8 Dec 2016
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.
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
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.
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.
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
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.
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.