Do it yourself

Tuesday, March 13, 2018

What's bothering Indian markets - 4

Thought for the day

"Deprived of meaningful work, men and women lose their reason for existence; they go stark, raving mad."

—Fyodor Dostoevsky (Russian, 1821-1881)

Word for the day

Paseo (n)

A slow, idle, or leisurely walk or stroll.

A public place or path designed for walking; promenade.

Malice towards none

Hakuna Matata!

First random thought this morning

Profligate print and electronic media advertisement by an institution or person, has in many cases been a harbinger of simmering scam underneath.

Many in their 40s would remember the plethora of celebrities endorsing "Home Trade" two decades back. Sahara India is another name.

These days, a small jurisdiction in Africa is bombarding India print and electronic media coaxing Indian investors to invest there.

Do you get an eerie feeling?

What's bothering Indian markets - 4

Indian banks have been struggling with the issue of non-performing assets (NPAs), for past few years.

A deeper study may be needed to establish the cause and effect relationship between the bank balance sheet problem and broader economic growth trend. Nonetheless, the NPA problem got exacerbated when the GDP growth has seen a declining trend;

...and credit growth has remained quite subdued.

More worrisome is the fact that Personal loans, usually considered the most vulnerable segment of bank credit has become a dominant segment in credit growth. In December 2017, it contributed 43.3% to the incremental credit mix.

Within personal loans, the riskiest segment Credit Card lending took the lead, while growth in vehicle financing moderated to 9.3% YoY.

There are a multitude of reasons responsible for deterioration in asset quality of banks. Some prominent being:

(a) Delay in execution of large infra and industrial projects, due to protracted litigation, departmental clearances and financial closures.

(b) Poor judgment of the viability of the project.

(d) Frauds, scams and manipulations

(e) Global development (dumping, change in technology etc.) rendering the projects unviable subsequently.

In past few months, the government took a number of steps to repair the balance sheets of public sector banks, notably, recapitalization of banks and accelerated resolution of NPAs under the new bankruptcy law.

However, some recent events appeared to have impacted the revival plans for banks. For example:

(a) In its bid to accelerate the NPL clean-up, RBI has withdrawn all forms of restructuring dispensations such as 5/25 refinance, strategic debt restructuring (SDRs), S4A etc. The RBI has also asked banks to expedite the resolution process in existing cases where the restructuring guidelines have been invoked; else those cases would be referred to the bankruptcy courts.

(b) The alleged fraud that started at PNB, has created tremendous uncertainty in the entire banking sector. The extent and impact of the fraud is difficult to judge at this stage. This is likely to make bank managements, regulators and auditors excessively paranoid.

These events:

(a) threaten to impact profitability of lenders;

(b) may require material amount of further provisioning; and

The markets may therefore be right in bothering about the health of financial sector in near term.

Friday, March 9, 2018

What is bothering Indian markets - 3

Thought for the day

"Acting is very fascinating, but being an actress is not, because you become so concentrated on yourself."

—Beatrice Wood (American, 1893-1998)

Word for the day

Minerva (n)

A woman of great wisdom.

Malice towards none

Bhasmasur is not an entirely a mythical character.

First random thought this morning

Globally, India is widely recognized as the diabetes capital of world. Indian government has also acknowledged this fact on a number of occasions.

However this acknowledgement has not resulted in acceptance of this fact. The designing and construction of most civic infrastructure and amenities therefore is incongruent to the fact that a large number of diabetic people will regularly use these amenities. For example, Delhi Metro has provided space for public toilets only on a few interchange stations; NHAI does not construct and public toilets on the highways nor does it require private road operators to do so!

What is bothering Indian markets - 3

As per a recent report published by RBI, currently the average capacity utilization in Indian industries is close to 72%. This has been the case for few years. The IIP growth during this period has been at multi year low.

However, the inflation has jumped above the RBI target rate of 4%.

This is when the economic growth has just started to pick up and is still seen much below the potential, leaving a large output gap. Private consumption is showing no sign of revival, employment level remains poor, and most of the investment demand is driven by public investment.

Despite benign growth, high output gap, and poor consumption growth, the rates have started to rise. Most banks have raised both the deposit and lending rates in past few weeks. The benchmark government bonds yields hace risen by more than 110bps in past six months.

The arguments in favor of higher bond yields have been many but mostly unsubstantiated, e.g., fiscal concerns, rise in global yields etc.

This situation is quite unusual. There is no instance in recent history where rate cycle would have reversed in this early stage of growth cycle.

So far we have not seen any effort from the government or RBI that would inspire confidence. To the contrary, the still rising stress in bank balance sheets, tighter domestic liquidity (though RBI announced early this week, pumping of Rs1trn in market to ease liquidity), tightening global liquidity threaten that rates may stay elevated in near term at least.

Higher cost of funds may not only impact corporate profitability, but also impede the investment plans.

Since, RBI is totally focused on inflation targeting, banks have to deal with the new set of problems, and government may get too busy with election schedule - the growth may not be a top priority for now.

This must be bothering equity investors

Thursday, March 8, 2018

What is bothering Indian markets - 2

Thought for the day

"But, you see, the theatre is not always art in America."

—Beatrice Wood (American, 1893-1998)

Word for the day

Benighted (adj)

Intellectually or morally ignorant; Unenlightened

Malice towards none

कुछ भी नहीं है,
बाक़ी बाज़ार चल रहा है\
ये कारोबार-ए-दुनिया,
बेकार चल रहा है\

—~सालिम सलीम

First random thought this morning

BJP won Tripura elections on the promise of "rule of law" and "good governance". An act of public outrage and destruction of public property (even if it is Lenin statute, it is public property constructed with people's money), with police acting mute spectator, is not an inspiring beginning.

The debate in media is totally irrational and ridiculously frivolous. Dragging Mahatma Gandhi and Bhagat Singh into this quagmire is blasphemous.

The better course would have been to pass a resolution in Assembly (BJP has 2/3rd majority), condemn Marx and Lenin and officially remove it.

Else, let people freely destroy all Mughal and British monuments!

What is bothering Indian markets - 2

In my view, the aggregate earnings growth estimates for FY19 and FY20 are optimistic and may need moderation in coming months.

I believe that analysts are not fully factoring the impact of the following in their estimates:

(a) Rise in financing cost.

(b) Persistently high inflationary expectations and hence acceleration in wage cost.

(d) Further deterioration in asset quality of banks and NBFCs as (i) paranoia hits compliance & audit functions; and (ii) rise in lending rates impairs debt servicing capability of more marginal borrowers.

(e) Extrapolating 3QFY18 earnings to FY19 and FY20 may not be appropriate as this quarter had a low yoy (DeMo affected) and qoq (GST roll out impact) base. The aggregate 3Q growth normalized for these two major disruptions, does not give much reason for being ebullient, especially considering that the earnings have remained flat for past three years.

I have read over 25 reports analyzing 3QFY18 results and forecasting FY19 and FY20 earnings post these results. All analysts appear predetermined to project a rather optimistic picture of FY19/FY20 earnings. They have therefore tried to present 3Q analysis on selective basis, like Ex-financials, Ex-SBI, Ex-energy, Ex-financials & OMCs etc.

I would though like to ignore this selection bias and consider the aggregate numbers. On aggregate basis:

(i) Nifty top line grew 13.4% (yoy) despite a low base affected by DeMo.

(ii) Nifty EBIDTA grew by 8.8% below consensus estimates of over 11%.

(iii) Nifty PAT grew 7%, much below estimates of over 13%.

The consensus amongst analysts is forecasting ~25% EPS growth in FY19 and another 18-19% growth in FY20. We have hardly seen any downgrades in past 6months. On these basis one year forward PE of current Nifty level is close to 17x, which is still higher than the long term average.

I feel before the dust settles on NPA issue, we may see another round of business disruptions, as credit is squeezed and cost is hiked.

Having said this, I must highlight, it would be highly imprudent to ignore the broad based earnings recovery and green shoots sprouting in various patches of the economy. I therefore feel that investors should stay alert and keep exploring opportunities burgeoning in pockets.

(Source: MoSl, Credit Suisse)

Wednesday, March 7, 2018

What is bothering Indina markets?

Thought for the day

"A rich poet from Harvard has no sense in his mind, except the aesthetic."

—Beatrice Wood (American, 1893-1998)

Word for the day

Ergophobia (n)

An abnormal fear of work;

An aversion to work.

Malice towards none

If my memory serves me right, earlier, RSS and therefore all its affiliates, used to dislike Buddhism.

What is the current status on this?

First random thought this morning

The CBSE Board examination for class 10 and 12 started from Monday. A visit to one of the examination centers confused me a lot. There were many things, but this one thing was seriously bothersome.

Students from 7 different schools have been assigned to this particular center (also a school) for writing exams. Most students, this being their first "Board Exam", appeared nervous. The alien place further compounded their anxiety. The parent accompanying the students waited outside the center for hours, helpless, anxious and distressed.

This very concept of making students to go to different place for writing exam, smacked of a "serious mistrust" of the system in its own schools, teachers and students. It should be completely unacceptable; and is also contrary to what PM Modi promised when he took oath of office in 2014.

What is bothering Indina markets?

In past one month there has been a definite change in the market sentiment. A significant number of market participants, who hitherto held an unqualified positive view on Indian equities, have turned conspicuously cautious. A number of legendary investors and reputable fund managers have sounded multiple notes of caution.

Even Rakesh Jhunjhunwala, fondly termed Warren Buffet of India, has also opined, a couple of days back, that Indian market might have already logged their intermediate top and may not rise from current levels in a hurry.

Foreign bankers like CLSA and Morgan Stanley have reduced the weight of India in their model emerging market portfolios by 1-2.5%, in past few weeks.

This caution is on the back of incessant selling by foreign investors in past many months. Out of past 9months, FPIs have been net sellers on stock exchanges for 8 months. The domestic mutual funds and institutions have however bought whatever FPIs have offered to sell. Nifty has is higher by ~3% since its July 2017 highs.

The bearish view amongst the domestic participants however is still tentative and lacks strong conviction. Hence, the domestic flows remain unabated.

What I gather from the popular commentary is that the participants are worried about a variety of factor. Some prominent of these factors could be listed as follows:

1. Earnings growth has been below expectations, and may see downgrade in coming months. The valuations appear elevated.

2. The rate cycle appears to have turned. The next RBI may be a hike.

3. Banks may see a fresh round of slippages.

4. Continuation of production curbs by OPEC could see crude prices remaining firm and rise further. Inflation & CAD situation may worsen.

5. Higher US yields may see acceleration in FPI selling, even in debt, putting further pressure on INR.

6. A spate of election in next 15months could lead the government to focus more on rural areas (higher farm subsidies and MSP) and less on urban infrastructure.

7. GST stabilization may take longer than estimated, thus keeping the fiscal at elevated level.

8. We may see higher supply of PSE stocks to meet the fiscal gap.

9. Global growth may falter as inflation and rates pick up.

10. Market needs to cool down after a sharp run up.

I shall present my views on each of these concerns in coming days.

Tuesday, March 6, 2018

2019 = 1977+1989?

Thought for the day

"Most potters go in for earth tones and subdued things, whereas I like color."

—Beatrice Wood (American, 1893-1998)

Word for the day

Peculate (v)

To steal or take dishonestly (money, especially public funds, or property entrusted to one's care); embezzle.

Malice towards none

D'nile is not a river in Egypt.

#CongressParty

First random thought this morning

The race to show one's hatred, especially towards the establishment, was never so intense. A slight hint of opportunity and every one rushes to condemn the entire system, establishment, traditions, gender, religion, community etc. Not a thought is spared before painting the entire spectrum black. Unfortunately the race is invariably led by the elite and intellectuals.

A classic example was seen last week, when a couple of young girls decided to play a creepy prank on police. They complained that they have been hit by balloons filled by semen. Hundreds of "progressive" citizens instantaneously pounced on the opportunity and castigated "male gender", "Hindu traditions", "Holi festival", "Police department" and "apathetic society", without even bothering about the plausibility of the alleged crime!

2019 = 1977+1989?

The recently concluded elections for three north eastern state legislatures validated a variety of trends in Indian polity, particularly those that emerged in past 4years. Some of the trends could be listed as follows:

(a) BJP has gained political ground across the country, primarily at the expense of the Congress Party.

(b) Since, the emphatic Lok Sabha victory in 2014, BJP has managed to win almost all relevant elections, wherever it was the principal party straight in contest with the Congress Party.

Beyond the popular perception about the last Gujarat assembly elections, one must note that BJP won in spite of 25yrs of anti incumbency; a rather unimpressive local leadership that replaced charismatic Modi; poor cotton and groundnut crop realization leading to elevated farmers' distress; Patidar (traditional BJP voter) agitation; and Dalit unrest, etc.

The right wing BJP, in its hurry to grow a pan India base has taken the "inorganic growth" route, incorporating a large number of core group people from so called socialist, secular, caste based and/or regional parties. These new incumbents hardly subscribe to the core RSS ideology and BJP ethos.

The left parties, having lost most of their bastion, appears more keen to play second fiddle to the Congress Party.

The Congress Party is eager to align with the Socialist parties whose raison d'être has been anti Congressism. These Socialist Parties having degenerated into feudal fiefdoms of few families are also happy aligning with the Congress Party to retain their relevance as legitimate political force.

(d) The Congress is now relegated to 3rd or lower position in states comprising more than 50% of India's voter base, viz., UP, Bihar, West Bengal, Tamil Nadu, Jharkhand, etc. There is nothing to suggest that the Party is even trying to regain its vote share in these states. It rather appear more willing to yield further ground to the respective strongest regional party in these states. So any alternative to BJP will be a fragmented coalition with no partner with pan India presence.

This situation is very similar to 1977, when all regional parties aligned to defeat the mighty Indira Gandhi. The interesting thing to note is that both in 1977 (Morarji Desai, Jagjiwan Ram, Raj Narayan, et. al.) and 1989 (V. P. Singh, Arif Mohammad Khan, M. M. Sayeed, V. C. Shukla, Satyapal Malik, et. al.) there were tall Congress leaders who challenged and defeated the Congress Party.

The point to ponder therefore is will history repeat itself or Modi shall remain invincible in 2019 and perhaps beyond too!

Wednesday, February 28, 2018

A sub-prime crisis brewing

We are delighted to greet all our readers on the joyous occasion of Holi.

Let’s forget, forgive and celebrate together!

Next issue of Morning Trekk will be published on Monday 5th March.

Thought for the day

"By working faithfully eight hours a day you may eventually get to be boss and work twelve hours a day."

—Robert Frost (American, 1874-1963)

Word for the day

Goldilocks (adj)

Not being extreme or not varying drastically between extremes

Malice towards none

कौन अच्छा है इस ज़माने में
क्यूँ किसी को बुरा कहे कोई
— नासिर काज़मी

First random thought this morning

Problem: The number of stalled projects continue to rise and are already at alarming level. Delay in statutory clearances, problems in land acquisition, financial unviability due to cost overruns and/or changes in competitive scenario, etc. are some major reasons. The staggering number is affecting investors' confidence and slowing down private sector investment. As per the latest Economic Survey top 100 stalled projects account for 75% of India's total "promised investment".

PMO Solution: Change the base. Change the label from "stalled" to "abandoned" or "shelved" or "dropped" where promoters have no further intention to start implementation.

We also shall regain the title of "fastest growing economy" by changing the base year for calculation to 2017-18!

A sub-prime crisis brewing

As I highlighted in earlier posts, in past one decade there has been significant rise in number of self employed people, as the job growth in organized sector and public sector has stagnated (or marginally declined).

An extensive research is needed to assess whether this is a cyclical trend or a structural change in the Indian economy.

Nonetheless, this trend may have contributed to a consistent decline in the household savings.

While the rise in household investment in stock of publically traded companies in past couple of years has been discussed and hailed widely, the rise in personal loans (other than education and housing) has largely escaped scrutiny. Moreover, contrary to popular narrative, the bank credit to the priority sector (including Agriculture, MSME, Education and Housing) has declined as percentage of adjusted net bank credit in past three years.

If we juxtapose - poor job growth; youth forced to "self employ" and be underemployed or get employed in disguise; tightening bank credit to MSME, education and housing; rise in "personal loans"; rise in high cost microfinance; rise in consumer credit by NBFCs; rise in share of riskier assets like equity in household savings portfolios - we get all the ingredients of a sub-prime crisis brewing in the Indian economy.

Tuesday, February 27, 2018

Ignore it at your own peril

Thought for the day

"A jury consists of twelve persons chosen to decide who has the better lawyer."

—Robert Frost (American, 1874-1963)

Word for the day

Mores (plural noun)

Folkways of central importance accepted without question and embodying the fundamental moral views of a group.

Malice towards none

मुझ को तो होश नहीं
तुम को ख़बर हो शायद
लोग कहते हैं कि
तुम ने मुझे बर्बाद किया
—जोश मलीहाबादी

First random thought this morning

Sridevi, was inarguably one of the most talented and gorgeous actress of all times. She was reputable and widely honored for her talent and conduct. This has been true for more than three decades.

The moot point is what then prompted the versatile actress to indulge in excessive weight management practice and other cosmetic procedures!

The answer to this inquisition will enlighten us to the real cause of her untimely demise.

Ignore it at your own peril

The Economic Survey for FY18, examined the issue of slump in investment and savings rate in detail.

As per the Survey report "India’s unprecedented climb to historic high levels of investment and saving rates in the mid-2000s has been followed by a pronounced, albeit gradual, decline. This current episode of investment and saving slowdown is still ongoing."

The two key findings of the Survey, in this regard are as follows:

(a) Investment slowdowns have an impact on growth but not necessarily saving.

(b) Another is that recoveries from investment slowdowns, especially those associated with balance sheet difficulties--as in India--tend to be slow. Notably, mean reversion or some degree of automatic bounce-back is absent so that the deeper the slowdown, the slower and shallower the recovery.

The Survey examines "Should policies that boost investment (viz. substantial infrastructure push, reforms to facilitate the ease of doing business or the ‘Make in India’ program) be given greater priority over those that boost saving? The issue is about relative importance and urgency. Both set of policies are crucial in the long run but which one needs to be prioritized at present?"

The Survey draws on a number of research works done on the subject by various economists and concludes "that policy should focus on urgent prioritization of investment revival to arrest more lasting growth impacts."

The Survey also suggests that "In addition, creating a conducive environment for small and medium industries to prosper and invest will help revive private investment. The focus of investment-incentivizing policies has to be on the big and small alike. The ‘animal spirits’ need to be conjured back."

Without going into technicalities of the research work relied upon by the policy experts engaged in the Economic Survey, I must say that it may not be entirely appropriate to apply the research done in developed western countries to India context as it is.

"Saving" is integral to traditional Indian ethos - in both business and household spheres. Living within one's means, sustainability, austerity, prudence, asceticism etc. form core of the traditional Indian economic behavior.

Imbibing these principles, Indian economy did extremely well for thousands of years. In modern times also, Indian economy has shown great resilience in most episodes of global economic crisis, including the latest one in 2008. Household savings and not the foreign investment protected us....to continue