3QFY19 - Mixed bag

Some food for thought

"We all need money, but there are degrees of desperation."

—Anthony Burgess (English Novelist, 1917-1993)

Word for the day

Cozen (v)

To cheat, deceive, or trick.

First thought this morning

The whole country celebrated the IAF strikes on JeM targets. People danced; distributed sweets; congratulated each other; saluted IAF; and commended political leadership. A large number of retired army and air force officers appeared on television and explained the strategic and diplomatic importance of these strikes. The inboxes and timelines were inundated with jingoistic jubilations.

I think we should conclude the celebrations fast and begin to prepare for what may befall on us in next few years.

These strikes have changed the post 1971 Shimla agreement paradigm of Indo-Pak engagement. It has erased all the pretense of normalcy and cordiality in relationships. There might be only a negligible threat of full blows war between the two nuclear powers. However, we shall certainly witness a material rise in (a) engagement at borders; and (b) activities of mercenaries backed by Pakistan Army.

Notwithstanding the farcical security check at shopping mall and hotel entrances, the preparedness of civil defense, police force and citizens in preventing and handling terror activities is abysmal. The private security personnel are mostly farmers and construction labor in uniform. Most of the guards who open car bonnets and trucks at malls and hotels have actually not seen a weapon or bomb.

Soon we shall start a long season of election campaigns. Given the current state of security apparatus, this would be an easy time for mercenaries to carry out their nefarious designs.

I feel, the administration and forces should immediately draw a plan to create awareness amongst people, train the civil defense personnel, and mark all the easy targets. The most peaceful and unsuspecting areas should be secured first, in my view.

Chart of the day

 

3QFY19 - Mixed bag

The result season for 3QFY19 has almost ended. The corporate performance has been mixed for the quarter under consideration. However, earnings have been downgraded across sectors and categories of companies for 4QFY19 well as FY20.

Based on reports of various brokerages, the key highlights of the latest earnings season, could be listed as follows:

Nifty Earnings (Edelweiss Research)

●     Nifty top-line grew by 23% Y-o-Y in Q3 while bottom-line grew by 5% Y-o-Y.

●     Financials were the major drivers of earnings growth led by banks. However, NBFCs continued to see weakness in growth.

●     Oil Marketing Companies (OMCs) were the main draggers of headline profitability on the back of lower refining margins and inventory losses.

●     Earnings were impacted by high raw materials prices, INR depreciation, muted demand sentiment and tight liquidity.

●     Going ahead, impact of low commodity prices including crude oil along with stabilisation of rupee may support growth.

●     Nifty FY19 diluted EPS from continued operations is expected to be 503

Consensus earning continues to be downgraded (IIFL Research)

Earnings downgrades have persisted through the 3Q reporting season, as FY19 EPS for the Nifty Index has been downgraded by 5.7%. While consensus estimates imply a modest single-digit EPS growth for FY19, FY20 growth is estimated to be more than 20%.

This is an extremely optimistic assumption and earning downgrades are, therefore, likely to continue through FY20 too.

Aggregate BSE200 profit growth is estimated to grow ~27% YoY in FY20, while aggregate BSE200 profits, excluding PSU banks and metal companies, is expected to grow ~21% YoY. We believe these estimates are extremely optimistic, given that the nominal GDP is expected to grow 11-12% YoY in FY20. While earnings growth should improve in FY20, with lower PSU bank losses and improvement in demand, earnings downgrade would continue in FY20 as well.

 

FMCG, IT and Infra reported strongest numbers, peak NPAs behind (Various Brokerages)

While two infra companies’ PAT grew 32% yoy, on account of strong operational performance (L&T on strong order inflows and execution and Adani Ports on strong cargo volume and profile), PAT of FMCG and IT companies grew 15-17% yoy, with a stable earnings profile.

FMCG particularly has seen higher support from rural markets (compared to urban) as they reap benefit of overall stronger crop output in last 2 years while urban markets deal with a high base owing to 7th CPC pay-outs that is finally fully implemented.

With a) overall system Gross NPAs coming down by 70bp sequentially in Sep 2018 and b) an uptick in corporate credit uptick (details here), we see corporate banks benefitting. Consequently, in current earning season, we have observed NPL recovery, stronger earnings outlook, expectations of improvement of ROE, ROCE across three Nifty banks with strong corporate loan book (ICICI, SBI and Axis Bank).

 

 

Where India stanmds in Sino-US trade war

Some food for thought

"He said it was artificial respiration, but now I find I am to have his child."

—Anthony Burgess (English Novelist, 1917-1993)

Word for the day

Evenfall (n)

Twilight; dusk; the beginning of evening

 

First thought this morning

Indian Air Force avenged the Pulwama attack adequately. Penetrating deep into the Pakistan territory (not just PoK), our fighter planes destroyed JeM camps. The performance was meticulous, worthy of a force which is comparable to the best in world. All citizens must be feel proud and safe.

The early reactions to the strikes from various sections are noteworthy, as these reactions indicate to some important trends.

(a)   Pakistan Army admitted the transgression, but denied any damage. They claimed that transgressing Indian Air Force planes were forced to shed "payload" in vacant land and run back. The adventurous attempt therefore has been successfully repelled.

This official reaction came much before any claim was made by any Indian official.

Obviously, Pakistan establishment is worried about its credibility and also preparedness of war, both economically and strategically. They are hence eager to preempt any adverse public opinion that might force them to retaliate without any preparedness.

Secondly, regardless of all the rhetoric, Pakistan is certainly not willing to escalate the matter further. Most voices in Pakistan media called for peace and dialogues.

(b)   Almost every opposition leaders in India commended IAF for the successful operation, much before any official statement was made.

It appears that almost all of them were suffering from the guilt of challenging the authenticity of surgical strikes of September 2016. They used this opportunity to remove the label of "anti national" pasted on them by BJP and allied organization. To this extent, it is clear that BJP has been largely successful in setting the narrative and agenda.

(c)    By making this overt operation, the Indian establishment has also made sure that the situation does not get escalated any further. The government has effectively calmed all the feathers that got ruffled post Pulawama attacks.

Chart of the day

 

Where India stanmds in Sino-US trade war

For past many months, the trade related disputes between two of the largest global economic powers have kept markets busy.

USA has announces several measures to reduce its trade deficit with China, including imposition of import duties on imports from China. The impact of the measures is visible in slowing Chinese growth and declining global trade. The exports of US to China have also suffered. The collateral is that the trade surplus of EU, Japan and Australia etc with China has further increased.

The financial markets have reacted wildly to each sign of truce and antagonism between the two super powers. Currently markets are running up, rather hard, fueled by the signs of thaw.

Notwithstanding the market volatility, as a small Indian investor, who is entirely focused on domestic assets, I find the following issues pertinent for examination.

(1)   Would India benefit from escalation of trade war between US & China, or complete normalization of trade relation between US and China; or continuation of current state of indecision and tentativeness?

(2)   If not resolved soon, would the trade conflict between China and US, remained confined to trade or escalate further into a geo-political crisis?

(3)   If the trade war escalates, and both the parties harden their positions, will we have a cold war kind of situation again, polarizing the world again?

All our neighbors (Pakistan, Nepal, Bangladesh, Sri Lanka, Maldives, Mauritius, Myanmar) have shown their inclination to side with China. Under these circumstances, what would be in the best interest of India? Should India side with US, because of lot of legacy issues siding with China may not be an option, or stay non-aligned?

(4)   In next few months, Europe might also see a new equation emerging. Notwithstanding, UK dithering on Brexit, a realignment of forces in Europe looks more likely. Under these circumstances, could we see support for China in Europe, especially from beleaguered economies like Italy and Greece?

(5)   Would a full US China deal reinvigorate the struggling global growth, and bring back inflation and higher rates?

Given that I am no expert on global financial markets, international relations, global economics and most other subjects, I would be contended to rely upon the views of the "experts".

Intuitively, I feel the US China dispute is not about trade, which is only incidental. The real issue is whether China will be allowed an entry in elite global club or not.

Therefore, regardless of the outcome of Summit on Friday, the condition may not normalize, until US begins to consult China before invading a country like Iraq, the way it does consult with UK and France. At best the deal on Friday would be temporary relief till a new flash point gets triggered.

I would be examining these issues in some detail over next few months to assess the impact on my investment strategy.

In the meantime, I shall be delighted to receive comments, views and opinions of readers on these issues.

Do we mind a war?

Some food for thought

"Who are you to condemn another's sin? He who condemns sin becomes part of it, espouses it."

—Georges Bernanos (French Author, 1888-1948)

Word for the day

Tabula rasa (n)

A mind not yet affected by experiences, impressions, etc.

 

First thought this morning

Till a few years back, "Kameti" (A kitty of businessmen) used to be one of the most popular source of financing for traders, cottage and micro industry in unorganized sector in many parts of the country. This very friendly source of funding was widely used for working capital, capacity building & expansion, and even meeting expenses of family events like marriage etc. In past few years, especially after demonetization, this source of funding has almost dried up.

The modus operandi of "Kameti" is very simple. 25-50 businessmen working in a micro markets would come together and commit a fixed monthly amount (say Rs50,000 and 40 people) to be a put in a pool. Every month there would be a meeting of all the participants. The participant(s) who need money for their business or personal purpose, would bid for the pooled money of Rs20lacs (Rs50000*40). The participant bidding the highest discount would take the entire pool less discount. The amount of discount is distributed equally amongst all the participants as "interest income". All the transactions are usually in "cash", and all the participants would generally know each other well.

The amount of discount (or interest) dynamically varied as per business cycle, and was determined in very transparent manner. In case there is no bidder in a month, the winner will be chosen by lot of draw and a pre agreed nominal discount would be applied (usually 1-2%).

In rare cases of a successful bidder failing in making successive monthly contributions, the rest of the participants would bear the loss in equal proportion. There were no willful defaults.

Like most other indigenous systems and traditions, I found this system also very effective and useful. From anecdotal evidence, I find this system to be the best example of Self Help Group - totally self regulated, based on mutual trust & empathy, transparent, flexible and dynamic. It involved no need for regulatory oversight and entailed no systemic risk.

First demonetization and now the new law on unregulated deposits, has virtually destroyed this very useful source of financing for small businessmen.

The only regulatory drawback of this system was that the "interest income" earned by the participants remained outside the tax net. But a pragmatic review of the system would have allowed tax exemption for the interest income from Kameti participation, as an incentive to MSME, provided such Kameti was approved by the local trade or market association. This interest is nothing but the compensation for the risk. If equity investors can get tax concessions for investing in "risky assets", why not these.

To those who believe that all cash is "black", I have all my sympathies with them. Nonetheless, businessmen could be motivated to gradually operate Kameti via an escrow account. All participants could contribute to this escrow account through digital transfers and the pooled money could be transferred to successful bidder's account, so on and so forth.

I am not naive enough to assume that this "escrow" account method would be equally useful and immediately acceptable to businessmen who still like to deal in cash. But the lure of tax exempted interest income will surely draw many people to this mode over a period of time, lessening the work load and risk for formal lenders, and lowering cost and inconvenience for small businessmen.

 

Do we mind a war?

Indian financial markets have totally ignored the war shenanigans and not reacted at all to—

(a)   Massive troop movement: Reportedly over 10,000 additional troops are being moved to J&K).

(b)   Pakistan preparing for war: Pakistan has reportedly declared war preparedness, vacating border villages, cancelling leave of forces etc. There are some unconfirmed reports of artillery mobilization also.

(c)    US President has cautioned the world that a "Big" action is imminent in the current Indo-Pak dispute.

(d)   Many friendly nations have extended explicit support in case a war does erupt. Israel in particular has been quite vocal.

(e)    Prime Minister is threatening an adequate response to Pulwama attacks, at least thrice a day.

(f)    Trade blockage has already started with withdrawal of MFN status, imposition of 200% duty; and "voluntary" refusal of merchants to export goods to Pakistan; boycotting of all Pakistani artists and sportspersons, etc.

This is not at all surprising. Similar escalations were seen in the aftermath of Kargil War (May-July 1999), attacks on the Parliament (December 2001) and Mumbai attacks (November 2008) and attack on Army base in URI (September 2016). On each of these periods of escalations, the market did not make any panic or unusual move.

What does this imply?

Does the collective wisdom of market not believe in any probability of even a limited war between two neighbors? If that be the case, what this all brouhaha is that we are witnessing in media, both mainstream and social?

Is it safe to assume that we do not mind a war insofar it has no significant economic cost?

Is it also safe to assume, even a small engagement at border may surprise markets hugely?