The road less traveled has its own perils

Thought for the day

In struggling against anguish one never produces serenity; the struggle against anguish only produces new forms of anguish."

-          Simone Weil (French, 1909-1943)

Word for the day

Stinkaroo (n)

Something markedly inferior in quality

(Source: Dictionary.com)

Malice towards none

Is there any study to assess what is the role of incest in worsening sex ratio in India?

The road less traveled has its own perils

The week expectedly started with Greece. Monday morning was overwhelmingly dominated by Greek talk. By the time markets opened, I had already participated in many discussions.

"What is happening in Greece?" Why people are discussing it 5am in the morning! my wife a student of Music and blissfully oblivious about finance, wondered.

"I am praying for Gexit. A vacation in Santorin at cost of Bangkok would then be possible!", a dear friend exclaimed.

"Should I sell everything at the market opening? Will the fall of Greece be as bad as the fall of Lehman Bros?" worried a traders.

"Tell me what to buy this morning, should market open materially lower", an investor who had been looking to increase his equity allocation, inquisitioned.

Unfortunately, I could offer no intelligent input to none of them.

All I could think was that "in 2008 the world reached a point where two roads diverged into the woods; and the world took the one less traveled. Seven years and few trillion dollars down the road, we find ourselves standing at the same fork we left in 2008, only more wearied and less sure about ourselves."

I feel taking the path less traveled was the right strategy back in 2008, as the conventional path was severely damaged and blocked. But the world outside US should have returned to the conventional path the moment US chose to ditch the global cooperation forged in 2008. Following the US was another option available.

If it appears Greek to you, let me get back to simple English.

To understand the problem of Greece and many other countries in Europe and find a sustainable solution, it is essential to understand the root cause.

The core of the European problem lies in the blatant fiscal profligacy in post War era. Both European governments and people have spent way too much more than they have earned in past few decades. Large socialist governments, high wages, inflexible labor markets, huge subsidies ensured that the fortunes collected through industrial evolution and colonial expansion were squandered. The industry thus moved to Asia, constricting the new avenues of employment.

To make things worse, the human lives lost in the two wars were never adequately replenished, making the demography old and dependent on pension. The virtuous cycle of economic development has been replaced by the vicious cycle of adverse demography. Most European nations have more people to provide for than the tax payers.

In post war era, despite all the mistrust, US kept its door open to the talent and capital from across the world. The mass emigration of talented people and real capital to US from Europe has left Europe way behind in technological evolution.

Following the unconventional monetary policy like US is no solution for Europe for the simple reason - US could grow at 3-4% and repay its debt and Europe cannot grow and cannot service its debt.

NEXT POST WILL BE PUBLISHED ON 7-JUL-15

True and fair

Thought for the day

"Deprived of meaningful work, men and women lose their reason for existence; they go stark, raving mad."

-          Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Ennui (n)

A feeling of utter weariness and discontent resulting from satiety or lack of interest; boredom:

(Source: Dictionary.com)

Malice towards none

What is morality and what is legality; and why should they cohabit; and how could morality be tangent on the legality.

True and fair

Someone raised a very pertinent question - should driving below speed limit be equivalent to driving above speed from viewpoint of the legality of the action?

In a scenario when everyone is driving at the stipulated speed limit, the safety of the vehicles and people riding in those vehicles would be endangered in equal proportion if someone decides to drive either below or over the stipulated limit.

A supplementary question that could arise out of this inquisition is - whether something done (slow driving) to avoid being caught in an unlawful act (fast driving) should be equally culpable as the unlawful act itself?

After an annoying argument with myself, I concluded that driving slower than the flow of the traffic is perhaps more perilous to the safety of other people than the fast driving. Because slow driver induces the trailing drivers to jump the lane and overtake his/her vehicle and in the process creates multiple chances of occurrence of an accident. Whereas the fast driver just himself jumps the lane and creates just one chance of an accident, should he lose the control of his vehicle.

I know it will make me hugely unpopular with many tax payers, but I find it very pertinent to extrapolate this logic to the debate of tax avoidance vs. tax planning (saving).

(a)   A public company taking business decision based primarily on tax saving considerations should be equally culpable as the company that avoids paying due taxes. For example, a film producing company investing in a windmill!

(b)   The tax concessions provided by the government for inducing investment in a specific geographical location, even though not necessarily in the best interest of the minority shareholders also need to be evaluated by the same yardstick.

Why the minority shareholders of a company (whose consent is not sought for making substantial investments) should be burdened with the obligation of aiding the development of a backward region?

Many projects that were primarily conceived to take advantage of backward area have become unviable due to poor infrastructure, higher operational cost, etc. The losses are suffered by the lenders, ancillary investors, families of the people rendered unemployed,

(c)    Bonus stripping is a popular accounting method that is used extensively for "tax planning".

The implications are - (i) investors are induced to invest in a business, they might normally not have done but for tax saving; (ii) government loses on revenue with no direct or indirect benefit at all; (iii) it does not add any economic value to the issuer company or its existing shareholders.

Why then the government should allow this blatant tool of tax avoidance in the garb of tax planning?

A stich in time!

Thought for the day

"The cleverest of all, in my opinion, is the man who calls himself a fool at least once a month."

-          Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Otiose (adj)

Being at leisure; idle; indolent.

(Source: Dictionary.com)

Malice towards none

In a society where history is quintessentially intertwined with religion & mythology and laced with guilt - how science could progress.

A stich in time!

At the recently concluded annual general meeting of the Reliance Industries Limited, the management of company presented some glimpses of their strategy for the telecom business under Reliance Jio brand.

While the analysts are divided over the extent of damage it might inflict to the existing players, three things are clear:

(a)   The Indian telecom industry shall see enhanced competition and pricing pressure in next couple of years. The consolidation and elimination process will continue and perhaps accelerate.

(b)   Most players will have to incur material amount of capital expenditure (capex) in next few years to protect their market share and growth.

(c)    Though the primary battleground will be "data"; the voice, smart phone and tower infrastructure segments will also see increased competitive intensity.

This essentially means that (a) debt of all major telecom players will remain at elevated level; (b) the financial stress of marginal players and consequently lenders will rise; (c) the lenders may be reluctant to fund further capex of even major players given already leveraged balance sheets and moderate profitability growth visibility.

The solution may come from further equity dilution or higher foreign equity contribution, at the expense of extant shareholders.

Another negative from existing investors' viewpoint would be that the transformation of Indian telecom industry from a high growth industry to a utility is pushed further back by at least 3years. The dividend paying ability of major players will remain constricted.

So while I eagerly wait for full fledged 4G services at promised rate of Rs400/month, I continue to ignore telecom companies for investment.

From policy perspective, I believe the government has been unfair to the industry.

The government has been consistently supporting the Textile industry in the country for past many decade. The primary consideration for such support has been the large number of people employed by the industry.

However, anecdotally I find that incrementally telecom sector has employed much more people than the traditional textile industry. During my travels across the country, I have noticed that mobile telephony has provided respectable and profitable self-employment to millions in past one decade.

The government has however only exploited this sector. Rather than recognizing the sellers of pre-paid cards, mobile repair shops, mobile accessories' sellers as MSME, the local civic authorities often harass them and treat them with contempt. These businesses are seldom considered favorably for organized financing.

May be the policy makers are waiting to see that the businesses in this sector also go the traditional textile industry way before making any concessions for them!

The scenario is neither improbable nor too distant in the future.

Let it go!

Thought for the day

"There is no subject so old that something new cannot be said about it."

-          Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Definiens (n)

Something that defines, especially the defining part of a dictionary entry.

(Source: Dictionary.com)

Malice towards none

Government is considering tax rebate for encouraging use of credit card.

Does promoting the use of debt not violate the "Indian Culture"?

Why no champion of "Hindu Rashtra" is seen protesting?

Let it go!

Last week, the government raised the import duties on flat steel products to 10.0% from 7.5% and on long products to 7.5% from 5.0%. Higher import duties on steel products are intended to ease some of the downward pressure on domestic steel prices from cheaper Chinese steel imports.

As per Moody's, Indian steel prices have dropped 27% over the past 12 months owing to a 70% increase in cheaper imports, one third of which came from China. As of the quarter ended 31 March 2015, cheaper imports led to a 6% decline in realized per tonne prices at Tata Steel, versus a year earlier, and a 10% decline at JSW Steel during the same period.

 (Via Moody's)

Kotak Research believes that the 2.5% hike in import duties on steel products to 7.5% on long and 10% on flat steel products is too modest to cheer domestic steelmakers in view of the sharp decline in global steel prices. Benefits will be limited given the large imports under free-trade-agreements and high domestic premiums over import offers.

What I would like to understand is that:

(a)   If the global commodity deflation due to demand slowdown in China, Europe, and many emerging markets is a realty and it is likely to persist for many more years, how long and how far the government of India is going to protect Indian producers?

I appreciate all the arguments that would be offered in support of this action - but I fail to understand that when the domestic consumer will get the full advantage of global correction in commodity prices.

(b)   Would it not be a better strategy to support the consumers of commodities by subsidizing imports so that they could optimize their capacity utilization, begin a virtuous cycle of lower prices in the economy, may be at the expense of few producers who are not globally competitive in the current environment.

Look at what you own, Sensex may mislead you

Thought for the day

"Man, so long as he remains free, has no more constant and agonizing anxiety than find as quickly as possible someone to worship."

-          Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Swashbuckler (n)

A swaggering swordsman, soldier, or adventurer; daredevil.

(Source: Dictionary.com)

Malice towards none

Has Bangladesh finally replaced Pakistan in terms of popular cricketing rival of India?

Look at what you own, Sensex may mislead you

The recently concluded result season (4QFY15) was one of the worst in past one decade. The Sensex earnings fell 7% yoy, led primarily by commodities. More companies missed the earnings forecasts of analysts as compared to the companies which met or beat the forecasts. Pharma sector perhaps disappointed most. Consumers, particularly discretionary, also let down the street expectations.

The most disappointing feature was broad based revenue contraction led by both price erosion as well capacity underutilization.

Though most analysts have put up a brave face - downgrading FY16 earnings but upgrading FY17 earnings, top line contraction, first since 2009, must be giving some jitters.

In the whole India story, demand has always been a given. 1.25bn strong population with burgeoning middle class and more than 2/3rd workforce has always supported the assumption of resilient underlying demand.

Now if even in "peacetime" this demand has shown contraction, it needs a close examination. This examination is also important given the fact that revenue growth has been on the decline ever since 2008 (except a stimulus and pay commission led bounce in FY10).

I believe that we need to examine the competitive strength of India Inc in the emerging global and domestic environment. It is probable that even many large companies may not survive in the changing competition landscape. The lost pricing power and market share may never be regained. Though we may see an "aggregate revival", it may not matter much if the companies I own do not grow in their business and profitability.

 

More on this tomorrow.

Greed still outweighs fear: Market crash not imminent

Thought for the day

"Much unhappiness has come into the world because of bewilderment and things left unsaid."

-          Feodor Dostoevsky(Russian, 1821-1881 )

Word for the day

Inviolable (adj)

incapable of being violated; incorruptible; unassailable

(Source: Dictionary.com)

Malice towards none

Why Lalu and Nitish are taking LKA side, who they believe to be the original villain of Secularism?

Greed still outweighs fear: Market crash not imminent

Since the all time high level recorded by Nifty on 4 March 2015, small cap and midcap stocks have mostly outperformed the benchmark. Despite rising threat perception, persistent selling by FPIs and worsening technical parameters, broader markets have continued to outperform last week. Though the small cap did worse than midcap last week, the scale is still tilted towards "greed" in the battle of bulls (greed) and bears (fear).

It is therefore not appropriate to expect a market crash anytime soon.

The market is  more likely to move in a sideways trading range with a distinct downward bias.

For the week, NIFTY faces strong resistance in 8350-8386 range. A minor support zone exists in 7980-8015 range. A strong short term support exists at 7860 level

 

Nifty poised critically: below 7850 floodgates open

 

Thought for the day

"Don't ever take a fence down until you know why it was put up."

-          Robert Frost (American, 1874-1963)

Word for the day

Yestreen (adv)

During yesterday evening.

(Source: Dictionary.com)

Malice towards none

To set an example, should AAP practice a pro-forma right to recall in Delhi?

 

Nifty poised critically: below 7850 floodgates open

On weekly charts, Nifty is poised precariously close to its major support range of 7800-7860. A weekly close below this level will open the way for a material correction (~10%) from that level.

A weekly close below 7200 will complete 20% correction from the March highs and establish a medium term bear market, in which case 8450 level will act as ceiling for next 36-52 weeks.

The market breadth has completely cracked last week suggesting that broader markets may underperform henceforth. For confirmation however the trend need to continue this week also.

A large underperformance of broader markets in next couple of weeks will suggest market bottoming without slipping into a bear market. As of this morning this is more likely scenario.

 

 

This jingoism is not new

Thought for the day

"In the name of God, stop a moment, cease your work, look around you."

-          Leo Tolstoy (Russian, 1828-1910)

Word for the day

Eternize (v)

To make eternal; perpetuate.

(Source: Dictionary.com)

Malice towards none

The jingoism seen in media over an army operation is not unprecedented. We have seen it before.

The question is - 'is it avoidable?" or they must do it.

This jingoism is not new

Besides the daily soap opera of Delhi government, some events that occurred last week need to be evaluated to find if some paradigms are shifting.

The most talked about event was the reported hot pursuit of Indian army into foreign territory to neutralize the terrorists who ambushed and killed army personnel in Manipur recently.

The government officials tried to convey the message that India is no longer a soft state. The media also played along in full zest.

It has been tried to convey that it is first of its kind operation, but certainly not the last one. I could not digest it. I find it impossible to fathom that Indian army was not responding to extreme provocations from across the border, including gruesome beheading of its personnel.

The jingoism demonstrated by the government is also not unprecedented. We have many instances of incumbent prime ministers and senior minister using threatening language against Pakistan, in particular.

So effectively I do not see any change here.

"The Visit", an online ad campaign for a ethnic garment line has evoked tremendous interest amongst people. The 3:24minute film takes a leap in terms of presentation and acceptance of same sex relationships.

I am not sure how the right wing elements who have been opposing omission of Sec. 377 of IPC would react to this. But a large majority of people would move an inch towards the line of acceptance. A paradigm might have begun to move here, if already not shifted.

Hindi films have mostly reflected the current positioning of various issues in the society.

I have been keenly watching how the metaphor for Mumbai has silently shifted from the iconic VT station and Marine Drive to the newly built Bandra Worli sealink. Similarly, Delhi is no longer represented by India Gate and Vijay Chowk. Instead Delhi Metro is used.

Also, the scene of action has moved away from Mumbai to North. While during 1980-2000, the scene of action was overwhelmingly Mumbai, a in past one decade substantially large number of films have focused on life in middle class Delhi, Punjab and small towns of Uttar Pradesh. A recent hit had the glimpses of life in interiors of Haryana perhaps for the first time in mainstream cinema.

This is a major trend having economic connotations. Firstly, it perhaps indicates that incremental rise in household income is higher in north and east as compared to west. This may be due to high concentration of young population in these states. Secondly, technology and new infrastructure are occupying large space in peoples' conscience as compared to culture and heritage. BJP in particular needs to note these trends. Akhilesh, Nitish and Manohar Lal ji would also be much better placed if they realize and accept these shifting paradigms.

For investors like me, nothing could be more pleasant than to hear that modern infrastructure projects are new heritage icons.

Weather is turning cold and windy

Thought for the day

"The law condemns and punishes only actions within certain definite and narrow limits; it thereby justifies, in a way, all similar actions that lie outside those limits."

-          Leo Tolstoy (Russian, 1828-1910)

Word for the day

Quidnunc (n)

Person who is eager to know the latest news and gossip; a gossip or busybody.

(Source: Dictionary.com)

Malice towards none

Though the flyers must be loving it, but is the price war in skies really good for the health of the sector?

Couple of more Kingfishers and the rest will kill the pessangers.

Weather is turning cold and windy

The infrastructure project lender IDFC has taken lead in implementing the latest RBI mandate for more effective handling of financially stressed infra assets. It has evicted the extant management of a Chhattisgarh based power producer SV Power which had repeatedly defaulted on its debt obligations.

In my view, it is a strong message to the delinquent companies and defaulting managements. A similar action in time could perhaps saved Kingfisher Airlines and other businesses in similar financial conditions.

It could be a potent deterrent for promoters who are chronic defaulter and have been taking advantage of the lenient enforcement norms in past many decades. Some steel producers, for example, have availed a corporate debt restructuring (CDR) package virtually in all business cycles.

However, by no means this would be sufficient measure, without a stringent project monitoring, money laundering regulation and fast track criminal prosecution of willful defaulters, this practice may only solve a part of the problem.

A suitable bankruptcy law that allows rehabilitation/closure of genuinely failed businesses without any stigma to the promoter of the project could help early detection and cure of financial stress.

It is an unproven but widely acknowledged theory that many unscrupulous promoters use a variety of means to escalate the cost of the project and virtually manage to get away with little or no equity contribution of their own. In such circumstances their personal stakes in the subject project are minimalistic. While they stand to gain most from the success of the project, they have little to lose in case the project runs into rough weather.

A large number of stressed road projects under PPP regime and power/steel plants based on captive mine allocations could be provide useful case studies to evaluate this proposition.

The bankruptcy and banking regulations therefore must be supplemented by a strong criminal prosecution regime for such unscrupulous businessmen.

The report of Nomura India about their trip in Europe to market Indian financial sector stocks makes some interesting reading. As per the report there was very little interest in PSU banks, expect SBI, amongst European investors. Investors were relatively more comfortable playing cyclical recovery cycle through private banks like Axis/Yes. It is generally felt that smaller PSU banks will find raising capital (for BASEL compliance) very difficult and there is little clarity as to see how they will break the vicious cycle.

German 10yr bond yields have touched 1% mark for the first time after September 2014. Gold, US yields and USD have also shown soft trend in recent weeks. No one is rushing to safe havens for now.

Malaysian Ringgit recently touched nine year low. Emerging market equities have cracked badly. Chinese market are in bubble. It's certainly cold and windy outside

All coal is not diamond

Thought for the day

"He never chooses an opinion; he just wears whatever happens to be in style."

-          Leo Tolstoy (Russian, 1828-1910)

Word for the day

Aggrandize (v)

To widen in scope; increase in size or intensity; enlarge; extend.

(Source: Dictionary.com)

Malice towards none

As things stand today morning, it's between Lalu and Modi in Bihar.

Supporting cast includes Nitish and Paswan.

Rahul plays a cameo.

All coal is not diamond

I can understand the political viewpoint in running Air India, BSNL/MTNL, BHEL, Coal India and scores of mid and small sized PSU banks. What I fail to see is the rationale behind an investor buying the stocks of these companies.

There is enough empirical evidence to show that the private competition has eroded market share and profitability of public enterprises. HMT, MTNL, Air India, SAIL, BHEL etc are good examples to show.

Recently, private sector banks have been gaining market share at the expense of PSBs. Most of these banks have also reported better profitability and asset quality.

Private sectors banks have been able to raise additional capital from the market and grow. They are also free to rationalize their costs, including workers' compensation, as per market conditions. Whereas PSBs have to depend on the government's fiscal condition to receive additional capital.

In a drought year when the banks may face rise in delinquencies and additional demand for farm sector credit, tighter fiscal condition may not afford them the much needed additional capital. Strong workers' union and political considerations also constrict them from workforce rationalization.

So while in the improving credit cycle, these institutions could provide a decent trading opportunity, these do not qualify to be investment worthy institutions for private investors under any circumstance.

NTPC enjoys the distinction of being the only company in the world all whose major customers are bankrupt. Despite whatever reforms in past two decades, the health of state electricity boards and distribution companies remains hopelessly poor. How could possibly, NTPC hope to grow and become a world class utility under these circumstances.

Coal India has admitted to being overstaffed and cost inefficient. At a recent analyst meet, the management has expressed its intention to reduce the workforce by 12000-13000 people every year, depending on how much and how fast technological upgradation is implemented.

Reportedly, the coal ministry has released a draft document which proposes that CIL should sell coal to the non-regulated sector at a price determined through auctions every five years. The draft document also proposes that the floor price for coal will be the notified prices of coal - the prices at which CIL sells coal to the non-regulated sector.

Considering that in past many attempts of the company to rationalize workforce have been thwarted by the workers' union, it would be interesting to see how this plan is implemented in next few years

The costs of the company are expected to rise by 60% over five years. If the prices for a part of its produce remains fixed, the margins will obviously take a hit. Moreover, given the expectations of a prolonged slowdown in global demand for coal and rock bottom freight rates, the competition from global supplies will be intense. The competition may further exacerbate if material improvement is seen in port facilities and inland rail connectivity.

Privatization of coal mining is inevitable. How the government prevents Coal India from becoming another MTNL, would need to be seen. In the meanwhile I am ignoring all "Buy" recommendation on Coal India.