Do it yourself

Monday, December 9, 2013

Congress losses semi final; captain retired hurt

Thought for the day

“Most of us spend too much time on the last twenty-four hours and too little on the last six thousand years.”

-Will Durant (American, 1885-1981)

Word of the day

Largesse (n)
Generous bestowal of gifts.

(Source: Dictionary.com)

Shri Nārada Uvāca

Morarji Desai (1977); V. P. Singh (1989); NTR (1982); Praful Mahanta (1985) Arvind Kejariwal (2013)?

A quick telephonic survey of 28 young finance professionals - 16 were not aware if V. P. Singh is dead or alive; 13 thought Morarji Desai was a RSS colleague of Atal Bihari Vajpayee and no one remembers who were three main leaders who founded AGP!

Congress losses semi final; captain retired hurt

The results of recently concluded four state assembly election, though not unexpected, would have surprised most. The key highlights of the results are (a) The people have mostly continued with the trend seen in past 3-4years by giving a decisive mandate at the state level; (b) complete and total decimation of Congress Party; (c) strong performance of the newly formed Aam Aadmi Party (AAP) and (d) stupendous victories of Shivraj Singh Chauhan and Vasundhara Raje in Madhya Pradesh and Rajasthan respectively.

The elections which were widely seen as semi final of the general elections due in 4months, have provided some very interesting trends. For example consider the following:

(a) In Delhi, Congress lost its traditional Muslim, SC and lower caste vote in Delhi to AAP. BJP failed to win central government employees who also went with AAP. But in MP and Rajasthan BJP gained votes from both BSP and Congress.

These trends could be crucial during 2014 general election in UP and Bihar. A change in voting pattern of Muslim, OBC and SC voters in favor of BJP in these states could be a major swing factor.

(b) Encouraged by Delhi results, AAP could take their chances in other metropolis, e.g., Mumbai, Bangalore, NOIDA where conditions are fertile for their kind of politics to take root.

(d) The detractors of Narendra Modi within BJP have got another chance; though they may not want to express their dissention before 2014 election. In case, BJP falls well short of 200 seats in 2014 election, Shivraj will definitely emerge as consensus leader around which a larger coalition could be stitched.

Implications

The results of just concluded state assembly elections, in our view, will certainly have far reaching implications for various parties in particular and general political environment in general. For example consider the following:

(a) The chasm between old feudal lordship within Congress Party and young turks has been widening since past few years. Loss in 2013 elections will embolden the old guards. With Mrs. Sonia Gandhi not in best of her health, and Rahul being repeatedly rejected by the people of India, we might see some Kamraj, Morarji Desai, Jagjiwan Ram, Biju Patnaik, Mamata Banerjee, Jagan Reddy Mohammed Alimuddin and Bhajan Lal sort of rebellion against the family. Nonetheless there could certainly be more episodes of Kamalapati Tripathi, Sharad Pawar and Sitaram Kesari sort of misadventures.

Rahul Gandhi in “acknowledgement of defeat” press interaction highlighted that the feudal elements in Congress Party have not heeded to his suggestion of changing the way party has traditionally worked. He said that he would pursue his agenda more aggressively going forward.

(b) Priayanka Gandhi has not been tested yet, but in our view, faced with such a situation she may not be as successful as Mrs. Indira Gandhi was in overcoming the threat from Syndicate in late 1960’s.

(c) Absence of any recognized national level leader outside Gandhi family will encourage more secession on lines of Sharad Pawar, Mamata Banerjee, Jagan Reddy, et al. This could be especially true in case of states where Congress enjoys reasonably higher vote share but is doing poorly in terms of electoral wins, e.g., UP, Madhya Pradesh and Gujarat.

(d) With Narendra Modi at the helm, the secularism vs. communalism debate will become almost irrelevant breaking the very fulcrum of opportunist alliances that have kept Congress and some regional parties like RJD in contention since mid 1990’s. The disenchantment of Muslim voters with Congress Party in recent elections indicates to this trend.

In a communally neutral political environment the regional parties would be more amenable to BJP which does not compete with many of these at state level and has demonstrated better track record in center – state relations.

(e) With Congress likely out of power for 5years, much reduced strength in Rajya Sabha and only a few states under its rule (forecasts suggest it losing Andhra Pradesh too, leaving it with just one big state under its rule, i.e., Maharashtra) the already meager cadre may further splinter away, making a comeback even more unlikely.

(f) Congress Party in panic may reverse its decision of going alone in the election in the key states like UP and Bihar. This would structurally weaken the Congress as they would get much fewer seats to contest and therefore find it difficult to retain their flocks together.

(g) Modi effect is clearly visible in the state election results. Despite strong undercurrent in favor of AAP and bitter infighting in BJP, the party has been able to retain its traditional voter base. In MP and Rajasthan it has broken new grounds. In Chhattisgarh, despite a strong sympathy wave in critical tribal areas of Bastar, BJP could scrape through. Weakening of Congress Party could further aid in strengthening of this trend.

Modi will however need to change his strategy to positive campaigning from mere Congress bashing as that space is crowded and regional parties might have edge over BJP in that space. The performance of AAP will certainly encourage the regional parties to adopt an aggressive anti UPA strategy.

(h) It is also clear that Modi alone will not be sufficient to take BJP home. BJP would need a strong local leadership to gain new grounds. The key states of UP, Haryana, West Bengal, Karnataka, Andhra Pradesh, Assam and Maharashtra etc. still do not have strong and popular leadership.

(i) India shall now move even faster towards a truly federal structure of governance with strong state leaderships and a “cooperating” central administration.

Tomorrow we shall discuss the socio-economic implications of the results.

Thursday, December 5, 2013

Investment Strategy - II

Thought for the day

“In a world where every event is identical to a previous event no change would ever occur.”

Peter L. Bernstein (American, 1919-2009)

Word of the day

Pokelogan (n)
Marshy or stagnant water that has branched off from a stream or lake.

(Source: Dictionary.com)

Shri Nārada Uvāca

Is it healthy for democratic traditions to presume a “demand for debate” as “opposition”?

Investment strategy - II

As the world endeavors to slither out of the fiscal crisis, a new global economic order takes shape and India’s socio-economic transition to a truly federal governance structure that is transparent, accountable gets established over next decade or so, Indian businesses will face numerous challenges.

Historically, a large majority of Indian businesses have grown on government patronage and/or resource arbitrage opportunities and have been low on innovation, productivity and scale. The politically advantageous socialistic façade of the government, especially during 1950-1990 led to misallocation of resources, trade and capital controls, demand suppression, and protectionism that promoted low productivity. The conditions have changed in past 10-15years but not sufficiently to make a majority of Indian businesses globally competitive.

The following trends, which are quite likely to strengthen in next few years, would suggest that a large number of small, over protected, less productive, uncompetitive, under-capitalized businesses should become extinct in next decade or so.

In past two decades we have seen this happening with small steel and cement plants, textile manufacturers, petrochemical plants, numerous public sector undertakings, NBFCs, etc. There is no reason why it should not happen to (a) small and mid-sized engineering and construction companies which purely survive on administrative patronage: (b) ITeS providers who are pure commodity plays solely focused on wage arbitrage opportunities; (c) mid-sized commodity producers who cannot scale up to compete with global corporations in a more open, price & quality competitive and transparent market; (d) intermediaries who are not adequately capitalized and technologically prepared to serve or compete with large global businesses which are highly price sensitive.

1. The cost structure of Indian businesses shall move up structurally due to higher wage inflation, rise in effective tax rates, higher compliance (social, legal, environmental) cost, higher cost of capital and rise in cost of resources like land, minerals, water etc.

2. Given the non-linear rise in consumption demand, the investment demand shall rise faster, in a period when global cost of capital would have bottomed out and begin to rise. India has clearly missed the advantage which China enjoyed by investing and building huge capacities in an era of lower interest rates. This shall force us to be governed by the terms set by the capital providers, essentially opening our markets to global competition. What we saw in case of FDI in retail might just be a small trailer of the things to come.

3. The global competition and rising cost should squeeze the margin and hence force the small and mid-sized businesses out of arena.

In our view, there is little opportunity in India’s SME segment at this juncture. Only the businesses which have shown the capability to take the game in global arena look promising. Otherwise stick to the large Indian MNCs – if one is looking at a really long-term horizon (5-10years).

Wednesday, December 4, 2013

Investment strategy

Thought for the day

“All you need is ignorance and confidence and the success is sure.”

Mark Twain (American, (1835-1910)

Word of the day

Twain (adj)
Two.

(Source: Dictionary.com)

Shri Nārada Uvāca

Why the Mint Street is not celebrating the victories over current account and fiscal deficits?

Is Dalal Street missing something which Mint Street could see clearly?

Investment strategy

The rays of optimism emanating from slight stabilization in macro fundamentals and above expectation 2QFY14 corporate performance has attracted foreign investors’ interest in Indian equities; though the domestic investors have mostly remained on the sidelines.

Despite low participation and late rise in volatility, Indian equities have been rather resilient. Nifty has averaged ~5900 in YTD 2013, much higher than 2010 (5468), 2011 (5352) and 2012 (5363). The collective wisdom of the market therefore appears to be much more sanguine about the economic conditions, and therefore corporate performance. Off late sell side analysts have also changed their stance to neutral with a mild positive bias.

From here on, in our view, the upside triggers would mostly be domestic, e.g., improvement in macro fundamentals, improved political environment post 2014 election, inflation peaking out next year on high base effect, peaking of rates, improvement in external trade, and pick up in investment cycle.

The earnings profile of large corporates with geographically diversified global business profile could help aggregate earnings numbers to show a better picture from 2HFY15. Though, mid and small enterprise should continue to struggle and post poor performance. The financials therefore would continue to experience deterioration in asset quality.

The 15-20% higher index levels will thus mostly be a consequence of 15-20% higher earnings .over FY14-FY16 rather than any multiple expansion. The multiple on the contrary might see some contraction at aggregate level. However, we may see some multiple expansion in capital goods, infra and financials while multiple of defensives contract a bit.

The caution here is that given the deposit rates persisting at high level due to savings deficit the domestic participation in equities is not likely to rise in any substantial manner. Moreover, the foreign participation in Indian equities has so far been mostly generic (EM) rather than Country specific. We do not see how the prospects of Nifty rising 15-20% would motivate foreign investors to specifically invest in “Indian equities” in a major way, as in all likelihood the currency will remain under pressure, rates will likely peak at elevate level and other EMs will likely outperform India should US and EU economies stablize.

The rise in domestic participation and return of EM generally in favor is therefore the key to the bull case for the market.

The downside risk to the market would mostly be due to external factors. Historically, large FII flows in a short period of time have caused huge volatility in Indian equity markets. A reversal of USD carry trade, if and when US Fed decides to moderate liquidity conditions in US, will certainly cause this event.

Though in our view, the liquidity moderation would not be disruptive to the global economy, in the short term it will certainly lead to global rise in cost of capital and weakening of currencies with higher CAD, like INR.

Under these circumstances, it would therefore be appropriate to focus on businesses that have (a) low beta to domestic macro fundamentals; (b) would not be materially impacted by global liquidity event and consequent rise in cost of capital and (c) would benefit from stable external demand environment.

Tuesday, December 3, 2013

…but harvest time may still be 2-3years away

Thought for the day

“Who can love to walk in the dark? But providence doth often so dispose.”

Oliver Cromwell (English, 1599-1658)

Word of the day

Pilcrow (n)
A paragraph mark.

(Source: Dictionary.com)

Shri Nārada Uvāca

8 gang rapes in 8months in Mumbai!

As we approach the first anniversary of notorious Delhi rape case (16 Dec), do we need to reassess the corrective and preventive measures taken so far?

…but harvest time may still be 2-3years away

The trend growth decline that began from FY09 may not bottom before end of FY16, even if we accept the rather bullish estimates of government agencies

In our view, it is pertinent to keep a watch on the periodic macro data. But it is often not appropriate to let these data lead a substantial change in the direction of investment strategy. A profitable investment strategy, in our view, needs to be based on medium to long term growth magnitude and direction.

Insofar as the current medium to long term growth trend in India is concerned, in our view, the trend growth decline that began from FY09 may not bottom before end of FY16, even if we accept the rather bullish estimates of government agencies.

The resumption of up move in medium term trend growth would only lead to a stable growth environment in the country and sustainable gain in equity prices, because a sustained growth over medium term would only-

(a) bridge the output gap and create demand for investment;

(b) lead to creation of productive employment opportunities;

(c) provide fiscal leverage to government for increasing social sector spending and thus increasing the sustainability of growth;

(d) lead to stability in prices as more capacities are added;

(e) lead to sustainable monetary easing as fiscal condition improves; and

(f) lead to rise in private income and savings, thus providing impetus to private consumption;

In our view, the potential growth of India under current circumstances is not more than 6%. Growing at 5-6% in the current direction would not lead to enough employment opportunities and strong consumption story will not remain sustainable. Agriculture, as we have seen in past couple of years is still “God” driven. Basing an investment strategy on God’s will alone is not advisable in our view.

(Source: CSO. InvesTrekk Global Research)

Also read Green shoots seen…

Sunday, December 1, 2013

Green shoots seen…

Thought for the day

“It is great to be a blonde. With low expectations it's very easy to surprise people.”

-Pamela Anderson (American, 1967-)

Word of the day

Wight (adj)
Active, nimble, strong and brave

(Source: Dictionary.com)

Shri Nārada Uvāca

Is the current UP sugar crisis a Samajwadi Party conspiracy to create distress in the bastions of Ajit Singh (western UP); Gandhi family (eastern UP) and Mayawati (liquor lobby)?

The twitter is that having failed to gain support of cane farmers in Merrut, Muzzafar Nagar, Rae Bareilly, Shahjahanpur, Lakhimpur Khiri, Sultanpur and liquor producers through carrot, SP government is now trying sticks!

Green shoots seen…

While it is pertinent to keep a watch on the periodic macro data, these data points often do not always reflect a “trend”. Personal investment strategy therefore should look at the medium to long term growth trends to identify any need for change in direction and magnitude.

Also, given the exuberance in the equity market primarily on account of global economic stability, abundant liquidity and domestic political optimism, it is important to do some realty check.

People starved of good news for long may sense “party time” from 2QFY14 GDP growth. In our view, the data definitely has some positive signs which raise hopes of a macroeconomic bottoming over next few quarters. However, the data does not provide much evidence to suggest that the boom time is around the corner.

Core sector improves, external demand, weak INR leads 16% surge in exports

Industry growth picked up to 2.4% in Q2FY14 from a mere 0.2% in the previous quarter. The revival in industry was led by an improvement in the core sectors – mining and utilities and construction. Electricity sector grew at 7.7% – its fastest pace in last eight quarters. Compared to over 1% decline in Q1, manufacturing grew by 1% showing some signs of recovery, primarily boosted by strong exports. In Q2, exports grew by a 16.3%, led by improving global demand and a depreciated rupee.

Agriculture supports household consumption

Above-normal monsoons lifted agricultural growth to 4.6%. Hopefully, higher farm incomes will raise rural incomes and help drive a recovery in private consumption growth in the second half of the fiscal year.

Downsizing affects government spending, services growth at decade low

Sharp decline in government spending was visible in Q2. As slowing GDP growth adversely impacted tax revenues and a weak rupee raised the subsidy burden of the government, a 10% cut in non-plan expenditure has been announced. As a result, growth in community, social and personal services almost halved to 4.2% in the second quarter, dragging down growth in overall services to less than 6.0%, lowest in more than a decade.

Share of private consumption falls to lowest, investment recovers qoq

Private consumption had been one of the major factors in resilience of Indian economy during previous global crisis. At 59.8% of GDP, the private consumption has fallen to lowest level in decades. Investment at 29.4% continues to be dismal and even lower than 1QFY13 level of 29.9%.

No fiscal leverage left

The Centre’s fiscal deficit touched Rs 4,57,886 crore or 84.4% of its Budget estimate of Rs 5,42,499 crore between April and October, 2013 on the back of slowing tax revenue and non-debt capital receipts outpaced expenditure.

Given that the FM is committed to the fiscal deficit as budgeted, there is little fiscal leverage left with the government over next five months.

…to continue

Friday, November 29, 2013

How to play Modi rally?

Thought for the day

“It is greed to do all the talking but not to want to listen at all”

-Democritus (Greek, 460-370BC)

Word of the day

Gelt (n)
Money (slang)

(Source: Dictionary.com)

Shri Nārada Uvāca

With Tata withdrawing and Mahindras not too keen, will the new bank licenses be a non-starters?

How to play Modi rally?

The current market conditions present a classic dilemma before the investors in Indian equities. There are reasonable indications to suggest that the global equity rally may extend little further into the summer; and along with this Indian markets may also show strength notwithstanding the fact that the trends in macro fundamentals of Indian economy may not suggest any improvement in 1H2014. The actual corporate performance has been better than pessimistic expectation in September quarter, but still no one believes it to be sustainable over next couple of quarters.

Prospects of Narendra Modi forming a proactive and decisive government next summer is also a catalyst for the equity markets. An overwhelmingly large number of analysts and investment strategists are now pinning hopes on positive outcome of this political event.

From the market internals it is however evident that domestic investors are still not much enthusiastic about a huge rally in equities. The volumes in cash markets, poor market breadth, and flows to domestic funds indicate that these investors have yet not taken plunge.

The moot question is should they be taking the plunge or continue to sit on the sidelines?

In our view, they should participate in the rally by –

(a) investing in select stocks that may benefit from the tangible recovery in global economy (mainly US and Japan); and

(b) trading in high quality stocks that may benefit from sentimental improvement in local business confidence.

In our view, investors should stop bothering about Nifty level. By over focusing on Nifty level, they risk missing some good opportunities. Nifty is a tool for traders and is enslaved to movement in 5-7 stocks – why bother about that?

While investing or trading, one needs to believe that no matter what happens to the headline macro numbers – GDP, inflation, rates etc. Indian equity markets are not shutting down. Only remember, the more poor the number, the higher would be the concentration in “expensive quality”.

In strict technical sense, a big round of rotation from high PE/PBV to low PE/PBV is beginning to show. This may accelerate in two ways – 1. The same money gets out of IT/FMCG and goes into Infra/financial or 2. The new money goes only to infra/financial etc.

In first case Nifty will not go anywhere (5700-6300 range with occasional violation on either side). In second case however, Nifty could go to 6700-6800 or even beyond. In our view, the odds are 3:2 in favor of second probability. Modi will play a big catalyst in this rotation that may occur post 8^th December.

It is however pertinent to note that technically probability of Nifty testing 4700 before March 2015 still exists. But as we said earlier, why bother about this if it is going to be a ‘V’ kind of move.

We shall discuss some of our preferred local and global themes next week.

Also read:

Letter to Mr. Narendra Modi

Whatever goes around comes around

Ganpati is son of Shiva

Follow the leader

Great Hopes – Part I

Great Hopes – Part II

Great Hopes – Part III

Thursday, November 28, 2013

Great hopes - III

Thought for the day

“Truth reveals itself, though often belatedly. This admirably suits the politician in power.

The interregnum between truth and its revelation is generally a period of manipulation.

In this interregnum alibis and half-truths rule. Finally, unless someone is alert, truth gets confined to the archives. Result: alibis masquerade as truth”

-S. Gurumurthy, as quoted in ‘Polyester Prince’.

Word of the day

Wroth (adj)
Stormy; violent; turbulent

(Source: Dictionary.com)

Shri Nārada Uvāca

Why Tarun Tejpal is so important?

Great hopes - III

We have been highlighting for past many months that there is a decent probability that we may have a equity rally as part of a highly charged global “risk on” mood. This rally would be akin to the surge seen 1998-1999 and 2006-2007 and therefore lead the valuations to bubble territory. The current market momentum indicates that the probability of such rally is rising.

In Indian context the local catalyst seems to be the likelihood of Narendra Modi becoming prime minister and replicating the success of Gujarat Model of development at the national level. In 1998-1999 the unprecedented wealth effect created by Y2K opportunity and global ITeS boom and in 2005-2007 unprecedented investment in infrastructure projects had catalyzed the massive equity rallies. Both the times, equities had given up almost all the gains made during the rallies within a short span of time, with the leaders of the rally losing massively.

It is therefore important, in our view, to understand the risks the expected 2014 market rally would carry.

2M vs. M: The most potent risk to the Modi becoming prime minister may come from the trio of Mayawati and Mamata Banrjee.

On our recent trip to UP we found that Mulayam’s Samajwadi party (SP) is losing considerable support amongst people. Congress’s local unit is completely demoralized and BJP is not aggressive enough. So, the SP and Congress loss could be gain of BSP, unless BJP consolidates substantially in next 4months. If Mayawati, who carries a strong national ambition gets 35 seats, Narendra Modi becoming PM would become a tough task.

Similarly, Mamata Banerjee has indicated that she would rather support a non-Congress non-BJP government at the center. The recent municipality polls suggest that her popularity is still strong in West Bengal.

Failure of BJP to get 190-200 seats on its own could therefore spoil Modi’s chances of becoming PM.

Global economic instability returning: Despite stratospherical rise in liquidity and near zero rates over past few years, the global economic has failed to grow at desired pace. This highlights the fragility of the current economic optimism. Any Greece or Lehman like event could again threat the surreal optimism over economic stability.

Global liquidity tightening: Though we do not believe that global liquidity would be tightened in any substantive proportion over 2014, but general view seems to be contrary to this. A QE taper and consequent rise in cost of capital could be a threat for debtor economies like India.

Inflation and rates remaining high: Sharp rise in global commodity prices due to US and China recovery, persistently high food prices and consequent higher domestic rates could not only delay the domestic economic recovery, but also snatch lot of political leverage away from Modi.

Continued policy logjam: The biggest risk to Modi Rally would come from the failure to put the new government’s act together in quick time. The margin for error here is almost NIL.

Also read:

Letter to Mr. Narendra Modi

Whatever goes around comes around

Ganpati is son of Shiva

Follow the leader

Great Hopes – Part I

Great Hopes – Part II