Do it yourself

Friday, January 17, 2020

Finding the contours of the economic slowdown

The recently published foreign trade data (see here) further confirmed the persisting slowdown in Indian economy.

As per the data, the non-oil non-gold imports during April-December 2019 period contracted ~8% yoy. The oil import in the same period was down ~12% yoy. If we consider ~17% rise in oil prices during this period, the fall in volume of oil import is much higher. Overall the merchandise imports contracted ~9% yoy in USD terms and ~8% yoy in INR terms during the first nine months of current fiscal.

In the nine month period during April-December 2019, the merchandise exports were lower by ~2% yoy. During this period non-oil non-gems & jewelry exports were almost flat yoy.

The services exports (up ~5.6% yoy) and imports (up ~7.5% yoy) during nine month period April-December 2019 have however recorded decent growth as compared to the merchandise trade.

Consequently, the trade balance is much lower as compared to the previous year. The overall trade balance for April-December 2019-20 is estimated at USD 57.66bn as compared to USD 89.46bn in April-December 2018-19.

As per the latest data published in September 2019, the current account deficit (CAD) of India was USD6.3bn or 0.9% of GDP in the 2QFY20 (vs 2% of GDP in 1QFY20). Given the lower trade deficit and decent capital flows, the CAD might have shown further improvement in 3QFY20. To some extent, the strength in INR could be attributed to this factor.

However, the moot point is whether the market should cheer the improved CAD data and consequently stringer INR or be worried about (a) the falling imports, especially engineering and consumer goods imports which implies slow down in consumption and (b) stagnant to contracting exports in the entire post global financial crisis (GFC) period!

Another aspect about the economic slowdown that needs to be examined is the contribution of the each of the following factors:

(a) The administrative, procedural and legislative changes like GST, IBC, UBI, RERA etc that are aimed at supporting higher growth in mid to long term but may have checked the growth momentum in the short term.

(b) The social policies of the government that are aimed at promoting national security and integrity but may have triggered an environment of mistrust and non-cooperation.

(d) The global trade slowdown due to trade wars, geopolitical tensions and uncertainty over Brexit etc.

(e) The cyclical global economic slowdown due to fatigue after long expansion period since GFC.

This exercise may help finding the right solutions and alleviating the atmosphere of despair and pessimism.

Thursday, January 16, 2020

Common investors may avoid PSEs for investment

As per media reports the government is seeking huge dividends (Rs190bn) from oil PSUs to meet its fiscal shortfall (see here). It is also reported that some companies might have to borrow money to pay the required amount of dividend as the cash balance with them may not be sufficient to meet the demand. Obviously the payout will at the expense of cutting capex and impairing the future growth potential.

In summer of 2016 also, the "Finance Ministry" had directed all profit making PSUs to use their surplus cash to buy back shares and pay handsome dividend, besides considering issuing bonus shares or going for stock split. (see here) Since then the benchmark Nifty50 has gained over 42%, while the Nifty CPSE has lost over 9%, underperforming the benchmark by massive 51%.

I have said it many time before, and I would like to reiterate this again - for a common investors, finding any reason for investing in a public sector enterprise (PSE) is extremely challenging; notwithstanding whatever government suggests or claims.

From the experience of MTNL, NBCC, Coal India, etc. it is clear that despite their dominant monopoly status, these companies are vulnerable to failure due to policy intervention; simply because the government in India is socialist by the constitutional mandate and an enterprise majorly controlled the government cannot have even profit optimization as its primary objective.

Most of the PSEs in India’s suffer from one or more the following limitations, that makes them unfit for investment by a common investor.

(a) The management lacks transparency and accountability.

(b) The management is corrupt, incompetent and/or instable.

(d) The companies operate under a highly inconsistent policy environment.

(e Many companies do not have control over pricing of their products, which is dictated by the government usually under political considerations.

(f) Some companies like power distributors are often forced to deal will bankrupt customers.

(g) The senior executives are appointed on the basis other than expertise in the area of operation.

(h) Most of the companies may be saddled with excessive bureaucracy without any control over the appointments, promotions and compensation.

(i) Most companies are egalitarian in their operating mission and more often work for social cause rather than optimization of profit.

(j) The companies need political sanctions for managing their capital structure.

Moreover, the ground reality of our economy today is that we are hugely dependent on foreign capital to ensure growth. It is therefore inevitable that government will have to keep relaxing foreign direct investment norms and open more and more areas of the economy to stiff global competition. Under these circumstances, many public sector undertakings with their inefficient capital and wage structure may crumble.

Besides, the majority shareholder (government) has consistently and blatantly oppressed the minority shareholders in these companies – by not allowing them to fix the prices of their products, raise capital when required, make investments where and when desirable and disallowing the managements to restructure their costs (especially employee cost) during downturns.

Under these circumstances, there is little rationale for a common investor to invest in PSEs or CPSE ETF. However, for the professional investors who understand the risk and know how to take advantage of trading cycles, it may be a different ball game altogether.