Do it yourself

We have highlighted in some of our earlier writings (E.g., see I and II ) that to achieve higher growth during  2004-2010 India has let structure of its real economy severely tempered, though still not irretrievably. The rush to accumulate cheap credit and unreasonably benefit from often ill conceived policy relaxations, has lead to excessive debt both at government as well as corporate level and dissipation of resources. This has brought a lot of unmanageable demand forward in time. The consequences are gross and extravagant misallocation of capital and unmanageable changes in consumption patterns. The following chart shows cyclically adjusted growth (5yr CAGR) since first plan period. After growing 2-4% during 1951-1975, a steady progress was made to 4-6% orbit in next 30years. However, a sudden spurt in growth during FY05 to FY11 has led to serious distortion in macro framework of the country, suggesting that (a) this high growth is unsustainable and unmanageable ...

Indian equities are popularly compared to the fabled Capital Hotel, in which guests can enter but can never exit. Usually high volatility in macro and corporate performance, frequent scams in financial and corporate sector, rampant malpractices and shallow market depth have ensured that no secular bull market evolves. Consider the following: (a)    For buy and hold investors since 1991 the Indian equities returns might have marginally beaten the bank deposits. A monthly SIP in Indian equities (BSE 500 that represents 97% of market capitalization) during January 1991 to July 2013 would have given an 11% CAGR, not much better than debt return, especially if you adjust it for the high risk. (b)    For 1991-95 returns were just 1.6% CAGR. Most of these returns were earned in just six months from Jan92 to Mar 92 which returned ~150% absolute return over Dec92 closing and Nov93 to Jan94 which returned 58% absolute return over Oct93 closing. The real return in t...

Last week was certainly forgettable for the investors in Indian financial markets. Currency, equities and bonds all plunged, inflicting serious losses to investors. The worst part was that the government still appeared to be under the impression that the current economic conditions are part of a routine downtrend that could be managed by taking some incremental steps like increasing interest subvention on export credit by 1%; hiking import duty on gold by 2%, or tweaking FDI rules etc. Current account deficit is consequence of some long standing structural problems in the country. But various measures announced by RBI and the government appear to suggest that CAD is a problem in itself that could be resolved simply by kneeling in front of foreign investors. The fact however is that the more they see Indian government genuflecting, more they are turning skeptical about the India story. RBI took some steps to curb the volatility in currency. But the statement of the gover...

The 1QFY14 results so far have conspicuously shown some trends that need to be noticed and considered while updating and executing investment strategy. In particular, we would like to highlight the following trends: Most consumer companies with their eyes and ears on the ground have discerned the structural decline in India’s growth potential. Accordingly, the companies like HUL, ITC, Dabur, Nestle, IDEA, Bharti, Maruti, Bajaj Auto, Hero Honda, etc. have re-worked their strategy to shift focus from volume growth to margin protection and improvement. Price hikes, cost savings, lower promotion spend, better working capital and inventory management,  are clearly visible. In our view, with consistent margin improvement and ~3-5% volume growth, these companies will more than address the valuation concerns, insofar as currently high P/E ratio is concerned. Moreover, expect payout and ROEC to increase. We suggest overweight on consumer companies (FMCG, auto, telecom). ...

Finance Minister P. Chidambaram’s obsession with “we are still the second fastest growing economy in the world” seems to growing with every passing day. Despite being reminded by many observers that this not only irrelevant but also factually incorrect. Nevertheless, the tendency to blame the economic troubles on the global challenges and sheltering behind this ‘second fastest’ argument is growing. Yesterday, FM promised a whole lot of measures to tackle the problems of rising CAD, falling INR, slowing growth. He also promised that he will deliver all this without compromising on fiscal deficit targets. He made the following promises. We leave it to you how much you want to believe. ·          We have succeeded in containing fiscal deficit and look forward to a growth rate between 5.5 - 6%. ·          Will ease long term External Commercial Borrowings ·    ...

In our view, the present state of Indian economy is characterized by Denial, Dithering and Dilemma (3D). Both the government and RBI seem to be in complete denial mode insofar as the growth and macro economic problems are concerned. RBI has been dithering in taking a decisive action since past many quarters and hence letting the situation to exacerbate itself. The government is facing classic democracy dilemma in choosing between convenient politics and sound economics. The consequences could be serious if immediate corrective steps are not taken. Waiting for the formation of new government could be too late. May be by then we would have lost the whole two decades of progress. Come out of denial (a)    Both the government and the regulator need to accept that 5% growth is normal and good if it is inclusive and sustainable. Faster we realize this, sooner we will be able to effect necessary structural changes in the planning process and realign the resource allocation ...

In the first quarterly review of monetary and credit policy RBI presented a very dismal picture of the economy with little hope. Although RBI did express hope of a slow progress going forward in the FY14, it gave little support to the view. We read some headlines of the documents and see no need to read between the lines. Global economy ·          Global recovery prospects remain weak. ·          Global commodity price cycle stay benign, but with upside risks to crude prices. ·          Global financial markets have entered into a period of fresh turbulence. Indian economy ·          Slowdown persists in the Indian economy. Slow-paced recovery likely to shape later in 2013-14. ·          Aggregate demand continued to remain weak. Improvement in aggregate dem...

In past couple of months RBI has taken some steps apparently aimed at stemming the slide in value of Indian currency (INR) against USD. These measures broadly target (a) liquidity in financial system to stem speculative demand for USD; (b) gold imports to control current account deficit; and (c) encouraging capital flows especially through causing debt yields to rise. Though it may be little early draw any conclusion on the efficacy of these steps in achieving the desired outcome; so far we have not seen much impact. INR continues to be in Rs59-60/USD band and sentiments continue to be bearish on currency. However, there are many side effects that are manifesting in various measures. For example, gold smuggling has reportedly grown four fold in 1QFY14 as compared to the same period previous year. Rate expectations have hardened substantially as reflected in failed OMO. Rate sensitive sectors like financials, realty and capital intensive debt laden infrastructure have seen ma...

On Wednesday evening Swiss cement major Holcim announced ownership restructuring of its Indian operations. In short, Holcim pared its economic interest in ACC from ~50% to ~30% by effectively transferring ~20% economic interest to minority shareholders of Ambuja Cement at ~20% premium to the current market price. In consideration Holcim got Rs35bn in cash and ~10% additional economic interest in Ambuja Cement. The deal apparently has no tax or duty payout, as it is effected through Mauritius based entity and therefore enjoys the benefits of DTAA (Double Taxation Avoidance Agreement). The investors, analysts and commentators are crying foul, as they feel that minority shareholders have been shortchanged by Holcim and investment case for both the Indian entities has been seriously damaged. In our view, the deal (a) does disregard the interests of the minority shareholders of Ambuja Cement; and (b) may erode value of ACC minority shareholders in due course as the stock get d...

For once every one in the world appears to be playing the game of cat and mouse. All appear to be running in circles, falling, rising, trying hard to outsmart others and in the process hurting themselves badly. The bad part is that spectators who are not in the arena are being forced to pay for these games which are not even funny. Ben Bernanke is playing with financial markets. Fully aware that his seemingly innocuous comments at some random symposium might cause billions of losses/gains in a matter of few hours – he is not showing any reluctance in making those comments. Markets, fully aware that QE is a matter of fact and could be withdrawn only and only if economic conditions improve substantially to warrant such withdrawal are swinging wildly at each such comment. Ben does retreats to his den after each such wild swing but only to reappear a little later. The global research and rating agencies are also playing a similar game in a different arena. Fully aware that thes...