Vijay Kumar Gaba

Wednesday, June 17, 2015

Finding the balance - II

"Always fall in with what you're asked to accept. Take what is given, and make it over your way. My aim in life has always been to hold my own with whatever's going. Not against: with."

- Robert Frost (American, 1874-1963)

Word for the day

Baleful (adj)

Full of menacing or malign influences; pernicious.

(Source: Dictionary.com)

Malice towards none

Kirti Azad has thrown hint of traitor within the BJP.

Most observers who keep a close watch on Raisina Hills are claiming to have unraveled the mystery.

What da' ya' say?

Finding the balance - II

As discussed yesterday (see here), the incumbent government needs to find a balance between the laissez-faire model that it advocates and the current variant of Nehruvian socialism model that is in vogue.

The government has however not made any notable progress in achieving this delicate balancing task.

Given the preferences of the newly acquired constituency of socially and economically backwards, who have not been traditional political supporters of BJP, the government's reluctance is understandable.

This reluctance is further compounded by the (a) opposition of core right wing elements within BJP who prefer self-reliance (Swadeshi) over foreign capital and competition; and (b) strong frequent attempts by the opposition parties to regain their core constituency from BJP by constricting all attempts to promote accelerated industrialization allegedly at the expense of public and social sector.

Historically, the economic policies of the governments have been materially influenced by the foreign policy considerations.

During 1950-1990 period, the economic policies followed by India borrowed heavily from the erstwhile eastern bloc.

Post Uruguay round of WTO which coincided with collapse of German Wall and disintegration of USSR, the economic policies of India have been struggling to maintain a balance between the two poles. Unfortunately, we have picked up the bad and ugly of both the worlds. The good being just sprinkled sparsely.

The incumbent prime minister is trying to end this struggle by siding conspicuously and unambiguously with the western world economies who strongly advocate and follow free markets.

The primary positioning of the government thus appears little skewed towards free market (capitalism).

However, on one hand the political compulsions are making government to wear a facade of a socialist dispensation; and on the other hand the internal compulsions of BJP are pushing it towards the agenda of unmindful self-reliance.

In my view, it is still possible to find a balance between all three pull forces e.g., (a) need for capital, technology and market access for faster development and job creation; (b) need for promoting inclusion and sustainability of economic growth and development and (c) need to achieve self-reliance in key areas like defense, food, and modern technology etc.

Unfortunately, this tight ropewalk may disrupt the capital markets in the short period. The free access to foreign capital and technology in manufacturing and infrastructure building area will make many Indian businesses that have been surviving purely due to protectionist policies, completely redundant - causing widespread losses to investors and lenders. High public social spending and increased pressure on corporates to spend more on inclusion could also impact cost of capital and profit margins.

Tuesday, June 16, 2015

Finding the balance - I

Thought for the day

"The brain is a wonderful organ; it starts working the moment you get up in the morning and does not stop until you get into the office."

- Robert Frost (American, 1874-1963)

Word for the day

Unquiet (v)

Agitated; restless; disordered; turbulent

(Source: Dictionary.com)

Malice towards none

When Indian telecom industry will become a utility service from investors' viewpoint?

Finding the balance - I

The current economic model being pursued since economic liberalization started in 1991 is largely a distortion of the classical Keynesian model that advocates a larger role for the private enterprise with active state intervention during extremities of business cycle and argues against higher savings in both private and public sector. The Keynesian model has its genesis in the great depression and mostly found useful during larger economic crisis.

As Chief Minister of Gujarat, the incumbent prime minister appeared an advocate of laissez-faire or free market which entails minimal state intervention even during crisis. He had implemented the model in Gujarat albeit with limited success.

However, as he must have realized by now, considering the present state of socio-economic development of various parts of the country, it is perhaps 10-15years too early to test the laissez-faire model at the pan-India level.

The major challenge before the government therefore is to find a balance between the desirable laissez-faire model and the current variant of Nehruvian socialism model.

From whatever I have heard from the government, it is planning to achieve the balance through (a) reforming institutional framework to promote ease of doing business; (b) materially enhancing physical infrastructure through public investment to improve logistic support for the businesses; and (c) encouraging entrepreneurs to invest in business ventures that will create productive jobs for the burgeoning Indian workforce and improve trade balance of India through export promotion and import substitution.

For executing the plan it has proposed to (a) rationalize social sector spending to save public resources for investment; and (b) liberalize capital controls (FDI rules) to encourage foreign investors to invest in manufacturing facilities and services like insurance, banking, retailing etc.

This strategy has faced opposition from both political class and civil society. Moreover, the government has not been able to make a convincing case about its strategy. The consequent environment of stalemate and mistrust is making financial markets jittery. It is creating doubts in minds of financial investors as to capabilities of the government in successfully achieving the desired balance.

Before I analyze the government positioning and likely outcome, I find it pertinent to note the following views of my favorite central banker Bob McTeer:

"I view the House vote today on trade-promotion authority, a necessary prelude to an important Asian trade deal, as a test of economic literacy. If there is anything most economists that don’t work for labor unions tend to agree on, it is freer trade. However, even if they pass the trade authority and ultimately some sort of trade bill, I’m not sure they will really have passed the economic literacy test for two major reasons.

One reason is that it has become commonplace to burden new deals that are supposed to take advantages of differences among trading partners with provisions “to level the playing field” like environmental, labor, and other measures. Trade is supposed to take advantage of unlevel playing fields, not take place only after all the social engineering has taken place.

The second threat to the literacy tests is the way the proponents and opponents frame the issue. It’s all about jobs. Proponents talk about all the good new jobs that will be created by more exports; opponents talk about all the good jobs lost to imports. Usually each side doesn’t acknowledge the points made on the other side. Everybody talks to their own choir.

I’m a proponent of freer trade, externally and internally, but it’s not a job issue with me. The impact of freer trade—and I say freer rather than free trade because I doubt they will come close to pure free trade—is basically neutral on the number of net new jobs created. More exports will create more domestic jobs; more imports will destroy more domestic jobs. The net result is unknowable, but it is likely to be close to zero because exports and imports tend to move together, not by coincidence, but by causal relationship.

More exports create more domestic income and cause more foreign money to flow into the economy. Both these things will stimulate more imports. More of our imports will stimulate the economies of the exporting economies and send them more of my money, both of which will stimulate more exports to them. Again, it’s impossible to say in advance what will be the net impact on the job count, but it’s likely to be close to zero.

While freer trade doesn’t necessarily create net new jobs, it does make jobs count for more. Protection is inefficient. It means we are using scarce and valuable domestic labor to produce things that we don’t have a comparative advantage in. Freer trade would shift jobs toward our comparative advantage and do the same for our trading partners. The world will experience an extra expansion of income and output because the world’s labor is shifting toward comparative advantage.

A major obstacle to economic literacy on this issue is that when workers lose jobs to imports, it is obvious what is happening and why. The new jobs created by exports are more invisible and aren’t necessarily attributed to exports. Of course, there will be frictions, including some unemployment, in shifting labor toward its comparative advantage. Some politicians probably understand the merits of freer trade, but find it expedient to avoid counter intuitive arguments with their constituents and demagogue instead.

My favorite quotation on the merits of free trade came from Henry George, who pointed out that protectionists want to do to their country in peacetime what the country’s enemies would want to do to it during war time. That is, close its borders to trade." (NCPA)

Monday, June 15, 2015

Nifty poised critically: below 7850 floodgates open

Thought for the day

"Don't ever take a fence down until you know why it was put up."

- Robert Frost (American, 1874-1963)

Word for the day

Yestreen (adv)

During yesterday evening.

(Source: Dictionary.com)

Malice towards none

To set an example, should AAP practice a pro-forma right to recall in Delhi?

Nifty poised critically: below 7850 floodgates open

On weekly charts, Nifty is poised precariously close to its major support range of 7800-7860. A weekly close below this level will open the way for a material correction (~10%) from that level.

A weekly close below 7200 will complete 20% correction from the March highs and establish a medium term bear market, in which case 8450 level will act as ceiling for next 36-52 weeks.

The market breadth has completely cracked last week suggesting that broader markets may underperform henceforth. For confirmation however the trend need to continue this week also.

A large underperformance of broader markets in next couple of weeks will suggest market bottoming without slipping into a bear market. As of this morning this is more likely scenario.

Friday, June 12, 2015

This jingoism is not new

Thought for the day

"In the name of God, stop a moment, cease your work, look around you."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Eternize (v)

To make eternal; perpetuate.

(Source: Dictionary.com)

Malice towards none

The jingoism seen in media over an army operation is not unprecedented. We have seen it before.

The question is - 'is it avoidable?" or they must do it.

This jingoism is not new

Besides the daily soap opera of Delhi government, some events that occurred last week need to be evaluated to find if some paradigms are shifting.

The most talked about event was the reported hot pursuit of Indian army into foreign territory to neutralize the terrorists who ambushed and killed army personnel in Manipur recently.

The government officials tried to convey the message that India is no longer a soft state. The media also played along in full zest.

It has been tried to convey that it is first of its kind operation, but certainly not the last one. I could not digest it. I find it impossible to fathom that Indian army was not responding to extreme provocations from across the border, including gruesome beheading of its personnel.

The jingoism demonstrated by the government is also not unprecedented. We have many instances of incumbent prime ministers and senior minister using threatening language against Pakistan, in particular.

So effectively I do not see any change here.

"The Visit", an online ad campaign for a ethnic garment line has evoked tremendous interest amongst people. The 3:24minute film takes a leap in terms of presentation and acceptance of same sex relationships.

I am not sure how the right wing elements who have been opposing omission of Sec. 377 of IPC would react to this. But a large majority of people would move an inch towards the line of acceptance. A paradigm might have begun to move here, if already not shifted.

Hindi films have mostly reflected the current positioning of various issues in the society.

I have been keenly watching how the metaphor for Mumbai has silently shifted from the iconic VT station and Marine Drive to the newly built Bandra Worli sealink. Similarly, Delhi is no longer represented by India Gate and Vijay Chowk. Instead Delhi Metro is used.

Also, the scene of action has moved away from Mumbai to North. While during 1980-2000, the scene of action was overwhelmingly Mumbai, a in past one decade substantially large number of films have focused on life in middle class Delhi, Punjab and small towns of Uttar Pradesh. A recent hit had the glimpses of life in interiors of Haryana perhaps for the first time in mainstream cinema.

This is a major trend having economic connotations. Firstly, it perhaps indicates that incremental rise in household income is higher in north and east as compared to west. This may be due to high concentration of young population in these states. Secondly, technology and new infrastructure are occupying large space in peoples' conscience as compared to culture and heritage. BJP in particular needs to note these trends. Akhilesh, Nitish and Manohar Lal ji would also be much better placed if they realize and accept these shifting paradigms.

For investors like me, nothing could be more pleasant than to hear that modern infrastructure projects are new heritage icons.

Thursday, June 11, 2015

Weather is turning cold and windy

Thought for the day

"The law condemns and punishes only actions within certain definite and narrow limits; it thereby justifies, in a way, all similar actions that lie outside those limits."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Quidnunc (n)

Person who is eager to know the latest news and gossip; a gossip or busybody.

(Source: Dictionary.com)

Malice towards none

Though the flyers must be loving it, but is the price war in skies really good for the health of the sector?

Couple of more Kingfishers and the rest will kill the pessangers.

Weather is turning cold and windy

The infrastructure project lender IDFC has taken lead in implementing the latest RBI mandate for more effective handling of financially stressed infra assets. It has evicted the extant management of a Chhattisgarh based power producer SV Power which had repeatedly defaulted on its debt obligations.

In my view, it is a strong message to the delinquent companies and defaulting managements. A similar action in time could perhaps saved Kingfisher Airlines and other businesses in similar financial conditions.

It could be a potent deterrent for promoters who are chronic defaulter and have been taking advantage of the lenient enforcement norms in past many decades. Some steel producers, for example, have availed a corporate debt restructuring (CDR) package virtually in all business cycles.

However, by no means this would be sufficient measure, without a stringent project monitoring, money laundering regulation and fast track criminal prosecution of willful defaulters, this practice may only solve a part of the problem.

A suitable bankruptcy law that allows rehabilitation/closure of genuinely failed businesses without any stigma to the promoter of the project could help early detection and cure of financial stress.

It is an unproven but widely acknowledged theory that many unscrupulous promoters use a variety of means to escalate the cost of the project and virtually manage to get away with little or no equity contribution of their own. In such circumstances their personal stakes in the subject project are minimalistic. While they stand to gain most from the success of the project, they have little to lose in case the project runs into rough weather.

A large number of stressed road projects under PPP regime and power/steel plants based on captive mine allocations could be provide useful case studies to evaluate this proposition.

The bankruptcy and banking regulations therefore must be supplemented by a strong criminal prosecution regime for such unscrupulous businessmen.

The report of Nomura India about their trip in Europe to market Indian financial sector stocks makes some interesting reading. As per the report there was very little interest in PSU banks, expect SBI, amongst European investors. Investors were relatively more comfortable playing cyclical recovery cycle through private banks like Axis/Yes. It is generally felt that smaller PSU banks will find raising capital (for BASEL compliance) very difficult and there is little clarity as to see how they will break the vicious cycle.

German 10yr bond yields have touched 1% mark for the first time after September 2014. Gold, US yields and USD have also shown soft trend in recent weeks. No one is rushing to safe havens for now.

Malaysian Ringgit recently touched nine year low. Emerging market equities have cracked badly. Chinese market are in bubble. It's certainly cold and windy outside

Wednesday, June 10, 2015

Finding a suitable match for your child

Thought for the day

"It is amazing how complete is the delusion that beauty is goodness."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Urbane (adj)

Having the polish and suavity regarded as characteristic of sophisticated social life in major cities.

(Source: Dictionary.com)

Malice towards none

Congress will end up post Bihar elections as:

· Phoenix

· King maker

· Loser

· Pawn

· Cipher

· Other (pl specify)

Finding a suitable match for your child

Anil Agarwal led Vedanta group is reportedly considering merger of its energy arm Cairn India with its metal flagship Vedanta Limited. The objective of the exercise is speculated to be use of cash pile of Cairn India to reduce ~US$10bn debt on Vedanta's balance sheet.

I am not sure how the minority shareholders of Cairn India will react to this proposal and whether the proposal will finally be implemented. However, regardless, this development highlights the intentions of the management; which are prima facie not benevolent for the minority shareholders of Cairn India.

The shareholders of the first incarnation of Sterlite Industries would remember the delisting of the company from bourses in a rather non-transparent manner. The shareholders of erstwhile Sesa Goa might also be feeling somewhat shortchanged. And now Cairn India minority shareholders.

Extending the poor management argument of public sector undertakings (see here) to the private managements which have perhaps destroyed more minority shareholders' value than they have added over a longer period of time, e.g., ADAG, Essar, JPA, Vedanta etc., it is advisable for non-institutional investors to maintain a safe distance from these entities. The institutional investors with their extensive analytical skills and research infrastructure, are much better placed to play the business cycle and trade accordingly.

Luckily for me, I have always followed the simple three point elimination criteria for selecting a company for investment, viz.,

1. Do I understand the business of the investee company.

2. Given an opportunity and adequate resources, would I like to own and manage the business of the investee company.

3. Would I like my child to marry the person at the helm in the investee company.

For a large majority of commodity companies in India, I get the answer to 2&3 mostly in negative.

Every day, I am getting large number of inquisitions as to what would be the appropriate Nifty level to increase equity exposure. Readers also want to know what should they be buying at lower market levels.

I am not an investment advisor, and as such I do not advise on individual stocks to invest.

However, technically speaking I have repeatedly stated that Indian equities should be hitting a soft rock sometime in next 17-19 weeks. (See I, II and III and IV).

I continue to maintain that closer to 7850 Nifty level, attractive buying opportunities may emerge. However, since I expect the rock to be soft, the market may not bounce back sharply, and may slither a bit before regaining its composure and stability.

Tuesday, June 9, 2015

All coal is not diamond

Thought for the day

"He never chooses an opinion; he just wears whatever happens to be in style."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Aggrandize (v)

To widen in scope; increase in size or intensity; enlarge; extend.

(Source: Dictionary.com)

Malice towards none

As things stand today morning, it's between Lalu and Modi in Bihar.

Supporting cast includes Nitish and Paswan.

Rahul plays a cameo.

All coal is not diamond

I can understand the political viewpoint in running Air India, BSNL/MTNL, BHEL, Coal India and scores of mid and small sized PSU banks. What I fail to see is the rationale behind an investor buying the stocks of these companies.

There is enough empirical evidence to show that the private competition has eroded market share and profitability of public enterprises. HMT, MTNL, Air India, SAIL, BHEL etc are good examples to show.

Recently, private sector banks have been gaining market share at the expense of PSBs. Most of these banks have also reported better profitability and asset quality.

Private sectors banks have been able to raise additional capital from the market and grow. They are also free to rationalize their costs, including workers' compensation, as per market conditions. Whereas PSBs have to depend on the government's fiscal condition to receive additional capital.

In a drought year when the banks may face rise in delinquencies and additional demand for farm sector credit, tighter fiscal condition may not afford them the much needed additional capital. Strong workers' union and political considerations also constrict them from workforce rationalization.

So while in the improving credit cycle, these institutions could provide a decent trading opportunity, these do not qualify to be investment worthy institutions for private investors under any circumstance.

NTPC enjoys the distinction of being the only company in the world all whose major customers are bankrupt. Despite whatever reforms in past two decades, the health of state electricity boards and distribution companies remains hopelessly poor. How could possibly, NTPC hope to grow and become a world class utility under these circumstances.

Coal India has admitted to being overstaffed and cost inefficient. At a recent analyst meet, the management has expressed its intention to reduce the workforce by 12000-13000 people every year, depending on how much and how fast technological upgradation is implemented.

Reportedly, the coal ministry has released a draft document which proposes that CIL should sell coal to the non-regulated sector at a price determined through auctions every five years. The draft document also proposes that the floor price for coal will be the notified prices of coal - the prices at which CIL sells coal to the non-regulated sector.

Considering that in past many attempts of the company to rationalize workforce have been thwarted by the workers' union, it would be interesting to see how this plan is implemented in next few years

The costs of the company are expected to rise by 60% over five years. If the prices for a part of its produce remains fixed, the margins will obviously take a hit. Moreover, given the expectations of a prolonged slowdown in global demand for coal and rock bottom freight rates, the competition from global supplies will be intense. The competition may further exacerbate if material improvement is seen in port facilities and inland rail connectivity.

Privatization of coal mining is inevitable. How the government prevents Coal India from becoming another MTNL, would need to be seen. In the meanwhile I am ignoring all "Buy" recommendation on Coal India.

Monday, June 8, 2015

Demographic dividend or EMI

Thought for the day

"If you want to be happy, be."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Gainsay (v)

To deny, dispute, or contradict.

(Source: Dictionary.com)

Malice towards none

Will the government stop at Maggi?

Or should it?

Demographic dividend or EMI

Millions of reams have been used to write and publish about the demographic characteristics of India. Many stories, themes and strategies have been built around the young demographic profile of 1.25bn Indians.

Almost all these stories and strategies recognize the young Indian as a great opportunity - "Demographic dividend" for the Indian economy. Of course few of them have words of caution also. Failure to channelize this vast reservoir of energy into productive streams may not only dissipate the demographic dividend but also prove to be counterproductive in terms of widespread civil unrest and violent disruptions.

I have however not come across any presentation that classifies this demographic profile as the solemn accountability and responsibility of India to the world.

The global community has always valued the resource rich nations and expected them to behave in a responsible manner to preserve the global order.

The capital rich western world has been expected to help the poor and starved of the world. The world looked forward to them to fund technological advancement, preservation of cultural heritage, assisting global growth and development. Even after taking full cognizance of the allegations of imperialism and suppression, I believe that financially rich communities have worked for the betterment of human life by funding technological innovation, life science research & development, productivity enhancement, and development assistance to the economically lagging world.

Similarly, nations rich in natural resources like minerals etc. have been expected to prospect and exploit these resources in optimum manner to assist the sustenance and growth of the global economy.

My point is that now since India possesses the largest pool of prospective workers for the world, should it not be responsibility of Indian government to prospect, grow, and develop this resource for the larger benefit of the global community.

This is even more pertinent in the context of the current global financial crisis. In places like Europe and Japan the root cause of the crisis could be traced to the aging demographic profile. China is also like to join the club in a decade or so. Under the circumstances it is the responsibility of India to provide educated, skilled and trained workforce to the global economy.

A number of research papers and surveys have shown that (a) Child and mother nutrition level in India is sub-standard consequently child mortality rates are poor; (b) higher and professional education standards are extremely poor consequently a large number of Indian graduates are unemployable even in routine jobs; (c) There is acute shortage of competent scientists to scale up research and development (R&T) activities to make Indian businesses competitive at global stage.

"Skill India" and "Make in India" are noble ideas for human resource development. But we need to make sure that these do not end up prospecting and developing only blue collar low skilled workers. In that case India will not only fail in its responsibility to global community but also slither back into the lower orbit of economic development like in 1950-80.

Bears still hibernating

Since Sensex recorded its all time high closing level of 29593 on 3rd March 2015, it has corrected little under 10%. However, Midcap and Small cap indices are down about 5% during this period.

Midcap and smallcap indices has peaked almost one month later on 13 April 2015. Even if we count from their respective tops, these indices have still outperformed the benchmark.

This suggests we may not have yet entered a bear market as greed continues to top the fear of investors.

In the bear phase, historically we have witnessed material outperformance of benchmark over broader indices.

Extreme caution in mid and small cap stocks especially those having higher momentum and beta is in order. In coming weeks, this segment of the market may witness virtual crash and illiquidity.