Vijay Kumar Gaba

Friday, May 20, 2016

Good days and peaceful nights

"Nature uses only the longest threads to weave her patterns, so that each small piece of her fabric reveals the organization of the entire tapestry."

— Richard P. Feynman (American, 1918-1988)

Word for the day

Jeremiad

A prolonged lamentation or mournful complaint.

Malice towards none

The ignominious decline of communist parties in India, at a time when income inequalities are rising at the fastest pace since independence, and a right wing party is dominating is quite intriguing.

First random thought this morning

Five key takeaways from the recently concluded assembly elections:

(1) Time is running out faster for Congress than most anticipated. The Congress stands almost no chance in UP, PK or no PK.

(2) BJP would need to galvanize the UP people on some issue if it wants to unseat SP. Otherwise, Akhilesh is set to come back by default.

(3) Nitish needed crutches of Lalu and Rahul to retain Bihar. Mamata has done it on her own. She may have better claim on united opposition leadership as compared to Nitish.

(4) The voters continue to give decisive mandate. The days of fractured mandate are gone.

(5) BJP might want to go alone in Punjab polls.

Good days and peaceful nights

Many parts of the country are presently experiencing an intense heat wave. The mercury is breaking more records than Virat Kohli. But we have not seen many citizens complaining.

One primary reason is significantly improved electricity supply. Despite sharp rise in electricity demand, the supply has remained stable; grid is working fine; and load shedding hours are much shorter and pre-planned. Many smaller towns in UP, MP, Bihar, Maharashtra, Tamil Nadu etc. where 6-10hr load shedding was normal during summers, are facing just 0-4hr of load shedding. Delhi, Haryana, Gujarat and many other states have not reported any scheduled load shedding.

For millions of students, small businessmen, farmers, housewives, and companies making electrical appliances Achhe Din & Raat (Good days and peaceful nights) might have already arrived.

People who did not had sweat for hours every day or stand in the long queues for two litters of kerosene (for lighting) or stay awake the whole nights as their power backups failed to recharge; and the people sitting in swanky TV studios might not feel it, but it certainly is a major relief for millions of people.

The power market in India is almost a buyers' market, much like the telecom and auto. It's different from cement and steel markets, which despite being in oversupply command some pricing power due to cartelization and state protection.

The situation has been fully exploited as an investment theme. All the fruits (low hanging, high hanging and the rotten ones) have been plucked.

The appliance manufacturers who are immediate gainers of better power supply are trading at valuations that would need 5years of exponential demand growth to justify. This market may not run into supply constraints anytime soon as the planned investments more than take care of the likely demand growth. The global capacities are already underutilized. JPY, KRW, CNY devaluation will keep imports competitive for long time.

The power producers, distributors, fuel suppliers and power equipment manufacturers are struggling with surplus capacity, falling regulatory margins; materially lower merchant prices and rising competition. In absence of material pick up in industrial demand, 80-90GW additional capacity, likely to go on stream in next couple of years will only add to the pressure. In my view:

(a) The appliance demand will explode during FY18-FY21. The high valuation currently enjoyed by the companies may sustain. I may stay invested there, and even add some more with 3year perspective.

(b) The power market will come to balance in FY18 as industrial and farm demand picks up and UDAY scheme is fully implemented. I will look at some producers from purely dividend yield perspective.

The collateral benefits of stable and adequate power supply:

(a) Rise in industrial productivity, especially MSME segment.

(b) Rise in household productivity.

(c) Lower household savings as expenditure on consumer durables rises and recurring electricity expense also picks up (much like telecom).

(d) Fiscal comfort as industrial and farm production rises, power subsidies not needed.

Thursday, May 19, 2016

You give some to get more

Thought for the day

"Europeans are much more serious than we are in America because they think that a good place to discuss intellectual matters is a beer party."

— Richard P. Feynman (American, 1918-1988)

Word for the day

Oenomel (n)

Something combining strength with sweetness.

Malice towards none

The speed with which global auto makers are joining the list of "emission norm cheaters", it would soon cease to be a headline news - and people will stop bothering about it!

First random thought this morning

After Sugar, Urea, Tea, Coal, bauxite, Pulses, spices, etc. India is reportedly also becoming a swing player (consumer/producer) in global crude oil market.

The natural consequence should be development of a strong and vibrant commodities' market. Unfortunately, even the Indian traders prefer Dubai, Singapore and London over Indian cities for carrying their commodity trading activities. The anomaly needs to correct sooner than later.

You give some to get more

Ostensibly, the upper half of the Indian demographic pyramid is not pleased with the performance of the incumbent NDA government.

This is the section of the society which has benefitted most from the globalization of the Indian economy in past 25years. Having grown at a rapid pace in past two decades, this section is also holding very high economic aspirations. Besides, the people in this socio-economic strata are well exposed to the living standards in the developed economies, and in majority cases set up higher benchmark for the quality of life. In their criticism of the government performance they are highly subjective. Much of their frustration could be traced to their personal circumstances, benchmarks and aspirations rather than to the consequences of the underperformance on part of the government.

In my view, the assessment of the government's performance my this upper half suffers from a major lacuna. It completely disregards the fact that in pursuance of 25years of economic, social, political and administrative reforms Indian economy has reached a stage where it has to accelerate and take a big leap, just like an airplane immediately before the take off. A failure here would set us back by 25years.

The government is like pilot of the airplane - it cannot avoid the acceleration, noise, vibration. The best it could do is to make the take off a little less bumpy. The worst it could do it is to abort the flight altogether and return to parking bay. I find the flight presently bumpy but on course.

The upper half of the Indian demographic pyramid needs to accept that, irrespective of the party running the government, it's time for:

· Better compliance standards

· Higher tax equity

· End of feudal lordship over labor

· Rise in global competition and lower state protection

· End of crony capitalism and crony socialism

· End to free resources and capital

These are pre-requisites for attaining higher living standards and meeting their high aspirations.

The bottom half of the Indian society has not moved much in past 25yr, so they do not have much to lose if the flight is aborted.

It is the top half of the pyramid which needs rule of law; less crime; trained and skilled labor; risk capital; best technology; global markets; larger markets for their products, services and ideas; better education and job/business opportunities for their children; and much more.

Trust me, none of these is possible if the changes that are taking place are not allowed to happen.

(Note: A small but highly visible and audible section of this section of the society is left leaning and would not concur with the BJP led government for a variety of reasons - not necessarily economic. Though dominating the media (including social media) space, they are in abysmal minority and do not represent the popular opinion.)

Wednesday, May 18, 2016

Times are changing - for good or bad, only time will tell

Thought for the day

"I was born not knowing, and have had only a little time to change that here and there."

— Richard P. Feynman (American, 1918-1988)

Word for the day

Quaff (v)

To drink a beverage, especially an intoxicating one, copiously and with hearty enjoyment.

Malice towards none

Congress celebrating Delhi municipal by-polls victory (4 out of 13) as if they have destroyed AAP and BJP completely.

First random thought this morning

Shiela Dixit and Tarun Gogoi served three consecutive terms as CM of their respective states. Ms. Dixit is already out of power. Mr. Gogoi is indicated to be going out. Given the state of affairs in the Congress Party, these leaders may not come back to power anytime soon.

Others who are serving third term are Shivraj Singh Chouhan and Raman Singh. They need to be extremely careful. A win will bring them in the league of invincible Jyoti Basu, Manik Sarkar, Pawan Chamling, & Naveen Patnaik, whereas a loss might severely dent their political career.

Times are changing - for good or bad, only time will tell

As the incumbent government completes 2years in power, a debate is raging whether it had been able to deliver on its electoral promises. The negative argument sounds mostly rhetoric and politically motivated. The positive argument too suffers from seeing little further from the present.

In my view, normalized for the impact of adverse weather conditions (severe drought and surprise floods) in past 2yrs, legacy fiscal constraints, export demand contraction due to global slowdown, and benefits of lower energy prices - the government has performed reasonably well on the economic front. The failings could be counted mostly on social front.

The government has managed the fiscal conditions very well despite socio-political compulsions. Prudent and frequent hikes in duties on fuel, despite severe criticism and political reverses in Delhi & Bihar, is just one example.

Improving systemic efficiencies through better use of technology and close monitoring from the top is also showing result in project execution especially logistics, power and financial sector.

One of the best performance has been in the area of image building. PM himself has executed the task of improving India's global image as attractive investment destination. The marketing exercise has been duly backed by significant legislative, legal and administrative provisions. The rules for foreign investments have been modified keeping in view the long term goals of making India a preferred destination for long term productive investment and not just a trading & arbitrage centre.

The government led by BJP has been able to successfully keep their party's economic ideas (mostly based on nationalistic self reliance) at arm's length, and maintain consistency in economic policies. Belying all fears of major disruptions in economic policy under influence of right wing ideologues. At the same time it has encouraged domestic enterprise to become competitive enough to take on global leaders. Patanjali is just one case in point. The domestic defense manufacturing sector might see some global size players in next 10-15years.

Moving away from traditional populism like loan waiver and unproductive stipend to help rural economy, the government has for the first time introduced some structural changes like comprehensive crop insurance and soil health card etc. Better communication through DD Kisan channel is also being appreciated widely. Better water management is a work in progress, but progressing well in right direction.

The government has struck some decisive blows to the parallel economy, breaking the nexus between scrupulous businessmen and politicians. The immediate impact is slowdown in business, but the long term benefits will be immense.

Achhe din (good times) might be an election slogan. The government might seem working against the interest of middle class (BJP's traditional core vote bank) but that may not be true...........to continue

Tuesday, May 17, 2016

I'm not going anywhere, neither do markets

Thought for the day

"If I could explain it to the average person, I wouldn't have been worth the Nobel Prize."

— Richard P. Feynman (American, 1918-1988)

Word for the day

Cunctator (n)

A procrastinator; delayer.

Malice towards none

After all is said and done, India will not be Congress Mukt, as by the end BJP would have become more Congress than the GoP itself.

The skeptics should watch TMC which is more communist than the CPM.

First random thought this morning

The famous Mumbai Dabbawallahs have evoked global interest. The British Royalty is impressed and so are management czars at elite Harvard Business School. The alcohol supply chain in Gujarat also deserves a place in the hall of fame for management wonders.

Regardless of the bitter rivalary between CM Nitish Kumar and PM Narendra Modi, the bootleggers in Bihar must be learning a lot from their Gujarati counterparts.

I'm not going anywhere, neither do markets

"Sell in May and go away", theme is playing well in global equity markets. Global investors are on a frantic selling spree, as not seen in past five years. Even though India, along with a couple of other emerging market have not witnessed much selling from global investors, the market is evidently worried.

In principle I dislike to be a contrarian. In my view, the natural tendency of people is to be conformist. In financial markets' context, being contrarian is mostly counterintuitive. In some cases it could be opportunistic, but mostly it is found to be egotistic waywardness. Sometime people, usually those who have recently made some exceptional gains, use this as indulgence at the cost of a small pie of such gains.

I have studied many contrarian views and ideas and also examined the success of these views and ideas in anteriority. There have been many isolated cases of large gains being made through contrarian ideas/view. But most contrarian investors who did not convert to conformism, soon after, have usually perished.

Most successful legendary investors have conformed to the classical investment theory. They have made money and left a rich legacy. The contrarians have made and lost money, enjoyed ephemeral glory, and live only in folklores.

In this backdrop, I would now like to answer the worries of my readers.

(a) In past eight years since the global financial crisis (GFC), research spanning millions of reams has been published, analyzing the global debt, fiscal constraints, limitations of non-conventional monetary policies, Chinese slowdown, Japanese stagnation, Commodity meltdown and American economy's frequent flirting with recession.

Contrarians have been predicting demise of USD as reserve currency, a widespread armed conflict, disintegration of common Euro area.

Everything is entered in spreadsheets and factored in forecasts. There is nothing left to imagination. I believe events like Brexit, China hard landing (CNY drastic devaluation), massive Oil defaults in USA, and prolonged slowdown in commodity economies may not led global financial markets to "crash".

If something could lead to crash, that is unknown and therefore people are not worried about that.

(b) The endgame of ongoing abnormalities - negative rates, ever expanding central bank balance sheet, and commodities glut is also well documented and known. No one has any doubts about that. I therefore believe endgame is more likely to be orderly than chaotic.

(c) It's may not be TINA alone that is driving foreign investors towards Indian markets. For a larger part, it could be the realization that Indian economy has gathered the required escape velocity to enter into a higher orbit and there is some exceptional profit to be made. TINA will not be able to protect us if the take off fails. But we still have two years.

Monday, May 16, 2016

Nifty: Still in consolidation mode, greed rising

Thought for the day

"Reality must take precedence over public relations, for nature cannot be fooled."

— Richard P. Feynman (American, 1918-1988)

Word for the day

Obviate (v)

To anticipate and prevent or eliminate(difficulties, disadvantages, etc.) by effective measures; render unnecessary: to obviate the risk of serious injury.

(Source: Dictionary.com)

Malice towards none

VK and ABD are on their way to become all time great in history of cricket, i.e., till a new star emerges on the horizon.

First random thought this morning

The stock Apple is down 27% in past 52 weeks and presently trades at ~10x trailing twelve months earning. The Indian consumer durable stocks with no innovation, little technology leadership, and no cash on balance sheet trade at 20-50x. The market could be irrational longer than usual but not till eternity. The question is who will be left holding the baton when the sun finally sets at the horizon.

Nifty: Still in consolidation mode, greed rising

Nifty sustained its weekly break down point of 7730 for second consecutive week (see here) and ended 1% higher on weekly basis.

On midterm charts, it appears much stronger as compared to couple of weeks ago. In my view it may consolidate for 3-4 weeks in broader 7690-8140 range and make a big move thereafter. At this point in time I would rate the probability of move being in north direction as 67%.

I will therefore be buying all the dips henceforth.

Two things are noteworthy for traders. One, after a long time, last week both FPI and DII were net buyers on weekly basis; though the level of activity and volumes were low. Two, the "greed" has again started to dominate "fear".

Nifty showing no sign of weakness as yet

...as greed begins to dominate fear yet again

Friday, May 13, 2016

Colletral damage

Thought for the day

"Flowers are restful to look at. They have neither emotions nor conflicts."

— Sigmund Freud (Austrian, 1956-1939)

Word for the day

Eldritch (adj)

Eerie; weird; spooky.

Malice towards none

In a country where even the statements of senior ministers are often brushed aside as "personal view", not the official stand of the party or the government, why a map published by some sundry publisher should be a matter of "national interest" or "sedition".

First random thought this morning

In one of the popular David Dhawan flicks, the heroine initially falls for the bad guy. She would not listen to any sane advice, not even her father. It was only towards the climax that she realizes her mistake. All ends well but not before a great deal of drama is enacted. There is no suspense. All viewer could exactly anticipate the endgame; and there are no surprises in the end.

The traders in Indian equities are much like the front row audience of that movie. They are clapping and whistling at the good, enjoying the rhetoric of the bad, showing no nervousness of anxiety - anticipating that all is inevitably gonna end well.

But what if this script has some twist in the tail?

Colletral damage

Continuing from Tuesday (see here).

In my view, the bigger ecommerce story is unfolding in B to B segment. This story is likely to grow much bigger in the times to come.

Unlike the mostly half baked and over-enthusiastic ideas in the B to C space, the enterprises in this space are founded on strong ideas based on innovation and commercial viability. Intellectual property is a key valuation element in this segment and forms a major entry barrier.

Unfortunately, I do not find any investing opportunity in this segment where a small investor like me could fit in.

I was perhaps little early in anticipating the colossal damage that would eventually be caused as we approach the day of judgment in the whole ecommerce mania. Like a stupid who reaches the venue of an Indian wedding well in time, I have been subjected to uncharitable adjectives and ridicule. But being a veteran of NBFC mania of mid 1990s, Dotcom bubble of late 1990s and cheap credit fueled bubble in reality and infra space in mid 2000s, I still prefer to be early than being late.

Undoubtedly, this time the direct exposure of household investors to this mania is not significant. To this extent one could argue that bursting of this bubble may not hit financial markets with same intensity as the previous ones.

I am really not sure about this at this point in time. But, I certainly see huge collateral damage whenever this bubble bursts. For example, consider the following:

(a) The sector has emerged as one of the largest provider of incremental employment, particularly to semi-skilled youth. A burst in this bubble will leave many of them unemployed; with little chance of alternative employment. Most of these are contract laborers with no social security, little savings, relatively higher personal expense level and high aspirations.

The pain will be much higher as compared to burst of first dotcom bubble where the unemployed were mostly middle class skilled people and employable elsewhere.

(b) Though the business model is equity based, many of these companies might have working capital and equipment loans from banks with little or no realizable value.

(c) The stability and growth in commercial real estate space in past couple of years is mostly driven by ecommerce ventures. The burst will surely hurt the sector, and consequently the lenders too.

(d) Fancy salaries and perks in the sector might be driving a part of sales of luxury housing, big cars and other premium articles. Expect a material slowdown there.

Thursday, May 12, 2016

Accounting is never a real problem

Thought for the day

"If you can't do it, give up!"

— Sigmund Freud (Austrian, 1956-1939)

Word for the day

Snuggery (n)

A comfortable or cozy room.

Malice towards none

The Uttrakhand misadventure of BJP will be forgotten soon.

But the price Congress would need to pay to Mayawati, may continue to reflect on UP elections.

First random thought this morning

Historically all developed markets have grown exploiting 3Ms of underdeveloped economies - Money, Materials and Manpower. What has made the difference are the other 3Ms, viz., Military power, Management and Marketing skills.

Logically therefore, a developing economy which is aiming to join the ranks of developed economy needs to develop the later 3Ms and reverse the flow of first set of 3Ms.

None in the BRICs seems to fit the jacket so far.

Accounting is never a real problem

Since Tuesday evening, I've got numerous calls from the readers, worried about the impact of the reported amendment in the Indo-Mauritian double tax avoidance treaty. Regardless of the market reaction in near term, I believe that most of the fears are unfounded and mostly stem from piecemeal thinking.

Firstly, from what I hear, I find that people believe that with the proposed changes, all the other things will remain the same. Which fortunately will not certainly be the case. Secondly, this amendment in the treaty is not a standalone event. It must be seen as just another measure in the series of globally coordinated efforts to make global financial system and cross border investments more stable and transparent, in the wake of the global financial crisis in 2008-09.

We have already seen changes in Swiss secrecy norms; deeper information sharing on tax evasion and money laundering; stringent norms for black money; and proposal to implement GAAR. This amendment therefore must be seen as a "reform" measure, that market is always craving for.

Coming specifically to this particular event, it is important to understand the implications, direct & indirect.

The proposed amendment "enables" the government to tax capital gains arising from sale of moveable assets in the hands of the entities resident in Mauritius. So far these entities could only be taxed only in Mauritius.

In this context, the following must be noted:

(i) The amendment, if ratified by the parliament and duly notified, shall apply only to the assets acquired after March 2017. All assets acquired prior to that shall continue to be treated as per the extant provisions.

(ii) Long term capital gains (holding period 12 months for listed equities and 24 months for unlisted equities) in India are taxed at zero rate. Hence, the amendment will have virtually no impact on FDI, which is normally long term investment.

(iii) Short term capital gains is taxed @ 15% in India. Assets acquired by genuine Mauritius residents post 31 March 2017 will attract this tax, subject to 50% tax rebate in two year period of FY18 and FY19. The key is that you pay tax only if you make "Profit" in short term.

This amendment thus removes the long pending anomaly of differential tax treatment of domestic and foreign investors. This measure may also discourage short term hot money flowing into domestic market and causing avoidable volatility. Moreover, it must be understood that FPI investment is no charity. FPIs invest if they see prospects of making profits, not to save taxes. So, our markets will continue to get flows if they offer relatively better tax adjusted returns to the investors.

I do not believe that likely accounting problem for P-Note holders is a valid argument against this amendment. I believe that proposal of disclosure of ultimate beneficiaries' details mandatorily was getting implemented in next 3yrs, and GAAR would have overridden this treaty anyways.

Wednesday, May 11, 2016

Dotcom 2.0

Thought for the day

"Children are completely egoistic; they feel their needs intensely and strive ruthlessly to satisfy them."

— Sigmund Freud (Austrian, 1956-1939)

Word for the day

Jeremiad (n)

A prolonged lamentation or mournful complaint.

Malice towards none

The Congress President made an emotional speech while campaigning in Kerala.

The speech had some parallels to the last speech of Mrs. Indira Gandhi in Odisha.

In the meantime the Congress Vice President has reported threats to his life.

What's happening?

First random thought this morning

My all time favorite Saratchandra once wrote "There is no eternal truth. The truth we consider eternal are mostly contemporary and lose their relevance and acceptance with change in time, place and circumstances."

For ages people believed Earth to be flat & stationary and Sun rotating around it. The venom which is medicine for snakebite is deadly poison for a healthy person. Once British Empire, USSR and German wall all looked like lasting till eternity. Only a few years back, INC appeared like the only party competent to rule India.

Dotcom 2.0

From my recent interaction with some e-commerce entrepreneurs, PE fund managers, angle investors and VCs who have invested in these ventures, I could get little insight into this business model.

By all means, the ecommerce business in India is still in infancy stage. Regardless of few Unicorns, the space is replete with half baked & ill conceived ideas, most of which may be commercially and financially unviable.

There is absolutely no doubt that e-commerce and m-commerce business will grow exponentially in next one decade. As a consumer I will definitely benefit from the economies of scale and convenience.

But as an investor, I am not sure. In fact, I am worried about the collateral damage that will inevitably be caused due to very high failure rate in this space.

I would like to share some random thoughts on the sector with my readers.

(a) In my view, the B to C (business to consumer) product sales and delivery business in India will be dominated by 3-4 large market places and manufacturers themselves. The business may get highly localized in terms of warehousing and delivery once clarity on taxes emerges and GST is implemented. Small and medium sized businesses will increasingly want to sell through large market places rather than selling directly. The logistic matrix for the business, as it exists today, may undergo serious changes in next three years.

(b) The 3 D's of the B to C model, i.e., Discounting, Discomfort (lingerie, sexual health products etc.) and cash on Delivery may diminish in relevance as the market and audience get mature.

(c) The services will grow faster than product. But the revenue model will have to change. No one is willing to pay for the services, arguing that even Google, Facebook and Whats App do not charge us.

(d) The largest opportunity is in financial services, health advisory and education & training.

(e) The services such as market place for used articles, matrimonial services, job search etc. be in demand but not financially viable.

The positioning of the market place for used article is particularly poor. One, the business lacks and entry barrier or innovation. Two, no one stops, Amazon to add another icon on its home page to provide this service. Three, the marketing tactics used by these entities ("Sell your useless and old stuff") is inappropriate. No one is interested in buying "useless" stuff.

(f) There is a serious lack of innovation in India. Most ideas are borrowed and may not be suitable to Indian markets and consumers at large. Targeted at a select class of customers, these ideas are not scalable and hence not financially viable - just as sustenance farming....to continue