From a stock market perspective, investors will be worried about the listed companies having significant exposure to the Kerala
Moneycontrol Research Team
Kerala, better known by the sobriquet God’s own country, is not just a vacationer’s haunt; it has a flourishing economy dominated by the services sector.
In FY17, the primary, secondary and tertiary sectors contributed 13.36 percent, 23.47 per cent and 63.18 per cent respectively to the GSVA (gross state value added). In the same year, the gross state domestic product was Rs 61,703,466 lakh which was close to 4% of India’s GDP.
With the entire state battered by heavy rains, economic activities have been disrupted. From a stock market perspective, investors will be worried about the listed companies having significant exposure to the Kerala.
Lenders could feel the heat
With economic activity slowing down dramatically, cash flow of borrowers will be hit, spelling trouble for lenders to start with. If large scale waivers are announced post the crisis, it will have a long-term debilitating impact on the credit culture. The two dominant kerala based banks are South Indian Bank (SIB) and Federal Bank.
For SIB, out of the total 855 branches, almost 54 percent or 464 branches are in Kerala. Similarly in terms of ATMs, 786 out of the total 1386 are located in the state. In terms of exposure too, Kerala is significant with close to 40% of the bank’s outstanding advances. SIB has been battling with asset quality woes both in its corporate as well as in small and medium enterprise book and is also looking to raise capital to grow. The Kerala crisis could make matters worse.
Federal Bank too is headquartered in Kerala, and almost 50 percent of its pan-India network of 1252 branches in the state. Thanks to this network, close to 69% of the low-cost CASA deposits come from the state. In terms of advances, out of the total outstanding book of Rs 95,515 crore, close to 33% is from the state. The exposure to Kerala is particularly high in business banking at 47% as well as commercial banking and retail where the exposure to Kerala stands at close to 45%. While the bank has shown signs of coming out of the worst of the bad loan crisis, troubles in its biggest market raises incremental concerns.
In addition to banks, two of the largest gold finance NBFCs earn a big proportion of their revenues from Kerala, where borrowing money by pledging jewellery is common. Over the past few years, however, both companies have expanded their presence beyond South India.
Manappuram Finance has a strong retail franchise, particularly in Kerala, supported by its long standing presence in the gold loan business. Around 7 percent of the gold loan portfolio and 15 percent of the NBFC's branches are in Kerala. Hence, floods in the state could affect the credit cost and business growth in the near term.
Muthoot Finance, the flagship company of the Kerala-based Muthoot Group, is India’s largest gold financing NBFC with loan assets of Rs 32,154 crore as on March 31, 2018. Muthoot’s operations are largely concentrated in South India, which constituted 62 percent of its total branch network and 50 percent of its total loan portfolio as on March 31, 2018. Kerala being the home state for the NBFC, exposure is obviously high. Out of its total 4342 branches, around 642 branches are in Kerala exposing it to economic susceptibility of the borrowers impacted by the floods in the state.
We see the microfinance companies operating in the state as the most vulnerable. In light of this, though relatively small in size, the portfolio performance of Belstar Investment and Asirvad, microfinance subsidiaries of Muthoot and Manappuram respectively need to be tracked.
Muthoot Capital Services (MCS), part of Muthoot Pappachan Group, is another Kerala-based NBFC which might be impacted. MCS is mainly into vehicle financing with 90 percent of its total advances portfolio of Rs 2,238 crore comprising of two-wheeler loans. MCS's operations are concentrated in Kerala, which accounted for about 46 percent of its advances as on March 31, 2018. The proportion of disbursements in Kerala has remained at around 48 percent over the past two years. Hence, the current situation in the state can slow down its asset growth which has been robust in past couple of years. More importantly, the asset quality of the book will be susceptible.
Kerela – the only rubber supplier
Kerala is the undisputed leader in natural rubber plantation and accounts for around 92 percent of nation’s production. The impact of torrential rains in Kerala on natural rubber production and its end users would not go unnoticed. Worst affected players would be tyre companies who are the major consumers of natural rubber.
Should the flood affect supplies, prices are expected to rise, since demand remains strong. Though tyre companies import a part of rubber requirement, the exchange rate is playing spoilsport at the moment. Earnings of tyre companies are highly susceptible to rubber prices and would warrant a close watch.
Companies with the K connection
Kerala headquartered V-Guard, was earlier a predominantly south focused company, but now derives close to 55 percent share of revenue from the South India market. This underlines improving ‘geographical diversification which can cushion the Kerala flood impact to some extent.
Kitex Garments is an export-oriented children wear fabric and garment manufacturer. The company’s Kizhakkambalam factory, located near Kochi, might have been impacted due to the ongoing heavy rains in Kerala. This unit handles key processes such as knitting, sewing and colouring.
Flooding can possibly impact operations at Cochin Shipyard, particularly its ship repair business. While there is no communications about any damage from the company, in the worst scenario there could be some damage to inventories, disruption or delay in ongoing shipbuilding and ship repair activities impacting its revenue.
In case of plastic piping industries, exposure to Kerala is estimated to be lower than three percent. Among the major companies having higher market share are Supreme Industries and Finolex which may be temporary impacted. Plastic piping for agri segment would be impacted more. However, in our conversation with the CFO of Astral Poly Technik, Hiranand Savlani said a replacement demand for the plumbing can help the industry on a medium term.
Cement – short term pain but long term gains from reconstruction
Demand in southern region remained muted over FY12-17 but has picked up in the past 2 years. Kerala forms around 13-14 percent of the demand in southern markets and continues to grow at a steady rate of high single digits.
Malabar Cements, owned by the Government of Kerala, is among the largest cement manufacturers in the state with an installed capacity of more than 8 lakh tonnes. Among the listed players, Chennai-based Ramco Cements derives majority of its revenue and profits from Tamil Nadu and Kerala. JK Cement also has 4-5 percent sales exposure to Kerala.The current situation in the state could have a bearing on the sales as well as financials of these two cement companies. There would be some indirect impact on the other companies (Shree Cement, India Cements, Penna Cement, Dalmia Bharat etc.) in the region. That is because states in the region such as Andhra and Telangana could see some downward pricing pressure amidst muted demand from the state of Kerala.