Bad Is Good!

The phoney financial markets currently flirting with record highs and the underlying real economy struggling with earnings and job growth are exhibiting unparalleled paradox. Domestic benchmark equity index Nifty is trading at a PE multiple of 24 while small-cap index trades at 70, three-times the valuation premium. There is another divergence: Companies are queuing at the Insolvency and Bankruptcy Board of India (IBBI) filing for corporate insolvency resolution plan (CIRP), aka Chapter-11 bankrupcy filings in the US.

We also know the party is at its peak when it’s just about to end.

History provides enough proof the weakest investors join the euphoria at the end of the bull market. This bull market has run its course for eight years since the March 2009 lows and is throwing signs that the ride for equity investors from mount-9300 Nifty onwards may be very challenging.

Not withstanding government high-decibel propaganda on the state of the economy, corporate earnings growth is missing, jobs are elusive but consumer goods and asset prices are steadily rising. Since the turn of the year, bankruptcy is a new buzz-word in banking circles as corporates line up for insolvency and bankruptcy filing.

Bankers perhaps never had such a bad time ever in the past, and corporates never so good. Banks want to rid themselves of the non-performing assets (NPA) to clean up their books to do fresh business and failed corporates are too eager to obtain a favourable hair-cut of their outstanding loans and clean-chit to re-start new ventures. During the first four months of 2017, about 60 companies have already knocked on the doors of the National Company Law Tribunal (NCLT) for Insolvency Restructuring Plan. These include some well-known names. Practitioners say the number is likely to touch 1,000 by next summer and perhaps 5,000 by the time Mr Narendra Modi seeks re-election in 2019.

Steel, power, textiles, infrastructure and chemicals are likely to dominate the list of failed companies seeking bankruptcy proceedings. The sunrise sector of the recent past, telecom, is also likely to show up for seeking a hair-cut. Paradoxically, some of these companies are traded on the markets and investors hoarding these shares assuming there is fire left in these stocks. They will be dealt a rude shock.

Ridding bank balance sheets of stressed asset are key to reviving credit growth. Without this the government can’t go ahead with its many plans. The foremost amongst them all is the creation of more jobs. Various schemes proposed by RBI to resolve the problem have been unsuccessful, with lenders reluctant to write down assets sufficiently and company owners unwilling to negotiate repayment plans.

How situation got worsened?