Some food for thought
"When my cats aren't happy, I'm not happy. Not because I
care about their mood but because I know they're just sitting there thinking up
ways to get even."
—Percy Bysshe Shelley (English Poet, 1792-1822)
Word for the day
Intellection
The action or process of understanding; the exercise of the
intellect; reasoning.
First thought this morning
Home Minister Shri Amit Shah made an emphatic speech in the
Parliament in support of government's decision to change the constitutional
status of the state of Jammu & Kashmir. It sure is a historic and very
brave step. The government, especially the prime minister and the home minister
must be commended for this unconditionally.
I am sure with this determination, the government will be able
to execute this decision as planned paving the way for overall development and
growth the region.
The reply of the home minister to the debate in Rajya Sabha
highlighted two things - (a) Article 370 and 35A of the constitution were
temporary and transient provisions and have outlived their purpose; and (b)
depriving the state of J&K from investment by outsiders has resulted in
grave injustice to the state.
I mostly agree with him, and request the following:
(a) Article 341
provided that after 15yr of implementation of the Constitution, he official
language of the Union shall be Hindi in Devanagari script The form of numerals
to be used for the official purposes of the Union shall be the international
form of Indian numerals. We all know that this could not be achieved in spirit,
even though In 1976, Official Language Rules were framed under the provisions
of section 8(1) of the Official Languages Act, 1963. The government at least
should ensure that the Supreme Court allows the cases to be filed and heard in
Hindi.
(b) There are number
of other states that restrict or prohibit investment in property by people not
domiciled in the respective states in pursuance of various provisions of
Article 371. Many of these states are presently ruled by BJP, e.g., Himachal
Pradesh, Uttrakhand, Arunachal Pradesh, Goa etc. It needs to be examined
whether the people of these states are also being deprived because of these
provisions.
(c) Indians visiting
the States of Nagaland, Mizoram and Arunchal Pradesh require to take permit
from respective states. The government may consider reviewing these provisions
also.
Chart of the day
Keeping it simple
It was summer of 2014. The citizen of the country had just
elected a new government with overwhelming mandate. The general mood in Mumbai,
the financial capital of the country, was ebullient. It reminded me of the
following lines of famous Hindi poet Baba Nagarjuna:
"कई दिनों तक चूल्हा रोया, चक्की रही उदास
कई दिनों तक कानी कुतिया सोई उनके पास
कई दिनों तक लगी भीत पर छिपकलियों की गश्त
कई दिनों तक चूहों की भी हालत रही शिकस्त।
दाने आए घर के अंदर कई दिनों के बाद
धुआँ उठा आँगन से ऊपर कई दिनों के बाद
चमक उठी घर भर की आँखें कई दिनों के बाद
कौए ने खुजलाई पाँखें कई दिनों के बाद।"
कई दिनों तक कानी कुतिया सोई उनके पास
कई दिनों तक लगी भीत पर छिपकलियों की गश्त
कई दिनों तक चूहों की भी हालत रही शिकस्त।
दाने आए घर के अंदर कई दिनों के बाद
धुआँ उठा आँगन से ऊपर कई दिनों के बाद
चमक उठी घर भर की आँखें कई दिनों के बाद
कौए ने खुजलाई पाँखें कई दिनों के बाद।"
In this hope filled environment, I happen to meet CEO and CIO of
a large asset management company, managing funds of about rupees one trillion.
The CEO asked me how do I see Indian equity markets and where would I be
investing my money?
From their public statements I knew that both of them were very
bullish about public sector banks (PSBs) and had huge overweight in most of
their schemes. I plainly told the guys, "I have not yet decided yet where
to put my money, but I am very sure where not to put my money, and that is the
funds managed by your AMC".
Not expecting such a direct reply, both were stunned and
immediately exclaimed "why?"
I explained my rather simple logic to them as follows:
"One of the reasons for businesses and markets not doing well
is the hugely stressed corporate balance sheets. Till the time these balance
sheets are deleveraged and destressed, the wheels of the economy could not be
put into motion.
Destressing the corporate balance sheets may inter alia
involve one or more of the following:
(i) Writing off
existing equity and Infusion of
further equity by existing equity owners;
(ii) Conversion of
debt into equity by lenders;
(iii) Writing off debt
in full or part;
(iv) Sale of assets
and repayment of lenders;
(v) Nationalization
of firms.
Historically PSBs have always played a major role in destressing
exercise by taking over a large part of the stress through loan write off, loan
conversion into equity and/or asset take over. So this time also there is a
significant probability that PSBs will be made to swallow the bitter pill to
put the wheels of economy in motion, i.e., take over most of the stress from
corporate balance sheets so that corporate may begin to borrow again.
This essentially means that PSBs and some private corporate
lenders cannot do well, if the economy and market has to do well."
Nifty PSU Bank rose further 10% from ~4000 to 4400 in the next
following 8 months (January 2015), before correcting 55% to ~1900 level in
subsequent 12months (February 2016).
Last week, I heard the same couple, and a few more, voicing
serious concerns about the future of PSBs and advising major underweight on
state lenders. I feel it is time to be overweight on PSBs, again for the simple
logic.
Corporate balance sheets have been destressed materially in past
5years. We hear new cases of stressed emerging every day. But these are regular
cases which are part and parcel of banking business. Whatever latest cases of
stress we are aware of may not account for 2qtr equivalent of profits of
banking sector.
PSBs have obviously consumed the bitter pill. The wheels of the
economy shall put in motion as the government begins its massive infrastructure
building drive, besides affording material cash in the hands of consumers. A
material rate cut may just be the catalyst consumers are waiting to begin
spending.
Recapitalized and cleaned up PSBs would be at front foot in
financing the investment and consumption growth as the rivals (NBFC and MFs)
have been cut to size. Any recovery from stressed assets acquired during
cleanup process would just be a bonus.
Important to note that unlike the 1990s credit cycle, PSBs have
materially strengthened their systems and processes, rationalized their costs,
attained a fair degree of autonomy (freedom from undue political pressure),
improved their business model and enhanced their understanding of business
dynamics in the process of learning from latest debacle.
To me, the top 4-5 PSBs offer best trading opportunity for next 2years. But remember, there could be some pain before any big gain accrues. And for god sake, please do not drag me into technical jargon like capital dilution, significant watch list, NBFC stress, IBC delays etc. I am not interested in bothering about these small chips in the big picture.
