Thursday, February 28, 2019

3QFY19 - Mixed bag

Some food for thought
"We all need money, but there are degrees of desperation."
—Anthony Burgess (English Novelist, 1917-1993)
Word for the day
Cozen (v)
To cheat, deceive, or trick.
First thought this morning
The whole country celebrated the IAF strikes on JeM targets. People danced; distributed sweets; congratulated each other; saluted IAF; and commended political leadership. A large number of retired army and air force officers appeared on television and explained the strategic and diplomatic importance of these strikes. The inboxes and timelines were inundated with jingoistic jubilations.
I think we should conclude the celebrations fast and begin to prepare for what may befall on us in next few years.
These strikes have changed the post 1971 Shimla agreement paradigm of Indo-Pak engagement. It has erased all the pretense of normalcy and cordiality in relationships. There might be only a negligible threat of full blows war between the two nuclear powers. However, we shall certainly witness a material rise in (a) engagement at borders; and (b) activities of mercenaries backed by Pakistan Army.
Notwithstanding the farcical security check at shopping mall and hotel entrances, the preparedness of civil defense, police force and citizens in preventing and handling terror activities is abysmal. The private security personnel are mostly farmers and construction labor in uniform. Most of the guards who open car bonnets and trucks at malls and hotels have actually not seen a weapon or bomb.
Soon we shall start a long season of election campaigns. Given the current state of security apparatus, this would be an easy time for mercenaries to carry out their nefarious designs.
I feel, the administration and forces should immediately draw a plan to create awareness amongst people, train the civil defense personnel, and mark all the easy targets. The most peaceful and unsuspecting areas should be secured first, in my view.
Chart of the day
 
3QFY19 - Mixed bag
The result season for 3QFY19 has almost ended. The corporate performance has been mixed for the quarter under consideration. However, earnings have been downgraded across sectors and categories of companies for 4QFY19 well as FY20.
Based on reports of various brokerages, the key highlights of the latest earnings season, could be listed as follows:
Nifty Earnings (Edelweiss Research)
     Nifty top-line grew by 23% Y-o-Y in Q3 while bottom-line grew by 5% Y-o-Y.
     Financials were the major drivers of earnings growth led by banks. However, NBFCs continued to see weakness in growth.
     Oil Marketing Companies (OMCs) were the main draggers of headline profitability on the back of lower refining margins and inventory losses.
     Earnings were impacted by high raw materials prices, INR depreciation, muted demand sentiment and tight liquidity.
     Going ahead, impact of low commodity prices including crude oil along with stabilisation of rupee may support growth.
     Nifty FY19 diluted EPS from continued operations is expected to be 503
Consensus earning continues to be downgraded (IIFL Research)
Earnings downgrades have persisted through the 3Q reporting season, as FY19 EPS for the Nifty Index has been downgraded by 5.7%. While consensus estimates imply a modest single-digit EPS growth for FY19, FY20 growth is estimated to be more than 20%.
This is an extremely optimistic assumption and earning downgrades are, therefore, likely to continue through FY20 too.
Aggregate BSE200 profit growth is estimated to grow ~27% YoY in FY20, while aggregate BSE200 profits, excluding PSU banks and metal companies, is expected to grow ~21% YoY. We believe these estimates are extremely optimistic, given that the nominal GDP is expected to grow 11-12% YoY in FY20. While earnings growth should improve in FY20, with lower PSU bank losses and improvement in demand, earnings downgrade would continue in FY20 as well.

 
FMCG, IT and Infra reported strongest numbers, peak NPAs behind (Various Brokerages)
While two infra companies’ PAT grew 32% yoy, on account of strong operational performance (L&T on strong order inflows and execution and Adani Ports on strong cargo volume and profile), PAT of FMCG and IT companies grew 15-17% yoy, with a stable earnings profile.
FMCG particularly has seen higher support from rural markets (compared to urban) as they reap benefit of overall stronger crop output in last 2 years while urban markets deal with a high base owing to 7th CPC pay-outs that is finally fully implemented.
With a) overall system Gross NPAs coming down by 70bp sequentially in Sep 2018 and b) an uptick in corporate credit uptick (details here), we see corporate banks benefitting. Consequently, in current earning season, we have observed NPL recovery, stronger earnings outlook, expectations of improvement of ROE, ROCE across three Nifty banks with strong corporate loan book (ICICI, SBI and Axis Bank).

 
 

Wednesday, February 27, 2019

Where India stanmds in Sino-US trade war

Some food for thought
"He said it was artificial respiration, but now I find I am to have his child."
—Anthony Burgess (English Novelist, 1917-1993)
Word for the day
Evenfall (n)
Twilight; dusk; the beginning of evening
 
First thought this morning
Indian Air Force avenged the Pulwama attack adequately. Penetrating deep into the Pakistan territory (not just PoK), our fighter planes destroyed JeM camps. The performance was meticulous, worthy of a force which is comparable to the best in world. All citizens must be feel proud and safe.
The early reactions to the strikes from various sections are noteworthy, as these reactions indicate to some important trends.
(a)   Pakistan Army admitted the transgression, but denied any damage. They claimed that transgressing Indian Air Force planes were forced to shed "payload" in vacant land and run back. The adventurous attempt therefore has been successfully repelled.
This official reaction came much before any claim was made by any Indian official.
Obviously, Pakistan establishment is worried about its credibility and also preparedness of war, both economically and strategically. They are hence eager to preempt any adverse public opinion that might force them to retaliate without any preparedness.
Secondly, regardless of all the rhetoric, Pakistan is certainly not willing to escalate the matter further. Most voices in Pakistan media called for peace and dialogues.
(b)   Almost every opposition leaders in India commended IAF for the successful operation, much before any official statement was made.
It appears that almost all of them were suffering from the guilt of challenging the authenticity of surgical strikes of September 2016. They used this opportunity to remove the label of "anti national" pasted on them by BJP and allied organization. To this extent, it is clear that BJP has been largely successful in setting the narrative and agenda.
(c)    By making this overt operation, the Indian establishment has also made sure that the situation does not get escalated any further. The government has effectively calmed all the feathers that got ruffled post Pulawama attacks.
Chart of the day

 

Where India stanmds in Sino-US trade war

For past many months, the trade related disputes between two of the largest global economic powers have kept markets busy.
USA has announces several measures to reduce its trade deficit with China, including imposition of import duties on imports from China. The impact of the measures is visible in slowing Chinese growth and declining global trade. The exports of US to China have also suffered. The collateral is that the trade surplus of EU, Japan and Australia etc with China has further increased.
The financial markets have reacted wildly to each sign of truce and antagonism between the two super powers. Currently markets are running up, rather hard, fueled by the signs of thaw.
Notwithstanding the market volatility, as a small Indian investor, who is entirely focused on domestic assets, I find the following issues pertinent for examination.
(1)   Would India benefit from escalation of trade war between US & China, or complete normalization of trade relation between US and China; or continuation of current state of indecision and tentativeness?
(2)   If not resolved soon, would the trade conflict between China and US, remained confined to trade or escalate further into a geo-political crisis?
(3)   If the trade war escalates, and both the parties harden their positions, will we have a cold war kind of situation again, polarizing the world again?
All our neighbors (Pakistan, Nepal, Bangladesh, Sri Lanka, Maldives, Mauritius, Myanmar) have shown their inclination to side with China. Under these circumstances, what would be in the best interest of India? Should India side with US, because of lot of legacy issues siding with China may not be an option, or stay non-aligned?
(4)   In next few months, Europe might also see a new equation emerging. Notwithstanding, UK dithering on Brexit, a realignment of forces in Europe looks more likely. Under these circumstances, could we see support for China in Europe, especially from beleaguered economies like Italy and Greece?
(5)   Would a full US China deal reinvigorate the struggling global growth, and bring back inflation and higher rates?
Given that I am no expert on global financial markets, international relations, global economics and most other subjects, I would be contended to rely upon the views of the "experts".
Intuitively, I feel the US China dispute is not about trade, which is only incidental. The real issue is whether China will be allowed an entry in elite global club or not.
Therefore, regardless of the outcome of Summit on Friday, the condition may not normalize, until US begins to consult China before invading a country like Iraq, the way it does consult with UK and France. At best the deal on Friday would be temporary relief till a new flash point gets triggered.
I would be examining these issues in some detail over next few months to assess the impact on my investment strategy.
In the meantime, I shall be delighted to receive comments, views and opinions of readers on these issues.