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.