Vijay Kumar Gaba

Thought for the day

Between two evils, I always pick the one I never tried before.

-Mae West (1893-1980)

Word of the day

Hadal (adj):

Pertaining to the greatest ocean depths

(Source: Dictionary.com)

Shri Nārada Uvāca

Fully knowing that the delivery mechanism for food security legislation is far from ready, Congress Party would be more interested in failing to pass the Bill and put the blame on opposition rather than passing the Bill and facing the flake for failing to deliver the promised food.

Thursday, June 6, 2013

Mandate 2014: Madhya Pradesh – complacent, poor and green

We travelled over 7500kms through 24 districts of Madhya Pradesh (MP) spanning 7 divisions and five major regions, i.e., Bundelkhand, Baghelkhand, Mahakaushal, Nimar and Malwa.

The first impression is that MP is truly an agrarian economy. People are friendly and complacent. Life moves slowly, except in Indore which has large immigrant population and has evolved as major education and ITeS center over past decade. Poverty is in abundance. Economic divide is relatively wider. Social and religious divide was however not as prominent as seen in the neighboring Gujarat, Rajasthan and UP.

The key highlights of the trip were as follows:

(a) The state is truly an agrarian state. People are generally complacent and youth is not running for greener pastures as was seen widely in the neighboring UP. The best part is that people are extremely conscious of nature and environment – a trait not seen commonly elsewhere. Bhopal would be a serious contender for best cities in the countries. We found the capital city incredibly clean, green, sustainable, friendly and secure.

(b) The socio-political structure is largely feudal in nature where people look upon political establishment and administration for most provisions.

(c) The political awareness of people is relatively lower. We found rural population mostly indifferent to the political establishment. The urban population, though politically aware, was not found to be having strong allegiance to any political party or ideology.

(d) The incumbent Chief Minister however enjoys tremendous goodwill especially with rural and semi rural youth and women. The urban youth and elite find him less aggressive in pursuing growth agenda but still prefer him over most other leaders from the state.

(e) The state has seen steady progress in infrastructure building and social sector development, especially primary education and health, over past one decade. As such we did not find any anti-incumbency in the state for ruling BJP. To the contrary, Congress appeared a divided house with number of central leaders (through their proxies) staking claim for the top post after end 2013 state election. We feel BJP may win again comfortably.

(f) The urbanization trend has not touched a large part of the state; primarily due to low population density, large tribal population and huge protected forest area.

(g) The state has successfully eliminated the dacoit culture from Chambal valley. Most erstwhile dacoit families have been assimilated in the mainstream. Law and order does not appear to be a problem in the state.

(h) Farmers were found to be in general poor, ill-equipped and using primitive technology. Power situation has improved somewhat but still far from satisfactory.

(i) Industry is largely agro-based. ITeS is emerging as a major industry.

Read our special series Mandate 2014

Thought for the day

“Don't let your special character and values, and the truth get swallowed up by the great chewing complacency.

- Aesop (620-560BC)

Word of the day

Anodyne (adj):

Not likely to offend; bland; innocuous.

(Source: Dictionary.com)

Shri Nārada Uvāca

Is the Modi vs. Advani vs. Sushma Swaraj vs. Shivraj vs … contest in BJP a sign of evolution of the party in democratic traditions or degeneration of the party into individualism?

Wednesday, June 5, 2013

Mandate 2014: Uttar Pradesh – land of million Grigoryevs - Part II

…continuing from yesterday

Unlike Karnataka, Maharashtra, Goa, Gujarat and Rajasthan we found the state of UP bustling with activity. There was no complacency. Driving over 5000kms through 11 divisions of UP, we gathered lot of hope. The pessimism, complacency and disillusionment seen elsewhere was present in much less proportion.

The youth in particular appeared “self motivated”. In that sense the feudal structure of the state appeared to be cracking from many places. The youth is certainly accepting the government facilitation but we found them least reliant on the political establishment or government -- something not found elsewhere, except Gujarat, in our journey so far.

Some of the key highlights of our discovery of UP are as follows:

(a) Owning and brandishing guns had traditionally been a passion, especially in Western UP. We found a conspicuous change – utility vehicles have replaced gun as primary passion. Sophisticated revolvers though continue to remain a coveted possession in both rural and urban upper middle class.

(b) Motor cycle has replaced bicycle as a mandatory dowry item. It is almost impossible to marry your daughter if you cannot afford a motorcycle in dowry. Smart phones also find place in most ‘demand lists’. A Gram Pradhan (Village’s Local Body Head) felt this is a collateral damage of better road and mobility network. Roads were indeed much better.

(c) We found most small factories running on diesel genset. All owners cribbed about poor power supply. Genset and inverters have become more important household appliance than TV and refrigerator.

(d) Many people told us how the state has been mismanaged post separation of Uttrakhand. Special status and large hydro power production has led to new industries flocking to Kashipur/Rudrapur area, besides neighboring Paonta Sahib and Baddi in HP. Many small industries like leather and textile have lost to cheap Chinese imports. Agra sells more Chinese fake leather shoes and Varanasi sells more Chinese artificial silk sarees.

(e) Society is divided on caste and religion but surprisingly the division is not as acrimonious as was found in the case Gujarat (religion) and Rajasthan (caste).

(f) Political awareness is very high in the state despite poor literacy rate. However, political commitment is relatively low. Most young voters would vote for the individual candidate rather than the party he belongs to. Nonetheless, Mayawati has a strong area of influence in dalits and most backwards. Congress and BJP have a miniscule core constituency.

(g) The common feature was total and complete disregard for political establishment and government. Local self government in rural area has gained tremendous strength in past one decade.

(h) Most people feel Akhilesh Yadav is an underperformer. However, they would give him some more time.

Read our special series Mandate 2014

Gujarat

Rajasthan

Tuesday, June 4, 2013

Mandate 2014: Uttar Pradesh – land of million Grigoryevs

In the final leg of Phase II of our ‘Discover India’ tour, we travelled through 65 districts of Uttar Pradesh (UP), Madhya Pradesh (MP) and Chhattisgarh in north and central India. This was the most interesting leg of our journey so far in which we have covered 11 states.

In this leg we commenced our journey from Western Uttar Pradesh and travelled through Brij, Rohilkhand, Awadh and Budelkhand regions of the state covering 11 of the 18 divisions.

Our first impression of the state strongly reminded us of the famous Anton Chekov story “The Malefactor”. Most of youth and middle age people we interacted with, behaved like Denis Grigoryev the protagonist in the story.

"Denis Grigoryev!" the magistrate begins. "Come nearer, and answer my questions. On the seventh of this July the railway watchman, Ivan Semyonovitch Akinfov, going along the line in the morning, found you at the hundred-and-forty-first mile engaged in unscrewing a nut by which the rails are made fast to the sleepers. Here it is, the nut!. With the aforesaid nut he detained you. Was that so?"

"If I hadn't wanted it I shouldn't have unscrewed it," croaks Denis, looking at the ceiling.

"What did you want that nut for?"

"The nut? We make weights out of those nuts for our lines."

"Who is 'we'?"

"We, people.... The Klimovo peasants, that is."

For once everyone appeared to be a free spirit – as if no rule of law exists. They would do whatever suits them – some would do it sheepishly, but most would be audacious in their defiance of rules. “Don’t bother…yahan sab chalta hai” almost appeared to be the state anthem.

On probing a little deeper, we discovered these are 200million people who are in great rush to move forward. The youth in particular is very diligent and eager to grow out of the perennial constraints that have afflicted this historically rich but economically backward state since independence.

We found, in past two decades education is perhaps the only area where the state has made definite progress. Though the standard of government schools continues to be below par, private English medium institutions have mushroomed in every nook and corner and people, especially lower middle class and backward class, are making tremendous effort to afford their children good education.

The American dream is fast catching up with the middle class youth in UP. It is more like Hyderabad and Bengaluru (where youth aspire to get foreign jobs on the basis of their professional skills and training) and quite unlike Punjab and Gujarat (where youth aspire to settle abroad by using their contacts). At current rate in two decades UP may turn out to be one of the largest destinations of inward remittances in the country.

Thought for the day

“Business opportunities are like buses, there's always another one coming."

- Richard Branson (1950-)

Word of the day

Zakuska (n):

A Snack

(Source: Dictionary.com)

Shri Nārada Uvāca

With BCCI drama now almost over, should we get back to some less important business like economic growth, governance etc?

Read our special series Mandate 2014

Gujarat

Rajasthan

Monday, June 3, 2013

Living in a ‘fixed’ world

In past couple of weeks, InvesTrekk team travelled through heartland of India - Uttar Pradesh, Madhya Pradesh, and Chhattisgarh. It certainly was the most interesting phase of our “Discover India” journey so far. However, before we share the key observations and conclusions with our readers in the coming days, we would like to share a key observation made during our interaction with people across gender, castes, religion, regions and age groups, i.e., “fixation with fixing”.

Across 11 states covered so far, we have found that a large majority of people sincerely believe that everything in our socio-economic milieu is “fixed”. We found that this belief is manifesting in three key behavioral traits (a) deep and sometime total mistrust in the government and political establishment; (b) insensitivity to corruption in public life and (c) implicit desire to be part of some sort of ‘fixing syndicate’, un-fulfillment of this desire was often seen reflecting in frustration and disillusionment.

A management guru in Rajasthan and an industrialist in Indore offered interesting international alibi to this ‘fixation with fixing’ thesis - “When Libor that affected transactions worth trillions of dollars on daily basis could be ‘fixed’; the international crude oil price involving billions of dollars of daily trade could be ‘fixed’; China has kept its currency ‘fixed’ for years; now BoJ wants to ‘fix’ its currency and inflation; US fixed the UN security council to capture Iraqi oilfields – what are we discussing here IPL spot fixing worth few million dollars! Who cares?”

The popular sentiments are so negative that people in general see all welfare and development schemes of the government as “fixed”. Though the perception is not completely unfounded as serious leakages do occur in these schemes, the most unfortunate part was that youth in general was not found revolting against this ‘fixing’. On the contrary, we found them fixated to the idea of fixing and actively looking for the opportunities.

We found the following three examples of fixing most intriguing:

(a) Stuck at a railway crossing in UP we felt that the “Phatak was shut down unusually early before the train arrival and took much longer to open after the train had passed. On enquiring we were told that the vendors selling fruits, tea, water and snacks at the crossing pay the gateman to keep the Phatak close for longer so that they could sell more to the travelers. Everyone seemed to know this – no one seemed bothered or seen protesting.

(b) We were in Raipur the day Maoists attacked a political rally in Bastar. We did not see any panic amongst people. We did not see anyone protesting. No peace march. No candle lightening. No tears. A senior UP minister commented on national television that this attack is “fixed”. The owner of the dhabha where we were having our meal not only concurred but also took liberty to name few suspects.

(c) A stock broker in Indore felt that the stock market in India is “100% fixed”. He says Nifty close value everyday is like the traditional “Matka” number. With over 85% daily volume now in Index options, the fixing has now moved to NIFTY from mid and small caps. No insider trading. No front running. No circular trading. Just “Index management”!

Thought for the day

“Opportunities are like sunrises. If you wait too long, you miss them. "
- William Arthur Ward (1921-1994)

Word of the day

Isolato (n):
Person who is spiritually isolated from or out of sympathy with his or her times or society.

(Source: Dictionary.com)

Shri Nārada Uvāca (Teaser)

Some day in not so distant history, we would know what truly led Mr. NRN Murthy back to the helm at Infosys with his son in his arm!

The interesting thing would be to see Nandan also following Mr. Murthy to the stable.

The mute question is should we buy Infosys right now or wait till more details and some result emerge?

Thursday, May 23, 2013

Shampoo, detergent, noodles, motor cycles are fine

4QFY13 results of L&T and guidance for FY14 substantiate our view that domestic investment cycle in India is seriously broken and may take more than marginal rate cuts to get back on track; natural corollary to this is that the path to 8% growth trajectory is not only long but also tedious.

Years of fiscal profligacy and misdirected monetary policy are to blame to a large extent, though poor governance and non-compliance by corporates and other tax payers cannot escape the blame.

In a recent article Nobel Laureate Michael Spence highlighted that “Accumulating excessive debt usually entails moving some part of domestic aggregate demand forward in time, so the exit from that debt must include more savings and diminished demand. The negative shock adversely impacts the non-tradable sector, which is large (roughly two-thirds of an advanced economy) and wholly dependent on domestic demand. As a result, growth and employment rates fall during the deleveraging period.

In an open economy, deleveraging does not necessarily impair the tradable sector so thoroughly. But, even in such an economy, years of debt-fueled domestic demand may produce a loss of competitiveness and structural distortions. And the crises that often divide the leveraging and deleveraging phases cause additional balance-sheet damage and prolong the healing process.”

Applying this to Indian context, first the rush to accumulate cheap credit and then fiscal misadventure in the name of stimulating the economy post Lehman crisis did lead to excessive debt both at government as well as corporate level in past 7years. This did bring unmanageable demand forward in time.

For example, over 50GW power projects were initiated and fertilizer policy was made when the feed stock supply chain to fuel the power and fertilizer plants was far from ready. The capacity to pay unaffordable toll was not there when over 5000km of toll roads were commissioned. Regulatory framework for sustainability was not ready when mining rights were awarded for numerous coal, iron ore and bauxite mines.

Many of these power plants are lying idle and so are numerous industrial projects conceived based on supply assumptions from these plants. Many toll roads have become unviable or are lying uncompleted. Most coal and other mines are yet to start commercial production and KG basin is producing only 1/5^th the assumed gas production.

Despite whatever government economists may say, the correction is going to be painful and lengthy. The deleveraging of corporate balance sheets will happen in three stages – asset sales, debt waiver and capital write off. The “restructured debt” plan of RBI is an artificial barrier to early and efficient completion of the process.

The government deleveraging should ideally happen in two stages – higher taxes and lower subsidies.

Does not sounds good for capex and credit. Shampoo, detergent, noodles, motor cycles are fine for now.

Wednesday, May 22, 2013

Take shelter as the tornado passes by

Many equity markets world over (with the notable exception of China) have mostly recouped their losses of past five years. The same however cannot be said about the macroeconomic data. In fact there are little signs, despite near zero interest rates and persistently low inflation in developed economies, of economic growth stabilizing even at lowest levels or employment conditions improving in any helpful measure.

This is leading many, including InvesTrekk, to believe that the extant equity rally may be purely technical and hence should not be considered as beginning of a secular bull market. In exclusive Indian context, the rally has certainly outpaced macroeconomic and corporate fundamentals and valuations in select pockets are already flirting with bubble like conditions.

A normal monsoon, complete government post next general elections (hopefully!), lower rate, benign consumer prices and massive election spend may support higher consumption demand and hence justify expensive consumer sector valuations. Passenger vehicle may also gain. But many pharma, banking and metal companies would need to correct over 25% to deserve an investment consideration.

Second tier IT could be one suitable shelter given their strong balance sheets, stable businesses and cheaper valuations. Though growth there may still remain muted for another year or so, favorable resolution of US VISA uncertainties may cause a rally there.

Similarly, the valuation gap between top 3 cement companies and the rest is probably at historic high. A revival in infrastructure spending next year post election aided by lower rates could be trigger there.

There is a strong buzz around PSU oil marketing companies (OMCs). The cheap valuations relative to their replacement value is the primary investment argument, duly supported by recent fuel pricing reforms. In our view, these companies are worst examples of corporate governance. 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. Moreover, there is no legal guarantee that the current fuel pricing mechanism will continue for, say next 5years.

Insofar as the global rally is concerned, consider the following three data points are worth considering:

1. The most-indebted U.S. companies are rallying more than any time in almost four years compared with the rest of the stock market.

2. China’s trade surplus is contested to be one-tenth the official $61 billion reported so far this year after accounting for fake transactions used to disguise hot-money inflows.

3. Imports of refined copper by China, the biggest user, declined in April to the lowest level since June 2011, while exports fell for the first time in 8months.

Tuesday, May 21, 2013

Bulls caged in Wall Street

We have been accused of being excessively and obdurately pessimistic on market in past one month. We strongly deny the charge. We are of the view that the present bullishness on Wall/Dalal street is like a cart without horse slithering down the hill. The following two charts (via Zero Hedge) aptly demonstrates that bulls are mostly confined to “the street’ and have not yet reached the real economy. We shall wait for the cart to get behind a healthy horse before riding it.

Monday, May 20, 2013

Changes in core portfolio FY14

InvesTrekk core portfolio for FY14 has returned 11% since its launch on 1 April 2013. This compares to 9% return on Nifty.

As two components Lupin and Yes Bank have returned over 25% in 6 weeks, we book profit there and invest the proceeds in TCS (8% weight) and keep 2% cash.

To see the updated portfolio please click here.

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It is important to note that InvesTrekk is a purely research oriented firm and does not offer any portfolio management , brokerage, money management or investment advisory services of any kind. The model portfolios are only for illustrative purposes. Please take advise of a qualified and registered investment advisor before taking any investment decision.

InvesTrekk Research Reports provide generalized macro investment strategy to its subscribers.. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). InvesTrekk reports are not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in the reports and should understand that statements regarding future prospects may not be realized.

Mandate 2014 – Rajasthan: Dying traditions and sweating dreams

Continuing with our second phase of discovering India, we travelled to Rajasthan in past one week. We drove through 15 districts of the state, namely, Udaipur, Sirohi, Jalore, Barmer, Pali, Bhilwara, Tonk, Jaipur, Sikar, Alwar, Bundi, Kota, Jhalawar and Rajsamund.

The most critical learning of this trip was that in a land that supposedly takes pride in its traditions and history, these things find little relevance in peoples’ life. People are concerned with their roots (history, culture, tradition) only to the extent it could be sold to “tourists”. Our efforts to find people who would wish to keep the traditions alive because they take pride in this, were totally futile. If we speak in words of famous American author Mason Cooley “Preserving tradition has become a nice hobby, like stamp collecting.” It is no longer a way of life.

The key take away of our Rajasthan trip were as follows:

(a) After speaking with over 800 people across 15 districts, we feel that the generational abyss in this supposedly traditional state is widening at fastest pace in the history. The young and middle aged who cannot adopt “history and culture” as viable occupation are totally disinterested in carrying out their tradition, whereas old still swear by them. Consequently, the rich tradition and culture is dying fast. The few rich people however would like to promote traditions with their young ones as a hobby and mark of distinction.

In our view, this will further increase the income disparities, which are already very high, as the poor lose their source of income from traditional arts and handicraft.

(b) Unlike the neighboring Gujarat, the religious divide is not very conspicuous in Rajasthan. However, the society remains deeply divided on caste lines. The politics remains art of managing caste balance rather than focusing on development. The consequences are there for everybody to see. The gender bias was also strong.

(c) Most of the development is consequence of central schemes like highways, rural roads, water canal, oil 7 gas exploration etc.

(d) The employment deficit created by diminishing illegal mining businesses and automation in textile and agro processing (mainly edible oil) is being met by booming real estate sector and MNREGA.

(e) The “self enterprise” is on the decline and traditional Marwari kids are taking to “professions” rather than businesses.

(f) The city of Kota (day temperature above 45C) was buzzing at midnight. The city’s economy, that once depended on mining, textile, cement, chemical and agriculture and related industries, is now centered around numerous “coaching centers”. Numerous aspiring IITans weather extreme heat and cold conditions to pursue their dreams. We wondered why many other places with good weather and better connectivity could not do this! On qualitative side, one respected “coach” told us that most aspirants are victims of their parents’ dream and are likely to grow into “frustrated useless unproductive reluctant workers”. Not a great commentary for ‘Bharat rising’.

Read our special series Mandate 2014

Gujarat