Vijay Kumar Gaba

Wednesday, August 24, 2016

All is not Well!

"My coming to faith did not start with a leap but rather a series of staggers from what seemed like one safe place to another."

—Anne Lamott (American, 1954)

Word for the day

Whigmaleerie (n)

A whimsical or fanciful ornament or contrivance; gimmick.

Malice towards none

Now you know why AAP is running its publicity campaign on public money - It has no money left of its own!

First random thought this morning

A Reuters headlines yesterday screamed "Naming of new RBI chief shows Modi government regains composure after Rajan shock". It was promptly carried out by the local media and discussed at various forum including social media.

I wondered - "when did the government lost if composure over the issue of extending the term of extant governor. It was the studio experts, some celebrated markets experts and opposition leaders who lost their composures and added sinister motives to the government decision.

All is not Well!

Target Corporation Inc of USA, one of the largest customers of Welspun India terminated its business relationship with the Vendor alleging that Welspun substituted Egyptian cotton with a cheaper variant of cotton while supplying it bedsheets.

Reportedly, Wal-Mart Stores Inc, Welspun's third-biggest customer, is also reviewing the company's cotton certification records, and if found irregular, it may also consider cancelling the contracts with the company.

Welspun in a conference call on Monday stated that it was investigating the product specification issue and would hire a Big Four accountancy firm to review its supply processes. The company was evasive in answering the specific queries and completely failed in assuring the investors.

Already two days have elapsed since the issue had first arisen. However, we have not heard anything from the government authorities on this.

One may argue that it is purely a business matter and government may not have any role in this. But I strongly disagree. I believe that these kind of matters have serious implications for the economy and markets and therefore require serious and prompt government intervention.

At this point in time we do not know if the allegations against the company are true. Nonetheless, it is pertinent to consider the following points in this regard:

(a) The company is one of the leading exporters of the bad and bath linen from the country. It claims to be exporting to over 50 countries. If the allegations against the company are proven correct, it may seriously damage the image of other Indian exporters also.

(b) As of end FY16 the company has a net debt of over Rs2500cr and an annual interest outgo of over Rs200cr. A contagion effect of Target Corp's action may lead to more order cancellations, thus jeopardizing the debt servicing capabilities of the company. We have seen similar instances in case of some diamond merchants. To this extent it could be a systemic problem.

(d) We are already witnessing a serious quality assurance crisis in the pharmaceutical industry due to callousness of a few players. We may not want this contagion to spread to other industries also.

My simple point is that if our government is serious about its Make in India mission, it needs to build a strong quality assurance and audit mechanism to ensure that all manufacturing in and exports from the country adhere to the top global standards.

We just cannot become a major manufacturing and export hub with our Jugaad mindset - both inside and outside the government

Tuesday, August 23, 2016

From "darkness" to "light"

Thought for the day

"My idea of absolute happiness is to be in bed on a rainy day, with my blankie, my cat, and my dog."

—Anne Lamott (American, 1954)

Word for the day

Me-tooism (n)

The adopting of policies, methods, products, etc., similar or identical to those of a peer, rival, or competitor.

Malice towards none

Rajan's Exit - "Rexit".

Patel's entry - "Pentry"!

First random thought this morning

After BJP was reduced to 2 Lok Sabha seats in 1984, it took a countrywide Rathyatra and demolition of a structure in a small dusty town at the banks of river Saryu in Eastern UP (popularly known as Babri Mosque and Birth Place of Lord Rama) to resurrect the fortunes of the party.

Now we are down to 2 medals in Olympic, after a rather surprising 6 in 2012 London Olympics. The morale of the players and coaches must be thoroughly destroyed, notwithstanding the celebrations over Malik-Sindhu achievements.

What would it take to restore this morale? Certainly not a government committee!

From "darkness" to "light"

From discussions with traders and MSME businessmen, it is abundantly clear that their primary grouse is that the parallel or cash economy has significantly weakened due to various legal and administrative measures initiated by the incumbent government.

Never in my life I have seen so much reluctance to accept payments in cash in India.

Empowered with advanced technology, data access and favorable legal & regulatory framework, the taxmen appear increasingly fearless and less compromising. Adding to the taxmen's aggressive pursuits is the worsening law & order conditions in large parts of the country that is making burglars, robbers and ransom seeker etc. increasingly fearless and more adventurist.

The small traders and businessmen are thus finding it extremely difficult to conduct their business in the "conventional" way. Full implementation of GST may mark a watershed for these businesses.

This is in fact a great news for the long term health and prospects of the economy. But the disruption in near term could be perilous for a majority of this group - that has so far successfully avoided compliance with tax laws.

The argument that the government should have planned the transition from "non-compliance & partial compliance to full compliance" in a gradual fashion is not only hollow but also appear flirting with immorality. Blaming the "system" for non-compliance is not a sustainable defense, either.

Indubitably, the near term implications of this shift from "black" to "white" to "darkness" to "light" may however be material.

On economic side, this move away from cash economy is leading to tighter liquidity resulting in lower inventories, poor channel credit, lower capacity additions, unemployment and distress liquidation in business as diverse as FMCG and real estate. Both the leaders in FMCG space - Dabur and HUL, did hint at this phenomenon in their recent presentations.

On the political side, this might alienate the small business and traders, who have been traditional supporters of BJP, away from the party and likely in the Congress camp. Although as of now there is little evidence of this.

In my view, investment implications of this phenomenon could be as follows:

(a) The businesses like FMCG, real estate, housing material, auto component, domestic pharma etc, where cash transaction have been material part of the trade might have to compromise on margins to grow - partly financing channel inventory and compliance cost.

(b) The organized retailing may grow faster than earlier estimates.

(d) The credit growth of NBFCs and Banks may not truly reflect the economic growth.

(e) GST implementation may see lower economic growth in the initial phase.

Monday, August 22, 2016

Nifty: wait'n'watch game may end soon

Thought for the day

"I am going to try to pay attention to the spring. I am going to look around at all the flowers, and look up at the hectic trees. I am going to close my eyes and listen."

—Anne Lamott (American, 1954)

Word for the day

Opacus (adj)

(of a cloud) dense enough to obscure the sun or moon.

Malice towards none

Olympics are over.

Let's go back to Cricket now.

First random thought this morning

Last week when I called on a landline in Delhi and heard the "the person you called is busy on the other line" message first in Punjabi, I realized Punjabi might have become first language of Delhi, without me knowing it. Nothing wrong in it, but it's just that no one bothered to inform me.

On the other hand PM has directed removal of 200 odd NRI supporters of Khalistan from the list of people who are barred from entering Indian shores. Again nothing wrong in it. But pardoning "traitors" without answering the debate on frequent misuse of the law relating to sedition seems odd.

We all know elections in Punjab are due and promise to be fierce one!

Nifty: wait'n'watch game may end soon

In the July series of derivative contracts Nifty closed at 8666.30, the same as the closing last Friday.

In the intervening three week period we had most of the quarterly results, GST, RBI policy, FOMC minutes, BoE Policy, Olympics, etc. done.

In this period of consolidation, Nifty has gained significant technical strength and looks all set to move higher.

In my view it is the Currently it is the reluctance of the participants and not the resistance that is stopping Nifty from moving up - Longs are reluctant to sell or add up; Shorts are reluctant to double up or book loss.

Difficult to say what will make participants more confident and take aggressive positions, but technical indicators are suggesting that this game of wait'n'watch is coming to a close in next couple of weeks.

In the meantime, Nifty has a strong support at 8490 and a resistance in 8864-8888 range. Bank Nifty has no credible resistance till 20600 mark.

(Nifty chart for derivative expiries since 2001)

Friday, August 19, 2016

Some random observations

Thought for the day

"If a farmer fills his barn with grain, he gets mice. If he leaves it empty, he gets actors."

—Walter Scott (Scottish, 1771-1832)

Word for the day

Lief (adv)

Gladly; willingly. E.g., I would as lief go south as not.

Malice towards none

Wildfire in California and floods in Louisiana - the Superpower looks so poor and helpless!

First random thought this morning

A new star, brand ambassador for gender equality, epitome of women power, and ray of hope for millions of oppressed girls, has emerged in Sakshi Malik.

The bronze medal she won at Rio is not just that. It is a consolation for millions of Indian who bet their pride on Olympic medal. It would also be used as justification for the Rio visit of many who actually have little to do with the sports.

The party at Social media will continue till 4.00AM in the morning!

Some random observations

The very sight of the daily routine at the Indo-Pak border near Amritsar (Wagha Border) evokes a great deal of enthusiasm and ardor amongst most citizens. Inasmuch, it has become a symbol of the traditional rivalry between the two nations.

A recent trip to the Terai region of Uttar Pradesh, provided a good deal of insight into this rivalry and a host of other issues that have material socio-economic & political implications; and therefore could have some bearing on the investment strategy also.

Firstly, a casual chit chat with Punjabi farmers in the Terai, who mostly belong to families which migrated to this side of the border at the time of partition in 1947, unambiguously suggested that their decision to cross over was purely based on the fear of being persecuted, and not due to any religious, nationalistic or patriotic reasons. The mass immigration might not have even taken place if the partition was peaceful and well managed by the British administrators. Persecuted, brutalized, plundered and traumatized - this section of the population hates Pakistan from the core of their hearts. (The immigration from Bangladesh, erstwhile East Pakistan, is mostly economic; hence it does not evoke similar sentiments towards that country.)

The people from other parts of the country might perhaps not share the intensity of their feelings. A national consensus on any Pak policy may therefore remain elusive; as is the case with the policy on Sri Lankan Tamils.

Secondly, when I drove through the roads of Eastern UP, it was the peak time for annual Kanwar Yatra in that part of the state. Millions of Kanwarias in safforn garb, captured most of the highways and facilities alongside it. The people ought to have been complaining for the nuisance - 24hr cacophony of loud music; violence; filth; traffic jams. Moreover, since from the Garh Mukteshwar till Shehjanpur the area is inhabited by a Muslim majority, it's always a major security risk from administration viewpoint.

But surprisingly no local resident really appeared complaining. The Hindu populace mostly see it as a "saffron deterrence" against the rising Muslim fundamentalism (a similar show of strength is seen during Eid Milad Un Nabi, Muharram and Shab-e-Barat, etc.). The rise in number of Ganpati and Durga Puja pandals is also seen manifestation of this deterrence. The Muslim populace uses it to justify the Islamic fundamentalism.

Moreover, since the participants in this annual ritual come mostly from the Bahujan Samaj, the poor and oppressed see this as a medium of social awakening. Politicians and social engineers are therefore quick to pump resources and passion in the event.

Economically, with over 25million people, mostly youth and children, already participating, this is potentially emerging as the largest and longest carnival in the world - much larger than the 10day Ganpati festival and 9day Durga Puja & Navratra festival. Thousands of "Startups" and "Standups" could be built around this.

Thursday, August 18, 2016

Market leadership may change soon

Thought for the day

"O, what a tangled web we weave when first we practice to deceive!"

—Walter Scott (Scottish, 1771-1832)

Word for the day

Honorific (n)

A title or term of respect.

First random thought this morning

From "Nani Yaad Kara Denge" by Rajiv Gandhi, to the latest Balochistan rhetoric - little has changed in independence day speeches made from Red Fort, insofar as Pakistan is concerned.

Those reading too much in the PM's Baloch reference might be doing just that - too much.

Market leadership may change soon

The current bull market in Indian equities began three years ago in early September of 2013. This was the time when the then finance minister P. Chidambaram and the newly appointed RBI governor Raghuram Rajan made some concerted efforts to repair the fragile balance of payment conditions. Many more fiscal and monetary corrections were also initiated.

In due course, the efforts were duly supplemented with the massive correction in the global commodity prices; abundant liquidity infusion by the central bankers in developed markets; yields vanishing from the global bond markets hence motivating the global liquidity to funnel into the emerging economies like India; and marked political changes in India that were perceived to be reform and action oriented.

The benchmark indices have gained 55-60% in past three years. However, over the same period the broader market indices have gained over 130-140%. If we consider the fact that INR exchange rate vs. USD has appreciated by about 2% in this period, the return in USD terms is even higher.

My greed and fear chart shows that the present spread between greed and fear (as represented by the divergence between the performance of the broader markets and the benchmark indices) is the maximum recorded during the past three years and compares well with the divergence recorded during the peak months of the past cycle (August 2007-January 2008).

Considering that in strict technical sense, the benchmark indices are not showing any signs of any major correction as yet, the spread may normalize only through meaningful correction in the broader markets.

I therefore am gearing for a ~10% correction in broader markets while the benchmark indices record gains of ~5% over next three months.

I would not mind even if I go completely wrong on my timing; since I seriously find the valuations in broader markets little bubbly.

Wednesday, August 17, 2016

I'm Ok. Thank you!

Thought for the day

"We build statues out of snow, and weep to see them melt."

—Walter Scott (Scottish, 1771-1832)

Word for the day

Blandishment (n)

Something, as an action or speech, that tends to flatter, coax, entice, etc.: Our blandishments left him unmoved. E.g., We succumbed to the blandishments of tropical living.

Malice towards none

The day after the Newspapers highlighted the speeches/comments made by PM, AK, CJI and Salman Khurshid.

This morning it's a new Sun.

First random thought this morning

We just celebrated 70th anniversary of our independence from the colonial rule of the British. We witnessed the expression of nationalism and patriotism in a variety of ways.

I joined a group of Punjabi farmers in Pilibhit for the celebrations. Most of them or their parents had migrated from the west Punjab in 1947. After the flag was hoisted, speeches were done and snacks were eaten, I raised a tough question - "why did you chose to migrate to this side of the border? Was it love for INDIA or fear of being persecuted?"

After two minutes of silence - all of them nodded for the latter!

I'm Ok. Thank you!

Since approval of the Constitutional Amendment Bill that has paved the way for implementation of a common GST regime in the country - a number of readers have asked me does this transformative change warrants any change in investment strategy, as highlighted at beginning of the current year (see here).

I had then mentioned that "the forces of hope may get traction from the policy reset in India becoming tangible. The investors’ sentiment at present is positive about the cyclical recovery. Investor positioning and market internals are clearly pointing towards that", while categorically stating that "I am not too excited about a conventional cyclical recovery in 2016. Cost efficiencies, productivity gains and ground breaking for some of the prominent FDI projects in manufacturing area would create excitement in market. Staple consumption could be supported by higher urban wages and normal rural income (assuming a normal monsoon). Export demand may continue to remain sluggish." (see here)

I have reviewed my investment strategy comprehensibly in this light and I see no reason to change my core investment strategy due to GST for the simple reasons that—

(a) I follow a strategy which is designed to be mostly policy independent and enjoys an optimum beta relative to macro economic growth;

(b) I had anticipated GST & other positive policy changes; higher rural income & consumption due to normal monsoon; and rise in urban wages etc.;

(c) Global competitiveness, technology, innovation and market leadership have always been at the core of my investment strategy. I have always avoided businesses that sustain purely on policy arbitrage and political patronage. The small and midcap businesses that would find it hard to compete in an open globally competitive market place with little policy arbitrage and political patronage have been in a "No Go" zone for me for long. (see here)

I continue to believe that the investee companies will be such that have demonstrated capabilities to remain relevant over many business cycles due to their product, market and technology leadership, strong financial position, lower beta to macro fundamentals, proven managerial capabilities.

I do savor the flavor of the season, but just as I do a pinch of pickle with my staple moong dal khichdi - not more, not less.

The movements in the market prices of financials and IT/Pharma have created some imbalances in my portfolio. These need to be corrected rather urgently.

I have therefore advanced my midyear portfolio review for FY17 by a month. I shall be planning and implementing the corrective measures by the end of this month itself.

Friday, August 12, 2016

Overeating invariably leads to indigestion

NEXT POST OF MORNING TREKK WILL BE PUBLISHED ON 17th AUGUST 2016

GREETINGS TO ALL OUR READERS FOR 70th INDEPENDENCE DAY OF INDIA.

Thought for the day

"Man has no right to kill his brother. It is no excuse that he does so in uniform."

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Polyphonic (adj)

Consisting of many voices or sounds.

Malice towards none

Indian Railway proposes to allow private parties to buy train names for a fee.

Would be great source of revenue and peace if the government makes it a policy and sells the names of all its schemes, e.g., Dhirubhai Ambani Gram Sadak Yojna or Godrej Worli Sea Link!

First random thought this morning

Almost every day, newspapers carry reports raising doubts about how Dr. Zakir Naik might be working against the national interest for long.

If these reports are even partially true, the security apparatus of the country might need a complete overhaul.

Not having done in the aftermath of 26/11, should be considered a brazen lapse on the part of the administration.

Overeating invariably leads to indigestion

In our country - SIP, Asset Allocation and Diversification are indubitably most misunderstood and misused terms in the context personal investing, in my considered view.

With due regard to the utility, competence and integrity of the investment advisors and wealth managers, I feel that their training and orientation lacks the understanding of investment basics. This deficiency in understanding is transmitted in the behavior of common investors and fully reflected in their investment patterns.

For example, consider the following—

(a) A systematic investment plan (SIP) is typically used to meet multiple objectives, e.g., investment discipline, benefit of compounding, avoiding the need to time the market, ease of managing investments, etc.

However, it is common to see advisors recommending SIP as a tool of cost averaging. Conceptually, cost averaging can only done in a static asset. How is it possible to do average cost in a dynamic asset like mutual fund portfolio that may change almost every day. In India even the constituents of benchmark indices have changed rather frequently!

(b) Asset Allocation (AA) is a procedure usually followed to bring the asset portfolio of an investor in synch with his risk appetite and life cycle. The task cannot be completed unless the advisor has a complete knowledge of the investor's assets, both financial as well as non-financials. This is seldom the case in Indian context.

Tell you an interesting anecdote relating to this.

Once I was sitting with the promoter of a south India based pharmaceutical company, who had material stakes in real estate business also. His wealth manager from a renowned global bank was also sitting with him. The promoter had got a few crore in dividend from his company and wanted to invest the money.

The wealth manager was privy to only 0.5% of his total asset portfolio. Nonetheless, he suggested him a 50:40:10 Equity:Debt:Gold allocation. In the equity part he suggested a set of mutual funds including a pharma sector fund and a mid cap diversified fund with 37% exposure to midcap pharma companies. In debt he suggested FMPs with material exposure to real estate bonds.

These suggestions were made to a person whose ~90% legal networth was invested in the equity of a single pharma company; 9% networth was in rent yielding (fixed monthly income) real estate and 1% was cash. Being a Andhra landlord, it is anybody's guess that he must have few kilos of gold at home that does not reflects in his balance sheet.

In this case, what would you think of the advisor suggesting the referred asset allocation plan, that I leave it to you.

(c) In the name of diversification, investors are many a times sold a variety of mutual fund schemes which not only are similar in risk profile, sectoral exposure, but in fact contain the same securities.

The point I am trying to make is that the greed dominating the investor's sentiment near the peak of a market cycle and fear overwhelming them closer to the bottom of a typical market cycle is no co-incidence.

It is the understanding, training, orientation and skilling of both investors and advisors that is lacking.

Unfortunately, it is not the investors & advisors alone, but the regulators & government may also be wrong about the dynamics of the equity investment in India.

In my view, post liberalization of trade and commerce in 1990’s, the number of self entrepreneurs has certainly increased in the country. This has coincided with the sharp fall in public sector employment. The aggregate private sector employment level has not been able to compensate for fewer opportunities available in public and unincorporated private sector. Consequently, the total number of employees on live payrolls has fallen sharply since early 2000’s.

The combination of two – lower employment opportunities and liberal business rules – has perhaps forced people towards entrepreneurship. The number of self owned enterprise has swelled in past one decade, implying people are investing in more in equity, but not in listed equity.

As per 67^th round of NSSO survey (June 2011), there were 58million unincorporated enterprises in India (excluding agriculture, construction and those registered under Factories Act). Over 85% of these enterprises are run by the owner himself, without any hired worker. 44% of these were run from the residence of the owner. These enterprises employed 108mn people against just 39mn on the live payroll in organized sectors, including 11mn in private sector.

These self owned enterprises generated annual gross profit of Rs628.36bn; whereas all listed companies in India generated gross profit of Rs610.44bn in FY12. 1/3^rd of this profit was earned by top 36 PSUs. Top 100 listed companies accounted for over 76% of this value addition.

The point I am making is that there is a strong equity culture amongst Indian households. However, factors like fewer employment opportunities, better business opportunities and dismal performance of publically traded equity have led them to invest more in their own business and/or home equity rather than listed equity.

Advising these people to invest in equity, directly to through NPS, EPF, ULIP etc. may actually not be a good idea. Because, these are the people who are highly aspirational but can ill afford any additional risk. They are therefore easily swayed by the forces of greed and fear.

Thursday, August 11, 2016

Prevention vs. punishment

Thought for the day

"O, wind, if winter comes, can spring be far behind?"

—Percy Bysshe Shelley (English, 1792-1822)

Word for the day

Cosmopolis (n)

An internationally important city inhabited by many different peoples reflecting a great variety of cultures, attitudes, etc.

Malice towards none

Nowadays there are two types of people in India - One: whose WhatsApp DP displays patriotic themes like the Tricolor or symbol of Indian Army; Two: the others.

First random thought this morning

The decision of Manipur Iron Lady to enter politics with the objective of making it to top is commendable. I guess this may mark a watershed in Indian politics.

For example, one, it may re-inspire many other right thinking citizens, including those who got completely de-motivated and disenchanted after their brief sojourn with Arvind Kejriwal. Two, it may trigger a rethink in the Congress Party that good people are willing to join politics if they are allowed a fair opportunity for rising to the top. Three, it may strengthen the forces of sustainability and equity against crony capitalism and crony socialism.

Prevention vs. punishment

Most of us would have encountered traffic cops hiding behind trees, electric poles, etc., waiting for someone to commit a traffic crime like jumping the signal or violating the prescribed speed limits.

It is usually annoying on an isolated road with scant traffic. Few of us have motivation to obey traffic rules under such circumstances. Many a times one even would not notice the traffic signal as there is no traffic on either side of the signal. You leisurely cross the signal and suddenly two cops spring up from nowhere waiving at you to pull over. Thereafter usually some negotiations are pursued and a suitable deal is arrived at.

But have you noticed that these traffic cops are usually not seen where serious traffic jams take place every day morning and evening. Have you ever seen a traffic cop filling a small two feet wide pit in the middle of the road, that is causing traffic jam of several kilometers. At least I have not.

So where is the disconnect?

In my view, the disconnect lies in the orientation of the personnel assigned the duty to manage the traffic on roads.

I did speak to some of them, asking "what is your primary duty?" A majority of them said "to enforce traffic rules". No one said "to ensure safety & security of people using the roads; maintain smooth flow of traffic; and/or properly guide the road users". None of them was aware of the bird named "right of way" on the road.

Prevention does not appear high in our priority of things. Punishment is what we pursue vigorously.

This perhaps applies to the whole spectrum of the public compliance management system - be it police, taxation, civic administration or anything else.

One may argue that it's not only the public compliance system, but the personal management also; as reflected in disease management at household level (including overwhelming use of self medication).

Our schools teachers are also mostly focused on the "marks obtained" by the students rather than focusing on the overall personality development of the students, including inculcation of traits like patriotism, nationalism and compliance. Consequence is that we are popularly regarded as a society which is cynical; argumentative; performs only when whipped; complies only for the fear of punishment; and usually puts personal interest before the common interest. The trust abyss between police/security forces and citizens is also a consequence of this orientation.

The government has great opportunity at hand to address this shortcoming in formulation of GST rules regulations and new education policy.

This mindset and orientation impacts our investing behavior also. Will discuss it tomorrow.

Still working on the implications of GST on my investment strategy. Will share with the readers next week.