Vijay Kumar Gaba

Wednesday, August 10, 2016

Coffin before cadaver

"A man, to be greatly good, must imagine intensely and comprehensively; he must put himself in the place of another and of many others; the pains and pleasures of his species must become his own."

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Fletcherize (v)

To chew (food) slowly and thoroughly.

Malice towards none

Arrogance cannot touch wisdom. This inherent protection distinguishes wisdom from intelligence.

We need more wise people to manage policy. Intelligence is mostly dispensable.

First random thought this morning

Broken table, high velocity winds, no coach, no room in Olympic village - are some of the platitudes for not winning medal at Olympics.

I wonder why can't our sportspersons simply say that we played our best (which they certainly did); and the better amongst the world's best won the medal. I mean it is plain truth and must be totally acceptable to all.

Coffin before cadaver

The outgoing RBI governor made his last policy statement yesterday. Many had anticipated this to be his swan song - something meaningful that will work as a guiding principle for his successor and the newly constituted monetary policy committee.

Unfortunately, the statement, as usual, had nothing noteworthy. It is full of prejudice and incongruence. Much worse, it clearly shows the absolute lack of interest on part of the incumbent RBI leadership.

In fact, I get a feeling that the policy statement has nothing to do with the policy stance, which has been taken regardless of anything mentioned in the statement. It is thus a classic case of "coffin before cadaver".

The statement, for example, notes about the global economic conditions as follows:

· Since June 2016, several developments have clouded the outlook for the global economy.

· The near-term outlook in emerging markets is still fragile.

· World trade remains sluggish in the first half of 2016.

· Yields on government bonds have fallen further and the universe of negative yielding assets is expanding at a fast pace, reflecting high risk aversion and expectations of further monetary accommodation by systemic central banks.

· Commodity prices, barring those of precious metals, remain soft due to weak demand.

However, the statement does not make any attempt to correlate these conditions to the Indian economic outlook. There is nothing to suggest that the policy stance assimilates the global conditions and is designed to provide a cover to the Indian economy from the likely cascading impact of a global slide. Addition of, nowadays usual, "whatever it takes" in the policy statement would have gone a long way in improving the sentiment of the stakeholders.

On the domestic economic outlook, the policy statement inter alia, notes that:

· On the domestic front, several factors are helping to support the recovery.

· The target for kharif production set by the Ministry of Agriculture appears within reach. Industrial production picked up in May on the back of manufacturing and mining, following a contraction in the preceding month. Service sector purchasing managers polled the thirteenth successive month of expansion in July on the basis of a sharp acceleration in new business.

· Business confidence is also looking up in recent months, though the Reserve Bank’s survey for March 2016 suggests that capacity utilisation, seasonally adjusted, is still weak.

· Retail inflation measured by the headline consumer price index (CPI) rose to a 22-month high in June, with a sharp pick-up in momentum overwhelming 3 favourable base effects. The rise was mainly driven by food, with vegetable inflation higher than the usual seasonal rise at this time of the year. Fuel inflation remained subdued, mainly due to sustained deflation in prices of liquefied petroleum gas.

· By early August, the cumulative rainfall was 3 per cent higher than the long period average, with more than 80 per cent of the country receiving normal to excess precipitation. Kharif sowing strengthened after a lacklustre start, particularly with respect to pulses. Barring cotton, jute and mesta, sowing of all crops is currently above last year’s acreage

· Liquidity conditions eased significantly during June and July on the back of increased spending by the Government which more than offset the reduction in market liquidity because of higher-than-usual currency demand.

· In the external sector, merchandise export growth moved into positive territory in June after eighteen months. This upturn was reasonably widespread, covering chemicals, marine products, handicraft, plastic, rice, electronic and engineering goods. On the other hand, imports continued to decline, albeit at a slower pace than in recent months.

· Looking ahead, the momentum of growth is expected to be quickened by the normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to consumption spending that can be expected from the disbursement of pay, pension and arrears following the implementation of the 7th CPC’s award. The passage of the Goods and Services Tax (GST) Bill augurs well for the growing political consensus for economic reforms.

RBI thus recognizes that domestic conditions are favorable whereas the global outlook is clouded. Business confidence is improving but capacity utilization is weak. Food inflation is totally seasonal and monsoon augurs well for the food prices.

It also notes that the consumers are getting huge payouts in terms of 7th pay commission and direct cash transfer. GST is closer to reality than ever.

Does RBI not realize that under the circumstances businesses may need support to convert their confidence into higher capacity utilization; and inflation feared out of GST cannot be controlled by tight monetary policy.

So why not cut rate upfront and support businesses. In fact not supporting businesses at this point may actually prove to be inflationary as demand outstrips the supply.

Just because the governor does not want to take a decision, RBI cannot leave the economic argument outside the policy stance.

Nonetheless, I am sure that a rate cut, and a large one this time, is coming before Santa arrives in the town!

Tuesday, August 9, 2016

Strategy for post GST era

Thought for the day

"When my cats aren't happy, I'm not happy. Not because I care about their mood but because I know they're just sitting there thinking up ways to get even."

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Conciliate (v)

To overcome the distrust or hostility of; placate; win over: to conciliate an angry competitor.

Malice towards none

After denying Sahara Shri any reasonable opportunity to get out of jail, now SC appears to be trying hard to keep him out of jail!

First random thought this morning

The State Assembly elections in UP are always interesting. In post Congress era (1989-current) UP has seen Janta Dal, SP, BSP and BJP in power, either alone or in coalition.

2017 elections promise to be equally interesting. With 71/80 seats in Lok Sabha from the State, BJP has taken the position of primary defendant. SP is also a defendant being the party ruling since 2012. INC is defending its choice of leadership. BSP is defending its position as the principal opposition party, and therefore a natural claimant of power if people vote for a change. JDU & RLD are marginal forces in the State.

The moot point is who is the challenger to CM Akhilesh Yadav?

Strategy for post GST era

After a decade long political scrutiny, the constitutional amendment bill that would enable implementation of a uniform nationwide indirect tax (GST) over next decade or so, is just few inches away from becoming a reality.

Regardless of the differences amongst various stakeholders with regard to the rate structure, and rights and obligations of the proposed GST council; the tax reform appears all set for implementation sometime in the next two years.

As state last week "The economic paradigm shifts with each progressive reform. The businesses, investors and consumers need to fully assimilate it and adapt to the new regime. Those who fail to adapt to the changed reality fast, run the risk of becoming redundant under the new economic paradigm". (see here)

It is therefore pertinent that I review my investment strategy to assimilate the changes that would occur due to GST implementation.

The conventional wisdom suggests that the following factors could majorly impact the performance of companies:

(a) The opportunity for tax evasion may diminish considerably, making many unorganized sector businesses unviable. This should help the competing large organized sector businesses gaining market share at the expense of fragmented smaller players. Players with material underutilized capacity, strong brands and market leadership will naturally be in a better position to take advantage of the opportunity. Consumer electronics, packaged/processed food, auto ancillary, textile, garments & footwear, and paints, lubes & chemicals are some of the areas where tax incidence is material and the market is fragmented with dominant share of unorganized sector.

(b) There could be a wave of M&A deals, as the smaller units find it tough to survive under the new regime. The larger companies with stronger balance sheets could take advantage of this round of consolidation to deepen their market penetration.

(c) We may see serious rise in road traffic within 3years of GST implementation, as road network improves further and Octroi check posts are demolished across the nation.

(d) Building of supply chain, both in physical and virtual sense, is one area that might attract maximum investment due to this change. Some companies will benefit from capacity building in this area; the others are that would benefit from the capex in capacity building.

(e) This change is not standalone development. This is accompanied by a host of other developments aimed at standardizing the business & compliance practices (ease of doing business) to attract the global investors and businesses. On successful implementation of GST, we may see exponential rise in competition for domestic players from the global businesses. I believe, any business which is not globally competitive should not find place in my portfolio....to continue

Monday, August 8, 2016

Nifty: All clear till next station

Thought for the day

Nothing wilts faster than laurels that have been rested upon.

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Bumptious (Adj)

Offensively self-assertive, e.g., a bumptious young upstart.

Malice towards none

Mrs. Funny Bone is not funny. Painting all 125cr Indians with the single brush is not funny at all.

Moreover, I retain my right to judge public personalities (including politicians, film stars and sportspersons) based on my likings; and Rajesh Khanna was indeed a below average actor, in my strong view.

Did someone bat for tolerance and freedom of expression a while ago?

First random thought this morning

In an open admission the prime minister admitted that the anti-social elements are violating the peace and social harmony; rather brazenly. More disturbingly, he suggested that these elements are using BJP's agenda to pursue their nefarious designs.

Two questions: 1. Is this count for the failure of law and order machinery? 2. Does BJP's agenda need a review.

Nifty: All clear till next station

Last week Nifty recorded its highest weekly close after 10th April 2015, making a strongly bullish weekly candle.

In fact after many week, Nifty appears set for an easy up move on all daily, weekly and monthly charts.

It is remarkable that the technical position of Nifty has strengthens when implied volatility (India VIX) is close its all time lows (no panic) ; market breadth is marginally negative (little retail frenzy) and domestic flows are negative for many weeks (consistent profit booking). Moreover, frequent rotation of sectors leading Nifty higher or supporting it to stay at higher levels is keeping individual sectoral indices below overbought zone.

As of today, rate sensitive like banks, real estate and automobile look set for a decent up move. PSU banks in particular look better placed in strict technical sense.

Nifty faces marginal resistance in 8680-8710 zone. A strong resistance will come only above 8864 level. No surprises if we see Nifty marking a new high in next 6-8 weeks. For now 8437 is a very strong support.

Bank Nifty has no credible resistance on its way to new highs. 18690 on closing basis is a strong support.

Friday, August 5, 2016

Adapt or perish

Thought for the day

"Blessed is the man, who having nothing to say, abstains from giving wordy evidence of the fact."

—George Eliot (British, 1819-1880)

Word for the day

Connubial (adj)

Of marriage or wedlock; matrimonial; conjugal, e.g., connubial love.

Malice towards none

The scene in Rajya Sabha during GST Bill debate was very similar to Sooraj Barjatya's family drama.

All 125crore Indians must have wished together - O' Lord please keep it like this always! Amen!

First random thought this morning

Those who were expecting fireworks in the market on Thursday morning, might be little disappointed.

But I do not see any reason for them to be disheartened. The fireworks will happen over next decade or so.

For now, perhaps the revelers might have exhausted their stock of firecrackers little too early. Wait till the new stock arrives!

Adapt or perish

The unanimous vote for the constitutional amendment that will enable implementation of a national indirect tax by replacing a myriad of regional and local taxes is definitely a landmark reform. This will certainly clear many hurdles and pave way for a faster economic growth.

However, I may reiterate that economic reforms do not necessarily result in more profit and convenience to people in the immediate term. To the contrary, economic reforms are more likely to cause pain and inconvenience in the immediate term as these involve fundamental changes in the processes and practices of doing business and consuming goods and services.

The economic paradigm shifts with each progressive reform. The businesses, investors and consumers need to fully assimilate it and adapt to the new regime. Those who fail to adapt to the changed reality fast, run the risk of becoming redundant under the new economic paradigm.

During 1970s and 1980s the government used to publish a list of businesses (including business groups) who were termed as "large" under the provisions of the Monopolistic and Restrictive Trade Practices Act 1969. From the country's top 50 business groups in 1980s, not more than 5 would figure in the list of top 100 today. Only a few people in their 20s and 30s today would even be aware of those names. Most of these businesses vanished because they could not adapt to the evolving (a) economic realities and (b) technology.

Even internationally, just 4 of the top 20 global corporations in 1989 were present in the list 25yr later in 2014.

A more pertinent question do I need to change my investment strategy due to GST? Will discuss more on this next week.

Thursday, August 4, 2016

My two cents on GST

Thought for the day

"It will never rain roses: when we want to have more roses we must plant more trees."

—George Eliot (British, 1819-1880)

Word for the day

Inculcate (v)

To implant by repeated statement or admonition; teach persistently and earnestly.

Malice towards none

Who was Geeta Zutshi?

Please answer without googling.

First random thought this morning

It is now confirmed that lower crude prices are hitting a section of Indian economy very hard. Remittances from gulf have fallen marginally last year. This year could see the worse in terms of both employment & remittances.

A lot of businesses rely upon activities of the Indian employed in gulf countries, especially travel related businesses and financial services firms. These businesses are already suffering. The pain may rise in coming months. Workers who have been supporting savings, consumption and investment back home may return and sit idle for some time.

Have you heard a plan from the government?

My two cents on GST

The wider debate on GST is now limited to two points - (1) whether it will be implemented from April 2017 or from a later date; and (2) whether it will be inflationary.

From investors' perspective the single point of interest is to find the potential gainers and losers from the indirect tax regime transformation. The traders want to know what can give a jump of 10%+ in today's trade.

Frankly speaking, I have no ready answer to any of the questions. Moreover I do not believe most of the answers provided by various experts and currently available in the public domain.

However, what the five things I can say with fair degree of certainty at this point in time are as follows:

(a) GST is a progressive reform and will benefit the economy as a whole. It is possible that due to regional political interest groups, in the initial years some restrictions are introduced in the legislation that prevent creation of a truly national market.

Nonetheless, it will happen as the benefits become quantifiable over next decade or so. We have been living without GST for seven decades. One more with partial implementation is definitely not a matter of life and death.

(b) One of the primary objective of GST is to improve tax compliance. This is hugely disruptive to the ways a large number of businessmen in the country are used to function.

Thousands of MSME units are viable just because of tax evasion opportunities under the current regime. These opportunities may not be available under GST regime. Hence, the sustainability of these units is under thick clouds.

Moreover, there is a full army of professionals which helps these businesses evade tax. These also risk losing their jobs. A large number of revenue department personnel who thrive on bribes, and agents responsible for collecting octroi and entry tax will also suffer.

Unemployment, losses and shut down of businesses due to financial unviability, are inevitable consequences that will impact urban consumption in the short term. The positive is that we may see many polluting factories operating in neighborhood getting closed.

(c) Many businesses have made huge investment in tax havens (backward areas) to benefit from tax arbitrage at the expense of business rationale. This investment risks going under water as this arbitrage vanishes in due course.

(d) Productivity gains shall be seen in most large businesses as logistic costs improve, and compliance becomes easier. For smaller local businesses though benefits are not so direct. These may mostly benefit from the overall pick up in economic growth.

(e) A household consumer may see rise in the cost of living.

Wednesday, August 3, 2016

For a few medals more - 2

Thought for the day

"Consequences are unpitying."

—George Eliot (British, 1819-1880)

Word for the day

Sonorous (adj)

Loud, deep, or resonant, as a sound.

Malice towards none

While pursuing expansion in North East, BJP might have lost sight of troubles brewing in its backyard.

First random thought this morning

Three years back, I complained that the authorities are in a habit of not learning from their mistakes.; and that despite our government proclaiming the “License Raj” dead two decades ago, in mindset of our politicians and bureaucracy it still endures. (See here)

Well RBI seems to have ceded some ground. Let's hope the other organs of the state also inculcate habit of learning from their mistakes.

For a few medals more - 2

In my view, various societies in the world could be divided into two broad categories - (a) Ladder societies; and (b) Cliff societies.

The ladder societies are usually upwardly mobile societies. In these societies all get support and an equal chance to move up step by step. The place at the top is strongly believed to be infinite; therefore, the competition in these societies is mostly internal - people compete with their frailty, depravity, fear, and vices like lust, anger, greed, haughtiness, and infatuation.

Peace, asceticism, abstinence, benevolence, goodwill, spiritual evolution are some of the key words in these societies.

Cliff societies, on the other hand are usually static societies. The core belief of these societies is that the place at the top is limited. The competition in these societies is therefore mostly external and fierce. To stay at the top, one must (i) stop others from climbing higher; (ii) be vigilant about those who have already reached the top, as they may try to push you down; and (iii) be consistently at fight with the peers and try to throw them off the cliff to secure your space at the top. Considering the intensity of the external conflict, the internal malice in these societies could remain unattended for unusually long periods of time.

Animal spirit, killing instinct, survival of fittest, relative competitiveness, material comfort, economic evolution, are a few of the key words in these societies.

All modern global sporting events, like global industry & commerce, have evolved in the cliff societies. These promotes relative competitiveness as key sporting objective. The necessity to win medals incites the "animal spirit" and "killing instincts" in the participants. Unfortunately, this animal spirit and killing instincts do not die at the podium. These stay with the participants for long and impact their personal, social and economic life.

Moreover, this concept of "relative competitiveness" (also known as first past the post) is a major impediment to the quality in life, as the focus remains on doing better than the competitors rather than doing best for the society.

Traditionally, India had been a ladder society. The concept of Ram Rajya is used to outline the tenets which promote absolute quality, equality and harmony in the society, permitting each individual to pursue his/her own chosen path with passion and dignity.

Winning Olympic medals does not fit into traditional Indian ethos, but excellence in sports does. Similarly, traditional Indian businesses were based on individual/social excellence (arts and crafts). The entire R&D effort remained focused on upliftment of entire society rather than profiteering.

But as the episode involving wrestler Narsingh Yadav shows, our transformation into a cliff society might be complete. Now, expect to see this killing instinct in businesses more prominently. Expect many more large businesses like RIL. Expect many more causalities like Orkay Silk Mills. Expect much more good times for investors. Expect many more cases of divorce, domestic violence, corporate espionage, abrupt bankruptcies and hostile takeovers. And of course expect many more Olympic Medals.

Tuesday, August 2, 2016

For a few medals more

Thought for the day

"He was like a cock who thought the sun had risen to hear him crow."

—George Eliot (British, 1819-1880)

Word for the day

Skylark (v)

To frolic, e.g., The children were skylarking on the beach.

Malice towards none

The total civic mismanagement of monsoon makes one thing certain - Still no one takes IMD forecast seriously.

First random thought this morning

There was hardly any day last month when newspapers did not prominently report a fresh instance of rape. Many girls who suffered were minors. Something is seriously and definitely wrong with our society; and the conditions are worsening with each passing day, beyond any doubt.

Despite all solemn commitments post the infamous Nirbhaya incident, the state has failed to address the issue in any effective manner. Under these circumstances if a girl/woman or their parents do not feel like living in the country, why should they be blamed or branded anti-national?

For a few medals more

In three days, 31st episode of the Summer Olympic Games of the modern era would start. India is sending her largest ever team of 120 sportspersons to the mega sports event.

On the occasion, I have few random thoughts that I would like to share with my readers. Some of these thoughts relate to the social issues that may potentially have serious economic implications in the decades to come. These may therefore be considered in formulation of investment strategy.

Primary observations

(a) One obvious, but still relevant, observation is that the Indian contingent of 120 sportspersons comprises 54 female athletes. I wonder whether it is yet another headline claim of gender equality. At the ground, I find little evidence of this phenomenon. The female athletes like all other female workers are not treated at par with their male counterparts.

(b) Olympic games usually illuminates the flame of nationalism amongst the middle class of the country. The poor have no time for, or interest in, these things. For rich it is a great tourism opportunity.

The government authorities and politicians, including the PM himself, want Indian team to win medals (we will be jubilant if our team brings more than 6 won at 2012 London games). Similar sentiments were seen when Amir Khan starrer Lagaan made to final round of the Oscars.

Wonder why politicians and government have started showing so much interest in games and films in past couple of decades. In my view, because these two recreation activities are emerging as large industries with huge employment potential. More important, unlike ITeS, these recreation activities are attracting people from the relatively lower economic strata (a fertile political constituency). Watch music TV realty shows, and check on economic background of IPL & Kabbadi league players to appreciate what I am trying to suggest.

The reluctance of the government to declare sports as an industry is however baffling. The sooner it is done, better it would be.

(c) A lot of clamoring, financial support and other efforts are made to make athletes competitive at the international level. These efforts have certainly yielded some results in past one decade. A number of sportspersons have performed well at the international level. Each one successful athlete might motivate 100k more to join the race. Just like one successful entertainment star motivates thousands to take the train to Mumbai (or Hyderabad or wherever).

Ever wondered if we could produce a noble laureate in mathematics, physics, or medicine. He could change lives of millions of the fellow countrymen through his work. But that is not the priority of anyone. This constituency is negligible from electoral viewpoint. Domestic NGOs and industry are not sure whether India can retain a noble laureate, even if she produces one. Overseas NGOs obviously see a conflict of interest in this area....to continue tomorrow

Monday, August 1, 2016

Nifty: still a long way to go

Thought for the day

"I like trying to get pregnant. I'm not so sure about childbirth."

—George Eliot (British, 1819-1880)

Word for the day

Woolgathering (n)

Indulgence in idle fancies and in daydreaming; absentmindedness

Malice towards none

Considering the stature of the main two Presidential candidates in the US, should the Congress consider allowing NOTA vote in the November elections.

First random thought this morning

The recent flooding of major Indian cities and consequent traffic snarls have led to severe criticism of public authorities. Indubitably, the public authorities in India are less sensitive, apathetic and mostly callous - so nothing new here.

After trekking social media for three hours, I could not find a single criticism of citizens - who refuse to follow lanes while driving; do not hesitate in jumping to opposite lanes in case of delay at traffic or railway signals etc.

In my experience of driving over half a million kms in India, 70% of jams and traffic delays are caused due to this intolerance of citizens.

Nifty: still a long way to go

The derivative expire of July series last Thursday must have enthused most bulls. The derivative expiry today is very encouraging for the bulls.

At 8666, it was the third highest Nifty expiry ever; marginally below the second highest expiry of ~8684 in Feb 2015.

After the highest expiry of 8952 in January 2015, it took 13 expiries for the Nifty to record the cycle low expiry of ~6971 in Feb 2016.

In a typical bull market it normally takes half the time to retrace all the losses. From that view point, it will be no surprise if we see an expiry of 8952 or more in September 2016.

In the process to recoup losses, Nifty may appear to be running too fast and too far from the average. But from historical perspective, it still has a long way to cover.

On past many occasions, the cycle top has between 2x to 3.41x of 200EMA on monthly charts. At present Nifty is just 1.8x of 200EMA of 4708 on monthly charts. Therefore on strict technical parameters the cycle top may occur between 9400-15500 in next 3-38months.