Wednesday, May 2, 2018

Four years of Modi rule

"A good way I know to find happiness, is to not bore a hole to fit the plug."
—Josh Billings (American, 1818-1885)
Word for the day
Machiavellian (adj)
Characterized by subtle or unscrupulous cunning, deception, expediency, or dishonesty.
Malice towards none
The Paan Shop idea of newly appointed Tripura Chief Ministers is revolutionary if we consider the direct and indirect employment generation potential of this vocation!
 
First random thought this morning
Pawan Chamling is now the longest serving CM of any state in India.
As CM of Sikkim for more than 23yrs, his performance has been commendable in most respects, especially improvement in social indicators.
Organic farming, cleanliness, education, public health, law & order, and even economic growth, the state ranks amongst the top performing states in the country.
Wonder, why we do not hear name for a bigger national role. He seems like the best PM candidate for the united opposition!!!

Four years of Modi rule

Last year, the results of some opinion polls for UP & Gujarat assembly elections, suggested that BJP might not be able win these states and Modi magic many be diminishing. The financial markets were totally disappointed at the very prospect of any fall in PM Modi's popularity. Even UP municipal elections later were discussed and analyzed with a great deal on interest and anticipation.
Later in the year, a close fight in Gujarat assembly elections also scared markets. It motivated many senior analysts, strategists and market commentators to opine that a loss for Modi in 2019 may adversely impact the India's economy that is beginning to recover from the twin disruptions of demonetization and GST implementation.
Surprisingly, market does not at all seem concerned about Karnataka elections. After every opinion poll that suggested that BJP may not do well in the state, the market has in fact risen higher!
What could this mean?
(a)   Has market stopped believing in opinion polls? Does it assume that BJP will win Karnataka, and opinion polls will once again prove to be wrong? or
(b)   Has market finally realized that the outcome of state assembly elections has little relevance for the economy and hence stock markets? or
(c)    Does market now believe that a loss for BJP in Karnataka would be good for good for the economy and hence stock markets? Does by extension this mean that market will celebrate a loss for BJP in 2019 general election? or
(d)   The market exuberance seen in April 2018 is misleading and market may correct in case Congress manages to retain power in the state of Karnataka.
As Pm Modi is completing four years in power, and the last year leading to general elections begins, it would be pertinent to make an objective analysis of the performance of incumbent government led by him.
An objective analysis is relevant from an investor's viewpoint, because that shall allow a considered positioning in the wake of 2019 general elections.
Over next few days, I shall be presenting my analysis of the developments in past 4years that have or could have material impact on my investments.
My readers are fully aware of my strong views about the "no correlation" between politics and economics in India. I would therefore not be discussing the developments from the prism of partisan politics.
I am more interested in analyzing the economy from the viewpoint of (a) sustainability; (b) break in linearity, if any; and (c) probability of discontinuity in case of political transition, i.e., BJP not being able to form government in 2019 with comfortable majority.
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Friday, April 27, 2018

Affordability of affordable housing

"Be like a postage stamp. Stick to one thing until you get there."
—Josh Billings (American, 1818-1885)
Word for the day
Velitation (n)
A minor dispute or contest.
Malice towards none
Heard a senior socialist leader from UP claiming — "Now only Rahul Gandhi stands between Modi and defeat in 2019"!
 
First random thought this morning
After terrorism, now rapes in India also have a distinct religious and caste identities. Rapists are identified as Hindu, Muslim, Christian, Saint Maulavi, Pastor etc. and victims (or as fashionably called survivors now a days) are identified as SC/ST, Dalit, North Eastern, etc.
The two pillars of democracy (Politicians and Media) are surely and fast degenerating. The confidence in the third support pillar (Judiciary) is also at its Nadir, with the voices of severe criticism coming from within. It is for the Executive now to take all the burden on itself and save country from slithering into the world of chaos.

Affordability of affordable housing

Across the world, housing is one of the key drivers of economic growth. In the high growth phase of Indian economy between 2004-2009, housing did play a major role. Nonetheless, affordability has remained a key constraint in growth of housing sector.
Many analysts, including CLAS Greed & Fear, have suggested in their recent reports that affordability factor may be coming back to 2003-04 levels in Indian housing market.
Latest issue of Greed & Fear reads that the best stories to invest in in India remain the affordable housing story and the dramatic, albeit healthy, consolidation of the residential property market triggered by the “double whammy” of the Real Estate Regulation Act (RERA) (implemented from May 2017) and demonetisation."
As per the report, the residential property market in India has begun to pick up, "after years of oversupply, helped by dramatically improved affordability." As per CLSA estimates, the mortgage payment to post-tax income ratio has declined from 56% in FY07 to an estimated 31% in FY18, the lowest level since FY04."


There is no doubt that compliance led disruptions, and raw material constraints (especially sand) have resulted in lower supply at a time when the government is pushing the affordable housing segment investment hard. On aggregate basis therefore the net new sales are outpacing net new supply (including new launches and delivery), and lower inventory of built up and under construction houses.
It would however be totally wrong to conclude that housing sector has turned around and is ready to play a leadership role in faster  and sustainable economic growth.
The affordability statistics presented by equity analysts is based on the data for actual borrowers from the banks. This data though useful may not be (a) a good representative sample of the economy; and (b) may not address the issue of affordability holistically.
The banks and housing finance companies have materially tightened the lending norms in past few years. They are now seeking much more margin of safety from borrowers. Lower mortgage payment to post-tax income ration may to some extent may be influenced by these stringent criteria.
Moreover, interest subsidy by the government for lower price houses may also be aiding to lower ratio, as interest subvention reduces the mortgage payment for individual borrowers.
But the large issue is the notion of affordability itself.
Measuring affordability only in terms of capacity to pay mortgage is structurally flawed.
A housing unit built 50kms from the city center, with negligible social infrastructure in the vicinity remains mostly unaffordable for the intended beneficiaries as the family has to travel long distances for job, schooling, health services etc.
Most of the affordable housing projects so far have failed to address the issue of affordability in a holistic manner. (Though in recent times, government has indicated that they mat redevelop government, port and railways land within the cities for affordable housing purposes, not much progress could be seen so far on the ground.)
Lower mortgage payments mean nothing if the house owner has to spend significantly higher on travel and other social services.
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Thursday, April 26, 2018

Valautions not a comfort



"There are some people so addicted to exaggeration that they can't tell the truth without lying."
—Josh Billings (American, 1818-1885)
Word for the day
Nocent (adj)
Harmful, Injurious
Malice towards none
How the end of H-4 VISA will impact social fabric of India?
First random thought this morning
Salman Khurshid is latest in the series of Congress and BJP leaders who have chosen to diverge from the party line and speak their mind.
This makes two things very clear:
(a)   Rahul Gandhi is inspired by PM Modi. He is building a team of his own, sidelining many of the senior party members, who chose not to "totally" agree with him.
(b)   The line separating Congress and BJP from each other can now only be seen by NASA satellites, just like Ram Setu.

Valautions not a comfort

Continuing from yesterday.
Another argument of Greed & Fear, I disagree with is that lower corporate profit to nominal GDP ratio to some extent mitigates the risk of high valuations.
Greed & Fear admits that "Valuations remain high, most particularly in the mid-cap space, though not as high as they were at the peak earlier this year. The Nifty Index and the Nifty MidCap 100 Index now trade on 17.5x and 21.3x one-year forward earnings, down from a peak of 18.6x and 25.2x reached in January and late December respectively."
It however argues that "the mitigating factor continues to be that corporate profits as a percentage of nominal GDP remain comparatively depressed, declining from 7.1% in FY08 to 3.0% in FY17 and an estimated 3.1% in FY18."
 




The primary reason identified for this trend is "the continuing lack of a new investment cycle."
The report argues that "corporate profits as a percentage of nominal GDP peaked in fiscal 2008 which was the peak of the last investment cycle."
The conclusion drawn is that "the Indian stock market can move much higher if there is a renewed investment cycle."
The authors finds enough collaterals like 20% rise in February 2018 IIP, 31% increase in domestic vehicle sales in 1Q2018, 12% growth in overall credit in 4Q2017 and 11% in 1Q2018, etc. He however admits that convincing evidence of a new investment cycle remains lacking.
I have many reservations about this argument. For example—
(a)   I believe that the capacity utilization level in Indian industry is presently far from being supportive for a new investment cycle.
(b)   There is serious risk of multiple disruptions (compliance rules, taxation, technology, changing consumption patterns and global competitive landscape, etc.) resulting in lower aggregate profitability for Indian corporate sector in near to midterm.
(c)    Structural changes in cost structure - higher compliance cost, rise in minimum wages, higher cost for natural resources, higher cost of capital, etc. do not augur well for sustained higher profitability which has been seen historically.
(d)   Lower profitability is also a result of structurally lower margins, as competitive intensity rises with opening of the economy.
(e)    This argument completely ignores the rise in private equity investments. In Indian context for example, the equity investment in self owned enterprise and home equity has risen sharply in past one decade, as compared to the decade prior to that. Besides, the size of unlisted private businesses has increased significantly. Factor in the investments of Amazon India, Vodafone India, PayTM, FlipKart, Honda India, Hyundai India, LG India, Samsung India, Apple India, etc. and you will find this ratio running much higher than what the data for listed companies suggests.
Moreover, the revival of huge amount of stressed assets may also obliterate the need for further investment in core sectors like cement, steel, power and telecom.
I find little reason for Indian equities to continue enjoying huge premium over other large emerging markets or many of the developed markets over medium term. The valuations therefore may still be on the higher side of the fair value bar.
To some my arguments may sound naive and untenable, as I am just a small investor not an expert analysts or strategist. But I would still prefer to work on my largely intuitive analysis.....to continue tomorrow
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