Vijay Kumar Gaba

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.

Friday, June 5, 2015

In search of opportunities

Thought for the day

"It is only by not paying one's bills that one can hope to live in the memory of the commercial classes."

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Middling (adj)

Mediocre; ordinary; commonplace; pedestrian.

(Source: Dictionary.com)

Malice towards none

Corruption of mind, ideas and preferences is equally detrimental to the progress of a society as the corruption in money and material matters.

First random thought this morning

Till Tuesday morning the financial experts were almost unanimous on the likely rate cut by RBI. Governor Rajan did not surprise the markets.

However, a couple of days after the policy announcement the street is vertically divided on the future course of action. Forecasts now vary from 75bps cut to no cut.

The governor has certainly brought back the element of surprise in the policy making. This un-does whatever Governor Rajan has sought to do since he took over the mantle at RBI.

In search of opportunities

OECD recently cut its global growth forecast for 2015 from 3.7% to 3.1%. To put this in perspective, the global economy grew at 3.9% CAGR in the decade through 2011. In 2014 global economy grew 3.3%.

OECD said that unlike past instances where the economic recoveries were aided by investment in manufacturing capacities and technology, this time it is not happening. Besides, lack of demand is holding back employment, wages and consumption.

US and China have been two big engines of global growth in past decades. Both these engines running out of steam. The OECD sees the U.S. economy expanding 2% this year, down from 2.4% in 2014. China is expected to grow 6.8% this year, down from 7.4%.

At first this trend might look ominous for Indian economy and markets. But a second look exposes underlying opportunities. For example, consider the following:

(a) The immediate fear of financial investors worldwide is the reversal of rate cycle in US. Slower growth and persistent deflationary pressures may delay the eventual "lift", providing a much needed window of relief to Indian economy. This may be particularly critical if the monsoon indeed turns out be bad and financial stress in the economy rises.

(b) Lack of investment demand in developed countries and China may augment availability of capital for starved Indian projects.

(d) Lack of demand may render a lot of global manufacturing capacities and capital equipment redundant. Given the rock bottom freight rates, Indian miners, construction contractors, and manufacturers may sources these capacities and equipment at much cheaper rates.

This may be a threat to the "Make in India" plan and domestic capital equipment manufacturing industry, but still a big opportunity for the overall economy.

(e) Slower growth resulting in lower income, lower subsidies and higher fiscal deficit may strengthen the demand for cheaper services, medicine, clothes, vacations etc. Thus benefitting economies like India, Bangladesh, Sri Lanka etc. Though some engineering exports may suffer.

Though some slowdown in demand is naturally expected, I would not be unduly worried about severe impact on Indian IT and pharma companies.

In view of this, I am more confident about my underweight on commodities and cyclical capital goods manufacturers. I would be inclined to look at large contractors who are in a position to compete with global construction companies, import/lease equipment's and capacities from overseas markets and sustain their hare in incremental business.

I am evaluating whether any change is needed in overweight consumers in light of likely deficient monsoon and Nestle controversy.

Thursday, June 4, 2015

Believe what you know

Thought for the day

"There is a luxury in self-reproach. When we blame ourselves we feel no one else has a right to blame us."

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Oxter (n)

The armpit

(Source: Dictionary.com)

Malice towards none

What is the ratio of people who have lost money in Unitech shares vs. the people who have made money in Unitech shares in past 20yrs?

If it is more than 100:1, does regulator need to take any step?

First random thought this morning

The prospects of third consecutive crop damage this kharif season (after poor monsoon last year and Rabi crop damage by hailstorms and excessive winter rains) does not augur well for the economy in general.

The challenge before the government is that the PSU banks' balance sheets are already crippled by massive corporate delinquencies. Exploiting these undercapitalized and stressed lenders for farm sector may not be feasible.

It would be interesting to watch how it reflects on political establishment!

Believe what you know

In one of his famous speeches PM Modi had said, "I am a poor person and I bother about small things". I really loved this. I believe this is the attitude needed to take India forward.

Given the six decades legacy of adhocism and Jugaad the task could be completed with least disruption only if we aim to build brick by brick.

The programs and idea for socio-economic growth and job creation proposed by the incumbent government are commendable. However, most of these ideas are massive and intimidating. They have substantial prerequisites and require commitment of large amount of resources for execution.

For example, development of smart cities would need large tracts of land, digital connectivity, trained and skilled administrative machinery, besides material capital investment. Similarly, highway projects, industrial corridors, waterways etc. all need huge capital, technology and other resources which may not be available within the country at present.

Even the pet project of PM Modi - Clean India - would need a revolutionary change in mindset of the people to be successful. This is beside significant capital layout and resource allocation. Building public toilets without adequate water supply and disposal mechanism may only lead to dissipation of resources.

In my view, the right way forward is to take baby steps rather than intimidating the audience with grandeur of the vision and planning outlay.

Mission of a young monk Jagdishanand in Uttrakhand hills could be a role model for the government in this respect.

This monk started his own Child Hygiene project in 2014 with capital of Rs3000. He bought 100 nail clippers and placed them in 20 primary schools across 20 villages in Pauri district.

One nail clipper is tied with the class room window through a small metal chain. The monk visits each school every fortnight and motivates children to clip their nails. He also teaches them how to properly wash hands.

He has received 300 more nail clippers and two more volunteers recently. He plans to cover 100 schools with them.

Through his mission he is not only creating awareness about hygiene amongst children but also revolutionizing the mindset of a whole generation. With Rs3000 he has already ensured hygienic living of at least 300 future families.

I am sure there are thousands of such missionaries who are working silently and selflessly for the Country and her people. PM Modi having been a full-time volunteer of RSS, knows it much better than most of us.

The point is whether he "believes" in what he "knows"!

If he does, India is in secure hands and we need not worry about the bumps on the way. Even if he is suspicious about his own knowledge of the problems and plausible solutions, there is one Jagdishanand in each street of the country to take care.

(Go to top)

Wednesday, June 3, 2015

Stressed, uninspiring and apathetic

Thought for the day

"I sometimes think that God in creating man somewhat overestimated his ability."

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Jiggery-pokery (n)

Trickery, hocus-pocus; fraud; humbug, manipulation.

(Source: Dictionary.com)

Malice towards none

No European summer breaks for Congress leaders this year.

What about a month of "introspection hiatus"?

Stressed, uninspiring and apathetic

Governor Rajan obliged the government and markets by a rather reluctant 25bps repo rate cut. However, in doing so he might have caused some harm to the market confidence rather than helping it out.

The latest RBI policy statement and subsequent press briefing by the Governor Rajan had five disturbing features.

(a) Recently on many occasions, the RBI has admitted to the elevated and still rising level of stress in the financial system. This stress has mostly prevented the banks from transmitting past cuts to the business borrowers. There is little in the policy statement to address this issue. The policy statement does speak of stress in power discoms and need for funding of some bank balance sheet. But there is nothing to suggest how RBI would like to manage the challenge of up-fronting of rate cuts in still rising financial stress environment.

(b) RBI has raised January 2016 inflation target to 6%, anticipating higher risk to price stability from sub-par monsoon and external factors. Despite slow down in headline numbers, RBI has admitted that the cost of living has been rising unabated impacting the household consumption and savings. A rate cut at this stage might weaken the RBI's battle against the inflation.

(c) In the latest policy statement and subsequent press briefing the Governor rather curtly nudged the banks to lower the lending rates. This may put the banks and the regulator on a confrontational path, impacting the business of the lenders as well as the confidence of the borrowers.

(d) The Governor has highlighted the existence of material external and internal challenges to growth. Under the circumstances a stronger INR could only negatively impact the growth by adversely affecting the exports. Given the large output gap, lower capacity utilization and benign demand growth conditions, the imports may not likely to rise materially anyways.

Moreover, since the governor has clearly belied his promise of making the policy objective and data driven (see here), this brings the element of unpredictability and surprise in the policy making. This should keep the foreign investors guessing about the timing of their investment in Indian assets and businesses. Thus adding to the volatility in flows and therefore current account.

(e) The last and the worst was the poor body language of the Governor. While announcing the policy he was nowhere closer to his cheerful self, he is best known for. He appeared stressed, uninspiring and apathetic. "If" it is indicative of a chasm between the regulator and the government or regulator and the lenders, or all three, this may not be good for anyone.

In my view, the rate cut announced by RBI might be redundant, and prove to be counterproductive. The markets correctly reacted negatively to the event.

(The third bi-monthly monetary policy statement will be announced on August 4, 2015.)

Expert views on RBI policy stance

"A repo rate cut of 25 bps was expected and already factored in by most of the market participants. It's consistent with the RBI's cautious stance, as it remains concerned about the monsoon outcome, geopolitical trends & U.S. Fed action. RBI's future actions will be governed by not just the above stated points but also the government's fiscal responses to adverse monsoon outcome and its efforts to push infrastructure growth." (Rupa Rege L&T Finance)

"Besides the as-expected 25 bp rate cut, the RBI's tone errs on the side of caution on the price and growth outlook. Growth projections were revised down a notch, reflecting the central bank's belief that the ongoing recovery trend will be interpreted as modestly positive and not as strong as new headline GDP seems to suggest.

RBI will also be wary of aggressively loosening policy reins given the likelihood of higher public spending to kickstart the capex cycle and fiscal support to compensate weak agricultural sector (if monsoon disappoint) this year." (Radhika Rao, DBS)

"This is as per the market expectations: a rate cut followed by indications of a long pause. You might get a knee-jerk rally in bonds on the rate cut, but frankly I think markets will settle down to where they were and maybe even weaken a little bit ... I don't really see yields, either in government bonds or corporate bonds, going down significantly from where they were before the policy (meeting): so it begs the question of how much of this can be transmitted by banks, if there is no real change to interest rates through the policy." (Ananth Narayan, Standard Chartered)

"Broadly in line with what we were expecting, which is RBI is basically saying that this will be an extended cycle, and in the near term with some of the risk they are seeing on inflation, they'd probably be on pause after today's rate cut. We do believe that RBI is probably over-conservative in its inflation forecast, and the 6 percent inflation they expect by the end of the calendar year or early next year, is probably going to be undershot. Thus, there is a possibility of a further rate cut. For that now we will need to see data as it comes in." (R. Sivakumar, Axis Bank AMC)

"In line with anticipation, RBI has cut the repo rate by 25 bps. Further rate cuts definitely would be contingent on a lot of factors, in terms of the impact of monsoons etc. (Shubhada Rao, Yes Bank)

"We'd like to see what happens in the market. You know we did a base rate cut last month...We'd like to see in the next two or three weeks what the action is in the market and accordingly we'll take action. I have to say that demand for credit remains weak. So probably the passing on too will also come in due course of time." (Ranjan Dhawan, BoB)

"I think the implication of the guidance is that the RBI is going to wait for more inflation data and also for more clarity on risks to inflation. We hold to our call that the RBI will be on pause for the rest of the year until December.

"There is likely to be a partial pass-through from banks. If government wants accelerated pass-through, whole public sector space, separate the stronger from the weaker banks, but that's a policy call the government has to take." (A. Prasanna, ICICI Securities Primary Dealership) (Reuters)

Tuesday, June 2, 2015

To cut or not to cut is not the question

Thought for the day

"The only thing to do with good advice is to pass it on. It is never of any use to oneself."

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Agog (adj)

Highly excited by eagerness, curiosity, anticipation, etc.

(Source: Dictionary.com)

Malice towards none

Reports suggest that the government is considering Exit Exam for MBBS doctors.

What problem does this exam seek to solve?

Can't Munna Bhai pass this exam also by proxy?

Do we have Munna Bhais only in Medical profession?

To cut or not to cut is not the question

The GDP date for 4QFY15 has further queered the pitch for Gov. Rajan.

The government authorities are claiming that the data shows that the economic recovery is taking off and rate cut at this point in time will provide the necessary escape velocity. The finance minister himself has publically coaxed Gov. Rajan to cut rates to help the struggling industry and infrastructure developers.

The independent economists however are discounting the recent GDP data as accounting miracle that is not fully corroborated by the evidence available from other sources like corporate financial results, consumption data, industrial production numbers, credit data and other lead indicators. The general view is that economy is still taxing slowly towards the runway and take off is at least couple of quarters away.

The analysts community is mostly expecting a 25bps cut followed by a long pause. Flipping through various reports, I could find little reasoning behind this expectation. Most of it is "just like that".

In my view, the rate decision of Gov Rajan this morning will be driven more by "INR" than "Industry".

Given the elevated level of stress on corporate balance sheets, as evident from the FY15 annual accounts, low demand environment, and poor credit growth despite comfortable liquidity conditions threeo things are more than clear - (a) few bankers want to take risk of giving fresh money to a stressed corporate or even a new project; (b) few corporate balance sheet will justify further lending even if rate fall by 50bps; and (c) some aggressive bankers may be chasing households with high priced relatively small ticket consumer loans, compromising prudent norms and laying foundation for a credit bubble 4-5yrs down the lane.

Under these circumstances a 25bps repo cut would be mostly redundant.

Gov. Rajan would not like to make a bigger cut, as it would risk further strengthening of already strong INR; force more liquidity infusion for buying USD; and thereby weakening the fight against price rise.

From market perspective I will not be too enthusiastic about a rate cut this morning. A sharp rise in financials may provide some short selling opportunities.

A cursory scrutiny of the FY15 annual accounts of profit making private sector undertakings shows a distinct trend of tax refunds and interest on tax refunds. State Bank of India alone reported Rs10bn interest income on IT refunds.

The official claims of no Tax Terrorism need to be closely examined by analysts in light of this trend. An informal interaction with many large tax payers and PSU managers suggests that the practice of forcing tax payers to pay higher advance tax to achieve tax collection targets is still prevalent. This "terrorist" way of deficit financing belies the government claims of "peace" with tax payers. Given that the rate of interest payable on IT refunds is higher than the present 365d treasury bill yields, it also does not make much financial sense.

Monday, June 1, 2015

Investors should think beyond 2015

Thought for the day

"I am so clever that sometimes I don't understand a single word of what I am saying."

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Polymathy (adj)

Learning in many fields; encyclopedic knowledge.

(Source: Dictionary.com)

Malice towards none

Congress party is losing the plot at unbelievably fast pace!

Investors should think beyond 2015

The events like summer Char Dham yatra in Uttrakhand hills and Kumbh Mela etc., provide a good opportunity to meet people from across the country and assess the general mood.

My team traveled to the holy shrines of Sri Kedarnath and Sri Badrinath in Garhwal Himalayas last week and had the opportunity to interact with over 500 people from 13 states.

The key points that emerged from these interactions could be summarized as follows:

(a) The general mood of the people could be described best as despondent.

(b) People across the demographic chart are feeling elevated level of stress, financially as well as socially.

(c) The disposable income and tendency to spend is showing a marked improvement over the level seen a few years ago. The traditional high propensity to save is waning slowly.

(d) The number of private vehicles visiting the holy shrines has multiplied. The administration has taken virtually no note of the trend, as could be seen from the parking arrangements. NGT also need to take a note.

(e) People in general are satisfied by the incumbent government at the Center. Most people from rural areas believe Niyat (intention) is more important than the Seerat (Deeds). The general sense is that PM Modi needs to be given more time and full support.

(f) Most people are amused by the sudden invigoration of Rahul Gandhi. We could find none who is taking it seriously or believing this phase of activism to last till 2019 elections.

(g) The people from Bihar were rather concerned about the prospects of Laly-Nitish combine wining in Bihar elections. BJP appears to party of choice. People were however skeptic about the infighting in the state unit.

(h) Akhilesh Yadav appears to have made a remarkable recovery in UP after 2014 general election rout.

(i) Till a few years back, the farmers and rural laborers used to be joyous and ecstatic for being able to undertake this highly propitious pilgrimage. They would not complaint about the lack of facilities, dishonest transporter and shopkeepers etc. This time it was not the case. Most people were complaining and appear undertaking the pilgrimage as a matter of obligation.

(j) The signs of distress and devastation from the 2013 floods were visible all along the route. The local people were cynical about government help and alleged huge scam.

My conclusion is that economy might take more than two quarter to bottom out. The private consumption may dip little further before picking up. The popular media debate over PM Modi losing popularity may be little misplaced.

Nifty: Once in eight year opportunity on the anvil

From weekly charts of Nifty it is clear that the market may be headed down to its major trend support range of 7630-7860 in next 18-20 weeks. There is a reasonable probability of briefly testing a lower level of 7200 in this period.

As stated a couple of week ago (see here), Nifty may peak between 8550-8630 range in next 12 trading sessions.

A fall below 7860 on weekly basis will turn the risk reward extremely positive and provide a once in 8yr cycle (2013-2021) buying opportunity.

Weekly Nifty chart for past one decade. Source: Falcon)