Sir, please guide me, what should I do?

Thought for the day

"Indians today are governed by two different ideologies. Their political ideal set in the preamble of the Constitution affirms a life of liberty, equality and fraternity. Their social ideal embodied in their religion denies them."

—B. R. Ambedkar (Indian, 1891-1956)

Word for the day

Ostensible (adj)

Outwardly appearing as such; professed; pretended, e.g., an ostensible cheerfulness concealing sadness.

Malice towards none

When would Dr. Manmohan Singh retire from public life?

From economic viewpoint - his incremental contribution is negligible!

From aspirational viewpoint  - he has no more heights to scale!

From social viewpoint - he is a misfit in young India.

 First random thought this morning

This could be one of the most unfortunate things to occur to a society when the TRP potential of an issue decides social, political and religious priorities.

As highlighted earlier also, the life insurance advertisements in India are blatant in depicting Indian women as totally dependent on their spouse and fathers. This does not outrages and feminist, whereas a dress code or restriction on mobile use in campus prescribed by an educational institution does.

Similarly, CEAT advertisement on TV implying that common Indians are non-compliant and have no road sense has not seen blood of anyone boiling. Millions raised hue and cry when Ms. Kiran Rao pointed out that non-compliance is rising in India, and she fears it.

Sir, please guide me, what should I do?

Shri R. K. Damani is certainly one of the most revered names amongst the financial investing community in India. Thousands of investors like me have grown up following his footsteps.

Long known as known as true value investor, in past few years he has established himself as a successful businessman through his retail venture popularly called D-Mart.

The company owning D-Mart retail business recently made an IPO priced at Rs299/share. The share price has raced to ~Rs800 in less than 3weeks of listing of IPO. Every day there is virtually a stampede in the market to buy stocks of this company.

As per consensus earning estimate, the stock is trading at ~40x FY20 earnings. The company has indubitably performed much better than all its peers. It has been profitable, mostly due to cost and procurement efficiencies. It mostly owns the premises where its stores are run, thus saving on rental cost.

In past Infosys has used this model of owning most of its business premises. But Infosys has the advantage of getting land at highly subsidized rate and tax rebates. Moreover, the company has the entire world as its business area.

PVR, the leading film exhibition company in the country, also started with this model, but changed the course midway. The growth post change in business model to leased premises has been phenomenal.

D-Mart, is in a business that needs to be located within or close to residential areas. Finding such places is difficult and expensive proposition. This business  has low entry barrier, is intensely competitive and facing serious challenges from large online retailers. There is little proprietary technology involved. The procurement and marketing innovations cannot be patented and would be emulated by many.

Though certainly not impossible, it is tough to foresee it growing from present 118stores to 1000 stores in next 10yrs, while maintaining same profitability and business model.

What I am pondering, before jumping onto the bandwagon is—

(a)   If the stock could have been sold at Rs1000 in April, as most market participants are telling me today, why did a seasoned investor like Shri R. K. Damani sold it for Rs299 in March?

(b)   If this company was not owned by Damani ji, would he be buying this stock today as a value investor?

(c)    If as one of his disciples, I take this idea of buying a grocery store at ~40X FY20 earnings to him, what would be his reaction?

(d)   The people who are buying at Rs800, what is their return expectation?

Till the time I get answers to my inquisitions, I am just holding my horses back and resisting the lure to own pure gold.

The army of Damani Ji's fans may please forgive me for the blasphemy I might be guilty of committing here.

MPC declares demon of DeMo dead and burried

Thought for the day

"One cannot conceive anything so strange and so implausible that it has not already been said by one philosopher or another."

—Rene Descartes (French, 1596-1650)

Word for the day

Fanfaronade (n)

Bragging; Bravado; Bluster.

Malice towards none

Yogi ji gives 15days to his officers, to chalk out a comprehensive strategy for improving business climate in the state of UP!

Bullock cart gets a Ferrari engine.

First random thought this morning

Syria is a true reflection of the acute leadership crisis prevailing in the world. The traditional global powers, i.e., US, UK, Germany, France, and Russia continue to be bogged down by their domestic issues. Japan refuses to get over its WWII guilt. China is making little effort to gain acceptance as global leader.

India is too fragile to lead an act in a foreign land. The Nehruvian legacy of Panchsheel and Non-alignment also prevents us from asserting in cases of human rights violations in other parts of the world.

The question is whether we are drifting towards a disintegrated world, where regional issues dominate the geo-political agenda, leading to emergence of multiple conflict zones, much like 16-17th century Europe.

MPC declares demon of DeMo dead and burried

The monetary policy committee of RBI seems unanimously positive on economy. The committee sees the risk to global growth receding rather precipitately.

The committee noted that "indicators of global growth suggest signs of stronger activity in most advanced economies (AEs) and easing of recessionary conditions in commodity exporting large emerging market economies (EMEs). In the US, high frequency data indicate that the labour market, industrial production and retail sales are catalysing a recovery in Q1 of 2017 from a relatively subdued performance in the preceding quarter. Nonetheless, risks to higher growth have arisen from non-realisation or underachievement of macroeconomic policies. In the Euro area, the manufacturing purchasing managers’ index (PMI) rose to a six-year high in March amidst improving consumer confidence and steadily strengthening employment conditions. In the Japanese economy, nascent signs of revival are evident in the form of falling unemployment, improving business sentiment on fixed investment, and rising exports helped by the depreciation of the yen; however, deflation risks linger."

The committee also noted that "For EMEs, the outlook is gradually improving, with indications that the slowdown characterising 2016 could be bottoming out. In China, supportive macroeconomic policies, surging credit growth and a booming property market have held up the momentum of growth albeit amidst concerns about financial stability and capital outflows. In Brazil, hardening commodity prices are providing tailwinds to reforms undertaken by the authorities to pull the economy out of recession, although financial fragilities remain a risk. Russia is benefiting from the firming up of crude prices and it is widely expected that growth will return to positive territory in 2017."

The committee highlighted that inflation is edging up in advanced economies on the back of slowly diminishing slack, tighter labour markets and rising commodity prices.

With few exceptions like Turkey and South Africa, the inflationary pressures have eased in emerging markets. Consequently, "Global trade volumes are finally showing signs of improvement amidst shifts in terms of trade, with exports rising strongly in several EMEs as well as in some AEs whose currencies have depreciated."

On the domestic front, the key noting of the committee are as follows:

(a)   In FY17, agriculture expanded robustly year-on-year after two consecutive years of sub-one per cent growth. However, in the industrial sector, there was a significant loss of momentum across all categories, barring electricity generation. The services sector also slowed, pulled down by trade, hotels, transport and communication as well as financial, real estate and professional services. Nonetheless there are several indicators that point towards modest improvement in the macroeconomic outlook.

(b)   The 77th round of the Reserve Bank’s industrial outlook survey indicates that overall business sentiment is expected to improve in Q1 of 2017-18 on the back of a sharp pick up in both domestic and external demand.

       Coincident indicators such as exports and non-oil non-gold imports are indicative of a brighter outlook for industry, although the sizable under-utilisation of capacity in several industries could operate as a drag on investment.

       Activity in the services sector also appears to be improving as the constraining effects of demonetisation wear off.

(c)    The 77th round of the Reserve Bank’s industrial outlook survey indicates that pricing power is returning to corporates as profit margins get squeezed by input costs.

(d)   Balance of payments data for Q3 indicate that the current account deficit for the first three quarters of the financial year narrowed to 0.7 per cent of GDP, half of its level a year ago. For the year as a whole, the current account 5 deficit is likely to remain muted at less than 1 per cent of GDP.

(e)    Foreign direct investment (FDI) has dominated net capital inflows during April-December, with manufacturing, communication and financial services being the preferred sectors.

(f)    Headline CPI inflation is set to undershoot the target of 5.0 per cent for Q4 of 2016-17 in view of the sub-4 per cent readings for January and February. For 2017-18, inflation is projected to average 4.5 per cent in the first half of the year and 5 per cent in the second half. The upside risks to inflation forecast stems from the uncertainty surrounding the outcome of the south west monsoon in view of the rising probability of an El Niño event around July-August, and its implications for food inflation.

(g)    GVA growth is projected to strengthen to 7.4 per cent in 2017-18 from 6.7 per cent in 2016-17, with risks evenly balanced.

(h)   Significant improvement in transmission of past policy rate reductions into banks’ lending rates post demonetisation should help encourage both consumption and investment demand of healthy corporations.

The committee stressed that along with rebalancing liquidity conditions, it will be the Reserve Bank’s endeavour to put the resolution of banks’ stressed assets on a firm footing and create congenial conditions for bank credit to revive and flow to productive sectors of the economy.

The committee noted that the transmission of policy rate cuts done in past has accelerated in recent months. However, the committee felt that further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates.

In consistency with the neutral stance of monetary policy, the committee unanimously decided to keep repo rate unchanged at 6.25%, and narrow the liquidity adjustment facility window by raising reverse repo rate by 25bps to 6%.

The next meeting of the MPC is scheduled on June 5 and 6, 2017.

Seek new horizons

See the part in whole, and whole in parts

Thought for the day

"I am accustomed to sleep and in my dreams to imagine the same things that lunatics imagine when awake."

—Rene Descartes (French, 1596-1650)

Word for the day

Platitude (n)

A flat, dull, or trite remark, especially one uttered as if it were fresh or profound.

Malice towards none

Does the social status accorded to any of the following people need to be reviewed?

(a) N. R. Narayan Murthy

(b) Anna Hazare

(c) Akhilesh Yadav

(d) Sonia Gandhi

First random thought this morning

In past couple of decades we have seen a material rise in contemptuous remarks against various deities, revered religious scriptures, practices and institutions. Some of these may be coming from the rise in awareness about the malpractices prevalent in the religious practices and institutions. But certainly easy access to religion does also have a role to play in breeding of this contempt.

Expecting someone, who knows Krishna only from TV serials, to have same devotion as someone who has been breathing Krishna consciousness for years would be too much to ask.

If someone walks 300kms from Rishikesh to Kedarnath and Badrinath through dense forest and arduous hilly terrain, reverence occurs naturally to him. Air dropping at temple might not have that impact.

See the part in whole, and whole in parts

Continuing from where I left it last month, I would like to point out that many of the recent measures taken by the government have been analyzed as socio-political steps that could potentially have serious negative implications for the Indian economy.

It feels terribly sorry to discover that many of the armchair economists and financial experts are so disconnected from the ground realties. These experts have been analyzing events and policy decisions piecemeal on standalone basis, whereas most of these steps are natural, logical and essential extensions of a series of positive developments in past two decades.

Demonetization was one such case in point. A number of reputable experts took no time and minced no words in terming it a monumental disaster. My assessment after travelling to hinterland was diametrically opposite. In hindsight I feel fortunate to have relied on what I saw rather than what I heard and read.

The shakeup in the animal product industry is yet another case in point. A number of experts are codenaming the move as purely political (some are even terming it religious bigotry). the general view seems to be that it will lead to massive job losses. Some experts have estimated the economic loss in trillions of rupees.

In my view, this is clearly a case of political and personal prejudices overriding the professional judgment.

I sincerely believe that the move could have just created a multibillion dollar business opportunity that may significantly uplift living standards of people engaged in one of the most derided profession.

As per the government records "India has the world’s largest population of livestock and is world’s 5th largest producer of meat."

"India's livestock sector has continuously provided structural support to the rural economy as an important vocation for rural population, next only to crop raising. On account of favourable socio economic factors such as changing eating habits, higher purchasing power, urbanization, increasing health consciousness towards protein rich diet, there has been increase in demand for meat and the sector has gained importance in terms of contribution to income, employment and forex earnings."

But unfortunately, the sector has remained mostly unorganized and has miserably failed to realize its full potential. In FY14, export of meat contributed less than 1.5% to India's total exports. The conditions in which meat trade is done are seriously sub-human. The social status of butchers and meat sellers is amongst the lowest in society.

If this business gets organized like other food processing businesses like dairy, ready to eat packaged food, etc., with the help of better capital, technology and market access, this could metamorphose the lives of millions of families engaged in the business. To understand what I am trying to say - just close your eyes and imagine your neighborhood meat shop as a fully air-conditioned kiosk with a large refrigerator, selling animal produce in nicely sealed packets with no foul odor bothering vegetarians like me....to continue

Adjusting to new normal

सभी पाठकों को नव विक्रम संवत्सर एवं चैत्र नवरात्र उत्सव की बहुत शुभकामनाएं.

The next post of Morning Trekk will be published on 3 April 2017.

 

Thought for the day

"All the ills from which America suffers can be traced to the teaching of evolution."

—William Jennings (American, 1860-1925)

Word for the day

Comportment (n)

Personal bearing or conduct; demeanor; behavior.

Malice towards none

Now that SC has effectively admitted that Ayodhya land dispute may not be decided through legal route, what are the options left?

First random thought this morning

Once a group of people comprising statesman, entrepreneurs, economists, bureaucrats, business managers, and financial analysts were asked a question – “What would you do if you get a INR100bn lottery? The replies were as follows:

Economist: “The proposition is purely hypothetical. I cannot answer this.”

Bureaucrat: “Will take early retirement, buy a bungalow on a hill station and enjoy”.

Business Manager: “Will put 75% in fixed deposit and start a business with the rest.”

Financial analyst: “Buy a good house, make a world tour, put 75% of money in fixed deposit and take a high risk bet with the balance.”

Entrepreneur: “Will leverage the money 3x and begin a new business venture.”

Statesman:  “Will investment money in projects that makes 1mn people capable of earning INR100k every year.”

You decide who from this group is fit to govern the country like India.

Adjusting to new normal

It is almost five years since the markets started discussing about the "New Normal" in global economics. The jargon essentially means that we should get used to a lower level of economic growth for a longer period of time.

The recent data, policy statements and policy actions suggests that the thought has begun to gain wider official acceptance.

Most global agencies like World Bank, IMF, ADB, OECD etc. have lowered the levels of global growth, which they would consider good or satisfactory. Even China sounds happy with 6.5% growth projection.

Central bankers like US Federal Reserve have already started to reverse the loose monetary policy, accepting that 3% GDP growth and 2% inflation would good targets to achieve. The others like BoE, BoJ, ECB, RBI, RBA etc. are also talking about the same.

In my view, as we adjust to a lower pedestal, new horizons would emerge. We are already witnessing the adjustment phase of the economic cycle shifting to a lower orbit. For example consider the following:

Corporate: Companies are selling core assets, acquired in past few years with great hopes; airlines are competing with railways; hotels are competing with home stay; automobile manufactures, realtors are offering humongous discounts to get rid of inventory; IT companies are delaying calling the new hires; instead of jumping over each other to capture airwaves, telecom operators are merging operations to spare existing airwaves; road projects that were awarded with exuberant premiums are getting cancelled; sports and entertainment events are finding it difficult to get sponsors; managements are working overtime in cutting corners to save margins, as topline are no longer priorities; many fancy startups have stated to wind up to cut losses.

Consumers: Consumers are not crowding the red sales; household budgets have reconciled to higher energy prices, rail fares, vegetable prices, service tax on every rupee spent and lower return on savings; savings are settling at lower level, and credit outstanding is rising.

Government: The government has become austere; has taken many unpopular decisions even during crucial elections

Financial institutions: Usually, the financial institutions, especially those in public sector, bear a substantial part of the cost of adjustment. We have seen in past 3years that the “restructured” assets of PSU banks have risen significantly. The credit growth is lagging even the GDP growth. The banks appear to have adjusted to the reality of “restructuring” and hence are conserving capital (by lending less and selectively).

New horizons

Historically, the adjustment phase has always resulted in durable cost efficiencies, higher productivity, smarter consumption patterns, stricter lending norms, better compliance levels and reformed policy framework.

Material (esp. cement and metal) companies, large banks, consumer (both durable and staple) companies and IT companies have come out much leaner and stronger out of this phase.....shall discuss it in more detail later

Where INR is headed

Thought for the day

"Burn down your cities and leave our farms, and your cities will spring up again as if by magic; but destroy our farms and the grass will grow in the streets of every city in the country."

—William Jennings (American, 1860-1925)

Word for the day

Anthophilous (adj)

Attracted by or living among flowers.

Malice towards none

Why a sudden rush in media to highlight the secular credential of the Yogi?

First random thought this morning

The common market area of Europe (European Union) is looking distinctly similar to the Congress Party of India.

The people outside it are not very sure if it will survive. The people currently inside are divided. Some, primarily who have lost their niche and suffer from a relatively stronger Euro, want to leave. Some, primarily who have gained from market access and relatively weaker Euro, hope that it is a sustainable arrangement, and therefore want it to stay.

Few appear confident about its relevance or otherwise in the current context.

Where INR is headed

A lot of people have expressed their surprise as well as concerns over sharp appreciation in INR value versus its global peers, especially USD, in past few months. Many have sought my views on the likely path for INR in near future.

I want to make it clear that I am no expert in the matters of macroeconomics, foreign trade or currency trades. While I do assign a small weight to the currency impact in my investment decisions; the consideration is mostly limited to avoiding companies that are unduly impacted by currency volatility.

I also strongly believe that Portfolio investment of few billion dollars may not have any lasting impact on the exchange rate of INR. However, sustained FDI inflows do support the case for some currency appreciation.

In my view, like any other tradable commodity, the exchange values of a currency vis-à-vis other currencies depends on the relative demand and supply of these currencies at any given point in time.

In simple terms, the recent sharp appreciation of INR vs. USD in recent months indicates that the demand for INR vs. USD has sharply outpaced the supply. There could be several reasons for this higher INR demand versus USD. For simplicity, I classify these reasons in three categories (a) structural, (b) cyclical and (c) speculative. Some examples are as follows:

Structural reasons

(a)   There have been some significant changes in the composition of foreign trade of India in past one decade or so leading to structurally higher demand for USD.

The structure of our imports has changed in favor of consumer goods as the domestic supply has failed to meet the burgeoning consumption demand. A large part of this demand has in fact been generated through massive government social sector spending and managed Chinese currency. The imports and therefore demand for USD is mostly inelastic to economic growth.

On the other hand the composition of exports has changed in favor of engineering goods, from dominantly consumer goods (tea, tobacco, leather, spices, textile, jewelry etc.). This has increased the correlation of exports to global growth, which is likely to remain below par in at least for next few years.

(b)   The change in political regime in 2014 has restored the confidence of global community in Indian political establishment and therefore markets & economy. This confidence was seriously impacted by a spate of scams, scandals and policy flip flops in the preceding 5-7yrs. This has certainly led to reduction in risk premium for INR denominated assets. Besides this has also prompted higher inbound FDI. There is nothing to suggest that this trend will reverse in near future.

(c)    The efforts to improve infrastructure and remove procedural constraints are likely to help improving India’s export competitiveness and result in higher exports growth.

The structural reasons are therefore mostly in balance at this point in time.

Cyclical reason

(d)   The success of RBI's measures in reigning the runaway inflation, strict fiscal discipline and improvements in trade balance have helped lowering rates in the economy to a limited extent.

As of now, both the inflation and fiscal deficit seems to have bottomed out and accordingly RBI has changed its policy stance to Neutral from the earlier Accommodative. The interest rates are therefore not seen changing materially from the current level in very near term.

This stability has made INR assets attractive to foreign investors.

(e)    The protectionist measure taken by the government in past one year to curb imports and promote exports through various tariff and non-tariff measures have also helped the trade balance to some extent. For example, from a large steel importer, India may have turned into a net steel exporter in past one year.

(f)    The outlook of EUR is clouded by the political calendar of Europe, especially schedule for Brexit, French and German elections. This is also seen helping Indian currency that is being perceived as safe haven by many under the current circumstances.

Speculative reason

(g)    The Fed Chairman’s recent remark about the gradual trajectory of rate hikes, against the widely speculated steep hikes, has led to recovery in US bond yields and weaker outlook for USD. This has made emerging market local currency assets attractive on relative basis.

(h)   The move to abolish 86% of Indian currency in circulation is speculated to have resulted in material reduction in informal market for USD, known as hawala trade in common parlance. This is speculated to have resulted in significantly lower demand for physical dollars in Indian market, resulting in stronger INR.

On balance, I feel the current strength in INR is mostly cyclical and to some extent speculative. It may not last beyond few months, in my view. Presently, I am working with 67/USD as average exchange rate for my FY18 earnings.

If they fail, well...they fail

Thought for the day

"Couples are wholes and not wholes, what agrees disagrees, the concordant is discordant. From all things one and from one all things."

—– Heraclitus (Greek, 544-483BC)

Word for the day

Portmanteau (n)

A word made by putting together parts of other words, as motel, made from motor and hotel, brunch, from breakfast and lunch, or guesstimate, from guess and estimate.

Malice towards none

The blame of loss lies on whose shoulders?--------

(a) If BJP losses

(b) If SP-Cong alliance losses.

(c) If BSP's vote shares falls below 18%.

First random thought this morning

What is the role of media of in the business of elections.

Is it an influencer, trying to mold public opinion in favor of or against a particular party or candidate?

Is it a reporter, just reporting the events occurring on the ground?

Is it a mediator trying to bring parties together or creating rift in them?

Is it an agent that brings political parties closer to people and their issues?

Then the question remains - what should ideally be media's role in the business of election, if at all there should be one?

If they fail, well...they fail

A very senior government official, who retired recently, argued that it is time to invest in public sector stocks. His argument was rather simple - the level of corruption is diminishing fast, level of professionalism is improving and transparency is much better now to provide comfort to investors.

He strongly felt that these changes are remarkable, sustainable and should lead to much better growth in these mostly large companies, with huge asset base.

I am somehow not convinced. I continue to believe that owning a miniscule stake in the businesses in which majority stake is owned by the president of India does not make much business sense.

My argument is simple. Like any other corporate house, the businesses of PSUs could be divided into two categories - (a) core businesses and (b) non-core businesses.

The core business of government of a democratic welfare state could only be the socio-economic welfare of the people. Making profit is usually incidental and mostly undesirable in these businesses. Running these businesses in an professional, efficient, and transparent way should ideally not add to the profitability of these businesses.

The non-core businesses of a democratic welfare state is an anomaly. The government has no business in doing such businesses. Why would an investors, who obviously invests for making money, should be investing in non-core business of a confused entrepreneur.

With 5% teledensity, Department of Telecommunication was a social venture. With close to 100% teledensity, BSNL, MTNL are non-core businesses for the Government. They should be looking for a closure to this business, with satisfaction that its objectives have been fully achieved. Trying to perpetuate this business and compete with private enterprises is not a good idea for the government.

Same is true with banking, civil aviation, power, capital equipment, and roads etc.

The Rail Minister wants us to buy minority stake in a company that runs business of railway ticket booking and catering food to rail passengers. He should answer, why government should at all be doing this business.

No matter how much transparent, non-corrupt and professional the manager of a PSU be, the fact is, and it would remain, that the majority owner does not care a dime for the minority shareholders. The regulator has so far not shown any teeth, insofar as the protection of minority shareholders' interest in PSUs is concerned.

For example, PSU banks have been burdened with the cost of servicing the Jan Dhan accounts. Could you raise a voice against it in the AGM. The most inefficient employees of PSUs are automatically entitled to the benefits of 7th pay commission award.

In my view, for investment the PSUs should be evaluated like any other private enterprises. If they fail corporate governance criteria, well they fail.

While I do not hold any brief for the momentum traders, to investors, PSUs have rarely made money.

And for those who are excited about the superlative performance of PSUs in the current market context, the following data point could be useful.

The current bull market started from last week of August 2013, with the government taking definitive steps to correct the problems of twin deficits and inflation.

In the last 42months period, Nifty has gained 47% and PSUs have gained around 22% (PSU Nifty, data available from march 2014). The worst underperformer IT sector has also registered similar gains. Metals and infrastructure have done only marginally better.

The current bull market had been about inflation and interest rates.

Auto and banks have clearly led the rally, and appear tired.