Vijay Kumar Gaba: Rakesh Jhunjhunwala

Wednesday, November 11, 2020

The State of Indian Economy

For past many years, it has become a tradition for popular market participants (brokers, fund managers, large investors, analysts etc.) to don finest attires and appear on special Diwali shows hosted by various TV channels to announce their prophecies for the traditional Indian New Year. In the spirit of the festivals of light, they enthusiastically speak about their outlook about the economy, financial markets, and investment opportunities.

In earlier years, these prophecies were taken seriously by the audience, mostly household investors. However, based on my interaction with several people from the targeted audience, I feel, now days most people listen to the experts for validating their own positioning rather than for guidance. Whether in consonance of their positioning or otherwise, these prophecies are drowned in the noise of firecrackers on Diwali night itself.

However given the mobility restrictions and popularization of digital media due to Covid-19 this year, most experts have presented their views from their homes (instead of TV studios) rather early. Therefore the audience has got 4-5 days, against the usual 2 days, to digest the expert views and react to these, even though there is no change in these views for past 15years.

Besides, the experts draped in fine silk Kurtas spreading the message of positivity and hope, another thing that has dominated the financial media in past one week is the state of automobile sector in the country.

First, the CEO & MD of Bajaj Auto Limited, rattled the markets with his rather despondent commentary about the state of economy in general and the state of automobile industry in particular. He categorically stated that the retail sales this Navratri have been disappointing this year, and even the present level of sub optimal demand is not sustainable after the accumulated demand post “unlocking” is met.

The rival Hero Honda management however calmed the ruffled feathers, presenting a buoyant picture saying that demand has remained robust during the festival season and is likely to sustain in coming months.

The management of the commercial vehicle major Ashok Leyland appeared confident that demand shall pick up steadily from hereon. Both the tractor majors, M&M and Escorts, also continue to show robust growth and margins.

One of the large non banking lenders, Mahindra & Mahindra Financial Services, recently said that the market for cars is limited by supply and not demand. They told analysts that against 39000 cars in September, they financed 50000 cars in October.

The Federation of Automobile Dealers’ Associations (FADA), in a press release issued on Monday, advised caution for OEMs and dealers. The apex body of auto dealers categorically stated that “Dealer Inventory for both 2W and PV are at its newest highs in this Financial Year. FADA requests all OEMs with a special request to 2W OEMs to assess the on-ground inventory level and curb production accordingly.” The near term outlook of FADA, as stated in the said press release, is extremely cautious. It reads as follows:

“As we enter the last leg of festivals and with Covid getting into its 3rd wave in many cities, there is a sense of cautiousness amongst customers. Due to the lockdown announced in few European Countries, procurement of spares will also be a cause of hinderance for smooth supply of vehicles in Indian markets. This will create a supply and demand mismatch thus affecting the passenger vehicle sales.

FADA once again cautions both OEMs and Dealers to keep a check on vehicle inventory as post festivals, demand may remain subdued. Since Inventory levels are at its highest during this Financial Year, it may impact Dealers financial health thus leading closures and job losses.”

In my view, the divergence of views in Auto sector, aptly reflects the state of overall economy as well. At this point in time it is extremely difficult to make a correct assessment of the state of Indian economy.

The general view that rural economy is resilient to the slow down while the urban economy continue to struggle may not be relevant for one year perspective. The fiscal challenges of the government ought to eventually reflect on the support extended to the rural sector also. But as I said, it is very complex at this point in time. Making a prophecy about the economy and market for next 12 months requires a certain degree of both audacity and apathy. Unfortunately, I have none.

Thursday, July 9, 2020

Few more random thoughts

Two years ago, my car cleaner asked for a loan of Rs75000 for building an additional room in his one room house. He said his children are grown up and need a separate room to study and sleep. I gave him money with the condition that he will return in 1yr. In February this year, I asked him to return the money. He promised that he will give within a month. Then this lockdown happened and he was barred by the RWAs to clean the cars of the residents. No one paid him for 3months. I do not know how he survived in this period, but he handed over me a cheque of Rs75000 last week. I deposited the cheque in my account, but it was returned due to "insufficient funds". When I told him, he told me to deposit the cheque again, which I did. It returned unpaid again for the same reason.

I have not confronted this guy again. I know both his children are good at studies and a separate room to study and attend online classes will be very useful for their studies. Mentally, I have gifted this money to his children. But this is not the story. The story is that my bank has charged Rs236 (Rs100 each for two cheque returns plus 18% GST) to my account for the two instances of the cheque return. Imagine the agony of a person whose debtor has defaulted and he is being charged by his bank for the fault of his defaulter!

A recent story published in outlook money magazine (see here) alleged that the banks which suffered hugely due to defaults by the Indore based Ruchi Soya Limited, were forced to lend even more to the Patanjali Ayurveda group for acquisition of the defaulter company. The minority shareholders who have seen their investments in these banks having eroded by over 50% shall suffer even more when the company defaults again. The lenders and investors in these lenders shall have same feeling as I got when I saw the debit of Rs236 in bank statement.

A few days ago, one of the legendary investor/trader of Indian stock markets repeated his staple opinion about the Indian economy and stock markets for the n^th time. Imitating the global legends like Peter Lynch and Warren Buffet, he exuded confidence that in the "long term" blips due to these market disruptions will lose their relevance and trend growth will only matter. As usual, media highlighted his views and his ardent followers added some degrees to their confident.

I have nothing to disagree with the legend. However, at the same time, I draw nothing from his views and suggestions that will compel me to change my investment strategy or process. I formulate my strategy keeping in view my resources, needs, aptitude, limitations, risk appetite, emotional strength, access to information, and analytical ability, etc. I have always refused to read bestselling books on investments written by the legends like Benjamin Graham, Philip Fisher, Peter Lynch, Robert Kiyosaki, Warran Buffet, Charlie Munger et. al. I believe that their experiences and thoughts evolved in a different socio-economic environment and they worked in a different regulatory and legal framework. My environment, opportunities, and abilities match to none of theirs.

Besides, the current environment is very different than in which they operated. No wonder Warren Buffet led Berkshire Hathways has been one of worst performing funds in US in past one decade. I do not know about the performance of our own legend, but as per publically available information, his portfolio has also performed too well in past one decade. One decade is a reasonable "long term" in common parlance.

The Benjamin Graham would not have anticipated that investors holding US$17trn worth of bonds will be willing to pay for holding those bonds for 7-30years (negative yield); buyers of crude oil will have to Pay US$37/bbl for not taking delivery due to shortage of storage; analysts will peg "reasonable valuation" to the "average valuations" of past 3-5yr rather than DCF because the traditional valuation method cannot operate with negative or zero interest rate and zero residual value of assets; and the person (or bank) suffering from debt default will be asked to suffer more by paying charges!