28 Jan 2016

Easy doing business, #India

The government is aggressively promoting its progress on the ease of doing business in India, with Finance Minister Jaitley emphasising prospects for the Union Budget next month. Meanwhile, from the 'smart money' corner, Apple has applied to open flagship stores in India where more than 200mil consum rs have smartphones out of a total of 1bn mobile phone owners. Also, a famously successful Chinese real estate developer has announced that his next project is planned for Uttar Pradesh.

Lifting of international sanctions

Following the lifting of international sanctions on Iran, India will shortly resume unrestricted import of Iranian oil. The IMF has restated its growth forecasts for the Indian economy at 7.3% in FY16 and 7.5% in FY17, as it pared its global growth forecast to 3.2% for calendar 2016. A survey of CEOs by accounting firm PwC reported that 64% of Indian CEOs were confident of their companies’ growth prospects over twelve months and 78% over three years. The comparable figures in a global context were 35% and 49%.

27 Jan 2016

Last week we saw a couple of results amongst the banks in our portfolio. Kotak Mahindra continues to perform superbly; net interest income (NII) advanced by 19.1% and reported profits by 31.9% as the integration of ING Vysia Bank continues to go well. Axis Bank reported NII ahead by 15.5% and profits up by 14.5%; the market responded well when its bad loan provisions improved slightly. In other sectors, IT stock HCL Technologies reported dollar income ahead by 5% year on year but profits were flat as margins were squeezed in their highly competitive markets. Agro Tech Foods reported sales ahead by 3.6%, yet profits were down by 31.9% in the face of competitive pressure on margins.

26 Jan 2016

Cheap oil and rocky road for China

Another rocky week for equity investors as markets continued to fret over whether cheap oil or China’s hard landing was the biggest threat to economic order. In the end an injection of confidence came from a surprise quarter as ECB Head Draghi appeared to commit to more monetary stimulus for the Euro area no later than March. His Thursday ECB statement was reinforced at the World Economic Forum in Davos on Friday and the markets duly closed the week with a sharp upswing. India was no exception, as the Nifty ended a soft week with a 2%+ advance on Friday to close the week just 16 points in the red at 7422, down 0.2% after trading in a range of 3.1% for the week. Unlike the US, where volatility was sharply higher, the India VIX traded in a tight range of 19 to 22, before closing where it opened, at 19. The average daily trading volume was a touch below the trailing twelve month average at $3.1bn. Strong net buying of $761mil by domestic institutions just about offset continued net selling of $757mil by foreign portfolio investors. Market breadth was even with advances and declines in balance; the big index points’ loser was Reliance, its 25.8 points loss just offset by a positive contribution of 26.3 points by the combination of ICICI Bank and Axis Bank. The Index futures market was not particularly excited though, the three-month contract closing at a premium of just 0.6% to cash.

21 Jan 2016

Corporates look at India for expansion

TCS is one of the bidders for Perot Systems, an IT management business owned by Dell. Magma Fincorp expects to achieve 20% growth in advances in Uttar Pradesh in FY16. Lupin has received USFDA approval for its Trilomarzia oral contraceptive in the US; the market has an estimated value of $500mil. Lupin has received 20 approvals so far in FY16, though many have been in highly competitive sectors. Torrent Pharma has launched its Adfrar biosimilar therapy for the treatment of autoimmune disorders in India. This is the second biosimilar version of Adalimumab. Netflix has announced that it is to enter the Indian market in a move which is expected to benefit aggregators like Shemaroo Entertainment. Bajaj Auto will enter twelve new export markets this quarter as sales in existing markets have been soft, especially markets in oil-producing countries. In India, the company will double capacity at an existing plant, launch new models and even a new brand to boost its efforts to grow market share.

20 Jan 2016

How doe the numbers look?

On the economy, December’s manufacturing PMI retreated from 50.3 to 49.1, showing contraction for the first time in months. IIP numbers for November were more revealing, however, as a decline of 3.2% reflected the holiday-shortened month and a sharp 24.4% contraction in the often lumpy number for Capital Goods. The Chennai floods were also a major factor; the year-to-date IIP is 3.9%. Consumer Price Inflation was slightly higher than expected at 5.6%, driven by elevated food prices due to unseasonal wet weather as well as slight back-up in energy costs. Wholesale Prices continued their deflationary path, though slightly shallower at 0.7% compared to 1.9% the previous month. The government has collected $144bn in taxes in the first three quarters of the current fiscal year, which represents 66% of the budgeted total for the year. It also collected $368mil on previously 'black money' reported during an amnesty which expired during the year. To ensure it meets targets for revenue from disinvestments the government may proceed to reduce its holding in Axis Bank this quarter.

19 Jan 2016

Corporate results kicking in!

The corporate results season for the third quarter of fiscal year 2016 began with the recent bellwether TCS. Revenues grew by 11.7% and profits by 14.2% year on year. The change from the previous quarter was depressed, however, mainly by flooding in Chennai, where they operate a 65,000-person campus. Infosys followed with a positive surprise, revenues ahead by 15.3% year on year and profit growth of 6.6%. Neither of the IT leaders reported signs of stress in their guidance, though hefty increases in US visa fees will be reflected in subsequent quarters. Indian Hotels reported sales ahead by 10.5% and profits by 25.5% as evidence of a turnaround by new management emerges, though restructuring costs were high.

18 Jan 2016

India looks better than the rest

The year has kicked off inauspiciously, to say the least as investors have been in a state of uncertainty over whether collapsing energy prices are a positive, in terms of a boost to consumers, or a negative, in terms of the accentuated credit risk to the banking system. In a weak global economic context, collapsing energy sector investment is triggering fears of a global recession. US Treasury yields are now lower than before the recent hike in the Fed Funds rate and strategists are pushing the timing of another move further into the future. Indian markets have been affected by the global risk aversion, though not as sharply as other emerging markets. The Nifty has shed 508 points in the first two weeks, ending 6.4% lower at 7438 on Friday after trading in a range of 7%. Average daily trading volumes have been at the twelve-month trailing average of $3.3bn throughout. Foreign portfolio investors have sustained their net selling, withdrawing a net $819mil so far while domestic institutions have invested a net $559mil. Volatility has remained subdued, the India Vix trading in a range of 14 to 20, closing off its high at 19 on Friday. As we enter another results season, Nifty futures have been trading weaker, the three-month contract closing at a premium of just 0.7%.

India, growth focus

We do not expect the current reporting season to generate enough traction to provide a catalyst for renewed market momentum. The next potential catalyst will be the Union Budget on February 29th, in which we may see some fiscal policy action to accentuate recent monetary easing by the RBI. Improved execution on government investment projects will be sustained, eventually providing a basis for a recovery in private sector investment. In the meantime, the power of India’s domestic demand potential should ensure it remains a positive outlier in global economic growth this year.

7 Jan 2016

World Economic Forum likes India

The World Economic Forum has published a review of a new study of investor views on the relative attractiveness of world markets over the next three years conducted by Ernst & Young. The results unequivocally place India at number one, both as top selection and for total mentions. Thirty two percent of respondents chose India as their first preference, compared to 15% for their second choice, China. India’s distinctive economic advance should continue in 2016 and the market valuation measures as at the opening of the year are compelling. The forward price/earnings ratio has fallen below its long-term average of just below 15 and stands at 14.3. On a price to book basis, the current valuation is 2.3 times; also well below the long-term average.

6 Jan 2016

Fiscal stimulus and good place to do business

Monetary policy is currently in easing mode but further rate cuts will depend on sustained low data on inflation, in which favourable base effects will be falling away now. Weak oil has been a bonanza for the Indian government, bringing a significant improvement in the balance of trade. It has also provided scope for important fiscal action, including the reduction of fuel subsidies and boosting of fiscal revenues from rising duty rates. This will allow the Finance Minster room for fiscal stimulus in the Union Budget in late February which will also bring a major reform initiative in the shape of a new Bankruptcy Bill. Unfortunately the Constitutional Amendment Bill needed to pave the way for the adoption of national GST continues to be mired in political strife but administrative action in preparation for its introduction is under way. Market sentiment has suffered from a perception that the NDA government’s reform efforts are tailing off but, in fact, this is only at the high profile level. Down in the trenches, the government is pushing a raft of administrative actions at federal and state level which is geared towards improving efficiency in execution and moving India up the World Bank’s “ease of doing business” rankings. As an example, the Bankruptcy Bill, introduced as a “finance bill”, which will only require approval in the Lower House, is alone expected to improve India’s ranking by sixteen places. Reform is alive and well and making good progress, even if much of it is below the radar.

5 Jan 2016

China stock down, think of India!

Global equity markets closed out 2015 fairly weak all around but India had a sustained run of upward momentum, adding 296 points to close at 7946, up 3.9% for the period after trading in a range of 5.4%. Average daily trading volumes remained at the low end of the recent range, at $2.6bn as FPIs were largely absent until the last few days, when they returned as net buyers to add to the upward momentum. After their sustained net selling in the last quarter, FPIs ended the calendar year as net buyers of approximately $3.2bn compared to domestic institutions who were net buyers of more than $11bn. FPIs mopped up more than $7bn of domestic debt during the year. Volatility waned towards year-end as the Indian VIX opened the last fortnight by rising from 17 to 18 before trading steadily downwards, as low as 10 before rallying slightly to end the year at 14. The New Year has opened with the Chinese markets limit down twice in a day, bringing a shut-down on fears of the lifting of the regulatory stock-sale limitation which has been in place for the latter part of the year. The global geo-political picture has been has been undermined by Saudi-Iranian tensions. This has framed the opening of the first full week of trading of 2016.

Excellent vehicle for foreign investors

Himalayan Fund has had an excellent year and we will shortly be circulating our December monthly portfolio report. The Fund provides an excellent vehicle for foreign investors to participate in the opportunity for attractive returns offered by Indian equities over the next few years. The Fund’s shares provide excellent liquidity through its trading platform at Euronext Amsterdam and we urge readers to subscribe at the start of this year.