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.