Do it yourself

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...

In past few days we have tried to highlight that the above potential growth in India during 2004-08 on the back of easy credit availability & loose monetary policies has led to serious misallocation of capital and other resources in the country. The recent abandoning of some large projects is certainly a hint of growing realization to this effect. Besides, the politics of “competitive majoritism” has also led to irrevocable government commitments towards flagrant welfare spending. Though, this has certainly provided some sustainable spending capability to the humongous bottom of Indian pyramid. This clearly suggests that government and corporate finances are likely to remain under pressure for protracted period. Therefore, in our view, capex, PSUs, credit themes may not work in Indian markets till the time necessary corrections are carried out. In this context, in our view, the only secular theme in India is that 1.25billion stomachs are to be fed and 1.25billion bo...

Once upon a time, there lived six blind men in a village. One day the villagers told them, "Hey, there is an elephant in the village today." They had no idea what an elephant is. They decided, "Even though we would not be able to see it, let us go and feel it anyway." All of them went where the elephant was. Every one of them touched the elephant. "Hey, the elephant is a pillar," said the first man who touched his leg. "Oh, no! it is like a rope," said the second man who touched the tail. "Oh, no! it is like a thick branch of a tree," said the third man who touched the trunk   of the elephant. "It is like a big hand fan" said the fourth man who touched the ear of the elephant. "It is like a huge wall," said the fifth man who touched the belly of the elephant. "It is like a solid pipe," Said the sixth man who touched the tusk of the elephant. They began to argue about the ...

Over the weekend we searched through a multitude of investment gospel in our quest to find a reason for investing in so called Public Sector Enterprises or simply PSUs. Not one, not even for argument sake, gave an iota of hint that in any circumstance one might consider investing even a tiny amount in a business: (a)    where the management lacks transparent and accountability; (b)    where the management is corrupt, incompetent and/or instable; (c)    where management has historically and brazenly violated the rights of minority shareholders; (d)    that operates under highly inconsistent policy environment; (e)    that does not have control over pricing its products; (f)      that is often forced to deal will bankrupt customers; (g)    where senior executives are appointed on the basis other than expertise in the area of operation; (h)    which are riddled ...

We maintain our 8000 Bank Nifty target in next 12months. Financials especially banking sector is at core of the Indian equity markets. In past few months benchmark indices have shown a divergent trend from the financial sector, as consumers, pharma and IT have held the benchmark indices at higher levels while financials have corrected sharply. YTD Bank Nifty is down over 10%, whereas Nifty is higher by ~2%. This being inarguably the most over owned sector has evoked more concerns amongst investors. InvesTrekk Research has consistently maintained its underweight stance on Indian banking sector for past one year. The reasons for our negative view on Indian banking sector, especially PSU are simple. Consider the following: (a)    It is common knowledge that a large section of India’s capital intensive long gestation enterprises is under tremendous financial stress. These enterprises engaged in critical infrastructure sector like roads, power, ports, a...

Yesterday we suggested that investors may follow a rather simple investment style to achieve their investment goals. It is highly likely that most find this path boringly long and apparently less rewarding, but in our view this is the only way sustainable returns could be obtained over a longer period of time. In our view, taking contrarian view (infrastructure), speculating policy changes (e.g., QE tapering, gas pricing, FDI rules relaxation etc.) anticipating short term performance (e.g., monthly sales, quarterly profits etc.) or arbitrage on information/rumor of a corporate action are some examples of circuitous roads or short cuts that usually lead us nowhere. Taking straight road means investing in businesses that are likely to do well (sustainable revenue growth and profitability), generating strong cash flows; have sustainable gearing; timely adapt to the emerging technology and market trends, and most important have consistently enhanced shareholder value. Thes...

“No one was ever lost on a straight road.” The conventional wisdom guides that roads are meant for moving forward; ropes are meant for tying and anchoring and trampolines are meant to get momentary high without moving an inch forward. Usually, the chances of reaching the planned destination are highest if the traveler takes a straight road. Similarly, the chances are least if you just ride a trampoline. Walking on ropes may sometimes give you limited success. The developments in global financial markets in past couple of weeks highlight that presently very few persons are interested in taking the straight road. Though there are many, like the legendary Warren Buffet, who continue to vehemently advocate this path, most may find this path long and boring. The market reactions to past two Fed statements, RBI action on Monday evening, Infosys results last week, and government’s announcements regarding proposed changes in natural gas pricing policy all suggest that ju...

Conventional economists have long argued that monetary and the real economies interact in a limited way through the determination of nominal quantities such as prices, wages, exchange rates and so forth. Therefore although a change in the quantity of money may create short term disruptions, the real economy would eventually settle at the same long term equilibrium as before. Implying that at 'normal' levels of money, a change in the money supply will not alter the long term economic equilibrium. In short, additional money made available to people, without any additional productive capacities made available, makes no difference to real economy. It just increases the price of existing goods in the same proportion as the additional money available. The problem however occurs when the supply of additional money becomes a constant and that too in an abnormal proportion. This not only disrupts the short term equilibrium but alters the structure of long-term equilibrium too....

The popular commentary these days is suggesting, rather aggressively, that the largest economy the USA has overcome all its problems – unemployment, fiscal deficit, public debt, housing market, household leverage and above all growth and investment cycle. In the same breadth it is also mentioned that emerging markets that have thrived on the excessive liquidity created by US Federal Reserve are destined for a painful grind to dust as the Ben Bernanke starts withdrawing the liquidity. In our view, nothing could be farther from truth. The USA still has over 7% of its workforce unemployed. Number of people surviving on food stamps is highest in recent decades. Growth for the current year is expected to be mere 2%. Investment cycle is far from robust. Deficit has come down on spending cuts, but continues to be threateningly high. This is when Fed had been printing 24X7. A lunch break of 45minutes is expected to worsen things again. Moreover, with 3/4 th of global population in des...

Recent sectoral credit and weighted average lending rate data published by RBI raises some pertinent questions: (a)    The share of industry in GDP over past two decades is unchanged, but the share of industry in bank credit has fallen by 25% despite rate for industry falling the most. Does this explains supply side constraints of the economy? (b)    The share of agriculture in GDP has fallen by 50% over past two decades. But the share of credit to agriculture sector has fallen by just 12%. Does this explain higher capital intensity of agriculture or populism, as there has been little improvement in productivity. (c)    Share of personal loans has more than doubled over past two decades, though housing loan rates in 2012 were 40% higher as compared to 1992. Does this imply speedier urbanization or unsustainable bubble in housing sector? Thought for the day “Confusion is a word we have invented for an order which is not understood...