Do it yourself

Friday, August 4, 2017

Factroing Japan in investment strategy - 4

Thought for the day

"It's the last thing a man will admit, that his mind ages."

—Will Durant (American, 1885-1981)

Word for the day

Dorp (n)

A village; hamlet.

Malice towards none

Who should be most concerned about the success of Amit Shah's Mission 2019:

(a) Congress party

(b) Sundry socialists like Mulayam Singh, Lalu Yadav, Mayawati and Mamata Banerjee et. al.

(c) BJP's partners in NDA

(d) We the people of India

(e) None of the above

(f) All of the above

First random thought this morning

While people are busy with structural reforms in elimination of subsidy from Kerosene and LPG, no one has highlighted the following structural destruction:

The government has already allotted 2.5cr LPG connections to BPL families under the UJJAWALA Scheme. The target is to reach 5cr households by 2019. 5cr households in Indian context mean 12-15cr voters and Congress got around 19cr votes in 2009 elections.

I bet someone like Rahul Gandhi, Mulayam Singh, Mayawati, will get up someday and announce that all these households will be provided 1 LPG cylinder free every month. That is a subsidy of close to Rs1000/month to 5cr households!

Factroing Japan in investment strategy - 4

Earlier this week, I briefly highlighted (see here) the fact that the commitment of Japanese investors (both public and private) towards India is very strong and may strengthen further in times to come. This commitment certainly transcends the politics and political leaders; though the personal chemistry between leadership does provide some impetus.

Furthermore this commitment has a strong foundation at policy level (see here) and has started to reflect in action in past 5-6years only. The exposure of Japanese investors and businesses to India is still very low, when compared to other Asian countries like China and Thailand. It is therefore most likely that the role of Japanese investment in India shall grow meaningfully over next couple of decades.

In terms of Investment strategy implications, I would like to consider the following:

(a) The return expectations of Japanese investors are amongst the lowest in the world, given their domestic environment and miniscule cost of funds. Hence, their valuation matrix may be very different from, say, the aggressive American investors.

(b) While transportation equipment and infrastructure may remain a key focus area, other infrastructure areas, especially roads and power (including nuclear), may see higher participation from Japanese corporations.

(c) In transportation equipment area players like Suzuki, Honda, Toyota, Nissan and Isuzu already have sizable presence. Many of these businesses may not be available to Indian investors for investing. Investing in their Indian ancillaries may be a good idea.

(d) One area where we could see significant rise in Japanese participation is Marine transport and equipments. I shall keep an eye on ports and shipyards for strategic Japanese investments.

(e) The engineering companies like Panasonic, Hitachi, Mitsubishi, Toshiba, Sony have materially increased their presence in India in past one decade. In my view, this trend is likely accelerate in the years to come. Again since not many of these companies may be available for portfolio investing in India, I would look for their Indian ancillaries.

(f) In consumption space, premium textile and household products, packaged food (especially seafood), wellness products could attract material Japanese interest in my view.

(g) On the negative side, I would like to avoid direct exposure to most of the businesses that compete directly with the Japanese. Though Japanese are not particularly known for predatory pricing, competing with them would essentially mean lower margins and market share for Indian players, given their lower return expectations and relatively superior quality.

I might have oversimplified my thoughts here. Nonetheless, I do believe in this opportunity, and urge the readers also to explore it at their level. All thoughts, views and opinions are welcome.

May also like to read

Japan: emerging from the lost decades?

Thursday, August 3, 2017

Yet another opportunity missed

Thought for the day

"Sixty years ago I knew everything; now I know nothing; education is a progressive discovery of our own ignorance."

—Will Durant (American, 1885-1981)

Word for the day

Anoesis (n)

A state of mind consisting of pure sensation or emotion without cognitive content.

Malice towards none

If elected representatives are public servants, why the rules relating to attendance and conduct in office should not apply to them mutatis mutandis, as these apply to every other person employed in public service!

First random thought this morning

When an elected representative takes oath of the office he has been elected to, he swears by the name of God that he will perform his duties and obligations as defined by the constitution, without fear or favor and without ill-will or affection towards any one.

I want to ask, when an MP or MLA recommends someone for admission to a school or college, or railway reservation, or out of turn treatment at a government hospital, or job - does he not violate the constitutional oath and hence become liable to be disqualified?

Would the Hon'ble Supreme Court like to examine this question as PIL?

Yet another opportunity missed

The decision of Monetary Policy Committee (MPC) of RBI to cut policy rates by 25bps is on the expected lines. In fact MPC was left with little choice after the largest Indian bank, State Bank of India, decided to cut savings rates that impact close to 330 million savings account, a couple days ago.

Given that SBI touches maximum number of poor households, and account for the largest number of marginal savings account, the decision to cut savings rate must not have been without strong reasons.

In my view, through this move the government has decided to lead the monetary policy. It would therefore be reasonable to expect that lending rate cut, may be little aggressively, will follow. Given the stature of SBI, most other banks may have to follow the move.

Though I will not go full length and question the legitimacy of MPC itself, under the given circumstances, it is certain that the government is more committed to growth rather than inflation at this point in time.

The difference of opinion between the government and MPC on the monetary policy stance is welcome. MPC not listening to the government is also a healthy sign.

But the problem is that this tussle between MPC and the government will likely erode the predictability and data dependability of the policy. This is something that may not be desirable for anyone.

Coming back to the MPC policy statement, I find the following worth taking a note, in India's context:

· A normal and well-distributed south-west monsoon for the second consecutive year has brightened the prospects of agricultural and allied activities and rural demand.

· Industrial performance has weakened in April-May 2017. This mainly reflected a broad-based loss of speed in manufacturing. Excess inventories of coal and near stagnant output of crude oil and refinery products combined to slow down mining activity. For electricity generation, deficiency of demand seems to remain a binding constraint.

· The weakness in the capex cycle was also evident in the number of new investment announcements falling to a 12-year low in Q1, the lack of traction in the implementation of stalled projects, deceleration in the output of infrastructure goods, and the ongoing deleveraging in the corporate sector.

· The 78th round of the Reserve Bank’s industrial outlook survey (IOS) revealed a waning of optimism in Q2 about demand conditions across parameters, and especially on capacity utilisation, profit margins and employment. The manufacturing purchasing managers’ index (PMI) moderated sequentially to a four-month low in June and the future output index also eased marginally.

· Surplus liquidity conditions persisted in the system, exacerbated by front-loading of budgetary spending by the Government.

· Merchandise export growth weakened in May and June from the April peak as the value of shipments across commodity groups either slowed or declined. By contrast, import growth remained in double digits.

· Business sentiment polled in the manufacturing sector reflects expectations of moderation of activity in Q2 of 2017-18 from the preceding quarter. Moreover, high levels of stress in twin balance sheets – banks and corporations – are likely to deter new investment.

· With the real estate sector coming under the regulatory umbrella, new project launches may involve extended gestations and, along with the anticipated consolidation in the sector, may restrain growth, with spillovers to construction and ancillary activities. Also, given the limits on raising market borrowings and taxes by States, farm loan waivers are likely to compel a cutback on capital expenditure, with adverse implications for the already damped capex cycle.

· External demand conditions are gradually improving and should support the domestic economy, although global political risks remain significant.

· While inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.

· There is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all.

· Keeping in view these factors, the projection of real GVA growth for 2017-18 has been retained at the June 2017 projection of 7.3 per cent, with risks evenly balanced.

Broadly, MPC did see material slowdown in growth momentum. It did recognize the need for reinvigorating private investment, especially in view of the rising fiscal constraints on state government due to loan waiver and pay commission payouts.

MPC did also note that some of the upside risks to inflation have either reduced or not materialised.

MPC also recognized that the global rates may move higher as central banks reverse some of their ultra loose policies. This implies that MPC must have discussed that there may not be much scope to cut rates later.

But still in its wisdom, MPC decided by a majority decision to cut the rates by 25bps.

Wednesday, August 2, 2017

Factroing Japan in investment strategy - 3

Thought for the day

"Moral codes adjust themselves to environmental conditions."

—Will Durant (American, 1885-1981)

Word for the day

Ergate (n)

A worker ant.

Malice towards none

NiKu's mantra of success - "If you can't beat NaMo, join him."

First random thought this morning

30 members, including some senior ministers, of Rajya Sabha belonging to the ruling NDA were found absent from the house when an important legislation relating to backward classes was being discussed and put to vote. Consequently, the opposition Congress was able to push through some amendments. This absenteeism happened despite specific directions from the prime minister.

The moot point is that should these MPs be punished the same way, as any other public servant would be, in case he knowingly and willfully remains absent from office when an important agenda is being discussed. Or if a senior police officer enjoys dinner at home when riots break out! Or 'we the people' should also not take PM seriously.

Factroing Japan in investment strategy - 3

The Policy Council of the Japan Forum on International Relations (JIFR) noted the following its September 2007 recommendations:

· India's rapid economic growth is attracting worldwide attention. Many countries are keen to strengthen their ties with India, with a population of 1.1bn the world's largest democracy and. like China, one of Asia's most important countries. From a geopolitical point of view s well, India has great strategic importance, located in the middle of what the Japanese government calls the "Arc of Freedom and Prosperity".

· Japan and India have deep ties, with roots extending far into the past, and today e two countries share many strategic interests. Now that India's global presence is growing, the two countries need to deepen their ties to spur prosperity in an Asia that is moving towards regional integration.

· Strengthening Japan-India ties depends on private sector business activities. The Japan-India relationship can be suitably enhanced only if trade and investment are increased far above their present levels.

· Japan and India share many strategic interests and a number of common diplomatic objectives.

· One prerequisite for enhancing Japan-India business ties is diversification of trade and investment. Most direct investments made in India by Japanese corporations are in the area of transportation equipment manufacturing., indicating a remarkable lack of diversification. Furthermore, the majority of those investments are to promote sales within the Indian market, and this inhibits diversification in India's foreign trade structure.

· In addition, Japanese investments should be made in various parts of India. Most Japanese investment in India has been concentrated in the Delhi capital region, because that is where many companies affiliated with Suzuki and Honda established operations in 1980s abd achieved considerable success.

· Promising areas for Japanese investment in India include general and industrial machinery, processed foods, everyday items such as sanitary goods and cosmetics, chemical products, pharmaceutical, retail markets, distribution, real estate, infrastructure, finance and software development.

· Another area worth considering is investment by Japanese financial institutions in the infrastructure funds of Indian financial institutions.

· Prime Minister Singh's visit to Japan near the end of 2006 formed the backdrop to an announcement that bilateral leadership-level consultations would be held annually, and that annual summit level meetings would be held in the respective capitals.

· Japanese corporations should adapt their business strategies to realities in India

· Japan's financial sector would benefit most from India's IT expertise. Instead of coddling their affiliated IT companies and client hardware companies, Japanese financial institutions should develop open IT systems and outsource some of their business to Indian software related companies. Japanese manufacturing sector should too make use of India's IT expertise.

· One of the most effective ways to promote human interaction is to greatly increase the number of Indian students studying in Japan. Bilateral government arrangements encouraging the employment of Indian exchange students in Japan should be augmented. Other possible approaches include Japanese universities promoting themselves in India to attract more students, and Japanese companies conducting hiring campaigns in Indian universities.

The events post these recommendations in 2007 indicate that these recommendations have been accepted and being acted upon.

The Indo-Japan relations have grown. The area of Japanese investments has moved much beyond Delhi NCR region.

Japanese companies have invested in building India's infrastructure. Metro Rail Projects, Dedicated Freight Corridors are some signature projects.

Japanese transportation equipment companies like Suzuki and Honda have greatly enhanced their commitment to Indian markets by larger investments in their local manufacturing units. Furthermore, they have increased the scope of these units beyond India's local markets to other parts of Asia and Africa.

Besides we have material rise in commitment and investments of other equipment makers like Hitachi, Toshiba, FCC etc.

Besides, investments have been made in logistic (Gati Ltd); Pharma (Deep Care), Consulting (New Era India, Alp Consulting), IT Services (Accel Frontline, Micro Clinic) Stationary (Camlin) and Telecommunication (Inmobi tech)

The most notable growth has occurred in financial and retail sectors. The corporations like Nippon, Softbank, Nomura, etc. have made significant investments in financial services, Financial technology services and ecommerce retail ventures.

Between 2008 and 2014, Japanese corporations made about 180 M&A deals in India (including minority stakes, joint ventures, acquisitions and increase in shareholding).

The point I am trying to make is that Japanese commitment to Indian economy is a mutual necessity and part of a long term strategic plan. It transcends political parties and political leaders.

The action so far is miniscule, if we consider the potential. There are enough indications that this engagement is going to rise exponentially. It is therefore important investment strategies and technical market studies include this factor as a critical one, in my view.....to conclude on Friday

Tuesday, August 1, 2017

Factroing Japan in investment strategy - 2

Thought for the day

"I am not against hasty marriages, where a mutual flame is fanned by an adequate income."

—Will Durant (American, 1885-1981)

Word for the day

Variegated (adj)

Varied in appearance or color; marked with patches or spots of different colors.

Malice towards none

Some present day politicians remind me of a short story by legendary Khuswant Singh, titled "Princess of Kahin Nahi" (The princess of nowhere)!

(You can read the story here)

First random thought this morning

This morning, leaving apart some understandings at the local level, an united national opposition to the marching BJP looks like a mirage.

Shrewd politicians like Amit Shah and Narendra Modi would be fully aware that the Congress Party and the degenerated socialists are opportunists and fast losing popular support. They are taking full advantage of this.

Arvind Kejriwal must be ruing his impatience. Has he controlled his larger ambitions and waited for the right time (which may be coming in next 12months), he could have easily emerged as the fulcrum of opposition unity. Alas! he exposed his limitations too soon and too much.

Factroing Japan in investment strategy - 2

The Japanese demand for Indian assets is so strong that assets of Nomura Holdings Inc.’s India equity fund quadrupled to almost 400 billion yen ($3.6 billion) in just the past year.

Another fund, Sumitomo Mitsui Asset Management Co.’s Indian bond fund, co-managed with Kotak Mahindra AMC, took in a net 24 billion yen ($214 million) from December through June, lifting total assets to about 87 billion yen as of July 10.

Japanese investors' portfolio investments in Indian stocks and bonds stood at $13 billion at the end of June 2017. As I mentioned yesterday (see here) the process that started a decade back in September 2007 has begun to gain significant momentum. A bilateral free-trade agreement, signed in 2011, is heralding a new phase in crossborder trade and investment.

In a recent press interview, the Japanese Ambassador to India Kenji Hiramatsu said, "We have already signed the Comprehensive Economic Partnership Agreement (CEPA)." he further added that "many companies are shifting their operation bases or manufacturing bases to India and they are producing their products here and selling them in the Indian market. Also they are developing industries or local part industries, as in they are making spare parts and not importing from Japan. It means that we are not only talking about the bilateral trade figure but in a wider context. Also I would like to say that the products that are produced here are exported to Japan, and some to the wider global market including Africa, Middle East and other neighboring countries, so Japanese companies are looking not only at the Indian market but also at the regional and the global market."

Japanese firms’ did not start the process of buying assets in India on a happy note. The ill-fated purchase by pharmaceutical company Daiichi Sankyo in 2008 of Ranbaxy proved to be a major sentiment dampener. NTT’s loss-making joint venture with Tata Group also did not end on a happy note. Nonetheless, these disappointments did not deter Japanese investors. M&A is picking up. As per available data Japanese companies made some 46 acquisitions (including minority stakes and joint ventures) in India in 2014, up from just 23 in the previous year.

To put things in perspective, as of 2015, close to 1000 Japanese firms had reported some kind of operation in India. This compares with 1400 firms in Thailand and close to 2500 in China. Till 2014, India accounted for only 1% of the outbound FDI from Japan, and less than 1.5% of Japanese exports.

In 2015, Japanese prime minister Shinzo Abe promised to double both Japan’s investment and the number of Japanese companies operating in India within five years, targeting ¥3.5trn (US$33.6bn) of private and public financing.

This needs to be understood in the context of (a) rising tension between Japan and China; (b) India promising to be remain fastest growing economy; (c) India offering a stable macro environment with a high yield differential compared to most of the developed world; and (d) traditional Indo-Japan cultural and religious ties.....to continue tomorrow.

Friday, July 28, 2017

Factroing Japan in investment strategy

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 for the day

Autarky (n)

The condition of self-sufficiency, especially economic, as applied to a nation.

A national policy of economic independence.

Malice towards none

Other things aside, one thing is very clear - most experienced Indian politicians are thick skinned and shameless!

First random thought this morning

In popular perception, both PM Narendra Modi and CM Nitish Kumar have an image of honest and development oriented administrator.

It is for the first time they have joined hands.

It would be interesting to see if this holy union metamorphoses Bihar out of BIMARU status and in the league of MP and Jharkhand at least.

Would also be interesting to see, whether it is the end of the road for Lalu Yadav, or he will rise again like a phoenix.

Factroing Japan in investment strategy

10years ago in September 2007, a Japanese think tank, The Policy Council of the Japan Forum of International Relations (JFIR), made its 29th Policy Recommendations. The recommendations were aptly titled 'India's Leap Forward and Japan".

The policy recommendations were drawn up on the basis of the considerations like the traditional Indo-Japan economic and cultural relations, paradigm shift in India's economic policy since 1991, India's dire need for infrastructure investment and risk capital, and status of India as the largest recipient of Japan's official development assistance (ODA).

The objective of policy recommendations was to influence the policies which Japan should develop vis-á-vis India, considering India's political and economic realities at that time, in order to make most of India's potential as a driving force for prosperity in Asia.

The group made the following 10 recommendations:

In past one decade, these recommendations have broadly guided the engagement of respective governments and businesses in India and Japan. The contours of these relations are build on strong foundations of mutual trust and benefits, and are regardless of the government or persons at the helm at a given point in time. Nonetheless, the bonhomie between the two incumbent prime ministers has certainly helped in smoothly advancing the agenda and further strengthening the ties.

In fact, the new phase in Indo-Japan ties started in 2011 with signing of a bilateral free trade agreement (FTA).

In recent months, Japanese portfolio investment in India have also accelerated and may have played a material role in rise in prices of Indian equities and bonds. Given the potential size of the Japanese investments that could possibly flow into Indian markets, it is therefore important to factor in the rudiments of the relationships between two countries in the investment strategy.....to continue next week

Thursday, July 27, 2017

In search of Ideas - 3

Thought for the day

"History is mostly guessing; the rest is prejudice."

—Will Durant (American, 1885-1981)

Word for the day

Highfalutin (adj)

Pompous; bombastic; haughty; pretentious.

Malice towards none

Bankelal from Bharatpur, Rajasthan:

"Maharana Pratap defeated Akbar."

Rajesh from Agra, UP (45miles from Bharatpur):

"My history book says Maharana Pratap fought valiantly but lost to Akbar."

Bankelal: "I hate you, you are a traitor. Go to Pakistan."

Rajesh: "You bloody, Sanghi, go to hell".

First random thought this morning

I do not have any data to support this thought, but my hunch is that in past 10years or so, the weather pattern in Thar dessert has changed materially. The area has received much higher than average rains, frequent floods, and cooler winters.

I do not know if authorities have taken note of it and planned to take advantage of this change in weather pattern, for example, by way of creating water bodies to store rain water, planting shrubs etc. that will help recharging ground water. Also is someone studying the impact of oil field that started production in that area almost a decade back!

In search of Ideas - 3

Continuing from yesterday (see here).

As I mentioned yesterday, my buzzword for Indian businesses is "Re".

While I set out on journey to discover ideas that fit in my theme, I would like to leave the readers with the following thoughts:

Re-skilling: In view of the technological changes in global markets, many of the traditional Indian businesses, especially technology services businesses, are finding a material part of their workforce being rendered unsuitable to the new skill set requirements.

Similarly, the regulatory changes like GST, RERA, would also leave many workers unsuitable for work. The accountants and clerks in their 40s and 50s who have managed to work without computers, may need to be re-skilled to work in the changed environment. The estate agents who provided services for sale, purchase and renting of properties may need to pass qualify examination for registering with the regulatory authority.

In my view, the positive investment idea here would be to invest directly in small businesses and start ups which would undertake the onerous task of re-skilling the Indian workforce. Whereas the negative idea would be immediately exit the ITeS vendors who may find it tough to bear the cost of re-skilling their workforce.

Re-locating: The changes like Brexit, stricter H1B and L1 Visa regime and GST may make it necessary/advantageous for companies to relocate their businesses. Especially in Indian context, many industrial units and trading companies that were set to only take advantage of tax arbitrage, may relocate in next 5-7years to more advantageous locations, e.g., near ports or central India. The real estate in these areas and logistic companies that will enable this re-location exercise may worth investing in my view.

Re-structuring & re-organizing: Restructuring of balance sheets and businesses, is already a popular investment theme. Business with stressed but manageable balance sheet; businesses with loads of "non-core assets" which were acquired in the credit frenzy of the previous cycle; and financial services companies which have been struggling with poor asset quality would make a good investment theme.

I shall be looking for (i) stronger balance sheets which will be out in the market with shopping bags to lap up the distressed assets; (ii) stressed companies with good quality assets which could be off loaded to repair the balance sheet, provided the P&L is already looking decent; (iii) financials where P&L is looking good, stressed asset are manageable, capital adequacy is decent and valuation is reasonable.

Re-orienting: The businesses that re-orient fast to be in synch with the new regulatory framework (GST, RERA in particular) and the companies that will be forced to raise compliance level to fall in synch may get favorable response from investors and get rerated. Some sin industries, contractors and real estate businesses will form this universe.

Wednesday, July 26, 2017

In serach of Ideas - 2

Thought for the day

"Civilization exists by geological consent, subject to change without notice."

—Will Durant (American, 1885-1981)

Word for the day

Tarn (n)

A small mountain lake or pool, especially one in a cirque.

Malice towards none

Media (print, electronic, digital and social) does not appear to be presenting true state of Indian affairs. The reporting and commenting seems to suffering from deep prejudice, partisanship and ignorance. Oversimplification and blatant generalization have become norm.

How do I get the true picture?

First random thought this morning

Police and society could not protect me from being raped.

But courts order me to give birth to the child that resulted from that rape, so that I never forget what kind of society I live in and how insecure and unprotected I am, and shall remain.

And you know the worst part, if my child want to mention his father's name in his passport or Aadhar Card, he might have to seek permission of my rapist.

Could it possibly get more ridicules?

In serach of Ideas - 2

Continuing from yesterday (see here).

In the global context, the technology companies that deal in Artificial intelligence (AI), automation, robotics, digitalization, et. al. have been in focus in past one decade. Most of the popular stocks, and perhaps also the top performing since 2009, could be identified with these buzzwords.

The Indian context is however different.

As yet, we are not facing the demographic problems, like the developing economies. To the contrary, to some extent we suffer from the problem of the plenty.

Enhancing productivity through automation etc. therefore faces a social dilemma. The fear of job losses or apprehension of low job creation invariably leads to socio-political resistance.

Moreover, so far, at household level we are certainly not spending more than our earnings. At the government level also, the fiscal discipline is remarkable, given the imperative socio-political compulsions and stark socio-economic inequalities. Cost efficiency though is an integral part of the Indian business as well as household management ethos.

Though, Indian economy has seen encouraging trend in automation & digitization in a large number of sectors, artificial intelligence (AI), automation, robotics, digitalization, et. al. have not been among the most popular trades in past one decades. The reason could perhaps be that most of these solution might be imported and not locally developed. (I may be guilty of overgeneralization here, but I find it ok, since it is the main point here)

I have seen many market experts and reputable stock pickers, suggesting big bets on companies dealing with these buzzwords. Some of their ideas have worked. But most of them have not, so far.

I believe that given the advancement already made in these fields elsewhere, it will be tough for the latecomer Indian (or any other emerging) companies to take pole position in these fields.

I am therefore convinced that in Indian context the primary trade may lie in the beneficiaries of these trends rather than the solution providers, who continue to remain marginal players in the overall global context. However, if some business shows excellence in these areas, that could be certainly added to the investment portfolios.

Insofar as I am concerned, my buzzword for Indian businesses is 'Re", especially in view of the recent regulatory changes.

Re-skilling, Re-locating, Re-evaluating, Re-building, Re-organizing, Re-structuring, et. al. are the trend that will create meaningful business opportunities in one decade or so. Re-orienting businesses to new tax paradigm and Re-organized real estate business would be important part of these trends....to continue tomorrow