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22% of the notes affected, with a value of some $44bn have been exchanged and an additional $7bn of new notes have been withdrawn through ATMs.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.