Reading the future

 

The 50% share of retail businesses in RIL’s OP and shift to clean energy capture an economy transiting to a buyer’s market

 12July 2021

Stock valuations can be misleading. They do not always correctly reveal management’s risk-taking or risk-averseness. Surging prices can be due to irrational exuberance or lots of liquidity even when there is lack of clarity on the road ahead. Depressed prices might stem from a cyclical downturn, credit crunch, or from an emergency like the current pandemic, affecting capacity utilization and output. A reasonably fair method to check the health of the economy is by examining the financial performance of companies. Unless subjected to window-dressing, numbers do not lie. There is no need to dig into all listed companies. A close look at a few, representing the industry they operate, can give a glimpse of ground-level reality. State Bank of India’s credit flow points to the economy’s slump or resurgence. Bajaj Finance is considered a play on consumer sentiment. The composition of the order pipeline of Larsen & Toubro indicates the state of domestic capex of the private and public sectors. The robustness of infrastructure capacity-building finds an echo in the financials of Bhel. Coal India’s offtake offers a clue to the ability of power producers to make payments. TCS and Infosys earnings are affected by the strength and weakness of the Indian currency, influenced by dollar inflows and the import bill. Asian Paints’ sales suggest revival or slump in industrial activity and discretionary spends by households. HDFC’s sanctions and disbursements hinge on mortgage rates and resistance to inflation. Rural demand, depending on monsoon and the procurement price fixed by the government, can lift or slow down Hero MotoCorp.

 

India’s most valuable company is increasingly being viewed as a proxy for India’s travel from the licence raj to a choice-based economy The oil-to-chemicals conglomerate’s moves usually mimic the direction of the country. Reliance Retail started 15 years ago and Reliance Jio 10 years later. The consumer businesses contributed half of the operating profit of the 48-year-old conglomerate last financial year. The transition from a B2B company to a hybrid model gradually focusing on the mass segment has a message for Corporate India if it has missed the better discounting banks with a higher share of retail deposits and assets are getting. The other takeout is the market’s diminishing obsession with oil. Two forces are responsible for the change. First, technology giants have replaced refiners in the market-cap sweepstakes. The top five companies in the US, including Apple, Microsoft, Amazon, and Alphabet, are much younger than Exxon Mobile, pushed below the 20^th rank. Second, the growing movement to reduce carbon footprint. Many big-ticket investors will not touch polluting companies. The availability of substitutes is hastening the transformation to clean energy.

 

RIL seems to have read the tea leaves. The quest to attain leadership by underwriting voice calls and offering data at low tariff was initially greeted with scepticism. The strategy looks visionary in retrospect, following the reliance on mobile connectivity during the pandemic lockdowns. Resources that would otherwise be swallowed by the commodity business are being freed by inviting Saudi Armaco to pick 20% stake for US$75 billion in the O2C segment and giving UK’s BP 49% equity for US$1 billion in the joint venture floated to sell fuel at pump stations. One-third control in Jio Platforms, the arm that will supervise the digital backup of the telecom and retail ventures, and a small stake in the retail entity to foreign investors resulted in a collection of Rs 3.24 lakh crore last year. Funds are attracted to mature industries for their track record and to emerging businesses for their potential is the third implication. Partnership with global brands is to tie up capital as well as knowhow. Two stakeholders, Facebook and Google, will provide the platform and support to make Reliance Jio addictive to users looking for entertainment, shopping and surfing. The net debt-free status allows raising Rs 60000-crore capex over three years to put up infrastructure to generate clean fuel, with an ambition to produce over 20% of India’s 450-GW solar generation target for 2030, in the race to become net zero carbon emission free by 2035.  Collaboration with small retailers through telecom and digital offerings and earmarking Rs 15000 core for value-additions and financing of solar ancillaries will ensure captive cash-flow. Ironically, the four giga factories will come up at Jamnagar in Gujarat, the venue of its Old Economy world-class refinery, setting an example of how to seamlessly transport from the past to the future.  

-Mohan Sule

India’s re-rating

 

A compassionate management’s drive to meet capex by restructuring has resulted in record-breaking forex reserves

 28 June 2021

What attracts investors to a company can be a mystery. Besides the ability to produce decent capital gains, a track record of hefty and consistent dividends interspersed with bonus shares and occasional buybacks to support prices during a turbulent phase might appeal many. Some are likely to mix and match past actions and outlook to take a bet. Several with low risk-appetite stick to sluggish stocks because of their transparent governance.  At the same time, investible savings are found to chase those whose tantalizing future promises a divorce from the rocky past. Allocation can hinge on the promoters’ clarity of vision. Headwinds do not inhibit if the challenges are viewed as temporary and openings to enter at low levels. Premium over peers is not scary if there is conviction that it arises from scarcity, product and marketing innovation, or pole position. Despite the market’s tendency to categorize stocks into buckets of emerging and beaten-down wealth creators, the hunt for growth cannot be exclusive of value. A cyclical scrip’s expensive valuation can be a turn-off even when demand is back. A fad is worth following if the price is not at a tipping point of turning into a bubble. Now the puzzle is if businesses can be separated from the countries in which they operate to assign discounting. Many companies’ credit worthiness is higher than the sovereign rating. Microsoft is perched above the US. RIL’s investment grade contrasts with India’s negative outlook. The fear of impact on operations by sudden political shocks recedes if these are listed on exchanges insisting on high standards of disclosures. In return for openness, they attract quality money, boosting their standing in the marketplace.

 

Realizing the indispensability of overseas funds to strengthen their social sectors, developing countries are increasingly focusing on reforms and effective grievance redressal. Though the competition to pull in dollars is fierce, India has an edge. Its history of peaceful regime changes assures stability. After a period of uncertainty from the late 1990s till the mid-2010s, it has got a new management team. The generalization of being a back-office supporter can be shrugged off on the reckoning that none of the Fang constituents (Facebook, Apple, Netflix, and Google) can do without its huge market. The world’s pharmacy, known to make cheap generics, is now demanding a seat at the table with the big boys after rolling out an indigenous covid-19 vaccine around the same time as by the developed world. Recently, all households were electrified. Now the race is to ensure tap water and housing for all. The dominant share in GDP of agriculture, whose resilience was demonstrated when rural purchases offset the fall in urban consumption during lockdowns last year, is used to underline the persistence of legacy weaknesses. Yet the leap to the top of the league of countries ranked by number of digital transactions illustrates the demographic dividend. The capex to modernize offers revenue visibility for manufacturing, whose neglect is being sought to be addressed through Make in India, Atmanirbhar Bharat and production-linked incentive schemes. India will be the only country in the world to grow by high single digits this fiscal year.     

 

Alongside restructuring, including ramping up FDI limit in insurance to 74% and multi-brand retail to 51%, divestment from non-strategic sectors and minimal presence in four strategic sectors, India is tightening the compliance architecture. The crackdown on delinquencies spares no one, be it the nation’s richest man or intra-day traders. Fines have been imposed for previous misconduct. Clients need to put up their own margins to scotch speculation. Their securities can no longer be used by intermediaries for proprietary transactions. Funds’ exposure to risky debt instruments is pegged to assets under management. Credit risk will be as per the duration of the holdings as well as the investment objective. The cleaning-up seems to be reaping yields. India became the biggest recipient of foreign portfolio inflows among emerging markets last fiscal year. Investment in equities of Rs 2.74 lakh crore is the highest-ever, despite the fiscal deficit set to touch 6.8% of the GDP in FY 2022. The US$64 billion FDI in CY 2020 is the fifth largest in the world even as global flows plunged 35% in the previous year. Forex reserves swelled more than US$100 billion between April and March 2021 to cross US$ 600 billion beginning June. What must be satisfying to big-ticket investors mindful of companies’ social responsibility is the transfer of cash to 400 million citizens and food to 800 million from end March 2020 up to November 2021. India is a growth stock with value proposition.

--Mohan Sule

 

 

 

 

Division in the ranks

 Discounting of companies is factoring in the share of products with pricing power, user stickiness and deployment of cash 

 

14 June 2021

 

The worst humanitarian crisis in 100 years is how Prime Minister Narendra Modi recently described the covid-19 pandemic. Contraction in India’s GDP by 7.3% last financial year has not been seen in 40 years. For the stock market, it is the best of times. The benchmark Nifty scaled 2021’s second new high early June, doubling from its multi-year March 2020 bottom. Several companies across market capitalization not only remained profitable during the year but continued to produce record-breaking numbers in January-March 2021 after the December 2020 quarter. Even amid the bleakest period, particularly during H1, companies in India and overseas were successfully raising funds. In India, the third consecutive normal southwest monsoon, competitive and accessible money and staying relatively untouched by infections bolstered rural spending, partially compensating for the caving in of urban consumption. Money shifted from producers of essential output in the early stages of lockdowns to neglected commodities and infrastructure players as restrictions began easing. The rollout of vaccines has now rekindled hopes of the global economy eventually getting weaned away from the life-support of liquidity infusion.  

 

In the absence of innovative tech companies, with the stature of Facebook, Apple, Netflix and Alphabet, investors in India resorted to sifting within sectors. Health and hygiene products supported the lack of interest in beauty products of FMCG players. Entry-level two-wheelers and cars were bought to avoid public transport. Drug makers with a higher share of active pharmaceutical ingredients turned star performers in search for niches. Fertilizers and insecticides makers surged as an above-average rainfall and cheap credit boosted sales. Differentiation based on demand is not new. Earlier, the backing was for those achieving scale. Higher revenues, it was believed, implied market share gain. The theory has evolved, with those commanding better margins, implying pricing power, bagging better discounting. What were informal distinctions for stock-picking even within thriving industries consolidated during the breakout and recovery from the outbreak. Companies tilted their portfolio in favor of premium products in the same category to squeeze out more realization. The strategy will pave the way to pass on increased cost of inputs as consequence of quality. If so, it will indeed be transformation of the marketplace. From pushing value for money gratification -- as amplified by sachets, beginners’ range discretionary consumer products, low-cost airlines, and budget hotels to woo ex-metro buyers -- to targeting discerning users is indeed a gamechanger. Valuations will also account for consumer engagement rather than relying primarily on the number of users. The trend has been visible for some time. The covid-19 upheaval has hastened its acceptance. The regulatory moratorium on servicing loans during the lockdown nudged investors to examine collection efficiency and composition of the assets instead of getting bewitched by the size of sanctions and disbursements. Holdings of mutual funds are getting closer scrutiny as safety supersedes risk reward. The attraction of financial institutions with a higher share of the low-cost current-account-savings-account deposits is not a secret. Also emerging is the preference for lenders servicing home mortgages and gold collaterals. Defaults are negligible when compared with borrowings against credit card limit and to finance purchase of consumer durables. A new order is emerging from the chaos.       

 

The frenetic rush to take advantage of the cheap funds to strengthen the balance sheet by reducing debt is another outcome of the medical emergency. The discounting separating companies from peers will factor if the preparation is to face future disruptions or to cater to the pent-up demand by ramping up capacity. Cash pile cannot be hoarded. If not used for organic or inorganic opportunities, it will have to be returned to the shareholders as dividends, capitalized as bonus shares or deployed for buybacks. The equity base of many companies has ballooned from private placement of shares at moderate valuations with institutional investors. Of the many implications, the prominent is the confidence of servicing the investment due to the low bar. Second, employing the inflows to deleverage the balance sheet will allow funneling the revenue stream into operations instead of interest payment. Third, the reserves can be used to fend off unwanted suitors, attracted by the low return on assets stemming from mobility restrictions, by shrinking the outstanding capital. For investors, all the possibilities will unlock value. 

 

 --Mohan Sule

The coming third wave

 

If the rebound rode on growth stocks and reopening boosted value plays, vaccination is set to prop up services

 

 The March 2021 quarter results were always expected to be an improvement over the low base of a year-ago period. A 21-day nationwide lockdown from 25 March last year had disrupted economic activity. An inkling of the coming boom was visible in Q2 and Q3 of FY 2021 numbers, reflecting the five-phase unlocking from June. The market, too, anticipated a healthy outcome. The Nifty scaled a lifetime high on 15 February of this year. Release of the bunched-up demand cannot be the only explanation for the record revenues, volumes, and profit by many companies. Several other factors converged to produce a memorable January-March 2021 period. The impact of the Union government’s cash transfer to farmers and rural and urban poor became visible in the marketplace. Focused spending on agriculture, healthcare, education, and infrastructure and reforms to ease doing of business were the other cornerstones of the aid package. The central bank, simultaneously, was lowering the cost of funds and undertaking targeted lending to sensitive sections with the capacity to magnify the assistance. Staring at credit crunch after the collapse of infrastructure financier IL&FS in September 2018, the gushing liquidity was a turning point for lenders to home buyers, farmers and MSMEs. Also emboldening banks was the implementation of the Insolvency and Bankruptcy Code from September 2020, freeing resources tied up in bad loans. Peak corporate tax was cut 22% from 30% in September 2019. Coinciding with the man-made efforts, a second consecutive average southwest monsoon improving rural purchasing power.

The two other catalysts, both in January 2020, were the thawing of the two-year-long US-China tariff tiff, with the phase 1 trade agreement, and the UK formally leaving the European Union, three-and-a-half years after a referendum. A deal for an orderly exit was finalised before the year-end deadline. The transition to BS VI norms from April 2020 cleared another overhang since 2016, contributing to spurring consumption and investment that had got stalled in FY 2020.  If MSMEs were able to tap low interest rates, institutional investors were snapping the downsized shares of large and medium corporations. The decline in input and overhead costs provided flexibility to deleverage, strengthening the balance sheet for funding growth. Tinkering the output mix towards premium products increased realization. Establishing a digital presence offset the drop in physical footfalls. Besides the need to meet higher usage, the coverage of production-linked incentives encouraged many companies to look for ramping up capacity as utilization touched the optimum level.  Gains made their way from growth to value counters, punctuating the market’s overheating. A vibrant primary market signalled risk-taking.

 

If the escalating benchmarks foretold Corporate India getting into shape, their current movements offer hints of outlook. The Nifty P/E has slowed to around 29 from a high of 41 mid- February. Apart from spurt in earnings, the contraction in the premium over the historical average of about 22 suggests a slower pace of returns as raw materials turn expensive and logistics issues persist. The Nifty IT index lagged over the past month on fears of recoiling inflation leading to tapering of prime pumping in the US and the EU, the major markets. The Nifty Auto index’s outperformance, despite down from its peak, captures the struggle to obtain chips as well as hopes of CVs catching up with PVs and two-wheelers on normalcy. Tie-ups to churn out covid-19 vaccines and medication are once again propping the Nifty Pharma index after a brief hibernation, when the first wave had started receding in H2 of FY 2021. The Nifty Bank index has doubled from its year-ago bottom, coming out of correction. Provisioning and capital collection are supposed to facilitate higher credit flow. The Nifty Metal and Commodities indices are touching new tops due to the revival of capex and prospect of another season of bumper harvest. They might plateau as central banks end their loose monetary policies early 2022.  In the run-up, attention will shift to the third orbit comprising frontline sectors including aviation and hospitality. The leaders in the entertainment and retail space are up from their pandemic lows and holding on to their gains. Services is consolidating the comeback of the US, initially fronted by tech and then by manufacturing, with outdoor masks no longer required for those inoculated with two doses. The sharp drop in caseloads and estimates of all Indian adults getting two jabs by December 2021 are setting the stage for funds to move into the next upcycle.

 

 --- Mohan Sule

 

Shift in strategy

 

Record-breaking quarterly numbers might remain history as the next challenge will not be demand but inventory management

 

The liquidity-pumped euphoria is showing signs of wearing out. The best-ever revenues, volumes, and profit in the March 2021 quarter produced by many companies are not generating the enthusiasm unleashed end of last calendar year. The market was flat in the past month to 7 May 2021. The benchmark had rebounded from the March 2020 multi-year low of 7,610 points, buoyed by RIL’s Rs 2-lakh-crore fund-raising through 33% stake-sale of Jio Platforms in less than two months from end April and a rights issue thereafter. After stabilizing at the 11,600 level for three months from August 2020, the Nifty shot up 30% in the subsequent four months to touch a lifetime high mid-February 2021. HDFC Bank, a proxy for economic health, surged 41% in the period. Bajaj Auto, capturing discretionary spend, gained 34%. Grasim, symbolizing industry consumption, advanced 64%.  Hindalco, a play on the private and public investment mood, improved 75%. Tata Steel, pointing to infrastructure capex, surged 66%. The tailwinds were the signs of spring in the June 2020 quarter results, which started trickling mid-July, after a 21-day nationwide lockdown from 25 March 2020 had knocked down Q4 of FY 2020 earnings. The catalyst was expectation of a better Q2 due to a normal southwest monsoon and festive spending in Q3. The second US$900-billion stimulus from the US end December 2020 put more cash with overseas investors.

The benchmark shed 2% in little less than the past three months despite a third fiscal stimulus of US$1.9 trillion by the US in March. HDFC Bank tumbled 31% and Bajaj Auto lost about 6%, reflecting the setbacks to the banking and automobile sectors. The Supreme Court end March 2021 lifting the moratorium on servicing loans from September 2020 triggered fears of  ballooning of advances turning sour as Indian states enforce region-specific shutdowns. HDFC Bank’s gross non-performing assets were up in Q4 over Q3 and over the year. Two-wheeler makers froze assembly lines as chips became scarce. Profit-booking from pharma, automobiles, and tech counters, the recipients of attention as public transport was curtailed to cap the spread of the pandemic, is making way to commodities, which will be at the forefront to benefit from normalcy, and because of a soft dollar. Grasim returned 17%, Hindalco 26%, and Tata Steel 63% over the past quarter till the first week of May. There are three messages that the market is giving. First is the doubt about the sustainability of current valuations. The outbreak and retreat of the virus is uneven across the world. The US and some parts of the EU are emerging from the emergency for the third time. India is facing a second surge. A fourth wave has overwhelmed Japan’s healthcare system. The Nikkei index tanked 3% on 11 May 2021. Travel restrictions enforced to isolate countries engulfed in the flare-up will worsen the disruptions in distribution. The second outcome is economies getting caught in the crossfire of uncoiling prices and fragile recovery. Stimulus packages have improved consumption but not employment as enterprises focus on keeping overheads low. US retail selling tag in April jumped to 4.2% over the year and from 2.6% in March. The rate was the highest since CY 2008. On the other hand, the number of unemployed is not dipping to show return of routine. Businesses are unable to cope with the release of pent-up demand due to difficulty in procuring raw materials.

The Federal Reserve wants 2% inflation to be persistent and vacancies to slide to the pre-March 2020 era before beginning to hike the cost of funds. In the meantime, it might start withdrawing from bond-buying to mop up liquidity. The European Central Bank is toying with the idea. India needs continuation of loose money policy as it is projected to see yet another round of higher caseloads. The Reserve Bank of India might be left with little room if there is an acceleration in the outflow of foreign funds, smelling higher yields back home. The third fallout will be volatility in earnings. Q1 of FY 2022 results, while expected to be better than a year-ago, are not likely to be accompanied by pronouncements of record-breaking milestones because of varying degree of impact of localized lockdowns.  The dilemma will be whether to pass on the higher input bill or focus on volumes. Inventory management will become complicated. Supplies tied up during revival will have to be disposed of at a discount if yet another resurgence paralyses economic activity. Investors and companies have never faced such a balancing act.

 

 --Mohan Sule

Making peace with uncertainty

 Investors will have to navigate volatility from localized lockdowns, ample liquidity, and short bull-and-bear phases    

 

One month into FY 2022, it is becoming increasingly clear that investors will have to tailor their strategies by co-opting the pandemic for several reasons. First, the rollout of vaccines from the end of the last calendar year had raised hopes that the outbreak was some months away from weakening. That might not be so. The retreating wave has the nasty habit of coming back by mutating into more lethal variants. The spread and decline of infections are not in synchrony across the world. Even as the UK and the US seem to have gained control over the third surge of late, India is facing a second comeback of coronavirus. Japan is seeing a renewal. Companies will have to prepared for supply chain distribution for a long time. Second, the campaign to blunt the medical emergency is not running smooth. Two provisional candidates were briefly suspended by the US and EU regulators post-administration complications despite the affected being a tiny fraction of the total sample. Eventually investigations ruled that the protection offered outweighed any possible deviancy. An opposition campaign in India criticized the rush to introduce a home-made vaccine, citing lack of clarity on the outcome of phase 3 trials. The concerns proved shallow as subsequent studies pronounced not only its efficiency but also its potency to fight newer strains. As such, a return to the pre-covid-19 job level will have to wait. Third, the coverage is not consistent. The UK had vaccinated most of those above 50 years, the most vulnerable group, by 15 April. In the US, 40% of the population has received at least one jab. With hardly any major incident of late, the Chinese seem to be in no hurry to get a security cover. India has become the fastest country to inject more than 14 crore people above 45 years in about three months. Region-specific travel bans will have to be in force till confidence returns that airlines are not ferrying potential virus carriers.

The fourth cause of uneasiness is the volatility in economy data and equity market indices imparted by the rise and fall of new infections and the pace of immunization. Even as the US is opening and the UK is gradually coming out of its three-month lockdown, some EU members are again tightening restrictions. The varying severity of curfews enforced by different Indian states to tame the latest fury will lead to uneven factory and services output and GST collections. Investors moving their cash and holdings as per the standard five- to seven-year bullish and bearish cycles might be unable to take a long-term view on any sector. If tech stocks go up on travel advise to stay away from hotspots, crude cools down but so does activity in oil producing countries that are markets for a host of goods and services. The fifth concern is the recklessness seeping into bets on the unstated understanding among participants that a market meltdown like that on 23 March 2020 is unlikely. If at all there is bleeding, it will be quickly staunched by fresh support packages. Liquidity pumping, incentives and cheap assistance looking for value are propelling the unlikeliest of stocks into stars at the first hint of turning of the corner. IPOs are sold for rich valuations. Prices in the secondary market run ahead of earnings, anticipating return to the pre-covid-19 era, despite uncertainty when that will happen.

 

The sixth outcome is the weakening of time-tested linkages guiding investors. Foreign portfolio investors and domestic institutional investors, who should behave in tandem, are staking out contrary positions. The mystery is if overseas funds are withdrawing due to the country’s isolation on the international map following the release of a new outbreak or on expectation of higher interest rates back home.  There is also no clarity if the net buying by mutual funds over the last couple of months is because of correction or on easing of redemption pressure. What is becoming clear is that the world is no longer flat. The US and China are rebounding even as many countries in Europe, Asia, and Africa continue to struggle. The seventh fallout is the increasing flow of cash infusion from governments into an alternative swap system that runs on sentiments rather than demand and supply. Already a legal tender in Japan, EV maker Tesla, some major corporations in the US and Singapore have embraced digital currency. Russia, China, and India are going to come out with their own versions. A trading platform for cyber currencies recently got listed at euphoric discounting. So far as transactions remained on the fringes, the parallel universe could be ignored. The Old Economy's acceptance of the new reality is a complication. Central banks can crack down on a market without rules to insulate the real world or shepherd its transition to the mainstream to control the narrative.

--Mohan Sule

Springboard of setbacks

 

Crises such as freezing of debt schemes and misuse of PoA by brokers have resulted in a safer trading space

 

What can move and shake the equity market is uncertain. The covid-19 outbreak was a health emergency, but the policy interventions of slashing interest rates and fiscal incentives mimicked those in a cyclical downturn. As is the norm, export-oriented sectors led the revival. Profit-booking in the tech and pharma counters trickled to commodities, infrastructure, and real estate. In a departure, domestic consumption, too, was happening alongside. A good southwest monsoon and cheap credit boosted offtake of fertilizers, insecticides, tractors, and housing products. Another divergence was the varying performance of segments within the industry. Health and hygiene products of FMCG companies sold briskly but not personal-care solutions. Entry-level passenger vehicles were favored for mobility, but commercial vehicles ignored due to movement restrictions. The rebound was quick, unlike the four to five years of zigzag trajectory during the transition from a bearish period into a bull run. The Nifty climbed up 21% in five months after wiping out the loss on the way to the bottom in less than 11 months. The benchmark expended 22 months to regain the January peak and 76 months to top it with 21% wealth creation after the 2008 liquidity squeeze. Big-bracket investors did not follow a secular strategy last year. After being overall buyers in CY 2018 and CY 2019, local institutions dumped shares even as FPIs net pumped Rs 2.42 lakh crore in the 15 months till March 2021. The unabated Rs 93000-crore 10-month selloff in the 14 months to February 2021, with the intensity tapering in March, by mutual funds was sparked by redemption pressure from corporate and individual unitholders to conserve reserves. In contrast, overseas accounts had access to ample no-cost cash searching for higher yields. 

 

What has been left unsaid but inferred is the disenchantment with money managers. The restlessness is despite the Securities and Exchange Board of India taking steps to instill confidence in pooled investments. Spreading the distributors’ commission replaced upfront payment to encourage long-term investing. A 1% advance fee per annum for three years is only for SIPs of Rs 3000 or more per month to ensure enlisting of serious investors. Inversely linking the total expense ratio to the growth in assets under management aims to discourage proliferation of copy-cat schemes. It took a series of crises for the realization that there are no risk-free returns. The seizing of the credit market following the collapse of IL&FS in 2018 resulted in side-pocketing of paper the day it is downgraded to insulate the NAV of the rest of the scheme. After the freezing of six debt schemes by Franklin Templeton AMC in April 2020 due to the pandemic-induced rush to exit, the portfolio and yields of the underlying instruments need to be disclosed fortnightly, and not monthly. Amortizing the coupon daily can be done only for fixed income instruments of 30-day maturity. Those of a longer duration are to be marked to market to know the realizable value. A fund house’s exposure to a single issuer is 10% of the corpus. 

 

Sloppy governance is part of the problem. The other is the uninspiring track record. The median one-year returns of the 10 best performing large-cap schemes at the close of March 2021 were 40%, the highest being 49%. The NSE’s mainline index improved 68%.  The top 10 performing multi-cap schemes’ mid-range was 8%, with the upper end appreciating 17%. The BSE 500 climbed up 73%. Besides ease of online trading, the near doubling of growth rate of demat accounts to 5.15 crore in the 10 months from end FY 2020 as against 14% increase from FY 2019 is in no small measure contributed by the desire of the ordinary investor for control due to the mismatch between expected and earned gains, particularly after the cleaning up undertaken by the market regulator to create a safe environment. The blowout in 2019 of Karvy Stock Broking, which quietly sold members’ securities to fund real estate arm Karvy Realty, was a turning point that led to reviewing the use of power of attorney given by subscribers. Now securities will remain with the clearing house and not transferred to the broker’s account. Since 1 September 2020, 20% upfront margin is required from the client for every intra-day order as against the practice of the platform provider often putting up the margin on the squared-up position at the end of the day. Buyers and sellers will now have to wait till settlement before executing a fresh trade. These reforms have emboldened the marginal player. It is a triumph of David over Goliath.

  

 -Mohan Sule