

Satyajit Das, an expert on Credit Derivatives speaks about how the Bank Stress Tests in Europe were rigged.

According to him, the banks are underestimating the actual fall in asset values. If the actual asset values are used, banks would have to write down huge losses causing a severe credit crunch bringing back memories of the Post Lehman panic.

The main crux here is that since European countries do not have their own currency (unlike the US), nor a large captive market of bond buyers (like Japan) nor rapid economic growth (like China), their debt positions are particularly precarious. In such a scenario, the countries are faced with a tough choice of accepting slow economic growth via de-leveraging.

http://www.vccircle.com/columns/the-destructive-power-dilution

Saurabh Mukherjea of Nobel Group talks about how equity dilution can affect EPS negatively in India.

If you go through any brokerage reports, most of them blindly assume that corporate earnings will keep growing at 20-25% as long as underlying GDP growth is 8-9%. But data seems to point otherwise.

Continous equity dilution to fund capex or reduce debt can cause EPS growth to be subdued. In fact, Q1 FY11 results were largely mediocre and we don’t seem to be getting to 30% PAT growth anytime soon.

The much touted growth sectors like Real estate, Power and Infrastructure are seen to be constantly needing more capital (via IPO’s, QIP’s etc). This can be detrimental to EPS growth. I shall surely do a post on trends in Sensex EPS soon.