Vijay Kumar Gaba

Tuesday, May 10, 2016

I see it half full!

Thought for the day

"Men are strong so long as they represent a strong idea they become powerless when they oppose it."

— Sigmund Freud (Austrian, 1956-1939)

Word for the day

Turpitude (n)

Vile, shameful, or base character; depravity.

Malice towards none

How valid is the argument of "potential job losses" against banning socially harmful and economically unproductive industries like fire crackers, tobacco products, etc?

First random thought this morning

Investors in ecommerce ventures like Flipkart, Jabong, Zomato, Housing.com, etc. have noted serious erosion in their valuations.

Should RBI be worried about bank's exposure to these companies' working capital funding? Also do the loans to fund fancy houses and cars of the executives of these startups need any red flag?

Does government need to review their "Startup India" model?

Or let it be! We'll cross the bridge when we reach there.

I see it half full!

Last week I mentioned about three key risks to Indian equities in the near to short term (see here).

The risk of water shortage hampering growth has resonated with the readers most, for obvious reasons. Many of them are facing it in their routine daily life.

However, the other two have evoked a rather ambivalent response.

Some traders have exposure to commodity reflation trade (mostly through steel, cement and sugar) whereas many others are regretting the "miss" and looking to buy on dips. The overwhelming feeling is that state protection is inevitably permanent and will likely increase from the current levels.

E-commerce has little direct exposure of domestic investors. Only a handful of ultra high networth individuals and some corporates have invested through various AIFs. The exposure of course is not meaningful, relative to their networth, and therefore not concerting as yet. On the contrary, private equity funds (mostly funded by foreign capital) are a seriously worried lot. The value of their funds has seen massive erosion. They have been forced to cut on costs. The commitment to future projects is filled with skepticism.

My views on this are as follows:

I believe in the forecast of an overall normal monsoon. I feel last week's reversal in Southern Oscillation Index (SOI) should further ease concerns about a serious delays in arrival of rains. Having said this, I believe that—

(a) This normal monsoon will mostly bring macro corrections in FY17 - normalization of food inflation expectations, relatively higher farm sector growth, lower financial stress in rural sector and hope of investment revival. 9MFY17 may not see much growth in rural consumption or farm sector investment. The conditions may improve only after a normal Rabi harvest in spring of 2017.

Nonetheless, if 1QFY17 and 2QFY17 results lead to unwinding of the "hope" trade, it will be a good opportunity for investors to aggressively bet on consumption theme - white goods, two wheelers, and construction material included.

A serious correction in banks and NBFCs will be an opportunity to build a financial overweight portfolio.

(b) I am too naive to intelligently analyze near term commodity trade. Nonetheless, I don't see global growth picking up momentum anytime soon.

I am confident that Chinese economy will witness a protracted correction period and may not rebound hurriedly. It's not only excess capacities, unsustainable debt or non-democratic corrupt administration. I am more worried about demography, global positioning and rise of nationalism in the west.

I therefore see a much deeper and longer bear market in global commodities, gold included.........to continue tomorrow

Monday, May 9, 2016

Nifty: Gathering momentum to make a "move"

Thought for the day

"A man who has been the indisputable favorite of his mother keeps for life the feeling of a conqueror."

— Sigmund Freud (Austrian, 1956-1939)

Word for the day

Flivver (n)

Something of unsatisfactory quality or inferior grade.

(Source: Dictionary.com)

Malice towards none

Outside the Islamic nations, two largest democracies - USA and India - are perhaps the most racist and sexist.

Why so?

First random thought this morning

As per reports India aims to create an additional 190 mtpa capacity by 2025-26. Approximately $1 billion investment is required to develop 1 mtpa steel capacity, implying a need for US$190bn investment requirement for the struggling industry.

Has someone examined leasing massive global idle capacities under 25-30yrs contracts.

Nifty: Gathering momentum to make a "move"

Last week I had mentioned that benchmark indices are close to an inflection point (see here). I mentioned ranges 7730-8013 (for Nifty) and 16270-17270 (fro Bank Nifty) on weekly closing basis in which these indices may consolidate before making their next bigger move.

Both the indices ended the week very close to the lower bound of their expected range, (7733 for Nifty and 16296 for Bank Nifty).

The global markets are jittery. The domestic markets have lost considerable momentum in past two weeks. Benchmark indices are poised precariously to their significant support level. But I do not see any sign of weakness in the market.

In my view, markets should rebound after consolidating some more around the present level. The intraweek volatility might surge materially as result season picks up momentum and more core sector stocks declare their results in next 2-3weeks.

For now I may reiterate what I said last week. I shall be watching the following points closely over next 2weeks to take a call on the market direction during June -October period.

Nifty: Weekly close below 7730 for a break down and 8013 for break out.

Bank Nifty: Weekly close below 16270 for a break down and 17270 for a breakout.

Nifty: Momentum weakens, but no sign of a break down as yet.

Bank Nifty: Limited upside, but not breaking down as yet

Friday, May 6, 2016

Key risks to Indian markets

Thought for the day

"What we see depends mainly on what we look for."

—John Lubbock (British, 1834-1913)

Word for the day

Prink (v)

To fuss over one's dress, especially before the mirror.

Malice towards none

Instead of urging his MPs to engage more with society, PM has urged them to engage more with social media!

Are means becoming goals?

First random thought this morning

Last week Priyanka Chopra (PC) took a strong objection to some views of the GoP's presumptive presidential nominee Donald Trump. Some friends are debating if she did commit a mistake. The debate is twofold - (a) whether artists should take strong partisan political positions; and (b) whether PC has unwittingly hampered her budding international career.

Personally, I do not see any wrong in PC, or any artist for that matter, taking a strong position for a cause, ideology, party or person - like any other common person. But being a person who is closely followed and idolized by many, they should be prepared and willing to face consequences. They can't just get away, like I may!

Key risks to Indian markets

Indian markets face three key risks at this point in time, in my view.

1. Water shortages

As I mentioned yesterday (see here), the most visible risk is acute water shortages across central and southern India. Almost all water intensive industries, like construction, chemical, paper, textile are staring at the prospect of production cut.

Cement and steel producers are already witnessing demand contraction in April-may. Large scale migration and erosion in purchasing power due to lower productivity, employment disruption, higher spend on water - consumption in affected areas is also suffering.

Lower milk yield due to fodder scarcity and higher sugar prices (lower production) may also impact many FMCG companies, especially diary and bakery products.

I guess poor 1QFY17 results of many of these companies will be a better opportunity to enter in their stocks.

2. Failure of global reflation trade

In past three months of months global commodities have seen a massive rally. Many commodities have witnessed 10-70% rise in prices from their recent lows.

The market participants globally are debating the reason behind such a rise in prices of industrial commodities, given that the growth continues to be weak. The views are diverging from "beginning of new commodity cycle" to "purely speculative" to "just a corrective rally in deeper bear market".

Nonetheless, our market has seen a massive rally in metal stocks on the back of this global reflation trade. Government protection in terms of safeguard duties, minimum import prices, etc. has also helped to a great deal.

Some reports are suggesting that many Chinese traders may have taken to commodities in a big ways in the wake of poor equity market prospects, and this position is already hurting (see here).

A failure of this trade is a key risk to Indian markets as it may inflict huge losses to investors who have taken larger positions.

3. Precipitated burst in e-commerce bubble

There are all classic indicators of a bubble in the Indian e-commerce space. The elimination has already started. The valuations are being adjusted lower. But the bubble is still there.

There is not much exposure to this space, insofar as listed equities are concerned. Nevertheless, it will have certainly have significant impact on employment market, financial system, FDI flows and consumption demand.

...to continue on Tuesday.

Thursday, May 5, 2016

State of Emergency

Thought for the day

"If we are ever in doubt about what to do, it is a good rule to ask ourselves what we shall wish on the morrow that we had done."

—John Lubbock (British, 1834-1913)

Word for the day

Amanuensis (n)

A person employed to write what another dictates or to copy what has been written by another; secretary.

Malice towards none

Want to get into IIT - preserve virginity and believe in God!

A survey finds that 95% new entrant in IIT-B are virgins and only 18% are atheist.

First random thought this morning

Reports suggest that many residents of the State of Bihar are crossing borders to Uttar Pradesh just to consume alcohol. A similar practice is seen in Gujarat, where people cross borders to Maharashtra, Daman and Diu just to drink.

I do not subscribe to the idea of legal prohibition at all. But since some states have already implemented, I feel the prohibition should be on people and not the place - all residents domiciled in that state should be completely prohibited from consuming, producing, buying, selling or storing liquor, irrespective of their present location.

State of Emergency

The response of the central government and many state governments towards two natural disasters, viz., massive forest fire in northern India, and acute water crisis in central India, is inadequate, in my view.

In particular, the economic ministries of the central government have either been underestimating the colossal economic impact of these disasters, or they have been misguiding the nation by claiming stable economic conditions and projecting 8%+ GDP growth in the current year.

A visit to railway stations in Mumbai, Kolkata and Delhi and/or a drive on NH-3 (Agra - Mumbai) is sufficient to assimilate large scale migration of people from parched fields to large cities in search of employment and food.

A casual discussion with cement manufacturers and dealers is sufficient to know that water shortages are hurting construction activities in many parts of the country. There are therefore even lesser employment opportunities for the migrant labor.

Besides construction, many other water intensive industries like textile, paper, chemicals etc. are also fearing serious production disruption should situation worsen further from the current level.

The hospitality sector in the hill stations of north India fears a washout season if the forest fire is not doused soon.

It is common knowledge that stale water starts stinking. This equally applies to ideologies, beliefs, traditions, conventions, relations and everything else.

If there is any argument on this, I am willing to hear. But if it goes uncontested, I will take a step further - why the Constitution of India should be beyond this rule.

The founding father of the Constitution of India envisaged three situations that may warrant declaration of a state of emergency, viz., under Article 352 (National emergency due to external threat or war); Article 356 (State emergency due to failure of constitutional machinery); and Article 360 (National/State emergency due to financial crisis).

Major natural disasters (Tsunami, Earth Quake, Flood, Drought etc.) are not specified as potential cause for declaring National/State emergency.

Article 356 has arguably been misused on many occasions. Mrs. Gandhi misused Article 352 once in 1975. But the larger point is that mere potential for misuse, cannot be an argument against the importance, need, rationality and utility of a legal or constitutional provision.

Just because Article 352 was once misused 40yrs ago, we cannot ignore the critical importance of this provision. And unless we accept its critical importance, we cannot sit and consider amending the constitution to provide for a national/state emergency due to major natural disaster.

In my strong view, the acute water crisis in the country calls for declaration of National Emergency - making water a central subject, enforcing strict norms for usage, and ensuring an equitable distribution amongst states.

Tomorrow - impact of water crisis on investment strategy and markets.

Wednesday, May 4, 2016

Problem of plenty

Thought for the day

"A day of worry is more exhausting than a week of work."

—John Lubbock (British, 1834-1913)

Word for the day

Woodnote (n)

A wild or natural musical tone, as that of a forest bird.

Malice towards none

Someone advised a PM aspirant that India has already had prime ministers from north, west and south. Only eastern India is so far unrepresented.

Did other leaders in eastern states also eavesdrop to the conversation?

First random thought this morning

Arvind Kejriwal led AAP has been successful in capturing some mind space of urban populace in the country, at public expense. In many areas, AAP might have an edge, whenever a need for an alternative to the established parties is felt by the citizens.

Paradoxically, the party has not been able to make much inroads in rural mind space where the quintessential Aam Aadmi lives.

Punjab villages, which are arguably most urbanized in the country, may show the way forward, to all - NDA, Congress, Socialists and of course AAP.

Problem of plenty

The summer this year is forecast to be longer and hotter than usual. Lower moisture level in soil due to two consecutive drought years and widespread forest fire in north Indian hills, is making the matter worse.

The consolation however is significantly better availability of electricity. Unlike past years, so far the availability of electricity is much better, both in terms of quality and quantity. This is despite much higher energy intensity of water, lower hydro power generation, and higher household demand due to hotter than usual weather.

The worst deficit states like Maharashtra, Tamil Nadu, UP & MP are reportedly not faring much better this year, despite high farm sector demand. As per government data FY16 saw power deficit shrinking to 2.1%, the lowest ever.

The improvement in power situation could be attributed to a variety of factors; for example-

(a) Completion of many power projects adding to the generation capacity, including renewable projects.

(b) Higher availability of fuel - cheaper global coal prices, higher local coal production, higher availability of LNG - augmenting plant load factor of conventional power producers.

(c) Lower industrial demand due to - lower capacity utilization, better energy efficiency standards and cheaper diesel; and slow down in real estate sector growth.

(d) Higher energy efficiency at household level due to rising use of LED based appliances and solar energy.

(e) Improvement if health of SEBs, due to financial restructuring under UDAY scheme.

The market has rightly taken fancy for the electrical appliance manufacturers, assuming better power availability will boost demand for appliance. A visit to nearby electronics shop will confirm this.

While the consumers have a reason to be happy, investors, banks and entities engaged in power supply chain are a worried lot. Impending completion of 80GW of power generation capacity under construction is just adding to the jitters.

Coal India had to cut production and shipments of the fuel as sluggish demand caused stockpiles to swell.

Merchant power producers are struggling to sell their generation as despite peak summer, demand is benign and rates hovering around Rs2.7-2.9/kWh. A normal monsoon might further hit the demand.

While my bias against Coal India is well known, I am not too worried about the others. I believe this period of plenty is an opportunity to accumulate efficient power producers and distributors. In less than 5yrs, these could be easily expected to turn into a regular decent dividend paying utilities in true sense.

Tuesday, May 3, 2016

Some random thoughts

Thought for the day

"Our duty is to believe that for which we have sufficient evidence, and to suspend our judgment when we have not."

—John Lubbock (British, 1834-1913)

Word for the day

Puckish (Adj)

Mischievous; impish.

Malice towards none

The massive forest fire in Uttrakhand proves three things:

(a) Nero still does not care if Rome is burning.

(b) Our disaster management has not improved much after 2013 Uttrakhand floods.

(c) Environment is not a priority for anyone, till it becomes a prime time news.

First random thought this morning

BJP has nominated Subramaniam Swamy to the Rajya Sabha, like a cat amongst pigeons. He seems to be taking the principal opposition Congress Party head on since the day one.

BJP might score some quixotic points here. But is it only about BJP and Congress or the people of this country also matter to someone?

Some random thoughts

In past couple of years, the non-performing loans (NPLs) of Indian banks have been a matter of deep concern. The subject has been a subject of intense debate amongst all market participants, regulators and other government authorities.

The debate has recently assumed a socio-political character after Mr. Vijay Mallya decided to leave the country without settling his debts. With this morality has become the primary issue in the debate. The points like "Risk", "Business Cycle", "Collaterals", "Force Majeure", "Process of Law" and "Intent to repay" etc., have taken a back seat.

Lenders are suffering for both (a) poor judgment of credit risk and (b) fraudulent diversion of funds by borrowers

Consequently, there is an environment of fear amongst borrowers who are going through a rough patch in their respective business cycles, prospective borrowers, and the credit managers of banks.

It is common knowledge that political pressures and social concerns have been an integral part of the lending mechanism of various public sector banks. They have thus not been observing very high standards insofar as the credit evaluation and risk assessment is concerned. Corruption and connivance with unscrupulous promoters has also not been uncommon.

But it also worth noting that NPL problem has been quite pronounced in case of banks like ICICI, AXIS, Federal. Even foreign banks like Standard Chartered, CITI and ING Vysaya have also suffered hugely on this count.

In my view, the debate needs to divert from the issue of morality to focus on the issue of rebuilding a sound financial system.

The suggestions like creation of a bad bank, naming and shaming all creditors in default, banks taking over businesses on TMS (take over - manage - sell) basis etc. are good to discuss over a cup of coffee, but may not be practical and/or sustainable.

In my view, banks, government (as majority owner of PSBs) and regulator need to take a holistic view of the situation, rather than just fire fighting.

As a first step, an independent assessment may be carried out of all bank loans to identify what loans have been used in building real capacities (roads, power plants, houses, shops, offices, bridges, etc.) and what loans have just been expensed in paying usual business expenses and interest. Different approaches may be required for managing risk in these two types of credit. As against a standard provisioning, a differentiated provisioning may be needed for a power producer and an e-commerce market place.

By enforcing mindless asset sales, banks may actually be exacerbating the NPL situation further. For example, one of the largest borrower is reportedly selling all his cash generating assets to pay about 50% of his loans. He would no cash flows to service the balance 50%.

These are some random thoughts. I will try to add more sense to these soon.

Monday, May 2, 2016

Nifty: Closer to potential inflection point

Thought for the day

"Rest is not idleness, and to lie sometimes on the grass under trees on a summer's day, listening to the murmur of the water, or watching the clouds float across the sky, is by no means a waste of time."

—John Lubbock (British, 1834-1913)

Word for the day

Gonzo (Adj)

(of journalism, reportage, etc.) filled with bizarre or subjective ideas, commentary, or the like.

(Source: Dictionary.com)

Malice towards none

For the sake of argument assume PM Modi is a school dropout and Rahul Gandhi's foreign degrees are all genuine and hard earned..

So what's the point?

First random thought this morning

A report suggests that only 4% Indian file income tax return. This number may be low but is not ridiculous. If all those liable to pay income tax under current law, do actually file their IT return, the number may actually not go up materially. Over 90% Indians may still be earning less than the IT thresh hold.

In his last Mann ki Baat, PM suggested experimenting with no ticket checkers in trains. Why not also experiment with no IT return? Citizens earning less than Rs10lacs per annum may just be required to visit IT department website once in 12 months to press a confirmation button that they have duly paid the tax due on their income!

Nifty: Closer to potential inflection point

Both Nifty and Bank Nifty ended the month of April, closer to their inflation points. A breakout from here will establish a new bull market that may last well over three years. However, a failure at this point may lead to a 5-7% correction in both the major indices.

As I stated earlier, in a case of a breakout, the up move will likely be led by non-financials, whereas in case of a breakdown the down move will be led by financials.

For now I shall be watching the following points closely over next 3weeks to take a call on the market direction during June -October period.

Nifty: Weekly close below 7730 for a break down and 8013 for break out.

Bank Nifty: Weekly close below 16270 for a break down and 17270 for a breakout.