Wednesday, June 13, 2018

Has 2013-2018 mostly been a "Hope" trade? - Part 2

"It is not helpful to help a friend by putting coins in his pockets when he has got holes in his pockets."
—Elizabeth Bowen (Irish, 1899-1973)
Word for the day
Blamestorming (n)
A discussion or meeting for the purpose of assigning blame.
Malice towards none
Ain't the Z+ security cover already assumes the highest conceivable level of threat to the person being covered?
 
First random thought this morning
The government has apparently decided to allow lateral entry of experienced professionals into civil services at Joint Secretary level. The idea is welcome, inasmuch as it aims at bringing wider experience and diverging thoughts into the administration.
A complementary idea would be to allow IAS officers with more than 10yr service, to work in private or social sector for 3-5year (without losing their seniority and other tenure related benefits) to gain wider and deeper experience and assimilate the needs of businesses and society from a non-administrative perspective.
An Investor's Diary
The corporate earnings picture of past 4years, indicates that the market rally in India has so far been driven more by "Hope" rather than delivery of results.
To quote a recent research report by Edelweiss "Q4FY18 was another disappointing quarter with profits for our coverage universe contracting 19% YoY (versus our forecast of +13% YoY). While corporate banks and commodities were big disappointments, even after excluding them profit growth was muted at 8% (versus Q3FY18 growth of 10% YoY) despite a low base....Nifty’s FY19 EPS consensus/Edelweiss forecast is 25%/30% growth (versus 0% in FY18)."
As per a recent CRISIL India Outlook report, though the revenue growth for NSE listed companies (ex financials and oil companies) has shown some signs of recovery in FY18, the EBIDTA growth has been the worst in more than a decade.


Despite major disappointment in past four years, the market is assuming more than 22-25% EPS growth in FY19, though rising input prices, wages and finance costs are clearly indicating the low probability of this kind of profit growth.


(Source: Edelweiss Research)
The capex has been collapsing ever since 2014, with the share of private sector capex consistently declining. As per CRISIL, FY18 saw capex growth of just 1%, out of which 76% was contributed by the government.
The sharp recovery in Capex projected in FY19 is mostly expected to be driven by the government. However considering the risk of government focusing on social schemes in an election year, rather than asset creation cannot be ignored.




Moreover, as the said CRISIL reports note, there are early signs of GST pushing the industries into consolidation. The large companies (mostly listed) are gaining market share in respected spheres at the expense of smaller companies.
So even if the aggressive projections of `22-25% earnings growth comes true, this will not be a true reflection of the stress in the economy that must get reflected in consumption at some point in time.

...to continue tomorrow
Also Read
Posted by at No comments:

Tuesday, June 12, 2018

Has 2013-2018 mostly been a "Hope" trade?

"Meeting people unlike oneself does not enlarge one's outlook; it only confirms one's idea that one is unique."
—Elizabeth Bowen (Irish, 1899-1973)
Word for the day
Scrutator (n)
A person who investigates
Malice towards none
Nirav Modi has reportedly taken shelter in UK!
Would be interesting to know how far behind is UK from Pakistan in harboring people wanted by Indian police?
 
First random thought this morning
The biggest fake news doing round on social media is about how the quota for SC/ST/OBC is undermining the merit in professional courses like engineering, medical and law.
As a recent TOI article highlighted (see here) it is the money power and feudal dynastic tendencies that are harming the merit more than anything else. Successful doctors make sure that their heirs get medical degrees (regardless of merit) so that they can inherit their Clinics and Patients. It is true for successful and famous lawyers and architects also. CAs have no quota or reservation system. Can anyone speak confidently about supremacy of merit in accounting profession? The merit is totally compromised in case of temple priesthood,

An Investor's Diary
In my view, the potential growth of India under current circumstances is not more than 8%. Growing at 6.5-7.5% in the current direction would not lead to enough employment opportunities. Agriculture, as we have seen in past few years, is still “God” driven. Basing an investment strategy on God’s alone is not advisable in my view.
The consensus growth estimates indicates that the recovery seen in past couple of quarters may sustain and gather some momentum. From sub 7% in FY18, the growth may recover to ~7.5% in FY19 and FY20.
As per a recent report by CRISIL, "We expect the Indian economy to expand at 7.5% next fiscal. After two consecutive years of deceleration, this looks like a strong recovery. But here’s the sobering thought: that would still be below the average growth of 7.6% seen over the past 13 years. To boot, it would come on a weak base of this fiscal.
 


However, much more than the quantity of the growth, it is qualitative aspects of the growth which are matter of serious concern. The structure of the growth as partly manifested in direction and constitution of growth remains weak and is expected to remain so for better part of next five years (More on this later)
The current estimates of the modest recovery in growth are overwhelmingly dependent on the steady global growth environment, continued high public expenditure and favorable weather conditions.
For a structural improvement in the economy we need our manufacturing and construction sectors to grow at a much faster rate. The current estimates of industrial growth service sector growth of cannot and will not lead to any material improvement in the structural weaknesses of the economy, e.g., high level of unemployment/underemployment, poor physical and social infrastructure, low tax to GDP ratio, declining private sector investment, etc.
All the indicators are highlighting that the modest recovery in growth will probably come from higher public expenditure and micro adjustments like correction in inventory levels, higher capacity utilization, higher exports, & improvement in project execution etc, .
This may not lead to any material improvement in employment conditions. On the contrary there are sufficient indications that many employers may actually further rationalize their work force to protect their margins. Historically, the work force rationalization in India, especially in manufacturing and construction sectors, has been more permanent in nature. Household savings and investment may therefore remain constrained in next few years at least.
The investment environment is not likely to improve in any substantive measures. Higher inflationary expectations shall keep rates at elevated level; producers are not likely to gain much pricing power as the demand domestic environment continues to remain weak; balance sheet stress that has eased in some pockets, may begin to show up again.
Insofar as the current medium to long term growth trend in India is concerned, in my view, the trend growth decline that began from FY09 may not bottom in FY19, even if we accept the rather bullish estimates of government agencies.
If we examine the extant bull market in Indian equities in this context of lower growth, and diminished growth potential, we get a feeling that the current market bear more similarities to 1998-1999 dotcom bubble rather than the 2004-2008 credit led infra building episode.
As could be seen from the following chart, the long term growth (5yr rolling GDP CAGR %) has shown little improvement in 1997-2000, but Nifty had still returned its second best yearly return of 67% during 1999.
Similarly, the long term growth has been largely flat during the current bull market since August 2013 (FY14-FY18).


The picture get more clear, if we compare the bull markets of 1998-1999, 2003-2008 and 2013-2018, juxtaposed with the long term economic growth.
1999 bull markets coincided with declining growth trend, and hence did not sustain much. Subsequent losses were huge and mostly irrecoverable.
2003-2008 bull market occurred when the growth was witnessing massive jump. The market lasted longer, and despite global contagion, losses were recovered in no time.
In the current bull market, so far we have not seen any material change in long term growth trend.


The point is how long and how far this market could continue to stand on fragile "green shoots" of economic recovery?
Also Read
Posted by at No comments:
Subscribe to: Posts (Atom)