Some food for thought
"When you want to fool the world, tell the truth. "
—Otto Van Bismarck (German Leader, 1815-1898)
Word for the day
Versify (n)
To relate, describe, or treat (something) in the form of poetry.
First thought this morning
With hand on your heart, how many of you sincerely believe that
there is an immediate threat to India's security from any of its neighbor? And even
if there is a threat, is it serious enough to deserve a higher priority that
jobs, farmers, education, health, infrastructure development, women security,
socio-economic inequalities etc?
Yesterday, I conducted an instant opinion poll of 40 people randomly
selected from my contact list. The respondents included professionals, bankers,
businessmen, students, youth, women and old.
Only one 73yr old retired Engineer, responded positively to my
question. Rest all felt that Pakistan or China pose no immediate threat to
India's national security at this point in time.
I am therefore deeply perplexed by the election narrative. The
incumbent prime minister, who was elected on the development plank, is making
national security as nationalism as the primary election issue, while the
challenger who does not stand any significant chance of gaining power, is
presenting an comprehensive agenda for development and inclusion!
Notwithstanding anything else, the Congress party deserves the
credit for setting a clean agenda for elections. BJP has prima facie tried to
ridicule it and dismiss it completely, but in a few days we shall see that BJP
manifesto is deeply mostly guided by Congress's agenda. The national security
narrative is not at all resonating with people beyond Hindi heartland.
Couple of friends, who just came back from Begusarai, suggested
that Kanahiya Kumar may not win elections this time. But he will certainly
register his presence and do good enough to revive the communist movement in
Bihar, Jharkhand and West Bengal!
Chart of the day
It's hot everywhere
Summer has finally arrived in many parts of India and
temperatures are soaring. Stock markets are also red hot, with benchmark
indices ruling at all time high levels. Intense electioneering is adding to the
soaring temperatures. In this environment of rising mercury, soaring stock
prices and scalding speeches, investors' would do better not to lose the sight
of 4QFY19 earnings' trends and deteriorating macro fundamentals.
I note the following reports by various brokerages:
Consumer goods (Edelweiss Research)
"Most consumer goods companies have logged strong volume
growth for the past six quarters. For Q4FY19, we estimate their YoY
growth would slow with revenue, EBITDA and PAT likely to rise 8.7%, 9.6% and
9.2% versus 14.3%, 11.5% and 14.8% in Q3FY19, respectively. While rural
continues to outgrow urban, the pace has moderated—rural growth is now about
1.15x urban’s (down from 1.3x in Q3FY19)."
The reasons cited for slower growth forecast are the following:
(i) Protracted
winter and, hence, the delayed summer is limiting off-take of summer products;
(ii) High base;
(iii) Liquidity crisis
pinching wholesalers;
(iv) Lower
procurement despite MSP hikes; and
(v) Lmited beneficiaries
of the PM-Kisan scheme.
The brokerage is however confident that this slowdown would be
short- lived owing to an incremental uptick in payouts under direct transfer
schemes and an ‘above-normal’ summer with ~50% probability of El Nino.
IT and ITeS (JM Financial Research)
We expect a modest (1.1-2.1%) QoQ organic revenue growth
(in constant currency, CC) for the Top5 in 4QFY19; reported growth could be
marginally higher due to cross-currency gains.
Margins could come-off QoQ for most players as fulfilment
costs remain high+ a strong INR. Our pre-quarter close conversations with
managements + channel checks indicate deal activity remained healthy in 4QFY19
across players (though not as strong as 2Q-3QFY19) – and there is no visible
impact yet of the macro-economic concerns on project flows, outside of select
client-specific situations.
This could induce a positive bias to players’ commentaries on
FY20 outlook.
We follow our recent 3-4% cuts in FY20/FY21 EPS estimates for
the Top5 players with a 4-5% cut for mid-tier players; we expect the consensus
to track with similar cuts in estimates. PER valuations for most players, on
the revised estimates, are 25-30% above the last 5-year median levels. Thus,
investors’ apathy to the broader sector could continue, at least in the
near-term.
Pharmaceutical ((Edelweiss Research)
For Q4FY19, we expect pharma sales and earnings to grow
13% each. In the US, we expect 13% YoY growth in constant currency,
mainly on: i) a good set of launches; ii) stable pricing; and iii) flu season
momentum picking up later in the quarter. This was accompanied with good growth
in APIs. In domestic, sales are likely to grow about 10% during the seasonally
weak quarter as a longer winter tamped down volume growth. However, 6% QoQ INR appreciation
will be a headwind, leading to lower INR realisation and losses from inventory
write-offs
Capital goods and engineering (Phillips Capital India
Research)
New announcements down 54% yoy / 18% qoq: New
projects announced in 4QFY19, at Rs 1.9tn, declined sharply partly due to a
high base and lack of decision making in view of upcoming general elections.
However, as seen even in 3QFY19, quality of projects has improved – we could
not identify any major project that was not likely to see the light of
day. Of new announcements: Manufacturing (chemicals Rs 237bn),
power generation (Rs 590bn – mainly renewable power projects by SECI), and
roads Rs 487bn accounted for 87% of new announcements. The private sector
accounted for 37% (vs. 42% in March 2018 and 30% in December 2018).
The sharp decline in project announcements was mainly because of
the impact of upcoming General Elections in May 2019. We expect elections to
dent new announcements in 1HFY20 as well, but we are enthused by the improving
quality of projects for the past two quarters. Another key highlight for us is
the early signs of revival in large projects in the private sector. Data for
3QFY19 was revised upwards with the addition of Rs 887bn projects by Haldia
Petrochemicals, followed by projects announcements by Hindalco, Grasim, Tata
Chemicals, BASF in 2HFY19. Even as we still reserve our judgment on the revival
of the capex cycle, this is now a key monitorable along with the starting of
stalled projects.
Focus on project completion in 4QFY19: Projects
completed in the quarter increased 14% yoy / 65% qoq to Rs 550bn. Key sectors
where projects commissioning was strong were Railways, Metro rail, Power, Oil
& Gas and Fertilizers. Major projects commissioned include Chennai Metro
(Rs 190bn), New Delhi Railway station modernisation (Rs 120bn), Odisha Genco IB
Valley project (Rs 120bn), IOCL‐ Paradip Polypropylene and Ennore LNG terminal
projects (Rs 83bn) and Chambal Fertilizer Gadepan Urea plant (Rs 59bn).
In this context, it is pertinent to note what IMF Managing
Director Christine Lagarde had to say on Tuesday:
"...the global economy is “unsettled” after two years of
steady growth, with the outlook “precarious” and vulnerable to trade, Brexit
and financial market shocks."
“We had this synchronized acceleration of growth a couple of
years ago. Now it is synchronized deceleration and a slowing momentum across
the spectrum.”
“The growth is losing the momentum that we had hoped for
pretty much across the globe. We have 70 percent of the economy that is slowing
down.”
More on this later.
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