10 Dec 2015

Shake of the lethargy

Recent equity market softness has brought the valuation parameters back to interesting levels. The forward PE ratio for the Sensex is now at 14.3 and Price to Book is 2.3. Bothe these are below the historic average. The March quarter should bring continued progress on reform, notably on fiscal consolidation in the Union Budget. The market should shake off its current lethargy and produce a strong performance in the first quarter.

9 Dec 2015

Andhra Pradesh support by World Bank

The World Bank has agreed a financial assistance package worth about $700mil for the power sector in Andhra Pradesh. Following the boost to the power sector from reorganisation of the finances of state level distributors, the nuclear sector received a boost with the signing of a nuclear fuel supply agreement with Australia, with immediate effect. In the railway sector, the government has already spent $1.6bn on railway development projects this fiscal year, more than twice the aggregate for the previous year. It has also awarded contracts to Alsthom and GE for the delivery of new locos with substantial local content. 

ICICI Bank, Kotak Mahindra, HCL Techno, Infosys

ICICI Bank has sold 4% of its life assurance joint venture to two private equity investors, valuing the whole at $4.9bn. Meanwhile, Kotak Mahindra Bank has had license approval for a 100% subsidiary, Kotak General Insurance, to start a full line of general insurance products, including health. HCL Techno has been awarded a long-term contract by Deutsche Bank for maintenance and application development work, including systems integration, product design and application implementation. Finacle, Infosys’ banking services platform sold through its product subsidiary Edgeverve Systems, will be offered via the Oracle Cloud as a managed service. Pidilite has acquired the Chemifix trade mark in Sri Lanka, along with certain assets of CIC Holdings which has been a provider of PVAC adhesives in Sri Lanka.

Remarkably cooperative start

The Winter Session of parliament has got off to a remarkably cooperative start, with no wilful obstruction from the opposition so far. The GST legislation may be the biggest beneficiary of this: various empowered and advisory committees working on implementation seem to be reaching common ground on subjects such as standard rates, as the NDA government negotiates constructively with the opposition. This is good, because both S&P and Moody’s have recently commented that India’s various ratings will be on hold for up to eighteen months and will come under pressure in the absence of continued reform by the government. Implementation of GST will be considered a major 'credit positive' within that timeframe.

8 Dec 2015

Qatar waives penalty

Second quarter GDP growth was 7.4%, with evidence emerging that public expenditure has become the major accelerant. Manufacturing contributed 9.3% in a positive surprise and even agriculture, despite a poor monsoon achieved 2.2%; services grew at a stable 8.8%. Confirming recent IIP numbers, gross fixed capital formation accelerated by 6.8%, suggesting that breaking the logjam in project execution is slowly reviving capital expenditure. Wholesale Price Inflation (WPI) completed a full year in the red with a print of -3.8% in October. Prolonged soft inflation could pave the way for a further 50 basis points in repo rate reductions but probably not until the June quarter at the earliest. Sustained softness in commodity prices has allowed the trade deficit to improve further to $9.8bn in October: exports fell by 18% in slow global markets but imports fell even more, by 21%. Services exports are stable at about $6bn a month. Helpfully, Qatar has waived a $1bn penalty due from India under LNG “take or pay” supply contracts and seems ready to renegotiate the price in line with prevailing lower market costs for energy.

7 Dec 2015

India flat, for now.

Since everyone seems to have positioned themselves for a Fed funds rate increase in December and closed risk exposures through year end to protect performance, markets have been moving pretty much sideways. Not least in India, where the Nifty has been more or less flat since Diwali, closing at 7782 on Friday compared to 7783 on the eve of Diwali, after trading in a range of just 3.4% for the period. Average daily trading volumes have been stable at just over $3bn a day while FPIs and domestic institutions have been trading volumes with each other while increasing retail interest has made up any difference. It is worth noting that domestic institutions have injected $15.5bn into Indian equities, even as FPIs have pulled out. Market breadth has been narrow, with honours about even between advances and declines. Volatility has also been restrained, the India VIX trading in a range of 14-19 before closing at 16. Nifty futures closed at a premium of 1.5% to cash.

19 Nov 2015

Above 7% annual growth

Like everywhere, economic growth in India is taking a slow path to sustained recovery, yet it is still running above the 7% annual rate which makes it the leading growth economy amongst the majors. The governments reform task just became a little more difficult after the Bihar election but it still has determination and is making steady progress on reforms in a low-key way.

18 Nov 2015

Fiscal deficit on target

The government has once again taken advantage of the weak oil price by raising the duty on petrol and diesel to boost the effort to keep the fiscal deficit on target. It has also added 0.5% to the tax rate on services. Total Indirect Tax collection in October was 36% higher than target at $8bn; for the seven months to-date this fiscal year, collections are $57.9bn, 35.9% above target for the time of year.

New order flow, distinguishes India!

The market has absorbed the NDA government’s state election embarrassment in Bihar and is moving on to search for signs of sustainable growth recovery. There are plenty. There is now a continuous flow of orders in the infrastructure sector, particularly roads, railways and ports. Sales of commercial vehicles are strong and consumer confidence is strong enough to be driving sales growth in passenger vehicles as well. Office occupancy rates are rising and advertising expenditure is up. In the transportation sector, airline passenger numbers rising strongly and toll-road collections are advancing at 15% per annum. In addition, FDI is heading for a record year with value running 30% ahead year to-date. Against this background, low commodity prices are helping operating margins across many sectors and falling interest rates are helping leveraged businesses. This environment distinguishes India from most countries and with its strong external balances Indian markets should be able to withstand the start of normalization of interest rates in the US. 

17 Nov 2015

Maggi noodles flashdeal

Netle brought the only piece of corporate news of interest: it launched a 'flashdeal' for Maggis noodles on Snapdeal and sold 60,000 units in five minutes. Meanwhile, the company has re-introduced Maggi instant noodles in stores in 100 cities. The government slipped out news of the relaxation of FDI rules in fifteen sectors, including an increase in the approval limit for the Foreign Investment Promotion Board by two thirds to $50mil. Foreign investment limits for private sector banks will now be fully fungible between FDI, FII and FPI limits and subject to an overall maximum of 74%. The revised policy on financing of electricity distributors will bring relief to the PSU bank sector, as it mandates that states will take on the burden of 75% of outstanding debt by 2017 and the remaining 25% will be refinanced by state guaranteed bonds at reduced interest cost. This will soften the prospective bad debt burden of the PSU banks and the servicing costs of the distributors.

16 Nov 2015

Indian Hotels up, Indraprashtha Gas up too

Not much in the way of company news during the festive season but we did have two second quarter announcements to note. Indian Hotels reported sales up by 10% in a highly competitive domestic market in particular, while cutting operating losses to a quarter of the comparable period. We built up our stake in anticipation of a smart turnaround driven by a new CEO. Indraprashtha Gas reported sales up by 10% but profit flat as it waits for price increases to take effect. With reporting for major names almost complete positive and negative earnings surprises stand at about 40% each with 20% reporting in line. Overall, the consensus EPS growth forecast for FY16 is a touch above 12%.

India: two holiday close

Equity markets stuttered a bit on further softening of commodity prices and the prospects that ever-weakening growth combined with the start of rates hikes in the US might stunt economic growth for some time. Meanwhile, India was closed for two holidays and in spite of an optimistic Muharat trading session on Diwali, the Nifty gave up 195 points to close 2.5% down after trading in a range of 3%. Average daily trading volumes were$2.6bn as FPIs continued to be net sellers of, $198mil in cash equity, while domestic institutions were buyers of a net $188mil.Breadth was six to four declines while the India VIX traded down from 19 to 15 before finally settling nat 18. Nifty futures closed at a premium of 1.1% to cash.

11 Nov 2015

Applications and approvals

Lupin has 160 applications before the USFDA and has received 18 approvals so far this year even after experiencing a slowdown. The latest approval is for its Calcium Acetate Capsules, a generic equivalent of Fresenius’ treatment for end stage renal failure. The company has also just received USFDA approval for its Doneprizal product, a generic version of the Aricept dementia formulation. Torrent Pharma has commenced production of pharmaceutical ingredients as well as formulations at its Dahej plant. HCL Technologies has acquired Minneapolis-based PowerObjects for $46mil.; the company is a provider of Microsoft Dynamics customer resource management and will boost HCL’s service in application development.

10 Nov 2015

Strong operational results

Finally, we had two results announcements from companies benefitting from strong operational metrics: Supreme Industries reported sales growth of 2.4% but profits ahead by 46.3% thanks to margin expansion. Similarly Pidilite, one of our largest holdings, reported sales growth of 5.2% but profits ahead by 38%.

9 Nov 2015

Corporate results: looking good

The second quarter results season continued with four Financial Sector reports in our portfolio: Axis Bank reported net interest income ahead by 11.5% and profits up by 18.9%. Magma Fincorp reported NII ahead by 23.5% and profits up by 39.2% and ICICI Bank reported NII ahead by 12.8% and profits up by 11.8%. Kotak Mahindra Bank reported NII down slightly, by 0.6% but profits ahead by 35% as it proceeds with the integration of its ING Vysia acquisition. Lupin reported sales ahead by 11.9% but profit growth slowed to 7.4% reflecting an earlier slowdown in USFDA approvals, affecting sales in the US market. We had two disappointments: Nestle, predictably, saw sales collapse by 34% and profits by 60% as it addressed the fallout from the Maggi Noodles additives problem. As further tests have shown no problem in product analyses, production has restarted in three states and a product relaunch is imminent. Kalpataru Power reported sales down by 17% and profits down by 4% as the company completes execution of low-margin legacy contracts and rebuilds the order book with higher margin contracts.

Delay in policy implementation

The election result in Bihar looks like a setback for the Modi NDA government, which seems to be losing heavily in the count, which is continuing. A loss will prevent the NDA from improving its position in the Raja Sabha upper house, making its pursuit of reform more of a problem. The market may see increased volatility into the Diwali period as FPIs in particular react out of concern that the introduction of national GST may be delayed.

Setback for foreign banks

The RBI has rejected a government proposal to increase the foreign investment limit for banks to 100%; this will be frustrating for the likes of HDFC Bank and ICICI Bank. A set back for foreign banks, but good news for investors in domestic players. On the other hand, the RBI governor, Raghuram Rajan has agreed with the government on the composition of the planned interest-rate setting monetary policy committee.

8 Nov 2015

GDP growth forecast for India

PM Modi hosted the biggest ever India-Africa summit as he attempts to challenge China’s dominance of economic development on the continent. The World Bank increased its GDP growth forecast for India to 7.5% as its regular ranking of places to do business showed that India had gained 12 places, rising from 142 to 130 (out of 189). The improvement is attributed greater ease of starting a business and greater efficiency in securing an electricity connection. Unusually, the Diwali season may see increased volatility until the NDA government provides comfort on its reform commitment.

India’s growth is not in question

The Fed held rates again, possibly for the last time as US job creation was very strong in October. The Bank of England held fast again too, with tightening looking more distant, thanks to inflation undershooting again. Meanwhile the ECB debates more QE as the growth outlook stays weak. India’s growth is not in question as second quarter results flow but politics may prompt volatility in the short term. Since our last commentary, the Nifty has shed 341 points to settle 4% lower at 7954 after trading in a range of 5.2%. Average daily trading volumes were around the trailing average at $2.7bnb as FPIs sold a net $542mil while domestic institutions invested a net $552mil. Declining stocks outnumbered advances by five to three as volatility rose from earlier levels: the India VIX traded up from 16 to 20 before ending at 19 for a gain of three points. Nifty futures closed at a premium of 1.5% to cash as the market waited for results of elections in Bihar.

29 Oct 2015

Neutral market, fixed on quarterly results

Moody’s Investor Services has given India a positive rating outlook based on GDP growth in the 7-7.5% range, favourable government policy action and low exposure to external shocks due to RBI actions. Standard & Poors maintained its current rating of BBB- but said that the prospects for a future upgrade were good as better policy-making is boosting the prospects for growth and fiscal performance. Following the weak monsoon, the government has imposed stock limits pulses to prevent hoarding by warehousemen and intermediaries and price manipulation which may affect the inflation outlook. The market outlook is now fixed on the quarterly results, which are largely neutral.

28 Oct 2015

Huawei joint venture with Infosys

Infosys and Huawei of China will cooperate in joint venture to launch a “smart stadium solution” to provide WiFi and smart services in stadia and exhibition centres. Infosys also announced the acquisition of Noah Consulting, a specialist provider of information technology consultancy services to the oil and gas industries. The consideration is $70mil. Nestle India has received test results for 90 Maggi noodle products from the three centres mandated by the Bombay High Court. All results fell well within statutory limits for additives, including lead. The state of Gujarat has lifted it ban on Maggi products as a result.

27 Oct 2015

HCL Tech numbers, optimistic

HCL Tech numbers reflected the weak first half seen across the sector. Sales were up by 7.3% but profits fell by 16.5%, largely attributable to a single client issue.  HCLT’s guidance, however, was optimistic. The company announced two acquisitions. In the first place, it has agreed to acquire the IT outsourcing business of Sweden’s Volvo. Volvo is in the course of a $1.2bn restructuring, which will see 2,600 staff transferred to HCLT for a payment of $100mil. In the second, the company also announced the acquisition of Concept to Silicone Systems of Bangalore, a private software services business, for an undisclosed sum.

26 Oct 2015

Acceleration of corporate results

The second quarter results season accelerated, with the balance of results fairly even: the majority of announcements so far are inline with expectations. Ultratech Cements reported revenues 5% ahead in conditions of soft demand. Yet profits narrowed by 4% mostly due to the effects of the District Mineral Foundation levy introduced under the Mining Act 2015. Agro Tech Foods managed to grow revenues by 1.7% but profits fell by 35.6%.  South Indian Bank reported net interest income up by 8% and profits ahead by 22%. HDFC Bank was as reliable as usual, reporting NII ahead by 21.2% and profits by over 20%. Bajaj Auto reported sales ahead by 2.3% and profits by nearly 58%. The company will roll out four new bikes to support its plan to get to 22% market share. In the first half of FY16, total motorcycle sales fell by over 4% as th weak monsoon softened rural demand. Bajaj Auto sales rose by 0.3% in the sale period.

25 Oct 2015

Foreign investment

Total foreign portfolio investment into Indian markets this calendar year to-date has amounted to just $10.3bn. Some 62% of this has been into the debt market, a number consistent with previous periods. Evolving RBI policy is highly supportive of the domestic debt market. The decisions of the monetary policy committee at its September 29th review included one committing to more than double the limit for foreign portfolio investment in debt over the next couple of years. Evidently, the next step in this direction may involve extending the limit to cover states’ debt, of which there is more than $200bn in issue. The yield on Indian government debt, around 7%, looks attractive to foreign portfolio investors, especially as the RBI actions have brought appreciation of the Rupee.

Monetary easing party

At the last minute this week, the Chinese central bank joined the monetary easing party by cutting interest rates and providing a boost to equity market sentiment across the globe. Optimism about quarterly earnings also helped. In India, the Nifty shook off a weak start last week to add 57 points for the full week. Closing 0.7% up at 8295 after trading in a range of 1.1% Average daily trading volumes softened to $2.5bn in a holiday shortened week, with FPIs continuing to sell, this week a net $279mil while domestic institutions were net buyers of a net $100mil. Market breadth was narrow, with advances and declines even. Volatility was mostly easy, with the India VIX mostly trading to the downside but then closing back where it opened at 16. A mixed reporting season failed to support the previous week’s optimism in the Nifty futures and the premium to cash slipped back to 1.1%

22 Oct 2015

Infosys reporting and company news

The second quarter results season kicked off with Infosys reporting revenues ahead by 17.2% year on year and profits up by 9.8%; this was a strong result but forward guidance was cut to a range of 6.9-8%. The US market continues to be crucial as the company continues to shift up the gears with strong execution. TCS reported revenue and profits growth of just over 14% year on year, with strength in all geographic areas. In company news, ICICI Bank has launched mVisa, an electronic payment service for smartphones which can be used in stores, e-commerce sites, home delivery, as well as for paying for radio taxis and utility bills. Lupin has agreed a strategic alliance with Boehringer Ingelheim of Germany to market its Linagliptin DPP-4 Inhibitor in India. Boehringer Ingelheim is a global layer in diabetes drug formulations.

19 Oct 2015

Indirect taxation

Late data reports show indirect taxation collection running nearly 36% ahead so far this year at $50bn; this growth rate is double the rate required to meet full-year budget targets. The CPI has moved up to 4.4% as favourable base effects pass through but food inflations remains subdued at 4.3% in spite of the poor monsoon. WPI inflation was negative for the eleventh successive month at -4.5%. The August Index of Industrial Production grew by 6.4%, a major positive surprise compared to expectations in the 4-5% range. Capital Goods production was the big contributor with 21.8% growth, followed by consumer durables which grew by 17%. Power generation grew by 5.6% and mining production by 3.8%. The government will provide a one-off injection of $135mil for build-operate transfer road projects which have been stalled since the Congress government. With evidence of strengthening underlying economic activity and government commitment to public sector investment, sustained GDP growth seems to be assured at the 7-8% level. This should support Indian equity markets which are already strongly underpinned by monetary policy and decisive action to strengthen India’s external position.

Private sector capital investment remains stagnant

The overall picture of liquidity flows on the Indian capital account now is of portfolio investment slowing but FDI increasing steadily. Domestically, private sector capital investment remains stagnant but domestic portfolio investment in the equity markets has seen sustained growth this year. Domestic mutual funds have seen net inflows in September for the seventeenth consecutive month even though markets retreated by 6.5% in August and by 0.5% in local currency terms. Year-to-date net inflows have reached $12.9bn., notably exceeding foreign inflows, a landmark support signal. The second quarter results season kicked off with Infosys reporting revenues ahead by 17.2% year on year and profits up by 9.8%; this was a strong result but forward guidance was cut to a range of 6.9-8%. The US market continues to be crucial as the company continues to shift up the gears with strong execution. TCS reported revenue and profits growth of just over 14% year on year, with strength in all geographic areas.

Some surprisingly weak economic data emerged

Following the FOMC decision not to raise US interest rates, some surprisingly weak economic data emerged, notably weak payroll numbers, combined with a downward revision of the previous month’s figure. In response, markets have pushed US monetary tightening forecasts late into next year. This eased back the recent risk aversion and equity markets stabilised. In India, the Nifty has added 229 points to move 2.1% up t0 8180 after trading in a range of 3%. Average daily trading volumes were $2.7bn but foreign investors continued to be net sellers, of $394mil in cash equity. Domestic institutions were net buyers, on the other hand, investing a net $207mil. Market breadth was modest as advances were slightly ahead of declines. Volatility subsided again, the India VIX trading in thee high teens before closing 17 for a loss of two points. Nifty futures closed at a premium of 2% to cash.

7 Oct 2015

Corporate news Infosys

Infosys has won the contract to build and maintain the backbone operating network nationwide for the implementation of GST. The contract is for five years and is worth $200mil. The network is to be implemented in time for the scheduled launch date of April 1, 2016. TCS is in partnership with UK building society Nationwide to provide the Ignio Neural Automation System for batch performance and capacity management. HCL Techno has launched its digital service exchange platform which allows clients to request and recall services efficiently. The company also issued guidance on earnings this quarter, indicating a weak quarter due to currency movements, a customer issue which led to a $20mil revenue reversal and longer lead times on new business negotiations.

6 Oct 2015

No outsourced Maggi noodles

Ultratech Cement has been busy with new capacity additions: it has commissioned 1.6mtpa of new capacity at Jajjhar in Haryana and the same at Dankuni in West Bengal, just 40km from Kolkata, bringing total installed capacity to 64.7mtpa in fourteen plants. The company has also commissioned a 2mtpa terminal in Pune in Maharashthra. Kalpataru Power’s JMC Projects division has been awarded $100mil in engineering, procuring and construction projects. Bajaj Auto has received type approval for the EU for its RE60 quadricycle before it has received clearance for the domestic market. The EU certification was done by the Bangalore subsidiary of TUV Rheinland of Germany. Nestle has terminated its sole remaining third party producer of Maggi noodles; it will not be outsourcing any production in future.

Pick-up in economic momentum

The SBI Composite Index for September 2015 was 53.9, an advance on 53.4 the previous month, confirming a pick-up in economic momentum, substantially in manufacturing. Mining production and power generation continue to be soft, however. Fuel duty hikes of petrol and diesel boosted fiscal revenue by some $4.6bn so far this fiscal year.  The fiscal deficit in the first five months was $56.3bn, 66.5% of the budget target for this year; the comparable level for the same time last year was 75%. This year has been helped by a jump in gross tax receipts of 40% in August, compared to a running rate increase of 18% in the four previous months. The main contributors were corporate and personal tax payments.

5 Oct 2015

RBI fires up economy

The RBI made a surprisingly aggressive contribution to stimulating the economy at its regular monetary policy review on September 29th. Surprising the market, they cut the repo rate by fifty basis points, twice the consensus expectation. Furthermore, they announced that to lubricate the transmission mechanism for the stimulus, they would cut the Strategic Liquidity Reserve (SLR) of the banks by 25 basis points a quarter from its current level of 21.5% until March 2017. They will also relax the limit for foreign portfolio investment in Indian bonds from the current $23.2bn to $49bn between now and March 2018. This is highly supportive for the Rupee, which duly added 1.5% after the announcement. Foreign reserves stand at a healthy $352bn. The inflation forecast has been revised down to 5.8% in January 2016 and the governor gave guidance for future repo rate action by setting a target for real interest rates of 1.5-2%.  

Driver of growth

The markets will be propelled by the repo rate cuts for the time being; this month’s second quarter results season is not likely to inspire. Yet the pace of government expenditure on infrastructure is clearly picking up and will be a key driver of growth in the absence of external momentum.

4 Oct 2015

Market goes sideways

At the end of two holiday-shortened weeks Indian markets have more or less moved sideways. External weakness dominated at first but a jolt of monetary stimulus halted a slide and restored upward momentum. The Nifty ended the period down 31 points at 7951, for a loss of just 0.4% after trading in a range of 4.3%. Average daily trading volumes were soft, just under $3bn, below the twelve-month trailing average. Foreign portfolio investors continued to sell cash equity, withdrawing some $500mil as domestic institutions bought a net $460mil. Volatility was, well, volatile, as the India Vix swung between a high of 24 and a low of 17 before settling at 19 for a gain of a point. Market breadth was strong overall with advances ahead of declines by three to one, thanks to a late surge of buying.  With a degree of optimism restored, Nifty futures closed at a premium of 1.3% to cash.

24 Sep 2015

Corporates continue to invest

The Indian pharmaceutical market grew by 1% in August. Lupin saw the highest growth amongst the sector leaders in domestic formulations at 21%. Torrent Pharma, benefitting from successful integration of last year’s acquisition of Elders Pharmaceuticals domestic business also grew by 21%. Supreme Industries is experiencing volatile raw material prices: polymer prices, except PVC, have been affecting revenue growth as the company has had to make adjustments to inventory valuations. In spite of this the company is expecting to see compound annual growth of 18% in sales and more than 30% in profits over the next couple of years. Ultratech Cement has received state environmental clearance to expand its plant at Awarpur in Maharashthra. The company will spend $40mil on expanding clinker production by 30% which will boost cement output from 4.5MTPA to 6MTPA.

23 Sep 2015

Last burst of monsoon

The monsoon is coming to a disappointing end, though a late depression in the Bay of Bengal will bring a last burst fo rain to the south and maybe the central regions. The overall outcome however looks like being about 16% below the Long Period Average (LPA). About half of India’s meteorological regions have reported deficient rainfall and reservoirs are 19% below their LPA, which may be a problem for the second cropping season. The kharif sowing is about 1.8% better than last year with pulses (+11%) and coarse cereals (+5.7%) notable strong. Smart supply-side management by the government as well as restraint on Minimum Support Price (MSP) increases (low single figure) suggest that there may not be a negative effect on the inflation outlook due to the poor monsoon. Thus the market is building expectations of a repo rate cut of at least 25 basis points and maybe even 50 on September 29th. 

22 Sep 2015

Further monetary easing

RBI Governor Rajan reacted to the Fed decision by suggesting that several emerging markets would be vulnerable in the continuing uncertainty about US monetary policy but emphasised the strength of India’s external position and the scope for further monetary easing.  This position was fortified by a couple of data points. India’s balance of payments deficit was 1.2% of GDP in the first quarter of fiscal 2016, with foreign reserves boosted by $11.4bn. This will obviously be offset somewhat in the current quarter by outflows triggered by the China crisis but these seem to be slowing now. August inflation numbers brought more encouraging news. WPI registered its tenth successive month in negative territory: -4.95%. The big contributors were Fuel & Power at -16.5% and Manufactured goods at -1.9%. Food inflation was muted, declining by 21.2% despite a jump of 65% year on year in onion prices. The CPI index grew by an annualised 3.7% in August, kept comfortably within the RBI’s target range by the same factors with different weightings. 

21 Sep 2015

Some confidance in the markets

The government may be on the back foot for the moment in parliament with its GST Bill, which it will try to move again in the winter session in November. Meanwhile, the states have been busy, with an empowered group of States’ finance ministers meeting to agree model state enabling legislation. On the side of fiscal policy, the government appears to be planning in the next Union Budget, to cut Corporation Tax by 1.5%, while setting a target date for the withdrawal of open ended tax benefits. 
With portfolio outflows driven by concern about China apparently slowing down and the lively prospect of a repo rate cut in India , the market may have a ring of confidence for a while.

FOMC, non-event!

So the September FOMC came and went: a non-event! In spite of strengthening domestic economic data, Chairman Yellen chose to allow external risks to determine monetary policy, in the short-term, at least. Many equity markets responded negatively but India continued to advance for a second week in succession, the Nifty adding 193 points to close 2.5% ahead at 7982, after trading in a range of 3.8%. Oddly, the advance came despite a drop in average daily trading volume to less than $2bn, as FPIs sold a net $293mil in cash equity and domestic institutions bought a net $226mil. Further evidence of growing retail interest in equities is encouraging. Advancing stocks outnumbered decliners by about 30% as volatility subsided noticeably: the India VIX opened flat and then declined steadily to close at 18, for a decline of seven points. Nifty futures closed the week at a premium of just sixty basis points, with investors still wary of the short-term outlook.

17 Sep 2015

Corporates moving forward

Indraprashtha Gas has been set a target by the government to reach 300,000 more households in the current fiscal year. This is some two times its previous best performance and will have to be pursued against difficult planning procedures and a soft market. The US Department of Labor has completed its investigation of the use of the H1-B visa programme by Infosys, as reported by a whistleblower. The investigation has found no evidence of abuse. Kalpataru Power Transmission is seeking shareholder approval to issue $50mil in new equity b way of a private placement. Nestle India will be using digital marketing platforms to re-establish consumer trust in Maggi instant noodles in preparation for a product relaunch by year-end.

16 Sep 2015

GDP plus seven percent in 2015

Economic data is still favourable, with GDP growth now confidently expected to be above 7% this fiscal year. July’s Index of Industrial Production delivered a strong positive surprise, registering 4.2% against expectations of no more than 3.4% and an actual 3.8% in June. The Capital Goods sector brought the big surprise, jumping 10.6%. Meanwhile, with oil and food prices still subdued the CPI number for August looks like hitting a record low, adding to pressure for a big repo rate cut from the RBI. The government is still struggling to push its GST plan through parliament, with the Congress Party obstructing progress in the Upper House, in spite of supporting the idea in principle. State elections in Bihar have been scheduled for five weekends in October and November. The outcome should be good for the government and improve their position in the Upper House.

15 Sep 2015

Waiting for the FOMC

Markets will probably be seized with anticipation waiting for the FOMC meeting which will announce its interest rate decision on Thursday. Our preference would be for the Fed to act this week, swiftly followed by the RBI the following week, or even before.

Priority for growth acceleration

Prime Minster Modi invited some forty Indian entrepreneurs, bureaucrats and chamber of commerce members of all kinds to his home for a conference on priority-setting to accelerate growth. He will have heard sustained clamouring for aggressive cuts in interest rates for a start. The RBI governor was in attendance and on the sidelines has admitted he is in a minority of one holding out on monetary easing. 

14 Sep 2015

Spare us continued volatility-pumping

It is starting to look like a broad swathe of central bankers wish the Fed would finally get decisive and bring an end to the uncertainty over a trivial increase in the Fed funds rate. Certainly it is a landmark, bringing an end to a long period of effectively no interest rate. In the context of two sustained periods of double-figure rates over the past forty years, however, to see rates slowly progress to a forecast 2% seems like an anti climax. It is to be hoped September 17th will bring the moment and spare us continued volatility-pumping by the financial TV fan club!

13 Sep 2015

Sense will return to markets

Investors rejoice! Last Saturday was Leger Day; the second part of the old stock exchange saying “Sell in May and go away and don’t come back till Leger Day”! The St. Leger is the last classic race in the English horse racing calendar and the implication is that on Monday, the grown-ups will return and sense will return to markets. India anticipated this in the past week and broke four successive weeks of losses, the Nifty adding 134 points to close 1.8% up at 7789 after trading in a range of 4.3%.  Average daily trading volumes stayed subdued at $2.2bn as FPIs continued to sell, unloading some $500mil of cash equity which was exactly mopped up by domestic institutions. Volatility stayed at a higher level as the India VIX traded up a point to 27 before settling back, eventually closing a point down at 25 on the week. Market breadth was good as advancing stocks outweighed decliners by six to four with gains evenly spread. Nifty futures closed at a modest premium of just 0.8% to cash.

10 Sep 2015

Disappointing corporate results

The first quarter corporate results season was a disappointment overall: the third successive quarter of declines in profits. Gross margins improved but operational leverage was lost because of revenue declines. On an optimistic note, there were signs of demand improving in some consumer and industrial segments. HDFC Bank is leveraging its strong deposit growth to accelerate credit growth by cutting its base lending rate aggressively. The market responded by cutting the share prices in the banking sector fearing margin pressure. Kalpataru Power Transmission has received new orders totalling $140mil from five international projects in Tanzania, Ukraine, Thailand, Tajikistan and Ethiopia, as well as domestic orders from Karnataka PTC and Gail. Ultratech Cement will boost total production capacity to 71.2mtpa by the end of this year. The company is negotiating the purchase of 2.2mtpa of additional capacity from Jaiprakash Associates in Bilal but needs approval from 26% shareholder SAIL. Lupin received final USFDA approval for the manufacture and sale of its Omeprazole delayed release formulation. This is a generic version of Astra Zeneca’s Prilosec ulcer capsule which has a market demand of some $185mil a year.

Indian Oil privatisation, money maker

The government received $1.5bn in privatization proceeds from the share placement in Indian Oil. The Foreign Investment Promotion Board has approved twenty projects worth $200mil in aggregate. The government is to auction 20 major mining licenses in the remainder of this calendar year, to boost investment spending. It will also move to an auction process for offshore oil and gas exploration licenses, to re-invigorate flagging interest in the sector.

9 Sep 2015

Monsoon is a challenge

The monsoon continues to be of concern. Rainfall remains sparse and unevenly distributed and stands at -12% of the LPA for the season. Nonetheless, kharif sowing remains 1% above the previous year: cotton is the weakest at -8% so far but the all-important pulse-cropping is 12% ahead, year-on-year. Reservoir levels are down, however, currently at 58% of capacity, compared to 67% at the same time last year. On a historic note, in years of poor monsoons, when Minimum Selling Price (MSP) increases are low, inflation tends not to be exaggerated; MSP increases are modest this year and commodity prices remain subdued.

8 Sep 2015

Fastest growing major economy this year

Indian GDP growth in the first quarter was 7%, a little lower than expected but still enough for India to be the fastest growing major economy this year. Finance Minister Jaitley has said that recovery to 8-10% is possible with accelerating infrastructure development and a good policy mix. RBI Governor Rajan, in a speech at the Kansas City Fed conference at Jackson Hole, said that whereas many central banks have exhausted monetary policy arsenals, India remains in an accommodating mode. This has raised expectations of more repo rate cuts to come in the remainder of this year. He reaffirmed that India has plenty of foreign reserves to withstand currency volatility and reminded his audience of India’s much-improved fiscal standing.

7 Sep 2015

Moving forward soon

Sustained selling by FPIs was the dominant feature last week, as they unloaded $3.1bn in cash equity. Though the selling pressure fell towards the end of last week. Domestic institutions were the default buyers, purchasing a net $3.4bn. Market breadth was heavy on the sell side, with counters marked down by six to four across the board. Volatility saw a sharp upward spike from recent levels, the India VIX trading up from its low of 17, as high as 36 before settling back to end at 23, for gain of six points.  Nifty futures closed at a premium of 1.1% to cash.

Indian markets have relapsed to a very undemanding valuation level. Thoughtful consideration by equity investors as they return to work should prompt some recovery in appetite between now and year-end. 

Buy low, buy now

After two weeks of China induced vapours in fragile markets we now have had Labor Day and hopefully some more mature minds will bring some stability to markets. Decent US labour market numbers on Friday may dampen interest rate jitters and allow the Fed to address its domestic policy responsibilities without being overburdened by foreign concerns: after all 25 basis points is only a gesture. In the midst of all this, India has suffered from portfolio outflows arising from an exodus from Emerging Market funds. The Nifty has surrendered 645 points, ending up 7.8% down at 7655 after trading in a range of nearly 9%. Daily trading volumes have been heavy but trailed off to a belowaverage $2.8bn.

28 Aug 2015

India: exceptional characteristics

A government panel has found that there is no legal basis for claims for MAT against FII/FPIs, which should put that matter to rest. Monsoon rainfall has fallen back to 10% below the LPA and as the El Nino effect gains strength, prospects now look weak for the rest of the season. Crop sowing, however, is still running ahead of the previous year, so food prices may not be affected. The market will still be subject to August weakness, especially due to external factors but India’s exceptional characteristics should encourage investors.

27 Aug 2015

Positive corporate news in India

Infosys has commenced construction of a 25,000-seat campus in Mohali, which is to be completed in 2018. The company also announced a significant realignment of service offerings across all of its businesses to drive a $2bn boost to revenues by 2020. Lupin has opened an R&D centre for inhalation products in Florida and has received USFDA approval for two dosages of its generic version of Tricor. Nestle India is starting to gain some pushback in the Maggi noodle crisis: the Bombay High Court found in its favour, setting aside the FSSAI ban on sales and questioning the regulator’s authority. Also, in the US, the company’s importer had six samples approved for sale by the USFDA.