Vijay Kumar Gaba: August 2017

Wednesday, August 30, 2017

...and the macro data

Thought for the day

"That which does not kill us makes us stronger."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Ruth (n)

Pity or compassion

Malice towards none

Dhirendra Brahmachari

Chandraswami

....

Asaram

Gurmeet Ram Rahim!

First random thought this morning

In past seven decades there have been numerous cases of impropriety, criminality and immorality by the people in religious robes enjoying immense trust of people, common and elite.

Why then is it so that each such instance is managed separately and not as a trend?

Handling this malaise as a trend, would mean taking preventive steps including regular surveillance over security and financial compliance matters.

...and the macro data

The earning season for 1QFY18 is almost over. The consensus is that the outcome has not been encouraging from whatever point you view it.

As per the Morgan Stanley's recent note in the quarter for the broad market (2629 companies) the net profit fell 11% YoY and EBITDA margins contracted 194bp YoY. The aggregate revenue grew by 9% YoY, mostly led by the commodity linked sectors (energy, materials and utilities) and industrials. For Sensex companies revenue and net profit growth of 5% YoY and -6% YoY, respectively. EBITDA margin contracted by 177bp YoY.

As per the report margin compression was conspicuous across sectors with healthcare and consumer discretionary leading the charge. The 11% fall in profit was led by telecoms and consumer discretionary.

The report finds that Financials, Utilities, Technology and Telecoms sector companies did not report impact of GST on their earnings either in their earnings release or the management commentary. Companies in the materials, consumer discretionary and consumer staple sectors reported impact due to channel destocking and dealer incentivization.

As per the consensus estimates, presently the market seems to be expecting 11% profit growth for the full year FY18 (Sensex FY18 EPS of Rs1600 vs 1448 in FY17) and a CAGR of 15% over FY17-FY19 (Sensex FY19 EPS of rs1928 vs. 1448 of FY17).

The data available so far for 2QFY18 is not encouraging either. Which means, the earnings estimates may see further downgrades.

For example, as per the latest Economic Indicator Update of Goldman Sachs, the preliminary July reading of their India Current Activity Indicator (CAI) suggests that growth moderated further to 6.8% qoq ann. from 8.5% in June, suggesting a deceleration in activity (GS India CAI is calculated on a 3month/3month annualized basis).

As per the update, most of the indicators such as two-wheeler sales, car sales, power demand, manufacturing and services PMIs and commercial vehicle sales witnessed slower growth in the three months to July compared to June.

Rural economy indicators like agriculture loans, tractor sales and agriculture exports remained laggards. GS's separate urban and rural economy CAIs indicate that the urban economy grew by 7.5% qoq ann. from 8.3% in June, while rural economic growth fell sharply to 5.1% qoq ann. vs. 9.5% in June. Excluding strong two-wheeler sales most other rural indicators continue to register tepid growth of 4%-5%.

Credit growth continues to remain weak led by subdued credit demand conditions.

The slowdown in economic activity has come on the back of inflation and INR/USD bottoming, and tightening of monetary policy easing corridor.

The markets have overlooked tepid earnings growth due to stronger macro outlook. The point is whether markets are prepared for a macro shock!

Also read Beyond macro data

Tuesday, August 29, 2017

Beyond macro data

Thought for the day

"The lie is a condition of life."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Verisimilar (adj)

Having the appearance of truth; likely; probable, e.g., a verisimilar tale.

Malice towards none

BJP lost in Bawana bypoll in Delhi.

Narendra Modi should resign, as he has lost mandate of people.

#AAPSpokesperson

First random thought this morning

As per NSSO survey on housing conditions, the majority of India's population, both rural and urban, may be living in homes with space smaller than the minimum floor area per person recommended for prison cells. Juxtapose this finding to other popular data points, viz., a large number of people still do not have access to toilet, primary health, and poor work conditions and may be living on Rs32/day income.

What you may get that is that Jail, for many of the poor in India might not be an unfamiliar or totally unwanted territory. #RightToLiberty

Beyond macro data

Investors' life in India is much simpler than their western counterpart. There are only 100 odd companies (mostly consumers - staple, discretionary and financing) that have consistently created wealth for their shareholder in past three decades. Then there are 100 odd cyclical businesses (mostly commodities) which have given decent return, if bought and sold between business cycles. Rest all has been mostly a typical Bollywood masala film.

A close study of the investment strategies followed by most successful fund managers shows that almost all of them have kept their life simple by not patronizing Bollywood masala films.

Though some occasionally successful, and not so reputable, fund manager do claim to have consistently discovered new gems (multibaggers in common market parlance) and made exponential returns for investors, very little data is available to verify their claims.

The question that is bothering my mind since past few months is why do we in India need the equity research as so highly ranked and paid profession!

The genesis of this question is the disconnect I am witnessing in the analysts projection of India growth story and the picture I am seeing while travelling through the hinterlands of the country.

Most of the equity research and strategy published in past six months broadly appears optimistic on Indian equities over next couple of years. But unfortunately, I do not see their optimism being shared by a vast majority of the populace.

Wherever I go there is an environment of despondency. Farmers, students, laborers, traders, manufacturers, industrialist, bankers, workers (including government workers), teachers, man, women, youth, old, rich poor - all appear complaining, unhappy about whatever they doing presently, and uncertain about their future.

I grant that some of this despondency may be emanating from the disruption due to regulatory changes having long term positive implications and therefore be very subjective and unsustainable. Some of this could also be attributed to the negative campaign of the dispirited opposition parties and section of media sympathetic to them.

However, that still does not take away my doubts. For once, I see the society divided and disillusioned like never before. The narrative is overwhelmingly "we vs. they". Everyone (class, caste, religion, region) appears to be at conflict with others.

Everyone is non-compliant and must be punished seems to have become the guiding principle of the administration, at all levels.

Lack of direction, poor motivation and incompetence of the machinery responsible for executing the Prime Ministers' grand vision of New India is conspicuous and alarming.

This situation does not augur well for the sustainable economic growth of India, at least in next couple of years. Though markets may do whatever they have to.

Thursday, August 24, 2017

Light in the darkness

Thought for the day

"It is not a lack of love, but a lack of friendship that makes unhappy marriages."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Comstockery (n)

Overzealous moral censorship of the fine arts and literature, often mistaking outspokenly honest works for salacious ones

Malice towards none

How Sikka's resignation from Infy is different from Mayawati's resignation from Rajya Sabha?

First random thought this morning

#TripleTalaq reactions

Amit Shah: 50% of Muslim votes are in my pocket!!

NiKu: Thanks god! I escaped the "Secular Ghatbandhan" just in time.

RaGa: Papa why did you do Shah Bano?

MSY: TTT was never an issue. लडकन ते गलती हो जात है|

Lalu & Yetchury : Secularism is in grave danger.

Light in the darkness

Yesterday, I briefly highlighted some of the weaknesses of our judicial system (see here). Though it should be a matter of worry for every righteous citizen, my immediate concern is implication for my investment strategy.

Considering the following trends, I believe that investors need to inbuilt litigation as important factor in their investment strategy.

(a) The businesses in India are entering the regulatory net at an accelerated pace. In next decade, there will be only a few unregulated businesses left, in my view.

In the transitory stage, it is common to have increased litigation, as both the regulator and the businesses adjust to the new regime. We have seen this in cases of TRAI and CCI, for example. In transition, RERA, GAAR, GST etc. will certainly lead to higher litigation.

While companies need to reform their business strategies to adopt to the regulated regime, investors would need to assimilate the impact of litigation in their strategies.

So far we have seen only extreme panic reactions from traders and investors in case a regulatory action is initiated on a company or group of companies. In my view, investors may need to learn to accept litigation and regulatory actions as a business routine rather than as a stigma.

(b) The compliance cost of businesses shall certainly rise materially. The businesses that have the benefit of administrative patronage due to historical or political reasons may suffer worst in this case.

(c) In past, the investor participation in corporate affairs had been minimal in India. With rise in investors' awareness, market participation, institutionalization of holdings, and evolution of strong investor advisory framework, investors participation in corporate affairs shall rise materially in coming years.

This shall certainly help in raising the level of corporate governance from the present standards.

Some good businesses which have historically traded at significant discount to peers, because of poor perception about their corporate governance standards, could benefit from this trend, in my view.

These business under pressure from investors' representatives (institutions, money managers, proxy advisors etc.) shall be forced to amend their ways, hence increasing the returns for investors and rerating of their stocks. We have already seen some such cases in the market.

(d) An easier route to bankruptcy and removal of socio-religious stigma out of financial defaults, may materially change borrower-lender dynamics in the country. Present valuations and business models of many retail banks and NBFCs may not be factoring this change in dynamics. Investors may need to be cautious about this. ...More on this later.

Wednesday, August 23, 2017

Transition from an argumentative to litigant society

Thought for the day

"In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Banausic (adj)

Serving utilitarian purposes only; mechanical; practical, e.g., architecture that was more banausic than inspired.

Malice towards none

General Bajwa to Trump:

डॉन तुझे पाकिस्तान पे भरोसा नहीं क्या?

First random thought this morning

One things is clear beyond doubt to me that the respect for human life does not figure in the priorities of political agenda in the country.

Now, if you agree with me on this, is there any point in listening to the political discourse and/or looking for a ray of hope in political promises.

We the people will have to put premium on our life. Raise alarm whenever you face a potential peril to a life.

Transition from an argumentative to litigant society

In India, various courts of law dispose off over 21million cases every year. But still there are more than 30 million cases pending in various courts across India. Over 6 millions of these pending for more than 10years.

Another interesting feature is that while in lower courts criminal cases form more than two third of all pending cases, in higher courts the ratio of pending criminal cases is less than 25%. (see here)

So statistically, one might possibly draw a conclusion that our criminal justice delivery system is superior and most of the cases are conclusively decided at the first point itself.

But anyone who has seen the Indian criminal justice system closely, would know that nothing could be far from the truth. Every common man who has been to police station or court of law even once would know that—

· Police personnel are criminally ill trained to prepare a criminal case and most of the cases do not even satisfy the elementary criteria for the trial of an accused.

· A large majority of lawyers and advocates are incompetent, unethical and unfit for the practice of law.

· The proportion of frivolous cases is too high, for want of an effective deterrent.

· The corruption in police and lower judiciary is rampant.

· The justice delivery for petty crimes is too cumbersome.

· The justice delivery at higher courts is unaffordable for most. Though there is provision for free legal aid for economically weaker section, most litigants are unable to use it.

I believe that if police were little more friendly and courts were little more efficient, the number of cases may rise materially, given that many people avoid seeking justice for fear of harassment.

If you happen to visit a court of law in any of the small towns in hinterlands, you would observe that many of the accused involved in serious crime cases are not criminals.

Most of them committed crimes in fit of rage, pretense of false ego or some misunderstanding. Most of these crimes could be prevented

A majority of property related crimes could be avoided if all property title records are digitized and people are made aware about the need for making a will.

Honor, ego and women related crimes could be totally avoided if children are taught to respect individuality of others at school level.

Ban on drinking at public places (festivals, marriages etc.) could take out more than 10% criminal cases.

If you are wondering, why I am bothering you by this rubbish, I feel there is a strong investment strategy connection here....to continue tomorrow

Tuesday, August 22, 2017

Strategy review

Thought for the day

"To spare someone shame, is the most humane thing."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Daymare (n)

A distressing experience, similar to a bad dream, occurring while one is awake.

Malice towards none

A survey by a large life insurance company, suggests that as many as 83% of the large city residents in India may be uncertain about their life!

First random thought this morning

Have you checked whether your kid can count till 100 in Hindi? Well I did, and I was astonished. None of my two children could move past 58!

While it is fashionable to feel sorry about the Mother Sanskrit, lying on deathbed, not many tears are shed for the daughter Hindi. Still not terminally ill, the mother tongue of at least over 300million Indians, is stagnant, feeble and helpless than ever. Incidentally, the cousin Urdu seems to be doing no better.

Strategy review

Mark Twain once famously said " There are lies, damned lies and statistics". Evan Fraser later clarified "The science of producing unreliable facts from reliable figures".

There are numerous data points being presented about the progress of current monsoon season. The financial markets are glued to all this statistics, since post twin setbacks of Demonetization and GST, a good monsoon is the straw of hope most of their forecast may be hanging to.

A recent visit to the states of UP and MP, however suggest that relying on official monsoon statistics might be misleading, at least for now.

As the table on next page shows, a large part of India, which is more relevant for summer Kharif crop, e.g., UP, Punjab, Haryana, Maharashtra, MP, Karnataka, Assam, Chhattisgarh, etc., has received rains less than the long term average. A few regions have received excess rainfall, most notably, Rajasthan and Tamil Nadu.

Besides, a large part of Assam, North Bihar and Eastern UP are reeling under severe floods, mostly due to excessive inflows in rivers from Nepal and China.

It would therefore be reasonable to expect flat to little lower Kharif crop, despite rise in sown area. For example, the farmers in UP suggested that sugarcane yield in coming season could be little lower. Rice yield in Punjab, UP and Assam is also reportedly affected.

I also observed that the impact of farm loan waiver, announced in some states, is already withering fast. Many rural families believe that their situation may not be much better even if they receive the benefit of loan waiver (despite all claims, many families seems not to have received the loan waiver certificates as yet).

The situation is worsened by the obstruction in construction work due to foods (or shortage of water), which means lower employment opportunity for construction labor.

In my view therefore, pinning hopes of earnings recovery in 2QFY18 mostly on demand recovery due to normal monsoon (statistically we might conclude the season with a normal monsoon!) may not be appropriate.

Moreover, I also have some problems with the premise that 4QFY17 and 1QFY18 earnings were mostly impacted by GST related adjustments and things should improve materially from 2QFY18 onwards. I think it may take another 2-3 quarters before GST related disruptions are fully normalized.

A major positive for the Indian financial markets could be a sustained fall in real interest rates over next few quarters. Recovery in commodity prices and progress of bankruptcy proceedings could also throw some interesting investment opportunities.

I would like to cut a bit on my middle class and rural consumption themes and add some selective stressed assets in my portfolio over next six months. Retail banks is something I am confused about.

Friday, August 18, 2017

Monekeyman, a Witch and GST

Thought for the day

"Every church is a stone on the grave of a god-man: it does not want him to rise up again under any circumstances."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Ululate (v)

To lament loudly and shrilly.

To howl, as a dog or a wolf; hoot, as an owl.

Malice towards none

People like Karun Nair are not sure, whether they will find place in Indian cricket squad anytime soon. And we are still discussing Yuvraj Singh.

First random thought this morning

The tragic events like Gorakhpur hospital tragedy and the Wednesday night theft in the Delhi-Mumbai Rajdhani, may sure make a good sequence in Hindi movies. Bollywood may want to thank the authorities for this

In the meantime, I must rework my maths for evaluating government's performance.

I am considering to raising the discount factor I apply to government claims of delivery substantially.

Monekeyman, a Witch and GST

In Vrindavan early this week, while mingling with thousands of devotees from across India, I learned a thing or two, that could have significant economic significance, especially in relation to my investment strategy.

In September 1995, the miraculous milk drinking Ganesha brought the country to standstill. Millions of people queued in front of temples to offer milk to Ganesha idols. The event attracted attention of global media and scientific community also. After discussing and debating for many days, the issues was buried as unresolved.

Six years later, a mysterious monkey man started terrorizing the people of Delhi. For many nights, people in many localities could not sleep. Unconfirmed reports of monkey man appearing subsequently in other cities also emerged. An investigation was launched. But the case remained unresolved. Later, the incidence was used in 2009 Hindi movie "Delhi-6".

Last month, many incidence of attack by a hair cutting Witch in NCR region appeared in media. The Witch would cut braids of sleeping women in night.

The latest incidence was a matter of discussion amongst the common people, gathered to celebrate the birth of Lord Krishna. The difference this time was that almost everyone, from illiterate old farmers to local pundits, was making fun of the "rumors". Even old village women were seen cracking jokes about it. No one appeared to be believing an iota in these incidence.

This is a significant change in the mindset of the society, in my view.

The second interesting thing was discussions on GST. A group comprising small traders, shop keepers, and small time contractors, enjoying lunch at banks of Yamuna was seen intensely debating the impact of GST. As I could feel, most of the arguments were based on inadequate information, misinformation, and prejudices. To most of them GST was no different than the mystery monkey man or the hair cutting Witch, that is out to catch them off guard and destroy their businesses.

This in my view is failure of government in adequately guiding people about GST and its implications for them. The positive thing is that the current gloom in the sentiments could be somewhat based on the misinformation rather than the actual impact of GST.

The third interesting discussion was about real estate. Many people from nearby towns were of the firm view that the prices of their properties are going to crash by 50% in next couple of years.

On enquiry, they suggested that the fall in prices of their property (own house or shop) may not have a material impact of their spending habits or expenditure plans. But it was certainly seen as an obstacle in their future investment and expansion plans.

A deeper inquiry suggested that it may not be GST or RERA that is bothering the real estate market in smaller towns and unplanned colonies of large cities, especially in North India. This is mostly about changing landscape of urban plans and preferences of people......More on this in a later post.

Thursday, August 17, 2017

Angry birds and spinning wheels

Thought for the day

"The word 'Christianity' is already a misunderstanding - in reality there has been only one Christian, and he died on the Cross."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Iconoclastic (adj)

Attacking or ignoring cherished beliefs and long-held traditions, etc.

Malice towards none

Justice is blind, I had heard. But the government is blind, deaf and dumb, this I only realize recently. It only sees, hears and responds when an issue gets good TRPs in media.

So much so that the amount of compensation in cases of rapes, murders and suicide is directly proportionate to the TRP of the case.

First random thought this morning

The positive outcome of Doklam standoff and Kim Jong Un's jingoism could be stronger and deeper Indo-US and Indo-Japan relations. While the hostilities will end sooner or later, the warmth relationships may last much longer.

The focus therefore should be on making efforts to preserve the opportunistic thaw in relations and convert into a sustainable and lasting phenomenon. Keeping Doklam at the center of focus, may not that fruitful after all.

In the meantime, two nuclear powers are fighting each others with stones!

Angry birds and spinning wheels

A 1hr travel in the Delhi Metro will tell you that a significantly large number of people, youth as well as middle aged, educated and not so educated, are hooked to the digital games like Angry Birds, Bubble Shooter etc.

Most of Indian middle class mothers could be seen complaining about Shin Chen, Doremon et. al., the cartoon character that our children are addicted to.

It was not long ago that when a digital game "Pokeman Go", got many people hooked. The fan club included some renowned people like Shah Rukh Khan (as per media reports).

The latest craze amongst masses seems to be the innocuous Fidget Spinner, being propagated as stress buster device. The device is nothing but a variation of ordinary bearing wheel that has been in use for more than two centuries.

On a visit to Mathura-Vrindavan early this week, I saw at least 500 varieties of Fidget Spinners being sold on the street of this tiny town. Yesterday I noticed that the situation is no different in the streets markets of Delhi. In the popular Connaught Place area you can see hundreds of colorful variants of designed to serve the local taste. On enquiry I discovered that most of the children I know are hooked to the device.

The point is that there are entrepreneurs who seems to have ideas that can work, and also have the capabilities to make such ideas work.

There are numerous examples of successful ideas like Whatsapp, Facebook, Angry Birds, Shin Chen, Doremon, Pokemon that transcend all boundaries be it geographical, socio-economic, or language.

I am sure behind every such successful idea there could be 999 failed ideas also. But that's not the point here. The point is that these successful ideas are about people and not any complex technology. Most of these ideas have created their market themselves. Till the time these ideas were commercialized, no one was really crying need for these products or services.

Unfortunately, our enterprise ecosystem is overwhelmingly skewed in favor of thought followers rather than thought leaders. The cherished unicorns like Flipkart (Amzon), Ola (Uber), PayTM (PayPal) etc. are all poor copies of the global leaders.

Mr. Bhatia created Hotmail two decades back. But he perhaps himself did not believe in the potential of his idea and was happy to sell it to Microsoft for a pittance. And Chota Bheem is so inadequate in rescuing children from the spell of Shin Chen.

If our government is seriously looking to create a New India in five years, we would need to develop an ecosystem that encourages, motivates and supports innovation and not just copying the successful ideas.

I do have some such ideas, if the Prime Minister does care. For those who are itching to make fun of me, I may just remind Dronacharya who taught many a prince and kings the art of winning wars and ruling always remained a poor teacher himself.