8 Dec 2016

Recovery in corporate earnings

A sustained recovery in corporate earnings has probably been postponed by a couple of quarters because of the currency note disturbance. The effect on GDP growth will probably be in the range of 1-1.5% on an annualized basis. The outcome is already well-trailed though: a significant boost to online businesses and the organized sector; acceleration in growth from execution of deferred purchases followed by a recovery to previous growth levels as the fundamental growth story regains traction. The market is holding around the 8,000 level and this may turn out to be a good entry point, in the absence of other outstanding opportunities for investors.

#teva to Aurobindo Pharma

Aurobindo Pharma as contracted to acquire a number of products from TEVA for the French market. These include calcium and calcium vitamin D3 products under the OROCAL trademark. No price was disclosed. Torrent Pharma has received USFDA approval to market its generic versions of two hypertension tablets. Infosys announced two investments by its $500mil Innovations fund: $2mil commitments to a start-up business called UNSILO and a commitment of $4.6ml to a fund managed by Stellaris Venture Partners.

7 Dec 2016

Corporates looking good

Bajaj Auto has commenced production of its new high-end sports motorcycle, the Dominar 400, as it pushes hard to raise domestic market share; it will be launched in the market in December. The company is also developing a mid-range version of this high-end range with a 125cc engine. Lupin’s USFDA application pipeline is starting to show results: its generic version of ViV Healthcare’s Epzicom tablet for the treatment of HIV-1 has been approved. The company has launched a generic version of Cephalon’s Nuvigil sleep disorder tablets into this $515mil a year market. In India, Lupin has signed an agreement with Eli Lilly to distribute its Eglucent rapid-acting insulin treatment through its salesforce.

Q3 growth 5,5%

The government now expects GDP growth in third quarter to be as low as 5.5%, even as the second quarter generated 7.3%. We would expect overall FY17 growth to be in the range of 6.5-6.75% as a result of the currency note shock, about 1%+ lower than previously expected. One of the notable adaptations by consumers is likely to be postponement of discretionary purchases which may drive a surge in demand once the adjustment period is over. There may also be a rise in credit defaults, extending the hardship period but these are most likely to be in small amounts, limiting the impact on banks and NBFCs.

Organized economy expands

The RBI has authorized banks to allow an additional sixty days’ grace on interest payments on low value loans in cases of hardship before recording them as in default. Also, to manage the exceptional inflow of cash to banks, the RBI has instructed banks to hold incremental deposits between mid-September and November 11th as CRR cash reserves instead of using the reverse repo window. This temporary move will be kept under review. The next monetary policy review on December 9th is expected to bring a repo rate cut and the scale of disruption is seen as reason for a 50 basis point cut this time.  In the meantime, newspaper reports suggest that anything up to 75% of the notes affected may already have been exchanged. This is probably an overestimate but after a slow start, the conversion of ATMs to the new notes is progressing, online businesses are enjoying a boost and the black market is being squeezed as the organized economy expands. 

6 Dec 2016

Credit for cash-strapped farmers

Looking for precedents for the scale of the demonetization being managed in India, there have been two previous similar episodes in India, at the time of independence and again in the early seventies. Comparisons might also be drawn with the experience in Ireland in the early seventies, when supply of all currency was severely disrupted by long bank strikes. The emergence of internet capabilities adds a new dimension to the current episode but nonetheless a signature feature is the adaptability of consumers. The government has been very active in responding to specific needs, such as allowing the continued use of the 500 note by farmers for seed purchases to sustain planting of the Rabi crops. Similarly, NABARD, the agricultural bank has been permitted to create an additional $3bn of credit for cash-strapped farmers. The immediate consequence of this is that midway through the season at the end of November, Rabi sowing was 4.6% up on the previous year. 

Nifty moves sideways

The dollar and US equities continued to draw global liquidity, while overseas markets were trying to interpret the policy direction of a Trump government from his cabinet appointments. In the meantime, India continues to adapt to the 'demonetization' of the most common currency notes in circulation. The Nifty 50 moved sideways over the past couple of weeks, adding 13 points to close at 8087 after trading in a range of 4.2%. Investment flows are still dominated by the draw from the US as foreign portfolio investors were net sellers of $1.1bn in cash equity. Strong mutual fund inflows saw domestic institutions buying an equivalent amount. Volatility was a notable feature, the India VIX spiking sharply up from its opening at 18 to a high of 23 before settling back into the high teens, closing where it opened. Breadth was even, with advances and declines in balance. Index futures closed at a premium of 1.2% to cash.

24 Nov 2016

History in profit

In the private sector, TV18 reported that History TV18, one of its joint venture channels, turned profitable in FY16. This does not include any contribution from the later launch of fyi18. These channels compete with Discovery Channel and National Geographic which were launched in India much earlier but History TV18 has the benefit of added local content. Lupin’s US subsidiary, Gavis, has received USFDA approval to market hydrocodone bitartrate acetaminophen painkilling tablets.

23 Nov 2016

Further monetary stimulus

This liquidity effect will sustain a benign background for monetary policy while continued weakness in food prices is pulling CPI inflation below expectations. October CPI was 4.2%, as food inflation dropped to 3.5% from more than 7% the previous month. The softness was confirmed in wholesale prices as the WPI retreated by 0.2% to 3.4% in October. The Index of Industrial Production rose by 0.7% in September, reversing a similar decline in August. The consumer durable sector reported 14% growth and manufacturing was in the black by 1%; capital goods contracted by 14% and mining (mostly coal) by 3.1%. Against this background, the new RBI MPC is confidently expected to add further monetary stimulus with a repo rate cut in December. 

Surge in non-cash transactions

The big currency reform combined with foreign investor sales continued to be the dominant market influences as investors struggled to come to terms with the withdrawal of the most common notes in circulation. About 22% of the notes affected, with a value of some $44bn have been exchanged and an additional $7bn of new notes have been withdrawn through ATMs. Consumers appear to be hoarding lower denomination notes (Rs50/10) to allow essential purchases in corner stores to be maintained. There has been a decisive surge in non-cash transactions, as online grocery sales have surged. The online COD (cash on delivery) business has slowed but no pattern has emerged yet and it may take two to three months for this to happen. Early reports suggest a slowdown of about 15% in sales at malls and markets and 20-30% at restaurants. The RBI will progressively raise cash withdrawal limits as production of new notes rises to match demand. In an interesting side effect, the central bank reports a surge in liquidity from reverse repo activity as banks park the flood of cash coming over their counters.

22 Nov 2016

Heidelberg, Kalpataru, Aurobindo; all up

Second quarter results continued to flow as the season comes to a close. Heidelberg Cements reported sales ahead by 13.5% and a substantial profits turnaround making comparisons not meaningful. Kalpataru Power Transmissions reported sales ahead by 20.7% as its record on executions continues to improve; profits advance by 40.9% as margins improve on newer contracts. Aurobindo Pharma reported sales growth of 13.2% and profits higher b 34.1%. VIP Industries reported a decline of 3% in sales in difficult demand conditions and profits were 4% lower as  advertizing expenditure was maintained. Indraprashtha Gas reported sales ahead by 12% and profit growth of 42% as raw material costs and product mix boosted margins.

21 Nov 2016

India nervous, but looks good

The medium term outlook for Indian markets is largely unchanged and completion of the currency reform adjustment may bring a compensating surge in consumer expenditure after a few months. In the meantime markets will continue to be nervous, but may get a boost from additional monetary stimulus in early December.  

Investors betting on 'Trumpenomics'

Global investors seem to be betting on the US economy moving into a higher gear under 'Trumpenomics', driving the dollar ever higher and holding US equities near historic peaks. The great sucking sound is liquidity being pulled out of other markets. India had a fourth week of declines as investors struggled to get to grips with the great currency reform. The Nifty gave up 218 points to close 2.6% lower at 8074 after trading in a range of 3%. Daily trading volumes stayed at recent elevated levels, averaging $4.3bn with heavy selling of $884mil by foreign portfolio investors while domestic institutions absorbed $590mil in net cash equity purchases. Volatility was fairly resilient as the India VIX traded mostly in the high teens, with one spike to 21 before settling back to 18, for a gain of one point on the week. Selling was across the board with some concentration in stocks perceived as most exposed to cash transactions, such as consumer discretionary and real estate. Nifty futures closed at a premium of just under 1% to cash, reflecting uncertainty over the enduring effects of the currency reform.

16 Nov 2016

Foreign Direct Investments increased by 30%

Official figures show that even as foreign portfolio investors were substantial net sellers of Indian shares in the first half-year, Foreign Direct Investments (FDI) increased by 30% to $21.6%. First half data on tax collection show direct tax collection increased by 10.7% and indirect increased by 26.7%. In an interesting footnote to these figures it was disclosed that in income tax, only 300,000 taxpayers contribute $49bn, or 74% of the total income tax revenue from a total of some 40 mil income tax payers. To keep up pressure for a rapid implementation of GST the government is drafting a GST Compensation Law for presentation to the GST Council in time for consideration at its next meeting on November 24-25.

Short period of disruption

During an amnesty period through December 31st. Banks, under instructions from the RBI, will be monitoring holders cashing in amounts of more than Rs200,000 as well as checking authenticity of bills. Overall, however, after a short period of disruption, the medium term benefit is expected to be a clean-up of the black economy which the World Bank estimates at as much as 25% of GDP. In addition, the move is seen as a boost to electronic payments systems, leading to an increase in the organized economy as well as boosting the collection of taxes. In the short-term, the large cash sector of the economy will suffer and extreme volatility in liquidity around elections will be eliminated. 

15 Nov 2016

New design banknote

Returning to the major reform theme of restraining the “black economy”, the government this week took the dramatic step of cancelling the most heavily used currency notes, the 500 and 1,000 Rupee denominations, as legal tender, with immediate effect. These notes represent some 87% of the notes in circulation and will be replaced by a new design of R500 note and a completely new denomination of R2,000. The withdrawn notes were seen to be the most-counterfeited and widely-used in black market transactions. The reform will be fairly disruptive at first as holders attempt to cash in their holdings at banks 

Family coup, US properties, drug approval

Second quarter results continue to flow. Indian Hotels, one of the Tata Group companies in the spotlight following the family-led coup against the first non-family Chairman, Cyrus Mistry, reported sales up by 6% as it leveraged new channels for generating sales. Losses were cut by half as margins improved but more importantly, net debt was cut by 25% as sales of overpriced US properties proceeded. Lupin reported sales up 31.9% and profits up 57.8% as strong US sales and a strong ANDA drug approval pipeline drove sales in the US market. Pidilite Industries reported sales growth of 6.6% and profit growth of 17.1% ahead on the strength of sustained input cost benefits.

New banknotes good against corruption

By the end of the week, this structural reform was perceived as beneficial overall, as an attack on corruption, counterfeiting and the financing of terror. Later more on the new banknotes.

Adjust portfolios

This week may see a continuation of last week’s volatility as investors try to figure out the path of the US economy under a Trump Presidency and adjust their portfolios accordingly.

14 Nov 2016

Trump swings markets

The election of Donald trump as President of the US was the major event of the week as global markets saw wide swings but largely settled down by Friday. We got a new catch-phrase though: a “reflation trade frenzy” is forecast as a conciliatory tone from the President-elect fueled hopes for tax cuts, infrastructure investment and a recovery of inflation. India had its own rollercoaster ride with the Nifty briefly falling to 8,000 before recovering its composure. In the end, the Nifty shed 138 points on the week, to close 1.6% lower at 8296 after trading in a range of 3.8%.  Average daily trading volumes jumped sharply to $4.4bn as FPI selling followed the global 'risk-off' reaction into selling $366mil in net cash equity. Domestic institutions were heavy net buyers, investing $425mil. The India VIX also reflected the global sensitivity, trading up from its opening of 17 to spike at 23 mid-week before settling back to close where it opened. Market breadth was quite tight, with declines outpacing advances by just five to four. At the close, Nifty futures were trading at a premium of 1.7% to cash.

10 Nov 2016

Catch a falling piano!

Last week Lupin announced that it had received USFDA approval to market a generic version of  Janssen Pharmaceuticals’ Otrho-Cyclon 28 oral contraceptive tablets to be manufactured at the company’s Pithampur facility. In the coming week we are likely to see equity markets cowering under cover until the outcome of the Presidential election is clear before reacting one way or the other. There is no clear consensus on how the markets will react either way, so the best tactic is probably not to try to catch a falling piano! 

Pharma under investigation

An investigation by the US Department of Justice into suspected price collusion in the Pharmaceutical industry caused significant losses amongst stocks in the sector worldwide, including India. The focus of the investigation is producers of generic drugs, which are intended to cut the cost of healthcare or routine treatments. More than a dozen companies and about twice that number of treatments are in focus. A grand jury is examining whether industry executives agreed together to increase prices and charges may be filed before the year-end. Only one Indian company, Sun Pharma, was served with a subpoena and most companies are cooperating with the investigation. The treatments under investigation include a heart treatment and an antibiotic. US lawmakers have been sharply critical of drug pricing in the past year because of dramatic price rises for some popular treatments and, notably Mylan for a six-fold increase in the price of Epi-pens for the treatment of anaphylactic shock. 

9 Nov 2016

Middle clas consumers are the economy

The GST oversight committee has determined that there will by four tranches of GST: 5, 12, 18 and 28%, with an additional premium (cess) payable on some luxury goods to help fund central distributions to states. About 50% of the CPI base will be taxed at 0%, including essential foodgrains and certain mass consumption goods. The kind of consumer goods typically bought by middle class consumers will probably fall into the 18% tranche. The kinds of goods which will attract the additional cess include luxury cars, tobacco and aerated drinks.

8 Nov 2016

Nikkei India Manufacturing on 22 month high

Reflecting a sharp increase in industrial activity, the Nikkei India Manufacturing PMI rose to a 22-month high of 54.4 in October, up from 52.1 the previous month. The Services PMI rose to 54.5% from 52 in September. Core sector growth was 5% in September after 3.2% in August and 3% in July. Out of the eight core sectors, Coal, Crude Oil and Natural Gas production were negative but Refining rose 9.3%, Steel production jumped by 16.3% and Cement production rose 5.5%. 

7 Nov 2016

Trump Terror gives global ripples

'Trump Terror' hit as global financial markets got the vapours over the US Presidential election. It can’t be all bad though: somewhere during the campaign he promised to repeal FATCA, the bane of financial businesses worldwide! The US market has been on an eight day losing streak and world equity markets have reacted in sympathy. In India, the Nifty50 surrendered 204 points to close the week 2.4% lower at 8434, after trading in a range of 3.3%. Average daily trading volume was stable at $3.7bn while foreign portfolio investors were net sellers of $225mil in cash equity. Domestic institutions were buyers of $170mil on the back of sustained inflows to domestic mutual funds. Volatility edged higher though the India VIX remains in the teens. It opened at 15, traded down briefly before moving up to 17, where it spent the rest of the week. Market breadth was on the downside, with declines running five to one ahead of advances; the Healthcare sector came under particularly strong selling pressure. The week closed with Nifty50 futures trading at a premium of 1.5% to cash. 

Maggi Noodles, Firstsource Solutions, Brexit

We had two second quarter results of interest. Nestle reported sales ahead by 35.1% and profits by 81.1%. The profits are not really comparable as the company continues to recover from the Maggi Noodles additive controversy. The power of a global brand is underlined however by the success of the company’s aggressive marketing response. Maggi Noodles have already regained a 60% market share as it heads back to its former 80% level. It is also notable that the response includes focusing on premium product launches which are good for margin improvement. Firstsource Solutions reported 14% growth in revenues in constant currency terms but the outlook is clouded a bit because its largest client is billed in sterling and thus exposed to Brexit-driven currency volatility. Profits were 21.5% and the company announced a ten-year extension to its contract with one of its largest healthcare clients in the US, worth $40mil.

3 Nov 2016

Boosting profit margins

Torrent Pharma had a poor quarter: sales in the US were reduced as a key drug encountered increased competition, a development well notified in advance. Sales overall were down 15% and profits by 56% as the company awaits four new generic approvals in the US, including two in November. Agro Tech Foods reported sales up by just 0.8% but sustained improvement in operating metrics brought an increase of 41.3% in profits; the company’s new product investment strategy is boosting profit margins.  Finally, Supreme Industries reported sales ahead by 14.1% and a jump of 80.3% in profits.

Government and credit cards

The government is proposing four levels of GST are adopted by the Oversight Council: 6, 12, 18 and 26%, the highest being applicable to luxury goods. There is also a proposal that a state-level 'cess' apply to certain specific luxury items. The Council has deferred a decision to its post-Diwali meeting in early November. Meanwhile, some 3.2 million credit and debit card users in India are at risk from a major data hack at processing centres.

Best managed private sector banks in the country

We are quite well into the second quarter results, with quite a number of our stocks having reported. The IT sector led the way and TCS came first: reporting sales ahead by 7.8% year-on-year and profits up by 8.8%. Infosys reported an increase of 10.7% in revenue and 6.1% in profit. The revenue guidance for the sector majors continues to be unexciting. HCL Techno reported sales ahead by 31.9% but margin pressure was reflected in profits ahead by just 1.4%. Our banks continue to do well; HDFC Bank reported an increase of 15.6% in net interest income and 20.4% in profits. Kotak Mahindra Bank’s numbers show continued benefit from the acquisition of ING Vysia Bank with net interest income ahead by 25.1% and profits by 27.7%. These two are still the best managed private sector banks in the country. 

2 Nov 2016

US, Brexit, Japan

US economic news improves steadily with bond traders now backing a December rate increase while Brexit continues to roil Europe and Japanese stimulus efforts continue to fall short. Equity markets have been mostly steady and Indian stocks have been mostly range-bound just above 8,500 on the Nifty. The benchmark index has surrendered 60 basis points to close 0.7% lower at 8638 after trading in a range of 2.6%. Average daily trading volumes have stayed within range of the twelve-month average at $3.6bn while foreign portfolio investors have been steadily cutting their exposure, being sellers on $697mil over three weeks. Domestic institutions took up the slack, investing a net $922mil. Volatility was steady, the India VIX trading up initially from 14 to a high of sixteen before settling back, to close at 15 for a gain of one point. Market breadth was weak, with advances just outrun by declines. Nifty futures closed on Friday at a premium of 1.1% to cash.

India media is doing well

The media sector holdings in the Himalayan Fund portfolio are doing well; Shemaroo Entertainment reported revenue ahead by 21.4% and profits by 35.5%. TV18 reported revenue ahead by 22% but recorded a small loss due to costs arising from new channel launches and integration of two acquisitions: Prism TV and Viacom 18. Bajaj Auto reported sales ahead by just 0.4% as exports in key markets came under pressure but profits advanced by 6.7% as domestic market share gains boosted margins.

1 Nov 2016

Inflation in the right direction

The August Index of Industrial Production was down by 0.7%; although this was a second successive decline, the pace has slowed from -2.5% in July. September’s CPI was 4.3% a sharp reduction from the previous month’s 5.1% and entirely due to much lower food price inflation, especially in vegetables, which was down 7% and pulses. Wholesale price inflation (WPI) was 3.6% in September compared to 3.7% the previous month.

31 Oct 2016

Corporate action in India

In the private sector, Torrent Pharma have invested $28mil for a 75% stake in a start-up enterprise, PurO Wellness. Infosys has agreed a cooperation agreement for its Finacle branded Banking and Financial Services platform to provide a blockchain network for ICICI Bank and Emirates NBD to process remittances and trade finance. HCL Techno has spent $85mil to acquire US company Butler Aviation to expand its footprint in the aviation sector. The price represents one year’s sales for Butler. Nestle India disclosed that it Maggi brand is rapidly recovering market share following the product ban in 2015 for alleged ingredient rule breaches.

12 Oct 2016

#india: strong consumer confidence

We are approaching the second quarter results season, in which we may see evidence of inventory-building in anticipation of a bumper festival season. There is already evidence of strong consumer confidence arising from the seventh pay commission awards and the expectation of an excellent kharif harvest feeding through to sales of two- and three-wheelers. Improved execution of public sector infrastructure projects is also evident and this may eventually be the spark for a recovery in private sector investment as excess capacity gets absorbed through the rest of this fiscal year and the first half of the next. With the new MPC laying out a path to fuirther monetary easing, the outlook for Indian equities looks assured.

11 Oct 2016

Corporates in India look good

Kotak Mahindra Bank has acquired, subject to regulatory approval, the microfinance non-bank financial company BSS Microfinance, for an outlay of $20mil. This acquisition will give the bank access to 217,000 customers through a branch network of 78 outlets. Aurobindo Pharma has dropped out of the bidding for the UK & Ireland portfolio of TEVA, the Israeli pharmaceutical operator. The company is still working on two prospective acquisitions in Europe. Lupin Pharmaceutical Inc., Lupin’s US subsidiary, has entered a strategic licensing agreement with MONOSOL RX. Lupin will develop multiple pediatric products for delivery through Monosol RX’s Pharmafilm technology which provides quick-dissolving, taste-masked and easy to administer delivery. The technology already has two USFDA approved products and a robust pipeline of applications. Staying in the US, Pidilite has recalled Tempra and Finger paints from the market due to quality concerns. The recall is not significant for the company in financial terms.  

10 Oct 2016

Something new: Public Debt Management Body

The Finance Minister has announced that the RBI’s role in debt management will be eliminated over a two year period to remove a perceived conflict with its role in setting interest rates. Initially a new cell will be established to handle debt management, which will eventually be formalized in a statutory Public Debt Management Body. The government has raised $3.2bn in proceeds from disinvestment in the first half of the current fiscal year; this is the highest total ever raised in a comparable period. The September Services PMI retreated to 52 from the recent high of 54.7 seen in August. 

India monetary stability

The big news of the week in India was the first meeting of the newly constituted monetary policy committee (MPC), which concluded with a unanimous decision to cut the repo rate by another 25 basis points, to 6.25%. The accompanying briefing brought some subtle clarifications, such as that the inflation target of 4% with a 2% upside margin was now a 'medium term target' rather than an objective with a fixed target date. Also, the target for real interest rates was established at 1.25%, instead of the previous range of 1.5-2%; this leaves scope for further repo rate cuts to come. Risk to India’s external balance arising from the redemption of FCNR deposits was played down as the first phase of redemptions has not affected liquidity and reserves remain at a record level of $370bn. Finally, it was noted that the accumulation of non-performing loans in the banking sector is slowing.

9 Oct 2016

Advances ahead of declines by four to one


Presidential campaigns and hurricane Matthew dominated US news, as soft job-creation and a downward revision of earlier numbers provided a backdrop to the US rate debate. The week ended with a 'flash crash' in sterling as the British currency continued to bear the brunt of reaction to Brexit. In India, the Nifty pushed slightly higher, adding 86 points to close 1% up at 8698 after trading in a range of just 2%.Foreign portfolio investment was sustained with net buying of $146.5mil in cash equity. Domestic investors were sellers of a net $67.4mil. Average daily trading volume subsided from recent levels, to $3.5bn. Volatility also retreated: the India VIX opened at 17, the high for the week and then retreated to close at 14 for a fall of three points. Market breadth was strong with advances ahead of declines by four to one. Nifty futures closed at a premium of 1.4% to cash.

6 Oct 2016

Monsoon on normal level

The monsoon season is coming to an end and the IMD is forecasting that the final outcome will be 'normal' even if a little below the long period average overall. The slowdown in precipitation came too late to impair crop-sowing, so a bumper Kharif harvest is expected to boost rural consumer demand while the public sector pay awards do the same for urban consumption.  The effects of these factors are expected to be reflected in third quarter earnings and capacity utilization rates.

5 Oct 2016

Nestle versus Cadbury and Ferrero Rocher

Pidilite has tied up with WD-40 to distribute a multi-purpose lubricant spray in India. Lupin has received USFDA approval to market its generic version of memantine hydrochloride extended release capsules for treating Alzheimer’s disease. Nestle India has asked the Supreme Court for permission to destroy 550 tonnes of instant noodles recalled in the recent additive controversy. They have passed their sell-by dates and represent a health hazard in the 39 locations where they are stored. The company is launching its European brands of premium chocolate in India to take on Cadbury and Ferrero Rocher. Bajaj Auto expects a 15% volume boost in domestic sales in this year’s festive period compared to flat sales last year. Exports will continue to be held back by Nigeria which is not recovering. Bajaj will launch a new 400cc bike in November.

India, second biggest market in the world

India has climbed 16 places in the World Economic Forum’s Global Competitive Index to 39th place. This is due to improved business sophistication and good market efficiency. Indian has overtaken the US to become the second biggest internet market in the world with 333 million users, behind China which has 721 million. The Bank for International Settlements rates India’s vulnerability to banking distress as lower than other major economies, because of a lower credit to GDP gap. China is rated much worse in the sample of 40 countries examined.

NDA reform works!

Elsewhere, there are good signs of life in the NDA reform programme. The GST Oversight Committee has moved aggressively on its agenda for implementation; it has already agreed on one major component: minimum thresholds have been agreed for the new nationwide tax. The committee has now moved on to its next priority: setting the uniform national rate and a decision is not expected to take long. Meanwhile, the government is planning to double the number of benefits paid through Direct Benefit Transfer (DBT) to 147 by the end of this fiscal year in March. Pilot schemes are already under way on paying kerosene, food and fertilizer subsidies. The Union Budget process has been modernized: the railways budget will be cancelled and the date for presentation of the Union Budget will be advanced to the beginning of February.

4 Oct 2016

Indo-Pak strife

The Indo-Pak strife over Kashmir blew up as Indian forces conducted a punitive strike against camps in Pakistan suspected of harbouring terrorist groups responsible for the deaths of 18 Indian troops in recent raids. This is unlikely to escalate beyond vacant threats, such as from a Pakistani politician threatening to use nuclear weapons in retaliation. It is worth remembering that that by maintaining a high expectation of a security threat from India, the Pakistani military is able to keep a strong hold over the government. At the same time, being in the process of a major long-term re-equipment programme, India is not really prepared for a major escalation.

3 Oct 2016

Up and down, but positive

In a kind of 'back-to-school' period, interest-rate bears were disappointed by central bankers maintaining accommodation as the US heads for a least-worst Presidential election, Europe adjusts to Brexit and global growth plods along. Over the past couple of weeks the Nifty has see-sawed in a trading range, closing with a drop of 169 point or 1.9% to 8611, after trading in a 4% range. Foreign portfolio investors were a bit shy in the earlier part but then stepped up, buying a net $467mil overall. Domestic institutions were also net buyers, of $320mil in cash equity. Average daily trading volume was up again at $4.1bn, but trending higher recently.  Market breadth was not great, with advances barely outrunning declines and some random volume spikes. Volatility was low and stable at first, the India VIX trading the 13-15 range before spiking up to 19 in the last couple of days before settling back to close at 17 for a gain of 4 points. Nifty futures had a volatile settlement day before closing at a premium of 1.3% to cash on the new three-month contract.

HCL Tech boost

HCL Tech will boost investment in Social Mobility Analytics and Cloud (SMAC) applications; these currently take about 60% of annual investment which is expected to rise to 80-90% by 2019/20. Infosys unveiled an innovative mobile modular platform to drive e-commerce programmes across retail channels.

22 Sep 2016

Surge in consumer demand

In India, the monsoon season is stuttering to an eventual close at slightly below the Long-Period Average, but the shortfall came too late to prevent a bumper cropping season. So we can look forward a surge in consumer demand driven by farm incomes in rural areas and the fruits of the seventh government pay commission in urban centres. Corporate earnings in the present quarter may only have the benefit of recent deleveraging by companies but earnings visibility improves thereafter.

21 Sep 2016

Plus for cement

Lupin’s US ANDA pipeline is starting to see a succession of USFDA approvals. Its US subsidiary Gavis has received approval for its Azythromycin oral anti-bacterial syrup. The company also received approval for a generic version of Paroxetine extended-release anti-depressant tablets and for generic Moxyfloxacin anti-bacterial tablets. Torrent Pharma is on of a sort-list of three final bidders for zinc-based branded products owned by Apex Labs in India. HCL Techno announced a partnership with Mesosphere, a data infrastructure company, to provide unified operational experience as well as optimal resource allocation for customers. Heidelberg Cement expects to see sustained growth in shipments following the monsoon as demand in its Central region market expands with little new capacity development and resulting price pressure.

19 Sep 2016

Government focus on reviving public sector

First quarter GDP was reported to be 7.1%, somewhat lower than expectations.  Strong contributions from Manufacturing (9.1%), Services (9.6%) and Community, Social and Personal expenditure (12.3%) were offset by weak numbers in Mining (-0.4%), Construction (1.5%) and Agriculture (1.8%). Growth of 18.8% in gross fixed capital formation reflects the government’s focus on reviving public sector investment. Subsequently, July’s IIP contraction of 2.4% reflected the weak Mining sector as well as continued weakness in the Capital Goods sector.

Beware of volatility vultures

“Sell in May and go away and don’t come back till Leger day” is an old saying in the London market which has been adopted more widely in recent years and for the benefit our readers, last weekend was Leger day. In principle we should see markets regain some momentum through year-end. In the meantime we have to run the gauntlet of various 'black' trading day anniversaries in October as volatility vultures try to generate profits by inducing successive periods of market tremors until the Fed eventually moves policy rates by a quarter of a percent. 

Glory for the fiscal balance

The crowning glory for the fiscal balance has been the eventual passage of the GCT Bill. Ratification by a majority of states has brought Presidential assent, allowing the establishment of the oversight GST Council, which will set the standard rate and oversee implementation.

Market obsession with monetary policy

As the summer vacation period came to a close, global equity markets returned to their obsession with monetary policy and in particular their speculation about the imminence of a Fed funds rate increase. In India, the RBI passed into the hands of a new governor, apparently set on a consistent course of policy. The markets traded steadily in the top half of the 8,000s with foreign buying providing a safety net. The Nifty added 207 points or 2.4% to reach 8780 after trading in a range of 5%. Average daily trading volumes rose appreciably, to $4bn, compared to a trailing average of $3bn. Foreign portfolio investors bought a net $437mil in cash equities while domestic institutions were net sellers of 461mil. Market breadth was strong, with advances outrunning declines by two to one. In the index options market, open interest expanded strongly at 9000 for calls while puts were concentrated at the 8600 level. Nifty futures are trading at a premium of 1.3% to cash.

More tax comming in

In August, the PMI numbers showed strength however, with Manufacturing reporting 52.6 and Services maintaining strength with a rise to 54.7. The impact and volatility of food prices in the CPIU index can be seen from the latest reported numbers: overall CPI was 6.1% in July, driven heavily be vegetable and pulse prices. In August, CPI retreated by a full percentage point to 5% as vegetable prices fell sharply while pulses moderated. Direct tax collection grew robustly in the first quarter, rising by 15% to $28bn on accelerating personal income tax collection. Indirect taxation grew even more strongly, by 27.3% to $50.8bn driven by growth and excise collection.

1 Sep 2016

Agricultural looks good


The Nikkei Purchasing Manages’ Index numbers for July showed improvement. The Manufacturing number was 51.8, up slightly on June and the Services number was 51.9, up from 50.3 in June. Core sector growth was 5.8% in June, up from 2.8% the previous month. In June the Index of Industrial Production increased by 2.1%, the best number since December 2015. Inflation numbers confirmed the concerns at the RBI: CPI rose to 6.1% in July, up from 5.8% in June. WPI maintained its advance out of deflationary territory, rising to 3.6% in July after 1.6% in June. The dominant contributor was food prices. The monsoon settled back in August, such that rainfall in the season so far is equal to the Long Period Average. Precipitation in September is expected to be no more than normal, so the final outcome will be lower than optimistic forecasts but normal nonetheless. The final outcome is largely irrelevant however, as the geographic and temporal distributions have enabled bumper cropping, ensuring an excellent kharif harvest. Prospects for the second, Rabi crop, which is dominated by wheat, will depend on water table replenishment, which has been good and reservoir levels which are recovering.

31 Aug 2016

Reserve Bank of India: focus on stability


The August monetary policy review resulted in no change to policy rates. The accompanying commentary emphasized a continuation of the central bank’s accommodative stance as well as the long-term inflation target. However, it also highlighted that short term risks to inflation were on the upside because of a temporary hardening in food prices, the consequence of two previous years of drought. An additional $1.5bn of liquidity was injected into the market by open market operations to ease the impact of the impending maturity of $20bn of NRI currency swaps. The government announced the appointment of Urjit Patel erstwhile deputy governor, as the new governor of the Reserve Bank of India. This appointment presages stability at the central bank and a continuation of the policy approach of Raghurav Rajan, with a lower profile.

India equities still looking good


Consistent monetary policy and GST reform combined with the expectation that implementation of the seventh pay commission recommendations and a normal monsoon will boost consumer demand as the year progresses are underpinning India markets. Evidence of companies using free cash flow to reduce leverage may drive revisions of earnings estimates for the current year, limiting downside risk in the market, in the absence of eternal shocks. Indian equity return prospects look good.

Corporates making progress


Infosys has invested $4mil in the Israeli company Cloudyn to provide support to customers migrating from legacy IT infrastructure to cloud applications. The company also announced the cancellation of a five year, $335mil contract for building IT infrastructure for RBS, which has cancelled its flotation of a separate bank named Williams & Glyns. The decision affects 3,000 staffers. TCS has paid $26mil to settle a long-standing lawsuit with Orange County California. Lupin has acquired a portfolio of 21 drugs from Japanese owner Shionogi for $150ml, to expand its market share in the country. The company’s US subsidiary Gavis has received approval for two generic launches: an extended release capsule of potassium chloride and a treatment for bacterial infections. HCL Techno has received Competition Commission clearance for a stock swap which will allow completion of its acquisition of businesses from Geometric.

Positive surprises


We have seen the late season results in the portfolio of our fund that mostly surprised on the upside. Shemaroo reported sales ahead by 23.5% and profits ahead by 19.5%. Indian Hotels saw an increase of 5.6% in sales and profits up by 5.4%. Sales at Lupin rose by 40.3% and profits by 68%. In the IT Sector, HCL Tech reported a rise of 15.9% in revenues and 15.3% in profits. Finally we had two companies report flat sales but strong growth in profits. Kalpataru Power Transmissions reported a 33.3% jump in profits, including a substantial reduction in interest costs. Indraprashtha Gas reported a 44.3% jump in profits in the first quarter.

Modi driver of reform


In the monsoon session of parliament, the Lok Sabha passed a Bill providing for accelerated recovery of bad loans by banks. In the Rajya Sabha, the government finally engineered passage of the GST Constitutional Amendment Bill. This paves the way for a long series of state and Union level legislation to implement GST and put in place a single market in indirect taxation in India. Execution is scheduled for April 1st, 2017 but in practice is likely to take somewhat longer. Nonetheless, this political achievement will restore the Modi government’s reputation as a driver of reform.

Direction sideways


Equity markets have mostly moved sideways in August as senior traders went on vacation and those left behind hung on the reports from the central bankers’ summer camp at Jackson Hole. India, as expected moved in sync as the Nifty50 traded in a range of 3% before closing down 266 points at 8573. Strong sentiment held the index above the 8500 level. Volatility was stable in the low teens, the India VIX trading between 12 and 16 before closing at 14 for a drop of a point. Stock price movements were pretty much results-driven: prices typically falling on the announcement before recovering on mature consideration. Nifty futures are trading at a premium of about 1%.

16 Aug 2016

Natural gas in India, time to boost

India has discovered large highly enriched accumulations of natural gas hydrates in the Bay of Bengal which are capable of being exploited. The GST constitutional amendment bill has been under intense negotiation between the states and central government since the Monsoon Session of parliament got under way, The Bill may be tabled in the Upper House this week if the government thinks it stands a good chance of passing. This would give sentiment a good boost and potentially sustain the surge of foreign interest in Indian equities.

15 Aug 2016

While central bankers sit on their hands

Equity markets have been stable while central bankers have sat on their hands. The US economy is showing new signs of strength, prompting the Fed to hint at the next interest rate move, while Japan and Europe are still in need of more policy stimulus. In India meanwhile, we had a flat week followed by a 98-point rise as a surge in foreign interest drove the Nifty up to 8639 for a gain of 1.1% after trading in a range of 2.4%. Foreign portfolio investors were net buyers of $822mil in cash equities as domestic investors sold a net $439mil. Market breadth was strong with advances outrunning declines b more than two to one and buying spread across the board. Volatility was stable with the India Vix trading down from its opening of 16 to a low under 12 before closing at 15 for a fall of a point. Strong buying drove the index futures to close at a premium of 1.6% to cash, the highest premium for some time.   

9 Aug 2016

No interest rate cut, RBI says


The outgoing RBI governor has ruled out an imminent interest rate cut due to inflationary pressures arising from food prices, which have been rising following a succession of weak harvests. The nomination of a successor to Raghuram Rajan has been pushed back until after his final review of monetary policy, due in the first week of August. This year’s kharif sowing is progressing strongly as the monsoon rains continue to match early optimism. Overall rainfall had reached 100% of the long-period average by July 28th. A slight deficit nationally in the latest week prevented the average being in excess to-date but the forecasts for geographic coverage and overall precipitation continue to be good through August. Reservoir capacity is now also recovering from drought conditions and has reached 34% after being in the teens only two weeks earlier.

1 Aug 2016

Torrent Pharma looks at Europe


Torrent Pharma is one of a group of bidders negotiating to acquire a portfolio of European products being offered for sale by TEVA. Lupin has launched two generic oral contraceptives in the US market on receipt of USFDA approval. The company has also received initial approval for a generic version of Lexiva tablets which have market sales of $76mil a year. Lupin is also in negotiations with two Japanese producers to acquire their portfolios of off-patent medicines.

26 Jul 2016

Mixed basket: ups and downs


Elsewhere, Heidelberg Cement reported sales ahead by 7.2% and profits ahead by 79%. Bajaj Auto, facing severe competitive headwinds at home and currency translation issues on exports, reported sales up by 3.5% but profits down 3.6%. Torrent Pharma reported a drop of 20% in sales as one of its big selling generics in the US market lost its exclusivity; profits were 53.9% lower as a result. Supreme Industries’ results reflected a change in its accounting period and policies which produced a drop of 6.7% in sales and 28% in profits. Finally, Firstsource Solutions reported a gain of 20.5% in revenues and 38.5% in profits as it displaced competitors to gain exclusive IT provider status with SKY.

25 Jul 2016

Corporaal results look good


In mid-season for first quarter results, we have quite a few which are of interest. Banks have proven to be as consistent as we expect. HDFC Bank reported net interest income growth of 21% and profits ahead by 20%. Kotak Mahindra reported NII growth of 22% and profits, after consolidation of its acquisition, ahead by 291% as it benefits from synergies. In the Consumer Sector, Agro Tech Foods reported an increase of 5.1% in sales and a gain of 32.9% in profits. Sales at Pidilite were 6.8% up and profits grew by 16%. Nestle India continued its recovery from the Maggi Instant Noodles controversy with sales ahead by 16.7%. Profit comparison is not meaningful on an annualized basis but was ahead by 14% on the quarter.

21 Jul 2016

India, all systems go!


Last week we thought the Nifty would be trading in a range in the mid 8,000s and it promptly move quite firmly above 8,500! The Monsoon Session of parliament starts next week and the Congress party, which has used its rump power in the Upper House to block the GST Bill, has announced that it will now support passage. Investor sentiment is only likely to improve on the back of favourable political winds and economic reform. 

20 Jul 2016

Optimistic monsoon forecasts


This year’s monsoon has continued to justify optimistic forecasts. Rainfall has now extended to cover the entire country and in the latest week reached 11% above the LPA. This brought the seasonal average for the ear-to-date to 102% of the LPA. Twenty-nine out of thirty-six regions have reported normal or excess rainfall this year to-date. July and August are the crucial months for kharif crop sowing and early reports indicate sowing is proceeding at a good pace, especially in grains and pulses.

19 Jul 2016

Indian corporates continue to develop


In the private sector, it is reported that the USFDA is accelerating the approval process for ANDA applications, with the idea of reducing the mean approval timeline to eighteen months. It is hoping to clear a backlog of applications which would be good for competition in the market but perhaps not so good for producers’ margins. Meanwhile, Lupin confirmed that the USFDA July 2015 inspection file at its Goa plant has been closed. The company has warned however, that some routine matters arising from a March 2016 inspection of its Dhabasa plant in Gujarat remain outstanding. Indian Hotels announced the completion of the sale of its Ritz-Carlton Boston property for a net consideration of some $125mil, which will be used to reduce debt.

First quarter GDP indicates growth, 7.9%!


With shortages arising from a couple of weak monsoons, food price inflation has accelerated, bringing an increase in the Wholesale Price Index for June from 0.8% the previous month to 1.6%. The Consumer Price Index was stable at 5.7% as the jump in food prices was balanced by soft numbers in other categories. The Index of Industrial Production advanced y 1.2% in May, boosted by a 6% gain in consumer discretionary categories but offset particularly by another lumpy decline in Capital Goods, down 12.4%. As an indicator of improving economic conditions generally, indirect tax collection accelerated by 30.8% in the first quarter against a budget projection of 10%. A flash report on first quarter GDP indicates growth of 7.9% annualized against widespread expectations in the low 7s percent. As some states struggled with the tail-end of two years of weak rainfall, the statistics for NREGA, the rural employment guarantee scheme make interesting reading. The scheme generated 790mil man-days of work in the first quarter of this fiscal, compared to 548mil the previous year. A surge in numbers in the drought-affected states of Uttar Pradesh, Karnataka, Rajasthan and Tamil Nadu drove the increase.

18 Jul 2016

Strong results IT sector


The first quarter results season kicked off with our interest concentrated in the IT sector. TCS reported sales ahead by 14.2% year on year and profits ahead by 10.7%. Revenues from the Financial and Retail sectors were weaker than expected even though operating margins were better. Brexit is expected to dampen discretionary IT expenditure by clients in the short term. Infosys declared a 17% increase in revenues and a 13% increase in profits. The company reported headwinds in discretionary client spending and foresees some slowing in revenues from consulting services and implementation of applications packages.

17 Jul 2016

Solid market, looking good


Strong data on retail sales and industrial production in the US underpinned a strong surge in US equities, driving markets to another high as a potential Italian banking crisis and geopolitical clouds overshadowed foreign markets. India’s markets also enjoyed sustained upward momentum in spite of a weak start to the earnings season. The Nifty added 218 points to close 2.6% up at 8541 after trading in a range of 3.3%. Average daily trading volume moved well above the trailing average at $3.5bn as foreign buying increased to a net $362mil in cash equity. Domestic investors supplied a net $301mil of the rising FPI demand, Volatility remained in stable in the mid-teens as the India VIX traded down to 14 before closing a point higher on the week at 16. Market breadth was very strong with advances outrunning declines by four to one; the downside was heavily dominated by the IT sector where weak forward guidance prompted heavy selling action. Index futures again traded at a premium of more than 1% to cash.

14 Jul 2016

Positive and strong corporate news in India

In the private sector, Torrent Pharma announced the acquisition of the bulk drug manufacturing facility of Glochem Industries at Vishakhapatnam, as well as some drug master files. Lupin received its USFDA Establishment Inspection Report, providing closure on the March 2015 inspection of its Goa plant. It also reported settlement of several minor comments from a follow-up inspection this year. The stock price responded very strongly after spending a few months in the doldrums. Kalpataru Power Transmission announced two new orders for transmission lines: one from Senegal worth $200mil and one from Afghanistan worth $86mil. TCS reported a new partnership with the Royal College of Physicians of Ireland to provide a cloud platform for global digital sharing of medical research. Infosys management explained that its acquisition strategy would focus on small scale investments to fill gaps in research and geographic coverage. Supreme Industries has leveraged the benefits of 25-30% reductions in raw materials costs to boost sales through price reductions on quality products such as pipes and consumer products. This will allow them to sustain a five-year track record of 20% compound growth.

13 Jul 2016

Modi continues to give momentum to change

Prime Minister Modi took advantage of the parliamentary recess to add more than a dozen junior ministerial appointments in the course of which he also shuffled a couple of existing ministers into minor postings. The clear political strategy was to grant patronage to politicians from states which are due to hold elections next year to boost government alliances and, potentially the NDA’s standing in the Upper House. There was also an underlying political mesage that appointments would be contingent on performance, commitment and transparency. The Monsoon session of parliament will probably see the enabling Constitutional Amendment for the introduction of nationwide GST tabled again. According to the mathematics, it stands a good chance of passing this time. The resulting implementation is likely to take some time but the effect will be a permanent boost to GDP. This could be the landmark reform of the Modi government.

12 Jul 2016

Monsoon session of parlement India

The next milestones for market sentiment will be the first quarter results coming soon and the monsoon session of parliament starting towards the end of the month with the monsoon rains providing a constant undercurrent. The news on the latter is so far so good. After a delayed start, by the end of the first week of July, overall precipitation is 218.2mm across the country, compared to a long-period average (LPA) of 215.3mm, an excess of 1%. Most regions have seen normal or excess rain and all areas which have previously experienced drought conditions have had some relief. Only five regions out of thirty six have seen below normal rainfall. The meteorological department is maintaining its monsoon forecast for 107% of LPA. The economic consequences are likely to filter through into aggregate demand in the October/December quarter. An above normal monsoon should, by historical standards contribute an additional 0.5-1.0% to GDP due to stronger growth in agricultural production alone. The boost to growth from a good monsoon will be accentuated by the Cabinet decision to implement the recommendations of the Seventh Pay Commission. These will give a 23% salary increase to 4.7 million government employees as well as income and benefits improvements to 5.3 million pensioners.

11 Jul 2016

Cruising into slow news season

Global equity markets have been strong over the half-year-end, supported by investors searching for return and very strong job numbers in the US; they have also appear to have ridden the Brexit shock. Now we are cruising into the slow news season with monetary easing in the limelight and rate increase expectations postponed well into next year. India has seen a strong couple of weeks as the Nifty added 234 points to close 2.9% up on Friday at 8323 after trading in a range of 3.8%.. Average daily trading volumes were slightly above the twelve-month trailing average at $3.2bn as FPIs were net buyers of a modest $152mil against domestic selling of $124mil. Volatility subsided quite sharply overall as the India VIX traded mostly to the downside of its opening level of 19, hitting 14 before closing at 15 for a decline of four points. Market breadth was moderate with 70% advances but the ratio was in decline more recently. IT stocks were squeezed as investors fretted about revenue growth in a tight global economy but Consumer stocks were strong on hopes for the domestic economy. Index futures closed at a premium of over 1%.