Friday, January 11, 2019

Burden of expectations easing gradually

Some food for thought
"The Haitian people are gentle and lovable except for their enormous and unconscious cruelty."
—Zora Neale Hurston (American Dramatist, 1891-1960)
Word for the day
Pawky (adj)
Cunning; sly
 
First thought this morning
The Law Minister of India, and apparently a close confidant of BJP leadership, inadvertently admitted three things on the floor of the parliament:
(a)   BJP is in a desperate situation. In next 40-45days, before the code of conduct becomes applicable, it may slog even more recklessly.
(b)   BJP did not play its 5yr inning in a planned manner. That is why it needs to slog in last couple of months.
(c)    BJP as a team is overwhelmingly dependent on its captain. The captain planned and executed Demonetization, as Finance Minister is on record denying any pre knowledge of it. The captain conceived, authorized and monitored the Surgical Strike on Pakistan. He himself indicated in his latest interview that the Defense Minister may not have been kept in loop. Reports suggest that the Union Cabinet and Law Minister might not have been consulted on the hurriedly drafted and passed 10% Quota for Poor legislation.
To win 2019 elections, BJP needs 19 runs with 4 balls remaining. They would need to hit at least three sixes. One dot ball, and its either a tie or loss for BJP.
Chart of the day
 
Burden of expectations easing gradually
The earnings reports for 3QFY19 have started to trickle in. From next week, the reporting will gather pace. After a long period, this would be the first earnings seasons where the expectations are running really low.
The consensus is estimating single digit growth on both EBIDTA and PAT. The estimates for FY19 and FY20 have moderated over past 3months. The consensus estimates for NIFTY EPS now stand around Rs500-520 for FY19 and 640-660 for FY20. This implies 12-13% growth for the current year FY19, and 26-28% growth for FY20. It is likely that we may see further cuts in post the 3QFY19 results. I expect FY19 growth to be around 8% and FY20 Nifty growth to moderate to 20-21%, implying an EPS of ~Rs575.
The burden of high expectations is thus lifting from the market's shoulders gradually. With election results out of its way, markets would feel much lighter and supple by the end of 1H2019, in my view.
Insofar as 3QFY19 is concerned, the consensus expects:
(a)   The drivers of earnings over past 4quarters, energy, metals and autos may take a break and report poor performance. About one third of the companies may report profit decline in the reporting quarter.
(b)   Large IT may continue to report decent growth. Overall sector growth to be in double digits.
(c)    Corporate banks may report a turnaround in both earnings and asset quality. Higher treasury income may add to the other income. Lower NPA accretion and some write backs should help asset quality and provision coverage. The biggest positive delta is expected in private corporate banks, while PSU Banks are also expected to do much better.
(d)   NBFCs shall report some margin contraction and poor credit growth. However, in aggregate they may still report decent double digit earnings growth.
(e)    Some sectors like pharma and cement are expected to report decent yoy growth given the poor base numbers.
(f)    The key sector to watch would be real estate. The market opinion is divided on this sector. However, majority expects material expansion in operating performance.

 

Thursday, January 10, 2019

Building UBI in investment strategy

Some food for thought
"Gods always behave like the people who make them."
—Zora Neale Hurston (American Dramatist, 1891-1960)
Word for the day
Malinger (v)
To pretend or exaggerate incapacity or illness (as to avoid duty or work)
 
First thought this morning
The controversy over constitution of five judge bench for hearing Ayodhya Sri Ram Mandir dispute is most unfortunate.
Mere thought that the religion of a Supreme Court judge might have a bearing on his judgment (whatever the matter be), is contemptuous and preposterous.
One can somehow understand the interested groups questioning the constitution of the SC Bench. But senior journalists and politicians taking the point of these groups forward is incomprehensible.
This is more important since no less than the prime Minister himself has already indicated that if SC decision goes against the cause of Sri Ram Mandir, the government may consider legislative action to undo the decision.
Putting so much pressure on judges in matters of national importance, will only further undermine the credibility of the judiciary.
In the instant case, no matter what the decision is, some are going to see communal colors in that.
Chart of the day
 
Building UBI in investment strategy
Telangana is the first State in India to implement a Universal Basic Income (UBI) Scheme for all the 6million farmers in the state. Under the Rythu Bandhu Scheme, the state government offers to pay Rs8000/year to the farmers of the state, irrespective of the size of landholding. The amount is given by bearer cheque through Village Panchayat.
Commendably, before implementing the scheme, the State has made all land titled good, by completely digitizing the land records and issuing new fully secured title deeds (Land Pass Books) to all the farmers. All land holdings records are transparent and could be digitally verified by anyone.
Arguably, this measure may not address any of the fundamentals issues plaguing Indian farm sector. Nonetheless, it may at least ensure that no one starves to death.
Telangana government's scheme for Universal Basic Income (UBI) for farmers has recently found favor with the governments of Odisha and West Bengal. It is only a matter of time when most other state governments follow this scheme to protect their vote share.
There would be absolutely no surprise, if we see a promise to implement such a scheme in the manifestoes of most parties contesting general elections in summer of 2019. The regional parties may promise to implement the same or similar scheme in their respective states. The national parties might promise a pan India roll out.
A MNREGA like mega pan India UBI scheme for ensuring a bare minimum standard of life for each farmer household can be clearly seen on the horizon, within next five years.
Soon, a strong demand would rise from the non-farmer poor for such basic income support.
As an investor I must evaluate whether my investment strategy accounts for such a major fiscal event!
I would imagine that a pan India roll out of some sort of UBI would entail merging or elimination of numerous schemes and subsidies. Nonetheless, it would certainly cast material additional burden on the already strained fiscal situation of the center and state governments. Given that most populated states in the country (e.g., UP, Bihar, MP, Rajasthan) are already fiscally challenged, this additional social spending would be at the expense of new capacity creation. It would therefore reasonable to account for a materially higher incidence of tax on corporate, discretionary spending, as well high income households.
The basic income would be sufficient to add some demand to consumer staples and things like Hawai Chappals. However, there may not be much impact on the discretionary spending. It would not be unreasonable to believe that the higher fiscal pressure might keep the rates at elevated level, further pressuring the demand for discretionary consumption.
I would therefore like to update my models for the following:
(a)   Higher overall tax rates, more so in case of luxury and sin category.
(b)   For companies with stretched finances, elevated finance cost may stay for much longer than earlier anticipated.
(c)    Volume growth for staples may sustain, but margins are unlikely to improve.
(d)   Foreign flows would be watchful, and may not rush to India anytime soon.
(e)    Domestic flows into market may suffer marginally due to higher incidence of taxation, both direct and indirect.