Vijay Kumar Gaba

Wednesday, April 27, 2016

I am holding on to my cheese tightly!

Thought for the day

"The mountains are calling and I must go."

—John Muir (American, 1838-1914)

Word for the day

Pecuniary (Adj)

Of or relating to money, e.g., pecuniary difficulties.

Malice towards none

Does anyone see any similarity between KG-D6 and Reliance JIO?

First random thought this morning

These days, there is no dearth of analysts and economists who have sighted flocks of Black Swans flying over Chinese skies.

I always thought, if you could see them - they are not black!

For record, did anyone saw Enron or Lehman collapsing?

I am holding on to my cheese tightly!

As I stated in past couple of posts (see here and here), I am not at all convinced about the so called "Monsoon Trade" in Indian equities. I believe that the markets have overreacted insofar as the price action in many agri inputs, farm equipments, rural financiers, and consumer stocks are concerned. I find many of these stocks way beyond the fair value line. I expect it to be a pain trade. The returns from the current level may be normal and back-ended.

At this point, if someone wants to narrate the fable of "sour grapes" to me, or present me Dr Spencer Johnson's "Who moved my Cheese?" or anything similar, they are most welcome.

Now moving to my take on investment strategy under the present circumstances.

I have been arguing for long that consumption will stay the mainstay of my India equity strategy.

I have also argued that consumption of service though growing much faster and deeper, may offer very few actionable investment ideas. For example, consider the following.

· We are already witnessing oversupply conditions in power and energy. The situation will only worsen as more conventional and solar power comes on grid, improved rail network and port connectivity augments coal supply, LNG supplies increase materially (both domestic and imported), monsoon improved hydro power generation, and LED and BEE drive optimizes peak power demand.

· Logistics stocks have already run up in anticipation of surge in E-commerce volumes and GST and trade at astronomical valuations.

· Telecom stock are staring at a fresh round of capex (a massive one) and disruptive tariff.

· Mining though mostly past the legal troubles, is facing huge global oversupply hang.

· Hotels, trade, e-commerce, construction are suffering from higher taxation, low demand growth, rising wages and stretched balance sheets.

Under the circumstances, I would stick to my stated (see here) strategy of focusing on upper middle class and aspirational consumption. I would focus on retailing, entertainment, service oriented banking, transportation & logistics, and healthcare sectors.

On product side, I would like to focus on aspirational products like lifestyle drugs, beer, premium liquor, household upgrade (lighting, tiles, plywood), luxury housing, premium automobile, packaged food (non-basic), etc.

Technology will also remain a core theme in the portfolio. However, focus will be on innovators, designers, and engineering services. I would mostly avoid body shops.

Tuesday, April 26, 2016

Was in rome, didn't see the pope

Thought for the day

When we try to pick out anything by itself, we find it hitched to everything else in the universe.

—John Muir (American, 1838-1914)

Word for the day

Eudemonic (Adj)

Pertaining or conducive to happiness.

Malice towards none

Did you know that foreign citizens can become members of Indian Parliament?

First random thought this morning

Wonder why should CPM support Congress? Do they believe that Congress will further the cause of Marx? What difference they find in Congress and TMC?

It's certainly not about any ideology. BJP and AAP leadership have also demonstrated in past 3years that ideology can take a back seat, while political parties are in the pursuit of power.

Now if I do not have to look for ideology when casting my vote, what should I look for? Obviously - I will vote a person who is most likely to help me in achieving something that I cannot do in normal course of my business.

Was in rome, didn't see the pope

The Indian equity market has witnessed a strong "Monsoon" trade in past few weeks. The trade is apparently predicated on the hope of a "Normal" monsoon and consequent surge in rural:

(a) Investment - farm equipments, tractors, SUVs, two wheelers, housing, white goods, etc.;

(b) Consumption - agri inputs, biscuit, hair oil, cosmetics, textile, etc.; and

Some brokerages have extended the trade to beginning of a virtuous macro cycle taking "Lower food inflation - lower rates - higher capacity utilization - higher earnings - better asset quality - higher investment demand - higher GDP - higher public revenue - higher public investment - everyone happy" line of argument.

I do not completely disagree with the premise that a good monsoon shall help the economy tremendously insofar as the macro fundamentals are concerned.

I am however not convinced about the immediate impact on corporate earnings. Based on assessment of my colleagues who recently travelled to many drought hit areas, and my travels in past one year, I believe that:

(1) The cost of planting this Kharif crop will be higher than usual, as preparing parched ground, with almost no moisture in it for, sowing will be a time consuming and expensive affair. Expecting any significant rise in rural household consumption under these circumstances might be a bit optimistic.

(2) The present water availability even in fully irrigated areas is low. Even a 2-3weeks delay in monsoon rains will therefore hurt more than usual.

(3) Most medium, small and marginal farmers are fully stretched financially. Sowing this time therefore will need much higher state help. The pressure on fiscal and financial system will intensify first and perhaps ease only after the harvest around Diwali.

(4) The investment demand could revive only during Rabi season. 1HFY17 results may not reflect any of it.

(5) The current marriage season in states like UP, Bihar, MP etc. is witnessing one of the lowest spending in the past decade. People do not expect the trend to reverse in the post monsoon marriage season too.

(6) Some forecasters are predicting a La Nina event in August-September period. If this does happen, we might see serious floods in many areas. This will further delay any likely recovery in rural demand.

I find that many stocks conforming to the "Monsoon" trades have crossed the line of fairness. I see them retreating in next 6months. Though I will not short these stocks as yet, I am not contemplating any buying here for sure.

...to continue tomorrow

Monday, April 25, 2016

Nifty: Financial outperformance may peak soon

Thought for the day

"God has cared for these trees, saved them from drought, disease, avalanches, and a thousand tempests and floods. But he cannot save them from fools."

—John Muir (American, 1838-1914)

Word for the day

Hoi Polloi (Plural Noun)

The common people; the masses (often preceded by the).

(Source: Dictionary.com)

Malice towards none

Is it immoral to be rich in India?

First random thought this morning

Regardless of the severe drought and water shortages in many parts of the country, so far there is no water cut or shortage at my place.

We have however pledged to immediately reduce our water consumption by 40% permanently. My children resisted initially, but are even more enthusiastically committed to the pledge now.

Nifty: Financial outperformance may peak soon

Last month, I had argued (see here) that financial will lead Nifty higher. I also argued that Nifty faces Nifty faces a strong resistance in 7925-7960 range in the near term. A monthly close above this range will set Nifty on course for new highs. A sustained monthly close above 7960 shall see Nifty testing its new cyclical peak of 13200 in the next following 39 months. (see here). So far the markets have been obliging by playing to the script.

A monthly and weekly close above 7960 this week shall set the path for NIFTY to scale much higher levels by summer 2019.

Three things are noteworthy from the weekly charts.

(a) Bank Nifty has completed a bullish reverse head & shoulder pattern, and looks set to rise to its next resistance range of 17300-17350, with some minor hurdles at 17040 level.

(b) Nifty faces some resistance around current market level and might even see some retracement. But the path to 8260-8310 range is clear and may be tested in next 5-6weeks.

(c) The leadership of Bank Nifty is fading and may peak in next 3weeks. The new leadership may emerge from IT and Pharma space.

Bank Nifty to race ahead to 17300 level

Nifty faces hurdles at 8K, but 8300 possible in 4-6weeks

Bank Nifty leadership to peak in 2weeks

Friday, April 22, 2016

Its not about drought only

Thought for the day

"Worry does not empty tomorrow of its sorrow. It empties today of its strength."

—Corrie Ten Boom (Dutch, 1892-1983)

Word for the day

Namby-pamby (adj)

Lacking in character, directness, or moral or emotional strength. e.g., namby-pamby writing.

Malice towards none

Over 250mn Indians are struggling to get a pitcher of drinking water, even risking their life.

Nero is busy discussing Kohinoor.

First random thought this morning

By criticizing the seemingly innocuous use of a popular Hindi idiom by governor Rajan at some academic forum, BJP leaders have taken the intolerance debate to next level.

Union commerce minister Nirmala Sitharaman, who never bothered to raise any objection to the numerous obnoxious, racist & sexist comments made by party leaders, was particularly uncharitable in her criticism of the governor.

For the n^th time, I want to rewind the tape and hear what Mrs. Amir Khan had said a few months back.

Its not about drought only

Earlier this week, the central government told the Supreme Court that over 330mn Indians are facing acute water shortages due to drought conditions.

I am not sure what my readers in metro cities having no direct connection to the affected areas would make out of this admission by the government. But trust me (a) this is much more serious than you could possibly imagine; and (b) the government is only partially right in its statement.

It is true that over one fourth of Indian population is suffering from serious water crisis. But it is not completely true that this is some temporary problem caused by two consecutive drought years and rains this monsoon season will resolve the problem.

In many parts of the countries, including many metro cities like Delhi, Bengaluru, Mumbai, Indore, Madurai etc., water shortages are perennial. People, mostly female members of the household, have to walk long distances and wait for hours to fetch few liters of water barely sufficient to meet their sustenance needs.

Large parts of central and south India, Rajasthan, Gujarat and Maharashtra are parched since decades now.

The current drought conditions have obstructed industrial production in affected area, damaged crops, and adversely impacted animal husbandry. But this is not the worst part.

My colleagues who returned yesterday from a trip of Bundelkhand and Vidharbha regions, tell me that acute water scarcities is severely damaging (a) the basic fabric of the society; (b) peoples' faith in the constitutional institutions; (c) the survival instinct of people; and (d) psyche of the people.

The rate of crime is rising. Even bigger problem is that the acceptance of crime as a way of life is rising; affording a certain degree of legitimacy and respect to the criminals. Child traffickers, organ thieves, pimps and rapists are not amongst the most hated. Police, district administrators, bureaucrats, and politicians enjoy that distinction.

On economic side, the country is witnessing humongous productivity loss. A large number of children and youth are missing school and work to go in search of water. Mothers are not getting enough time to feed their newborn. The business of dirty water is growing much bigger than the bottled water and so is the business of water borne diseases.

I cannot agree more with the governor Rajan, when he says higher and faster growth is not sufficient. We would need to make the growth much more sustainable and equitable. I have been writing on this subject consistently for past many years. For example you could read the following:

Money or happiness - make a choice!

Growth vs. sustainability

Sustainability vs. speed

I would share my thoughts on implications of this on my investment strategy, next week.

Thursday, April 21, 2016

Mindless bulls may hit the wall this fall season

Thought for the day

"The first step on the way to victory is to recognize the enemy."

—Corrie Ten Boom (Dutch, 1892-1983)

Word for the day

Miche (v)

To lurk out of sight.

(Source: Dictionary.com)

Malice towards none

Secondary school students are a worried lot these days.

Going by the current rate of growth, their history books would have added at least 50 more chapters on great personalities in next three years!

First random thought this morning

Upper reaches of Himachal Pradesh received unprecedented snowfall in April, at a time when most of the country is witnessing intense heat wave conditions.

On the top, astrologers are predicting major natural calamities as sworn enemies Mars and Saturn come face to face. They feel tremors in Japan and Ecuador were just a forewarning.

The Finance Minister is upgrading growth estimates every week!

Mindless bulls may hit the wall this fall season

Impregnated by the hopes of a bountiful monsoon, the Indian equity markets are euphoric again. Optimistic statements by the people such as the finance minister, RBI governor etc., are making headlines every morning; adding more fuel to the fire.

The character of market rally is distinctly cyclical - Hope of a good monsoon, after two consecutive droughts, is driving companies engaged in the (a) production of agri inputs and farm equipments; (b) production of fast moving consumer goods (FMCG) which drive significant part of their incremental revenue from rural consumers; (c) rate sensitive businesses, e.g., automobile, housing finance etc., in the expectations that improved macro conditions will afford RBI an opportunity to cut rates rather aggressively and hence spur the sagging credit demand.

Besides, the global commodity trade is also getting reflected in Indian markets. The commodity stocks across sectors - agri, metals, chemicals, paper, cement, etc. have seen phenomenal rise in past 3-4months.

The investor in me is little disconcerted. Though, I had anticipated the markets to take this turn; and I had also deliberately decided not to follow the market on this detour; I feel the smaller investors who are chasing the market trend again getting crushed, for the following reasons.

(a) The rural sector is under tremendous stress for past three years. The farmers and laborers are deeply indebted, after having exhausted all their savings of past decade. Severe drought and extreme water shortage is a reality, whereas bountiful and timely rains is still a hope. Even assuming a timely and widely spread good monsoon, the farmer may not get much money to consume or invest this year. Debt repayment and rebuilding emergency buffer will take most of the earnings. This trade therefore may underperform from the current levels.

(b) Outperforming private banks, NBFCs, HFCs, CV and tractor producers are already trading close to their average historical cycle peaks in terms of valuations. Whereas the cheaper public sector banks are languishing (not without reason though). The trade seems already overdone, and we are still at the take off stage.

(c) Europe and Japan are flirting with recession. China is expected to remain in slow lane for next decade or so. Commodity dominated emerging economies like Brazil, Russia, South Africa, etc. are struggling. Australia, Canada, Hong Kong, Singapore, Korea etc. are not growing either. US is stable but likely to complete this economic cycle with weakest ever recovery rate. So where is the case for commodities. In my view, what we are witnessing is nothing but a sharp correction in a major commodity bear market that may last even beyond 2020. The trade here, with few exceptions like Cement, may not last beyond this fall. Those entering the sector now, I see them working hard this winter to find a bigger fool.

Also read:

A detour to economic recovery

Strategy for the detour

Wednesday, April 20, 2016

States of the Union - 2

Thought for the day

Never be afraid to trust an unknown future to a known God.

—Corrie Ten Boom (Dutch, 1892-1983)

Word for the day

Fuliginous (adj)

Sooty; smoky, e.g., the fuliginous air hanging over an industrial city.

(Source: Dictionary.com)

Malice towards none

Shahrukh Khan claims to be the greatest patriot in the country!

Any higher bids?

First random thought this morning

Now a days it is common to watch, hear and read stories narrating how a child born in a very poor family landed a good job or succeeded in competitive examinations, etc.

Ostensibly, the objective is to highlight the social awakening and to motivate millions others who are facing similar types of socio-economic challenges. Unintended consequences are rise in fear psychosis in a section of the society that is unnecessarily feeling threatened by rise of the downtrodden.

This reminds me the most overrated Hindi movie of recent times - 3 Idiots. Whatever was the objective of that movie, it might have motivated many stressed students to commit suicide!

States of the Union - 2

Confronted with chronic and unsustainable levels of fiscal deficits and public debt regional governments have embarked upon corrective strategies to attain a certain degree of fiscal consolidation. The primary objective is to align the key macroeconomic parameters with the broader socio-economic context of respective states.

These efforts are typically driven by a rule based framework through the enactment of fiscal responsibility and budget management (FRBM) legislations. The legislations at state level are designed, keeping in view specific requirements and characteristics of the respective states.

While the fiscal rectitude shown by the states is welcome, a careful impact assessment of the mechanism employed for expenditure management is imperative.

For seizing the full impact of the fiscal consolidation, it must be made sure that it does not result in sacrificing the expenditure considered necessary for stimulating growth, and promoting larger objectives of inclusion, equality and integration of socio-economically backward population.

The study of FY15 state finances relates that there is significant variation in expenditure on social and physical infrastructure among states in terms of both composition and the level of spending. Expenditure on physical infrastructure shows greater variability, with energy being the most volatile component. By contrast, states’ spending on the social sector exhibits stability and is dominated by outlays on education.

Majority of the Non Special Category (NSC) states incurred expenditure on social and physical infrastructure (as proportion to aggregate expenditure) below the group average; indicative of the presence of sharp outliers.

Two features are noteworthy: (a) states’ spending on medical and public health has tended to exhibit a central tendency, with a greater degree of cluster around the average (NSC states) relative to expenditure on energy which is at the other end of the spectrum in terms of dispersion from the average.

At a disaggregated level, average social sector expenditure on education and health is higher among top 5 states than the other states, indicative of the impact of income levels on the quality of expenditure. In respect of physical infrastructure, expenditure on roads and bridges is highest for the bottom 7 states.

It is clear that the states in lower income brackets need to improve social sector spending, given the correlation of around 0.5 between expenditure on health and education and the human development index (HDI) of NSC states. These adjustments would enhance labour productivity and enable states to reap the benefits of the “demographic dividend”

(Source: RBI)

(Based on April 2016 report of RBI on "State Finances - A Study of Budgets of 2015-16")

Monday, April 18, 2016

Nifty: On the verge of breaking out

Thought for the day

"When a train goes through a tunnel and it gets dark, you don't throw away the ticket and jump off. You sit still and trust the engineer."

—Corrie Ten Boom (Dutch, 1892-1983)

Word for the day

Ossify (v)

To become rigid or inflexible in habits, attitudes, opinions, etc., e.g., A young man who began to ossify right after college.

(Source: Dictionary.com)

Malice towards none

There are two types of product advertisements - (a)which mention price of the product being offered; and (b) which do not mention the price!

First random thought this morning

Post the forecast of normal monsoon, Governor Rajan has hinted at possibility of further rate cuts. Infosys obliged the bulls by disappointing the naysayers. USFDA data suggested that the Indian pharma companies are doing great. The settings are perfect for Nifty to top mount 8k again, after five months.

Nifty: On the verge of breaking out

I have been insisting that Nifty has completed a market cycle in February 2016. The cycle had started in late August 2013, got firmly established in March 2014 and peaked in March 2015.

Now a sustained close above 7980-8060 range (on weekly basis) would mark beginning of a new market cycle, that shall get firmly established above 9000 level. Between 8060-9000 level we may see multiple trading opportunities.

I am also insisting that this cycle would be a larger cycle both in terms of time period and distance covered.

For now, there is some resistance in 7960-8060 range; but the rise in momentum suggests that overcoming this resistance will not as difficult as previously perceived.

On daily charts, I see Nifty testing 8210-8270 range being tested within next 10weeks.

Wednesday, April 13, 2016

States of the Union

Thought for the day

"Gratitude is a sickness suffered by dogs."

—Joseph Stalin (Georgian, 1879-1953)

Word for the day

Reconteuse (n)

A woman who is skilled in relating stories and anecdotes interestingly.

(Source: Dictionary.com)

Malice towards none

Kurmi for Kurmi; Koeri for Koeli; Yadav for Yadav; and Lodh for Lodh - it's like a hockey match in UP with man to man marking strategy.

First random thought this morning

The presidential election in the USA no longer seems to be a contest between the republicans and democrats. It has definitely transformed into something else.

The leading republican contender is creating fears of anarchy in many minds. The leading democrat contender is seen less as a politician and more as a woman.

The deeply sexist and racist character of white American male is out in the open for everyone to see and feel.

States of the Union

RBI recently released a report on the finances of the states of the union. The report highlights many interesting developments. The most significant been that in FY16 state finances budgeted for a turnaround in fiscal performance during 2015-16 from the deterioration that set in during the earlier two years.

The projected improvement in key fiscal indicators was led mostly by austerity (cutbacks in revenue expenditure). The capital outlays on consolidated level saw only a marginal decline.

The report highlights that the state finances have improved materially post implementation of FRBM Act. The states are now more pragmatic in handling the constraints faced in augmenting expenditure without compromising on fiscal consolidation goals.

The report also highlights that contrary to the propaganda the increase in states’ share of tax devolution from 32% to 42% of the divisible pool on the recommendation by the fourteenth finance commission actually works out to a decline in consolidated state revenues from central transfers (share in central taxes plus grants in aid) by 0.3 per cent of GDP in 2015-16, due to discontinuation of many centrally sponsored schemes (CSS) announced in the Union Budget, 2015-16.

The report also explores issues which are likely to have a bearing on the quality of states’ expenditure in the medium term; reform of state-level public enterprises, the goods and services tax and the Ujwal Discoms Assurance Yojana (UDAY) scheme.

The report focuses on state finances to assess he quality of expenditure which is key to sub-national level fiscal consolidation to reap efficiency and welfare gains while smoothing the effects of fiscal adjustment.

The quality of expenditure is at centre-stage of the dynamics of subnational level fiscal consolidation in India. Empirical evaluation indicates that expenditure on public infrastructure, human capital, science and technology can be growth and welfare enhancing by improving capital and labour productivity.

The report prominently draws attentions to the rise in revenue and non-development expenditure of the states and the consequent deterioration in the quality of states’ spending.

It is widely stated that Indian states need to prioritise expenditure on physical and social infrastructure and economise on nonessential heads. From a medium term perspective, enduring improvements in the quality of states’ finances hinges around the revival of state level public enterprises (SLPEs), improving the viability of Discoms and rationalisation of centrally sponsored schemes.

I shall discuss some key issues highlighted in the report next week.