INDIA: SIMILARITIES BETWEEN 1990-1991 and 2011-2012

India seems to be entering the 1990-1991 situation again and for the PM, then the FM of the company - this will be deja-vu.

A fiscal deficit which is balooning, a capital and current account deficit - inefficiency of the regulation (FRBM) coupled with high dependence on fleeting foreign investment (specifically FII not FDI) are weak links of the Indian sector.

Expect long funds to move money out of India and currency to depreciate causing a double whammy as deficit builds on further. Almost on the cusp of causing a balance of payment challenge in 2012.

Dr. Manmohan Singh will be facing the same challenges as in 1991 and will need to resolve to a similar solution

1. Fiscal responsbility and targetted, reduced subsidies

2. Focus on investment v/s expenditure by subsidies

3.  Encourage export growth

4. Liberalize the economy and cut the red-tape to increase FDI participation in key sectors.

In my opinion, sectors to benefit in 2012 are Retail (Pantaloon, Shoppers Stop), Capital Goods (L&T, Punj Lloyd), Export Sectors (IT - Infosys, Wipro, TCS and Textiles) and Insurance (ICICIBANK, SBIN, HDFC, HDFCBANK)
Avoid Oil PSU's especially downstream segment like plague - until rupee normalcy returns or government shows keenness to take strong action
Everything assuming government is forced to action from the current freeze situation

STAY BEAR

Equities, Real Estate and Commodities all seems stretched in India and globally given current income levels


Markets nearing crashing point. STAY BEAR, STAY CASH. If anything,spread money across currencies and between gold.

Only silver lining could be global liquidity splurge by Central banks co-ordinated and RBI cutting interest rates by more than expected for local reason, 50 or even 75 basis points. Trade on the upside, do not invest. Fundamentals remain weak

HOLD CASH AND GOLD, AVOID BUYS

Central Banks are running short of policy tools and have reverted to direct liquidity infusion, and in a co-ordinated manner.
We seem to be entering a period of stagnation /deflation and all the monetary expansion will probably mask the data from a nominal standpoint for a few quarters - the medium term trend is painful

1. Simultaneous de-leverating of households, industrial sector and sovereigns will reduce global spending in real terms
2. Reduction in growth, in real terms, will mean painful contraction of incomes (for individuals, corporates and sovereigns) and lead to painful defaults where any of the entities are not able to pay due to increasing interest demands (rising risk profile) and reducing incomes
3. Sovereigns are introducing liquidity measures to pump the markets with cash, will have a nominal effect and delay the trickling of real impact : Indebtedness cannot be solved by a liquidity push, it can delay the invetiable. The only solution to indebtedness is deleveraging or default.
4. Either ways it will be a difficult time swinging between sub-normal growth or inflationary pressures (caused by liquidity push by central governments). Hot money in-and-out, especially EMs and even DMs is a possibility, especially on the equity and commodity sides
5. Markets entering unchartered territory where for the first time sovereigns will have the same challenge as individuals and corporates earlier, and that too on a significant scale world-wide
6. Sovereign defaults will be more frequently talked about in the coming quarters and I presume, competitive devalution will resume - which has now slowed after an initial burst in 2008-2009
7. Expecting equity incomes to be -ve, unless if trading on volatility. Do not expect EM markets, espeically India to outperform given global macroeconomics, condition of infrasturcutre (especially power sector), slowing policy - making, shutdown of privatization, high interest rate scenario and falling rupee
8. Avoid NIFTY, stay in cash. I'd prefer GOLD.

Markets on Boil, Trade Upside, Invest on Sharp Correction

World market seems to be on an upsurage after the recent Eurozone announcements. However, all the announcements have done is pushed the can a few weeks to a few months down the road.

SYSTEMIC ISSUES ARE UNRESOLVED:
Systemic issues of high debt/GDP and reducing private consumption and public sector spend will contract economies widening Debt/GDP ratios. Both personal and sovereign balance sheets need to unlever. No long erm resolution is adopted:

• Resolution 1: Euro as a currency is de-valued to promote export promoted growth
• Resolution 2: Weaker sovereigns are banished out of the Eurozone in a systemic way and stronger governments recapitalized the banks with help from China/Mid-East, Other hungry investors
• Resolution 3: No nominal devaluation, but increased inflation supported by current low-interest rates regime to devalue in real terms
• Resolution 4: Sharp correction in prices of basic raw materials [Hydrocarbons, Metals, Crops] in dollar terms [Unlikely unless BRICS enter recession]

Since none of the resolutions are adopted in completeness, a solution seems elusive. However, by partially defaulting and partially recapitalizing the banks - the can has been pushed further down the road.

TRADING CALL: Trade on momentum of euphoria, go long but exit on profiting. Keep strict trailing stop-losses.

INVESTMENT CALL(Indian Market):

• PSU Banks starting to look lucrative (Check exposure to Real-Estate, Power Sector before investing.Any bank low on both these sectors is a good investment candidate even at current prices).
• Avoid commodities and real-estate.
• Infrastructure (Roads) seems good to buy when the current euphoria ends and corrections begins (down 15% from current levels).
• I am still undecided on Infrastructure (Power), with DISCOMS struggling and delays in generation sector. Will need to research a bit more.

Greece is not Lehman!

Greece is not the new Lehman! Please... no one tried to save Lehman failing!! Everyone is pretending to save Greece, but only buying time to prop-up the real chance of zone failure - Spain and Italy. The EU leaders know well enough that once Greece defaults, all attention will fall over to Spain and Italy which are too big to be defended the same way. Everyone just kicking the can down the street and making it that much more difficult for Greece to recover....All efforts will eventually fail and move over to recapitalizing French and German banks. For now, however, Greece is the pawn between the real chances of Euro failure and the carrot to an IMF style recovery (Has that ever worked with a structural loan cycle situation before, however?) Oh YES: Forgot to add: Continue to remain bearish for the medium term, irrrespective of short bouncebacks. Structural problems remain.

Continue to be bearish... respect short team bouncebacks, but medium term outlook remains unfavourable

Continued with bearish mode on the market, though more circumspect after the recent fall. Expecting an immediate bounce-back for NIFTY tomorrow given the US bounce-back later today. However, remain bearish on the market from a medium-term perspective. Unusual how none of the economists are using the 'D' word or the 'S' word... For people in countries like Greece, Italy, Spain - the real economy is almost entirely in a Depression mode with reduced consumption, excessive and abrupt tax-cuts and reduction in investment leading to sharper contraction. Add countries which might not be (or will not be in future) a part of Eurozone and it could lead to chaotic inflation exercised by currency devaluation (e.g. Countries in Mid-East, South-East Asia) For now, most of developed world seems to be in a Stagflation mode --- technicalities might be modified maneovured to attempt defy this. But that is what the median of the population is really experiencing. From a medium to long term perpsective, this might cause basic materials (Metal, Oil, Coal) to correct, but for now... bearish on equities in the short to medium run and bearish on developed market fundamentals, emerging market fundamentals with debts > 90% of GDP and bearish on leveraged balance sheets!

time to buy?

Markets seem to have entered long term bearish mode - so for NIFTY overall, it is still an INVESTOR STAY AWAKE signal. Trading bets should be the order of the day, if to play.


From a mid-cap, small-cap perspective, a lot of the hit is already taken in. Expect fundamentals to improve based on:

a) Increased bearishness of growth outlook and slowing growth will reduce cost of raw materials

b) Rate cycle should cool down from here - don't see any further rate hikes coming with global growth uncertainty, so RBI will be forced to change its hawkish stance, and at the very least put an hold on any further rate hikes. Maybe even turn dovish and start cutting rates

c) With decreasing disposable income (real), expect consumption to trade for lower brand, less expensive products especially in the middle market range


All three should help companies not overly leveraged, having better control on costs and not dependent heavily on imports (given rate change challenges for INR with widening deficits)

Good time to start accumulating for value stocks. Will try to research and post stock specific ideas over the weekend

Inflate your ways out of indebtness

Read a very reputed article which comapares ways countries can and try to deal with indebtness as is the case with US, most of the western world and even developing countries like India

1. Austerity: Does not work because mulitiplier effect of austerity from govt, especially in situations where Debt/GDP >90% does not work.

2. Grow your way out: Exteremely limited for developed economies, but for developing countries (e..g India), this is one possibility

3. Default: Plain and simple, if you cannot pay back - make it quick and surgical. Default and move on, maybe raising debt for now will be a challenge, maybe next 4 years will be painful, but you have a clean slate to begin with and hopefully the next generation will not bear the brunt (does anyone remember the UK of the 70s?)

4. Inflation: Possibly the worst option of all, but the most palatable to politicians - the impact is on the the prudent savers which is to inflate currencies so much and print out , so total debt outgo in the currency of choice is small. Called by different names, including competitive devaluation, printing money, QE etc... It all basically boils down to the same ethically wrong behaviour of Cheating the savers to pay for the imprudent behaviour of the over-spenders.

Unfortunately from the US to Europe to India, let's brace ourselves for the age of government sponsored inflation

DEBT Problems Continue... India in the picture now!

Debt Ceiling in US has been reached. The political drama between the Republicans and Democracts continue. Too much of political gimmick has gone into it, I don't expect it to fundamentally alter the debt or borrowing profile - maybe some points scored.

In EURP, Rating agencies have given a real scare. Expecting that Greece will get the much needed relief in the short run now. But long term prospects for all of Eurozone are daunting. Countries in the Eurozone (and the US for that matter) may have noted the expression by the rating agencies. Anticipating that the rating agencies will now come under intense scrutiny in the medium term. After all, its not dictatorship, so you cannot 'order' things, but you can 'influence' the decision-making purposes to be optimized :).

In INDIA, interestingly no one is talking yet (at least openly) about the multiple debt monsters building up:
a) Air India : Has defaulted and been bailed out by Banks and OMCs.

b) OMCs : Will probably be bankrupt. Need to understand better how this is stacking up in the Union Budget (all Oil Bonds, Losses to Upstream and OMC companies), is this all on Govt Balance Sheet, or off the balance sheet item ( I infer this will be later, but just a conjecture yet will need to dig and confirm)

c) State Electricity Boards: This is the biggest ticking bomb of all. No one is openly mentioning it, but the kind of burden built up is almost asking for another bailout and amnesty. Either the SEBs will default or the banks loaning to them will have to declare significant NPAs.

Altough not mainstream, the Street has already built in the assumption of a 'technical default', where REC, PFC etc will have to rollover the bonds with lower NIMS and longer periods, perhaps also take a haircut on accumulated interest. Check the recent prices of REC, PFC (or the drops) and this seems to be built in. Interesting to see how this pans out

Debt problems in US and EURP

In US, the Republicans and Democrats are sparring over the debt ceiling. Here is how I see this getting resolved:

There will be more bonds issued. A large chunk will be bought by China(It is almost completely caught in its own web now). Another substantial chunk by other emerging markets (read: The Arabs) and any unbought will be taken by the Fed, under QEx(X = 1,2, 2.5...., this is a more sophisticated way to say 'Printing Money')


In EURP, Germany, UK and France are battling Ireland, Greece against easing debt servicing terms and using more debt to pay existing debt. Here is how I see this getting resolved:

In the short run, There will be lot of hue and cry on getting stricter terms imposed on Greece, Ireland (and maybe Portugal and Spain). Further, bondholders will possibly do a very small haircut on their holdings - but a technical default will be avoided

In the longer run, There is no way the weaker countries can avoid the debt trap. In fact the stricter norms will force stronger decleration of their GDP and push them deeper in the trap - forcing either a default and/or being pushed out of the Eurozone to save other countries.

The easiest way out is to take the pain pill right now i.e. accept that the deficit is structural and default right now - let the bondholders take the pain. Market does have a very short memory :)
Though don't see that happening with the stance of EU & IMF

Bottomline for Equity Investment: Stay cautious on UK, Europe dependent consumption stocks.

Difficult time for Bulls on NIFTY and specifically RE stocks

CY11 has all the makings for being a difficult year for Bulls:

1. Writing this blog on 9-Mar-11, Oil is still on boil with Brent around 116 USD/barrel and Libya seems headed for a civil war.

2. The FY12 budget has disguised an under-capitalized liability on subsidies (Oil, Fertilizer). Expect Debt ratios and CAD to be higher than projected

3. Affordability is going low - food prices worldwide still on a boil, at least a 10% food inflation on items I buy in the UK (Aubergines up from 70p to 87p, cucumber up from 70p to 85p, Diary Milk Chocs up from £2 to £3, Bread up from 60p to 72p, £1 pizzas only on bulk buy of 3 pizzas)

Expect affordability to go low, real estate prices to fall preceded by screeching halt to new buys culminating into indebted developers and project execution delays.
Don't trust research reports giving BUY signals, avoid RE like plague

NEUTRAL on Nifty, NEGATIVE on REAL ESTATE Stocks
On Nifty falling closer to 5000-5200 levels, a good opportunity to buy into quality stocks from a long term perspective. Buy on every 5% -10% dip from 5000-5200 levels.


PS: This is not financial advise, I have holdings in Nifty stocks

Crude Oil on a boil...

Regime changes in Egypt, Tunisia.
Popular rebellion in Yemen, Bahrain, Libya..
Smoldering discontent in Oman, Saudi and Iran...
Commodity speculators in search of a killing to make from fear....
Brent @ USD 116/barrel, WTI Crude @ USD 101/barrel.....

Oil has been on a boil last few weeks. This post tried to measure the impact of Oil on Indian Economy sector-wise:

1] PRIVATE REFINERS: RELIANCE, CAIRN ENERGY, ESSAR OIL : Positive, GRM's will increase

2] PSU UPSTREAM, OMCs: -ve, OIL, GAIL, ONGC will lose 2 ways - increased subsidy burden, but no increase in realised profit due to fixed rate of Crude obtained from OMCs.

3] Indian IT: +ve, Higher Crude prices should cause a widening of CAD and currency depreciation which will improve margins (so long as developed markets don't slow down tech spending suddenly). +ve for INFOSYSTCH(INFY), WIPRO(WIT), TCS, (CTSH), HCLTECH etc

4] Financial Services: - ve, Higher crude will push up inflation necessiating interest rate hikes, impacting NIMs and affecting equity flows, hence the brokerage side of equity business. Higher GOI bond requirement will drive down yields impacting MTM values of held securities, Increase in NPAs

5] Infra: -ve, Rate hikes, rising cost of raw materials and labour cost spike (due to rise in basic living cost of workers) will impact margins and bankability of new projects

6] Telecom: NEUTRAL. Lower disposable income might imply drops in ARPUs and interest costs(most indian telecom companies are burdened with debt for n/w rollout and 3g). However, overall impact is much lower than other sectors. +ve on BHARTIARTL which has signficant non-India business

7] Metals Mining and Commodities: NEUTRAL, Speculating that metals cost will go up in tandem with Crude Oil, hence slightly +ve, however labour and RM , Transportation costs will go up significantly

8] TRAVEL, CARGO, TRANSPORTATION, LOGISTICS, HOSPITALITY: Big -ve as costs are largely in direct correlation to crude and competition is hugh, so scope for margin retention is low. Particularly -ve for airlines JETAIRWAYS, DECCANAIR, SPICEJET

9] REAL ESTATE & Construction: Costs to go up, landbanks already purchased at very expensive valuations in recent times. -ve for entire RE lot. DLF, UNITECH, HDIL etc and any other RE that I might have missed. Esp -ve where D/E is already high and company is not listed, awaiting favourable conditions for IPO


Basically, largely -ve. Time for India to launch NELP IX in a big way and try to benefit. For common investors, wait for a carnage and then invest when valuations are right

My current stock preference on a market correction:
(For the adventurous): Puts in early phase of the fall, CALLS when mkt is close to 4900-500

(For the common man i.e. me)
LnT, IRB From infra space for the long term
REC, SBIN, ICICIBANK from Financial Services
COALINDIA in Energy, (Buy ONGC on the FPO, hopefully with a further 5% retail discount)
As usual : No comments on the IT segment esp. Large Caps.

PS: These do not constitute financial advise. Please use your common sense before investing -> If I'd be rich advising on financial matters, I wouldn't be writing this for free.

PS2: Yes, I am heavily invested in the mentioned stocks

Consensus Estimates is not Common-Sense Estimate, is It?

Saw a few reports on Consensus Estimates for Indian Markets by renowned bankers. With base case estimate running at 20% YoY earnings growth to 28% YoY earnings growth for FY11, FY12, FY13 - it just does not make sense.

Any competitive industry - and a company having decent scale with it - will probably grow 15-24% YoY. And with rising interest rates (falling volume growth and NIM's for banks), subsidies in Oil and Gas (losses for OMCs, profit reductions for upstream), stagnating real-estate (demand oustripping supply, rising EMI's, increasing inflation), infrstructure panting (rising inflation).... most sectors are up for negative revision in growth rates.

With all this in the picture, not able to fathom what is the consensus estimate made up of? - Either there is a lack of common sense in the creaters and audience of these reports or I seem to be on a different plane.

My growth estimates will probably be - Bull Case of 20% per annum for FY11-FY13, Base case of 16)% (which is still very optimistic) and a bear case of 12% growth.

Will probably come back and check in the next 12-18 months.
At present, Sensex looks overpriced and ripe for a correction if we do a global P/E of 12 month TTM or a FY12'Consensus' projections - operational risks are taken too much for granted.

Budget FY12

Budget FY12:
From an economics point of view, here is what I expect should happen:

1. Strengthen FRBM and target 4.3% fiscal deficit ( since with overspend we will realistically achieve 4.5%)

2. Take steps to control current account deficit. Really little scope for increase exports. Idea should be to reduce import burden by promoting alternatives to imported oil:
a) Incentivise prospecting and stable governance for technology to get into India for Oil/Gas prospecting, discovery, production
b) DGH to incentivise shale gas production
c) Technology import to be incentivised (150% depreciation?), acquisition of oil field services companies abroad promoted
c) Gas/LNG imports, IPI pipeline, Coal Washeries by Oil India
d) Biofuel(though it has a downside on food prices)

3. Rein in speculation on perishable food, grains and metals. Strengthen PDS or at lesat take steps in that direction and set a policy framework (An agriculture minister saying non-foodgrains esp. vegetables are not as part of his department purview does not really help bring down prices, does it?)

4. Bring some fiscal responsibility to states, stop free SOPs - free electricity, fertilizer subsidy etc. Reform SEBs. Privatise quasi-governmental institutions used to subsidize and pay all subsidies from your own budget (includes ONGC, OIL, OMC's, SEB's)

5. Widen the tax net, include the current exclusions. Keep tax slabs unchanged at least for 5 years and create a policy to notify changes at least 2-3 years in advance

6. Too many too small banks, begin merger procedure. Strengthen 2-3 state-owned banks to achieve global Top 20 brackets

7. Spend on infrastructure (INVEST) - Power, Roads, Bridges, Ports, PDS. Not on sops (EXPENSE OUT) which only overheats the economy.


Given elections in states, here is what will probably happen:
1. Target 4.5% achieve 4.7% and then reduce by disinvesting wealth accretive units of the govt.

2. CAD un-touched, incentivise non-competitive industries which have better clout

3. GST Rollout delayed, a PDS policy framework which is so loosely defined that it is never implemented.

4. Pandering to popular sops - fertilizer subsidy, no change in diesel rates, subsidy on GAIL, ONGC etc(not so much on ONGC since govt. needs to divest)

5. No steps to include agriculture under the tax net