Thursday, January 31, 2019

EODB means higher CODB



Some food for thought
"If I can't have too many truffles, I'll do without truffles."
–Sidonie Gabrielle Colette (French Novelist, 1873-1954)
Word for the day
Assimilation (n)
The process of adapting or adjusting to the culture of a group or nation, or the state of being so adapted.
First thought this morning
Without faith we have no hope, and without faith we stubble through life in the dark.
Reportedly (see here), National Statistical Commission (NSC) Acting Chairperson PC Mohanan resigned from his post on Monday, 28 January. He alleged that the government is withholding the National Sample Survey Organistaion’s (NSSO's) Annual Survey on employment and unemployment for the year 2017-2018. This survey is the first one after demonetization and palpably sheds some light on the impact of demonetization on employment conditions.
I would not like to comment on the authenticity or otherwise of the report or the allegation. Nonetheless, one thing is certain - it does further diminish the faith of people in institutions. We have recently seen faith of common people in key institutions like Supreme Court, Election Commission, CBI & other investigating agencies, et al vacillating violently.
The most unfortunate part is that the incumbent governments (at center and states) appear complicit in this whole endeavor to undermine the people's faith in institutions and the democratic traditions.
In financial market parlance too, many of the recent events have led to the dissipation of investor's faith in critical factors like credit rating, auditing, corporate governance (esp independence of independent directors), due diligence capabilities (and intentions) of lenders and fund managers, etc.
Incidents involving top rated corporate like IL&FS, DHFL, Essel Group, Sun Pharma, etc. threaten to turn the entire investment process into "shooting in the dark".
Not a happy situation, for sure.
Chart of Day


Wednesday, January 30, 2019

10years of poor corporate profitability

Some food for thought
"If I can't have too many truffles, I'll do without truffles."
–Sidonie Gabrielle Colette (French Novelist, 1873-1954)
Word for the day
Synecdoche (n)
A figure of speech in which a part is used for the whole or the whole for a part, the special for the general or the general for the special. Example: ten sail for ten ships or a Croesus for a rich man.
First thought this morning
As expected (see here) the Congress president, Rahul Gandhi has finally mainstreamed the idea of Universal Basic Income. The idea had been in air for past few years, but no national party had committed to it in as many words.
As per some unconfirmed media reports, the former RBI governor Raghuram Rajan may be guiding the Congress Party in formulation of its socio-economic agenda. If true, the assertion of Mr. Gandhi may not be an empty bubble. It may have at least some economic thinking behind it.
Publically, the BJP leaders (top and sundry) may have chosen to ridicule the idea thrown by Rahul Gandhi. Nonetheless, they must be worried. Rahul Gandhi is beating them on their own game almost every day.
It was well anticipated that PM Modi shall announce a draft Minimum Income Scheme before the code f conduct for forthcoming Lok Sabha elections kicks in.
By announcing this Rahul Gandhi has foxed BJP. If they announce the scheme, Rahul Gandhi, Mamata Banerjee and Naveen Patnaik et al would claim credit for it, saying that they forced PM to announce this. If BJP decides to follow its fiscal dreams and does not do this, it would be risking some more popularity points for the PM.
Interesting to note, as per the recent popularity survey aired on India Today TV, Rahul Gandhi has already reduced the 55% gap with PM's popularity to just 15% in past few months.
Ruling parties in West Bengal and Odisha had already made their intention public to implement such a scheme on lines with the scheme running in Telangana. These are incidentally the only two big states where Congress is trying hard to save its status of principal opposition from BJP.
Chart of Day

10years of poor corporate profitability

Last week couple of domestic brokerages printed interesting reports highlighting how the ratio of corporate profit to India's GDP has fallen sharply in past decade, contrary to the trend seen in US for example.
The report published by Motilal Oswal says, "India’s corporate profit to GDP ratio dropped from 7.8% to 3% over 2008-18. For the Nifty-500 universe, the ratio has declined from 5.5% to 2.8% – a-15 year low – over the same period."
The report adds, "The corporate profit to GDP ratio doubled from 2.8% to 5.5% over 2003-08, with Nifty-500 profits growing at a substantial 31%, 2x the pace of underlying GDP growth (CAGR of 14.5%). This surge was driven by the export-, investment- and capex-oriented sectors. Over 2003-08, the global economy was growing at a faster clip, helping the export-oriented players. Capacity investment across sectors was also significant as investment cycle took off." Whereas, "Over the last decade, the corporate earnings distress in India has translated into corrosion in the Nifty-500 profit/GDP ratio from 5.5% to 2.8%."

Analyzing the relative share of various business groups in corporate profit, the report notes that while the share of foreign firms has mostly remained stagnate for past 15years, the contribution of public sector has fallen by over 75% (from 1.8% to 0.4% of GDP). The share of Indian private businesses has accordingly growth materially (from 0.8% to 2.2% of GDP).
As per a report published by Emkay Research, Corporate profits-to-GDP has declined for India despite being the fastest-growing economy, while the US has seen a rise. The analyst concludes that weak profitability for Indian companies reflects low productivity
Like in the story of "An Elephant and Six Blind Men", everyone may try to interpret this data from their own viewpoint.
For example, Motilal Oswal analysts are assuming that from a 15year low, the corporate profit share in GDP must bounce back, hence it may a once in many decade opportunity to make super normal profits for stock investors; whereas, Emkay Research analysts are circumspect. they believe that "asset turns and balance sheet deleveraging are still to reach an inflection point before the virtual cycle starts to unfold".
Being one of the Blind Men in the game, I too have some views on this, that I shall share with readers first thing tomorrow morning.