Security check

The success in finding buyers for a stressed asset depends on the reasons for the distress and the external environment

The divergence in views on the role of promoters in bidding for their stressed assets means the Insolvency and Bankruptcy Code, 2016, remains a work in progress. The noisy differences over whether owners should be allowed or debarred from the exercise should not hide the welcome consensus that some companies might be beyond repair in their present form. The change in mood is a significant departure from the earlier practice of consigning sick companies to various boards and bureaus to nurse them back to health. The process went on for years. Financial institutions continued to carry on the bad loans in the books in the hope of revival. Eventually, the government would bail them out without fixing any responsibility for their shoddy supervision. The borrowers carried on merrily, flitting to the next opportunity without any accountability. No more. To avoid making hefty provisions over a fixed time-frame and take steep haircuts thereafter, financial institutions have to undertake careful due diligence and constant monitoring of accounts. Companies have to hedge by broadening fund-raising activities. The judicious mix might comprise private placement with institutional investors and domestic and overseas bond markets. To get good valuations and fine rates, issuers have to open up their books and submit to credit appraisal. Even small subscribers stand to gain. They will have better access to information.

For all the good intentions, the polarizing positions over who should participate in the liquidation of non-performing assets have brought to the fore the practical problems in implementing IBC. The most buzzing of these is scouting for the right fit. Any discussion has to take into account the track record of PSU divestment. Except for Navratnas, the route of pushing small lots of shares into the market has not met with the desired response. Whiff of an impending offer for sale results in a bear assault on the stock. Second, big-ticket investors’ skepticism stems from the reality that the government remains in a controlling position. The alternative devised was strategic sale to get a fair discounting. The approach eventually turned controversial as doubts were about pricing. There was suspicion of dummy candidates fronting those who might not want the spotlight or not qualified to bid. The lock-in, being proposed by the present dispensation, was flouted in one case. Keeping out defaulting risk-takers might prove counterproductive in industries undergoing stress merely because of miscalculations of the potential or cyclical headwinds. The wireless space is a glaring example. The rush of players in the initial stages intensified competition, forcing many departures. The predatory pricing of Reliance Jio is now testing the patience of the remaining survivors. Reliance Communications, fighting insolvency, belongs to a group that can muster up the financial resources to keep the venture afloat. Group companies in the financial space have renowned partners and investors. The question is if ADAG wants to do so or move on.

The success or failure to find a buyer hinges on industry dynamics. Private equity is interested in the towers of RCom. Peers are more likely to acquire its spectrum, a tell-tale sign of consolidation and asset-light model. Efforts to monetize fugitive industrialist Vijay Mallya’s properties have been fruitless. Airline operators lease planes. Human resources and aviation turbine fuel are the major overheads. Even a successful sale of immovable assets might not be sufficient to recover all the dues if the brand is sullied. Extradition and jail time will be symbolism for the lenders and the Indian government unless there is evidence of fraud. In contrast, getting the Sahara owner to compensate the depositors appears to be an easier task as most of the unaccounted wealth has been funneled into businesses that have ground-level visibility such as real estate and hotels. Here, too, getting a good bargain is proving difficult due to the worldwide slowdown till last year. The collapse and resurrection of Satyam Computer Services hinged on its position as one of the top five tech exporters. M&M bought the firm not for its physical presence. Rather it was the roster of clients that was the attraction for the group with a nascent presence in the sector. The uneven enthusiasm for distressed steel assets comes at a time when Tata Steel is deleveraging. The NDA government’s policy to buy local steel offers a temporary respite for the enhanced capacity of domestic players, who still lag behind China on volumes. Therefore, the chances of finding a suitor increases if a company is going down due to corporate governance missteps rather due to sector disruptions.

Mohan Sule

An uneven field

The heat over different tax slabs in a uniform tax regime is just one of the asymmetric situations that investors face

Does a uniform tax imply a single rate on all goods and services across the country or different rates for different groups that are the same everywhere? The answer to the question is at the center of the debate if the roll-out of the goods and services tax has simplified the indirect tax regime. Five slabs replaced various Central and state government levies from 1 July. The unfairness of applying the same rate on wheat flour and luxurious cars are noted in support. The counter-argument is that, even at the same rate, the absolute tax revenue generated will depend on the cost. Categorization leads to arbitrariness and disputes. The finance minister has hinted that eventually the 12% and 18% tax rates will be merged and there will be three groups comprising the poor man’s basic necessities at zero tax, demerit goods in the highest slab of 28% and the rest in between. A few items still remain at the discrimination of states. There is a consensus that mass consumption items require moderate rates. Yet, along with alcohol, fuels are heavily taxed both by the Central and state governments. Despite unanimity on the need for one rate on the same product, the disagreement on whether there should be a single rate has underscored the fact that tax payers and investors have to contend with a field that is not leveled. If it were so, there would be one income tax rate. 

The market assigns higher valuations to mid and small caps due to their potential despite the downside of these companies requiring to sacrifice the quality of their earnings in the quest for growth. At the same time, companies belonging to the same industry get different treatment after taking into account tangibles such as promoter holding, the margins, deployment of cash, capital expenditure and dividend payout as well as intangibles such as corporate governance and brand image. Algo trading gives big-ticket investors advantage in placing orders. Despite proportionate share allotment, the primary market is rife with instances of favoritism. The book is run through big investors to determine the price range. Nearly two-thirds of the issue is assigned to institutional investors. Though the quota for small bidders has increased over the years and a discount is offered on the cut-off price, those opting for the lowest band and minimum quantity often return empty-handed. Steps have been taken to correct the perception. Information that might have an impact on share prices has to be immediately disseminated to stock exchanges. Still, issuers prefer qualified institutional placement to raise capital. Obviously, these fat cats have access to the top managers and better insights about the company’s operations and outlook. The voice of the ordinary stakeholders is frequently ignored at AGMs. To rectify the situation, companies have been directed to get a majority of the small shareholders on board for passing resolutions. The problem is not all the members of this category hold equal number of shares. How a dominant section can subvert the process has been displayed during the reverse book-building exercise for de-listing. Several companies prefer to stay put than agree to the exorbitant demands. To get even, ordinary investors are directed to mutual funds in spite of absence of mechanism to demand accountability from the fund managers for their performance even as the asset management company continues to enjoy a fixed fee.

      

Amalgamations, too, create an unfair situation though the apparent aim is to create synergies, enlarge the product basket and market reach and cut costs. Mergers are never between equals. A sluggish leader often takes over a smaller but efficient peer with better growth prospects. A group might want to combine a capital-guzzler with another with plenty of cash or hive off a division weighing on the discounting of the flagship. The immediate problem from the asymmetry is valuations. Should the transaction price take into account debt, sales, operating profit or market cap? Discontent over the share-swap ratio has resulted in the dissolution of several merger proposals. Succession planning has forcefully brought investors face to face with market distortion. In an ideal world, the heirs would get a share of the empire that is equal in value. In an unfair world, some businesses might be doing well, while a few might be mediocre performers. Obviously the patriarch cannot slice and dice the conglomerate so that a portion of each business is grouped and parceled off to each of his children. The small shareholder who has spread his investment across the group to de-risk or with faith that the new businesses too will get the promoter’s magical touch feels short-changed at the division that creates uncertainty as not all the  siblings will have inherited the good businesses or their father’s acumen.

Owner’s pride

Unlike the developed economies, the Indian stock market will have many triggers to sustain and accelerate gains

The equity market surged more than 2,500 points from the recent low in less than two months before pausing for breath early November and letting off nearly half of the gains thereafter. The spike in oil prices after the power grab in Saudi Arabia did raise questions about the sustainability of the buoyancy in stocks worldwide. Oil producers suffered in the years since 2008 as developed countries slid into recession or slowdown. The mixed signals emitted by China did nothing to offer clarity on the way ahead. India, another big consumer, was struck with policy paralysis since 2013, two years of drought and the roll-out of structural reforms. All these variables are not out of the question. China might not grow at the same pace as earlier but it is also not likely to fall off the map. It is understandable that West Asia wants to catch up with the rest of the world by making the most of its strength. The cutback in oil production by a section of Opec to support and boost prices will be a trigger for the Gulf region to recover from the slump. It might even gain its position as one of the important destinations for exports from the emerging markets, after the US and the euro zone. Indian exporters of manpower, merchandise and farm products and services to the region had to bear the consequences of soft crude prices. Their remittances will be valuable contributors to the reserves. Oil exporters are not likely to embark on reckless adventurism by allowing prices to go unchecked. The outcome of such a suicidal strategy is clear: worldwide recession. It might even spur renewed effort into shale-gas drilling that had tapered after the plunge in oil prices.

The market is forward-looking. Projections by multilateral institutions that the global economy is set to expand over the next two years have supported most prominent indices’ journey to historic highs. The recovery of the US and euro zone have provided fuel so far. The unemployment rate is low in both the geographies. The US market crossing new milestones is on the back of President Donald Trump’s tax-cut proposals. It might even have factored in the productivity gains of the next couple of years. The current high valuations might look reasonable in retrospect as the world sets to usher in an era of unprecedented prosperity. The crux is if these can be sustained. If the US Federal Reserve begins increasing interest rates from next month, the American economy can be considered to be into over-bought territory. Funds from profit booking are likely to find their way into fixed-income products to hedge against future shocks. Fearing pull-out by foreign investors, emerging markets might be tempted to follow the example of the Fed. The wave of higher interest rates around the world can torpedo recovery. The conclusion is that the US, the euro zone and Japan have to rely on monetary policy tinkering to drive or pull back inflation, now being considered as an important indicator of a nation’s dynamism. It should not be high enough as at to tempt consumers to stash cash in savings accounts for better returns and not low enough to discourage companies from undertaking expansion.

The striking feature is that while the developed countries might have to worry about finding triggers to keep growth intact, India should not have to face such concern. First, a buoyant global economy will propel exports, aided by a weaker rupee if short-term foreign money exits. The outflow is likely to be compensated by inflow of foreign direct investment as policy makers engage with stakeholders to climb the Ease-of-Doing-Business rankings to the 50th spot in the next two years. The Insolvency and Bankruptcy Code, the Real Estate Regulation and Development Act and the goods and services tax have set the stage for more reforms. Simplifying land acquisition, restructuring of PSUs and making labor laws flexible will nicely complement programs such as power and houses for all. The ambitious road connectivity plan supplements the GST reform. Heightened economic activity and the improvement in tax collection will allow the Central government to rationalize GST and income tax slabs and rates. The possibility of the central bank increasing interest rates if consumer price index looks up is rare at the moment. For one, the real interest rates are still around 3%, more than the preferred 1-2%.Demo has ensured liquidity in the banking system. The low lending rates have prompted companies to undertake debt refinancing and boosted buying of consumer durables and affordable housing. In fact, he creeping up of inflation will have a salutary effect on risk-taking as producers of goods and services will feel emboldened to take price hikes. A fall-out will be higher wages and purchasing power.

Mohan Sule

India’s GEs

Telecom assets acquired to accelerate growth have instead turned into capital- guzzlers

The directive of the telecom regulator to halve the interconnection charges billed by the telecom service provider of the recipient to the telecom operator whose subscriber originated the call has brought the focus back on a sector that was once sought by investors. Not that it was ever out of the limelight. A real estate tycoon and a minister landed in jail as a result of the scramble to bag licences on a first-come-first basis. Even as the law was running its course, whether auction was the right method to sell spectrum occupied considerable bandwith as successful bidders were left with huge debt. BhartiAirtel’s was more than Rs 45000 crore end March 2016 after splurging above Rs 43000 crore in 2016 and 2015.  Reliance Industries plonked Rs 11000 crore to bag licences in 14 circles early 2014. There is no telling when Reliance Jio will be able to recover the investment due to a long period of free run. It did show an operating profit in the September 2017 quarter on the back of price hikes taken after triggering a bloodbath and hastening consolidation that was in the offing following the CBI filing the 2G-scam charge sheet in April 2011. The buyout by Bharti of Videocon’s licences for six circles and Aircel’s for seven circles and the swallowing of Telenor early this year and the consumer business of Tata Teleservices recently and the Vodafone-Idea Cellular and the failed Reliance Communications-Aircel parlays to combine operations were viewed as inevitable when talk-time’s role in contributing to the average revenues per user had vanished and the cost of transporting data slid.

The developments saw a re-rating of the sector, where gaining market share is a race to offer cheap tariffs. With a huge treasury chest (Rs 1754-crore cash end March 2017) accumulated from refining operations, RIL  bought back shares to boost prices when oil  was sliding. Additional shares were distributed to mark confidence in servicing the enhanced equity base as its strategy of brutally taming competition drained out liquidity but improved the return ratios. The crucial issue is at what point will RIL shareholders question the deployment of resources in a business that is a capital-guzzler and demand more bonus issues and higher dividends as the stock climbs to new highs in anticipation of the diversification outperforming the sluggish core operations. Besides the turbulence and possible truce in the near future dictated by realism, there is another striking feature binding the players who are struggling to stay afloat. RJio, Idea and RCom are parts of conglomerates with diverse interests. For Idea (42% promoter holding) and RCom (60%), the telecom foray has been a stamina-sapping exercise. If not for the expensive mistake, RCom would not have had to embark on a de-leveraging spree: it is now pulling out of 2G operations.  Fortunately, the commodity upturn will offer support to the Aditya Birla group.

Bharti, the standalone Indian player (excluding British Vodafone, with a war chest of US$9.7 billion end March 2017, though down nearly 40% from the previous period) has presence along with RJio in 90% of the circles. Not that it is out of trouble. The costly African foray has bombed. The owners had to shed stake in some assets to shore up funds. There has been churn at the top.  When the dust settles, so will the unrealistic expectations of the small shareholders from the diversification forays of their companies. The telecom business, besides financial services and the Mumbai and Delhi power generation and distribution, was inherited by the younger Ambani sibling when Dhirubhai’s legacy was sliced. The emerging opportunity was expected to put the ADAG on a growth rate superior to the fossilized business of refining or electricity generation, where the return on asset is fixed. The difficulty of RCom in selling its transmission towers is a foretaste of what seemed like sensible allocation of capital for backward integration eventually turning out to be a wrong call due to shift to asset-light model. The focus will now be on defence. In contrast, RIL is darting in all directions. Entry into renewable energy is on the drawing board and so also manufacturing of lithium-ion batteries for electric vehicles with the Adani group. Besides exposure to TV and digital content to feed its telecom arm, there is presence in the retail space. An example of how companies straying into unrelated areas in search of growth lose their way is GE. It has divested the securities, banking, financial services, property, appliances, industrial solutions and TV and film businesses to concentrate on big-ticket manufacturing. The market does not seem to be impressed. Despite being a constituent of the Dow Jones Industrial Average for most of the time since its inception, less and less analysts are tracking the stock.

Mohan Sule

Back from the brink

An important lesson from the stock market’s recent brush with bears is that valuations is a dynamic concept

The near 1,200-point slide in the stock market following the Federal Reserve’s stated resolve to begin the cycle of interest-rate hikes and the eventual recovery have plenty of lessons for investors. The first is that the rules of the game have changed. Equities are shrugging off the control of foreign investors, though the category still has the power to sway the market like the four trading days in September. In fact, companies with high foreign fund holding have become liabilities due to their sensitivity to international events. Instead, mutual funds are the new movers and shakers. Many of them are maintaining a higher percentage of cash to deploy on dips. Their exposure is not limited to index constituents as is of most pension funds from the developed economies because of their investment objective. The second change is the shift of mood.  Investors are tapping players creating ripples in niche platforms, bypassing those with established revenue models. Retailers, pathology labs and fast-food providers have emerged as forces to reckon with in contrast with tech, telecom and banks in the pre-2014 era. The slowing of MNCs in the large-cap space in providing capital gains is the third conclusion. They do surprise from time to time. These occasions are exceptions rather than the rule. Indian peers are seizing the initiative as consumers are shaking off their reverence for established brands. They score with their value-for-money proposition by spotting space in the market that big players have ignored or unable to tap due to the low margins. Some are becoming MNCs in their own right by going to neighboring countries.

The fourth inference is the preference for listing gains, as reflected in the huge over-subscription to IPOs of late, rather than bracing up for the long trot or fluctuations in the secondary market to gather capital appreciation. Some dodgy issues, to be sure, don’t elicit the necessary interest, a display of maturity of the market that prefers quality even if it is expensive. The fifth outcome is the dramatic transformation in the outlook for valuations. The yardstick of using historic P/E to determine if the current prices are over the top is turning obsolete. Fancy for stocks in high double-digits seems to be a reiteration of the understanding that the economy is set to scale up at a faster pace. The sixth observation is that many hot and happening sectors have let down investors unexpectedly. The lukewarm reception to e-commerce properties is in consonance with their de-rating by private equity and venture capitalists earlier. Volumes cannot be a substitute for quality of the earnings is the message of the market.  The seventh noticeable trend is that every phase has some comfort sectors. These continue to perform steadily, irrespective of the internal and external environment. Passenger cars and two-wheelers fit the slot. A range of models cater to different needs, without bloodletting. There is seamlessly adoption of new challenges.

Each bull-run throws some surprises, too, is the eighth fallout. The trigger could be transformation in the market’s taste or change in technology or regulations. Ignored till recently, deregulation of petrol and diesel have made refiners the market’s darlings. The danger here is that just as loosening control permitted PSU oil marketing companies to bloom, any tinkering with norms could also make them wilt.  The eighth footprint is that traditional safe harbors are no longer dependable. FMCG and pharmaceuticals, once considered defensives, are now becoming unpredictable. Sales of personal-care products bob according to rural consumption that, in turn, depends on rains. Drug producers’ fortunes wax and wane as per the observations and clearances by overseas regulators. The ninth marker is that sub-segments can perform in a diametrically opposite fashion. Even as state and some private lenders are fighting off the market’s negative perception in the financial services space, NBFCs continue with their trail-blazing run due to their nimble-footing in customizing to borrowers’ needs. The riddle is if consolidation will make banks responsive or shackle them with more layers of decision making.  There is possibility of hitherto-shunned industries making a dramatic comeback is the tenth inference. Non-glamorous nuts-and-bolts producers are coming out of hibernation. Bearings, components for machines, water and sewage treatment, chemicals and metals are once again meriting a closer look from a market that is fed up of the hype and want India Inc to walk the talk.

Mohan Sule

Silver linings

The huge foreign exchange reserves leave enough room to keep interest rates low and rupee capped

Whether demonetization has resulted in the destruction of the economy or is a much-needed disruption is a polarizing issue. Despite the differences, there is consensus that India needs to widen the tax base. The conflict is how to go about doing it. Opponents such as former governor of the Reserve Bank of India Raghuram Rajan or former economic advisor to the UPA II government Kaushik Basu have no answer other than to point out to the short-term setbacks. The practitioner of coalition dharma, Manmohan Singh, pronounced the exercise as legalized loot, conveniently forgetting the plunder of the national treasury by crony capitalists. A swap of high-value notes mutated to mean their confiscation. How daily wage earners and those with unsteady stream of revenues came to own such a large number of high denomination currency and who was responsible for injecting them into the system remain a mystery. Digital India would have remained a catchy slogan and Jan Dhan accounts with nil balance. Destruction is needed if the edifice is too rotten to be repaired. Disruption results whenever there is change in current status. The sinking of the Titanic in 1912 and the take-off of commercial air travel in 1914 could not have been a coincidence. The outcry system of stock trading got seamlessly converted into online trading without any glitches.  Credit goes to the ease of using the interface as well as the aggressive push by the market regulator. The plunge in telecom data prices should have been the trigger for exodus to cashless transactions. If payment gateways are yet to find widespread usage despite their proliferation, the fault lies with the central bank for not doing enough to push down transaction charges.

The second silver lining is the implementation of the goods and services tax. The entire value chain from the supplier of inputs to the manufacturer to the distributor and the consumer has to become tax-compliant. Not surprisingly, there are complaints about the frequency of filing returns. Much sympathy is being extended to the difficulty faced by micro, small and medium enterprises so soon after DeMo. In a sense, GST is anti-thesis of the socialistic policy of protecting these units with tax exemptions and benefits instead of incentivizing them to grow big. Most of them till recently were reluctant to avail or unable to access capital from financial institutions due to absence of book-keeping. The new regime encourages these units to achieve economies of scale by availing of input tax credit.  Many of them could turn out to be DMart or LalPathlabs by tapping the equity and debt markets. The cascading effect will not only be visible in employment generation but also in boosting consumption. Mutual funds in search of high-quality, low priced offerings will get an opportunity to deploy their subscriptions, encouraging more investors into the market on the prospect of better returns.

A valid point is the number of tax slabs. A uniform tax regime implies a common rate. Enough hints have been given by the finance minister that some of the rates will be merged once the system becomes revenue-neutral. Eventually, there might be just two rates, one for essential and another for non-essential items. No product or service should remain outside the purview. The recent spurt in petrol and diesel prices has provided an impetus to bring them in the GST net, too. The third comforting factor is that interest rates are still high. Recently, the bond market saw turbulence, with yields on government paper rising on talk of an imminent fiscal stimulus. The fear was that increased government borrowing would crowd out private players and strain liquidity, thereby pushing up interest rates.  The concern seems exaggerated. The real rate of interest is near-about 3%. The Reserve Bank of India can adopt a neutral stance for the remaining part of the fiscal even if wholesale and consumer inflation rallies. It can begin the reduction cycle if there are signs of cooling of food inflation as late rains in many parts of the country seem to have nearly wiped out the monsoon deficit. Besides, the high rates have proved to be magnets for foreign funds. Their inflows have bolstered the foreign exchange reserves to a record US$400 billion. The stockpile gives room to the monetary authority to maintain liquidity to keep interest rates soft and to depreciate the rupee to boost exports, thereby ensuring that the withdrawals of the dollars from the treasury are replenished. When the economy begins to recover, inflation will also look up. As long as it does not run away, the development should be welcomed as it will induce risk-taking. Producers will be able to earn better realizations because consumers will be in a position to absorb the prices hikes.

Mohan Sule

What the market knows

The rally in the broad market and the continuing attraction of mid caps indicate the present economic woes might be temporary

Baiters of Prime Minister Narendra Modi have been quick to blame demonetization for the GDP growth slowing to a three-year low of 5.7% in the June 2017 quarter. The trigger seems to be the Reserve Bank of India annual report coincidentally coming around the same time. It revealed only about 1% of the old currency was not returned to banks. There could be two reasons for depositing of most of the cash in circulation. First, only a handful of people might be in a position to generate, store and utilize the liquidity. The possibility is that they are at the top of the pyramid and rented the accounts of their field force. Second, many might have already laundered the loot through a web of channels. The discovery of nearly two lakh shell firms and the restriction on trading imposed on more than 300 listed companies should be counted as major successes apart from the revival of the dormant zero-balance Jan Dhan accounts. There is some quibbling whether 90 lakh new tax payers were added or about 50 lakh as mentioned in the second Economy Survey. The controversy is silly. What is important is the amount of income declared rather than the number of tax payers. The puzzle, however, is why the impact of the swap of currency should be felt after a quarter. The GDP grew 6.1% in the January-March 2017 period over a year ago, when the intensity of the fallout was the highest, with the 50-day period for exchange of old notes closing in the previous quarter.

The disruption in the rural economy could be responsible for the lag effect. Last year’s normal rainfall resulted in supply glut. Prices of many farm produce crashed. The distress of farmers after two consecutive years of drought, therefore, did not ease, affecting karif sowing beginning April. The roll-out of the goods and services tax from the second quarter of the current financial year forced manufacturers to cut production on dealers’ reluctance to restock. Companies were busy shedding off past excesses on fear of being declared insolvent. Construction stalled as new houses now have to be Real Estate Regulation and Development Act-compliant. A strong rupee and the churn in the tech sector hurt export services. Infrastructure initiatives of the government such as Smart Cities and Digital India are at the planning and ordering stage, with execution of many yet to commence. Therefore, the growth in industrial production, at 1.2%, and construction, at 2%, was lower than that of farm output, at 2.3%, in the quarter. If manufacturing has slumped and food inflation is rearing its head due to floods and patchy rains in different pockets, why is the market not bothered? The benchmark index of the BSE once again crossed 32,000 and of the NSE 10,000 after retreating amid a spell of volatility triggered by North Korea’s missile tests. Yet, investors have been selective in their approach to leaders in recognition that many of them have to diversify to bolster earnings, a risky exercise. Only a handful of index constituents are attracting most of the inflows. Interestingly, these stocks get most of their revenues from the domestic market.

Nearly 30% of the NSE Nifty 50 hinge on exports for a major part of their revenues. After capturing a commanding share of the local market, other companies in the index too, have been seeking international orders. The quest for dollar-denominated income made sense when the rupee was depreciating. The acceleration of foreign direct investment since the launch of the Make-in-India initiative and foreign portfolio investors’ increasing interest in debt due to high real interest rates have boosted the Indian currency. Many export-oriented sectors are facing headwinds. Mid- and small-sized companies are getting better discounting despite the general belief that large companies are better placed to absorb external shocks. Domestic funds, buoyed by cash that turned formal, are betting on these counters. Only about 10% of the 100 companies in the S&P BSE Mid-cap Index depend on exports. Many medium and small companies are in nascent sectors or emerging from segments dominated by the informal economy. There is scope for them to run at a faster pace. The low base effect of the GDP growth rate in Q1 and possibly Q2 of the current fiscal could also be a launch pad for recovery going ahead. The spurt in spot prices of electricity points to the bottoming out of the economy. The increase in August in CPI due to food articles and WPI largely by metals implies the slump in demand post DeMo and GST turbulence is fading. Fortunately, interest rates are not so low as to push the RBI to reverse the course. No wonder, the market continues to remain bullish on the India Growth Story.

By Mohan Sule

Cleaning up

After the crackdown on shell companies, time to completely phase out participatory notes

Sebi has restricted trading to once a month in more than 300 listed companies on suspicion of being vehicles for money laundering. Going beyond, the market regulator should examine when and how these companies got listed, the investment bankers who shepherded them and the auditors signing their books. The Insolvency and Bankruptcy Code, passed in May 2016, has blocked crony capitalists with a track record of defaults. The travails of a consumer durables company and a conglomerate with dreams of rivalling RIL are symptomatic of the changed times. Earlier, some helpful bankers would have bailed them out. Now, they are shedding businesses to survive. Ironically, both had interests in oil exploration and telecom, the two sectors with plenty of room for arbitrariness in awarding contracts and licences in the pre-May 2014 era. The recall of high value notes late last year flushed out unaccounted cash. The income tax department got a wealth of data to inspect and pursue. One lakh shell companies have been detected. Banks got low-cost funds. According to a Reserve Bank of India study, most of the deposits were later diverted into mutual funds, a departure from the earlier practice of opting for real estate and gold. Therefore, a major benefit of demonetization is the weaning away of the equity market from foreign investors. The introduction of the goods and services tax from 1 July 2017 will support listed companies to capture the share of the unorganized sector. Companies in the informal sector that have achieved scale but were reluctant to list due to the increased scrutiny will no longer be able to enjoy the edge of tax evasion. Investors should gear up for a booming primary market.

Despite some hiccups, the stock market has been stable during these surgical strikes. Previous attempts to staunch dodgy foreign inflows did not meet with a calm response. In October 2007, Sebi proposed curbs on participatory notes (PNs) issued by registered foreign institutional investors to overseas investors who wished to test the Indian stock market. It is not possible to know who owns the underlying securities. Hedge funds acting through PNs were the cause of much volatility. The instruments accounted for around 50% of investments made by FIIs then. Within a minute of opening for trading on 17 October, the BSE Sensex shed 1,744 points, or about 9% of its value, in the biggest intra-day plunge in absolute terms. Finance Minister P.Chidambaram had to clarify that there were no plans to immediately ban PNs. Stocks staged a remarkable comeback after opening at 10.55 am and ended down just 336.04. The Sensex tumbled 717.43 points, or 3.83%, its second biggest fall, next day. There was a 438.41-point slide the day after. Sebi chairman M Damodaran had to announce simplification of the FII registration process. The market gained 879 points, its biggest single-day surge. The regulator nonetheless banned FIIs from issuing fresh PNs and asked them to wind up their exposure within 18 months. In a couple of days, the benchmark crossed the 20,000 mark for the first time.

Five years ago, Sebi ordered FIIs to report monthly details of PN transactions within 10 days instead of six months after a Union government white paper on black money identified the instruments as one of the routes through which black money transferred outside India comes back. End 2014, new regulations were published to curb illegal fund inflows by tightening know-your-client norms and shutting out entities with opaque structure. A couple of months ago, a fee of US$1,000 was levied on each PN. Issuance for speculative purposes was barred. At the same time, entry was relaxed for FIIs willing to invest directly. In July, the regulator put in place restrictions on FIIs from issuing PNs for derivatives. These were to be used only for hedging. Besides, existing positions on un-hedged PN derivatives had to be liquidated by end December 2020. The market in the meanwhile has become more transparent. Disclosure norms are getting stringent. Companies have to inform the stock exchanges of any defaults within 24 hours. The usage of Aadhaar and KYC removes ambiguity about the identity of domestic investors. FIIs are now choosing the derivatives platform over the cash segment. Despite their falling share, to 6% end April, the opaque nature of PNs does not fit in the concept of New India propounded by Prime Minister Narendra Modi on 15 August. Concerns still remain that PNs are being misused for round-tripping. With mutual funds displaying capability to insulate the market from any external shock, it is time to bury the ghost of PNs once and for all.

Mohan Sule

Tough love

Indian companies’ stormy transition to transparency should be welcomed despite some short-term capital loss

Less than 10 months following the boardroom turbulence at one of India’s oldest conglomerates in the country, another high-profile exit has rocked the stock market. Parallels are being drawn between the spat involving the board and larger-than-life former honchos. The conflict at the Tata group and Infosys revolved around the direction of the companies under the successors. If the proposed write-downs and deleveraging of the balance sheet angered Ratan Tata, N R Narayana Murthy was annoyed with the splurging on compensation packages and an expensive acquisition. Both have been criticized for interference. In the meantime, the market value of their companies eroded as panicky investors dumped the stocks, unsure of future. The trigger for the bloodletting seems to be the downturn in the businesses. The global fund crunch turned the Tatas’ strategic buys to ramp up growth into costly mistakes. The shift in the market mood from back-office support to digital innovations after recovery from a decade-long slowdown caught the Indian tech sector including Infosys off-balance. The five large businesses of the Tatas that were the cause of the misery and the subsequent coup seem to have bottomed out due to the turn in the global economy. Though a massive buyback has failed to stem the slide in the stock for now, the turmoil at the tech major will be a distant memory shortly. The market is back with its preoccupation of how global and domestic winds will affect the flagships of the Tata group. In another couple of months, analysts will be examining Infosys’s revenue guidance for the second half of the fiscal to gauge the outlook of the sector.

An evolved market should really not care who the boss is as long as the company is delivering capital gains consistently. Transfer of power should take place without much ado, with replacements spotted and groomed at least a year in advance. Big investors are constantly pushing controlling shareholders to broad-base the pool to run their companies to ensure longevity. The Tata group was often cited as an excellent example of a promoter-driven enterprise managed by professionals. Some of them assumed legendary proportions till Ratan Tata arrived on the scene and carried out a putsch. JRD Tata’s choice of a relative to succeed him rather promoting one of the competent managers within the fold was disappointing but understandable. Who else but a part-owner to hold together disparate companies? Vishal Sikka was a lateral appointment and only after the co-founders had their turn at the wheel. The decision did not signal a desire to voluntarily step back but reluctance to let go the reins. The market is divided over Tata’s and Murthy’s refusal to lead a quite retired life despite both holding some equity. The irritation over the events leading to the departure of the new recruits in less than four years of their anointment is because of the uncertainty ahead and not out of concern for accountability. Surprisingly, there is no introspection over the inherent contradiction of exiting a counter that is the midst of cleansing process. Rather than wishing the issues to be swept away, investors who grumble being bypassed at annual general meetings should be using the opportunity to let their voices be heard. A debate is necessary to learn lessons.

The market’s reaction to succession points to an over-riding desire for a smooth transition irrespective of the choice. Despite their distaste for family-dominated businesses due to their opaque operations, the only time apart from financial performance that institutional investors take flight is when there are squabbles. The RIL stock suffered volatility post Dhirbubai Ambani’s failure to make public his preference for either of the two sons laying a claim on the business. Ordinary investors, who are told to prefer companies with large non-promoter presence for liquidity and enhanced scrutiny, cannot be faulted if they feel bewildered by the recent events. The combined shareholding of foreign and domestic institutional investors in Tata companies and Infosys is more than those of the promoters. Till the explosion, there was no hint from these investors about the shape of things. The regulatory emphasis on corporate governance is an acknowledgement of the limits of the auditors. They can only point to lapses in book-keeping. The recognition of the role of whistle blowers underscores the importance of corporate culture. The market is known to assign better discounting to transparent companies over peers. There is plenty of scope to earn fat profits from cyclicals such non-ferrous metals and sugar. Yet most risk-averse stay away from these counters because of their dependence on government support. How a company achieves growth is the crux.

Mohan Sule

Take a bet

Regulatory changes, corporate greed and market pressure can be triggers as well as dampeners for stocks

For investors, patience can be a virtue as well as a pitfall. How fortunes can change within days was on display in the run-up and after the roll-out of the goods and services tax (GST). Fertilizer and agro-chemical stocks had rallied on a favorable policy environment triggered by Union Budget 2017-18. The mood dampened when GST of 12% was applied on fertilizers and 18% on inputs. Realizing the misstep, the GST Council reduced the rate on fertilizers to 5% a day before the implementation. ITC surged as the 28% tax imposed on cigarettes was slightly lower than the burden in the earlier regime. Taking note of the unintended bonanza, the GST Council hiked cess to restore the original structure. Though the stock’s pace of gain slowed a bit thereafter, it became one of the contributors in fueling the benchmark indices to new highs. Investors who booked profit in fertilizer stocks factoring in the adverse effect of the new GST regime would have lost out on further appreciation. Buyers of ITC would have been slightly more fortunate as the conglomerate passed on the increase in the levy to the consumers. Investors in pharmaceutical stocks are all too familiar with the feeling of sinking or getting a high on regulatory observations and clearances to introduce new drugs. It is not only regulatory decisions that can make long-term investing a hazard and taking short-term positions risky. Ambitions of companies and large shareholders, too, can bring pleasure or pain.

The current trend of consolidation is an apt illustration. The HDFC group and the Anjalit Singh group decided to engage and then break off the proposed tie-up between their life insurance ventures. Instead of doubts over synergy or share-swap, the market watchdog’s fear of the combined entity’s clout led to the dissolution of the vows. Dreams of investors who might have rushed to buy into parent HDFC and Max Financial, hoping to be part owners of the largest life insurer in the country, must have crashed after the collapse of the deal.The fate of another mega agreement between the IDFC group and the Shriram group to work towards becoming a financial powerhouse will be watched with interest, particularly so as the IDFC Bank stock moved up, believing the benefits of the transaction. Even as the merger talks between Bharti Airtel and the Tatas’ telecom ventures have been called off, two other intended marriages of convenience in the telecom space—Idea Cellular with unlisted Vodafone and Reliance Communications with Aircel— remain works in progress, with investors in Idea nor RCom getting richer despite the resultant enterprises expected to be in a better position to face Reliance Jio. The dilemma of investors is should they quit or stay put hoping that the troubled competitors will eventually get a fair chance to fight it out after tariffs normalize. The power generating sector is another growth story gone wrong. Of the 15 ultra mega power plants to be set up, no bids have been awarded for 12. Tata Power, with debt of Rs 14500 crore, wants to sell 51% stake in the 2,000-MW Mundra UMPP for Re 1 as the cost projections were based on imported coal. Reliance Power’s Andhra Pradesh UMPP is up but it has withdrawn from the Jharkhand project as equations have changed with solar power available for as low as Rs 2.4 kwh as against fossil fuel-based power’s targeted tariff of Rs 3.

The other uncertainty is the moves of companies in response to market pressure. A contentious issue is how much liquidity a company should possess. There is no ideal measurement such as proportion to net profit, operating profit or sales. Many fret over reserves dragging down return ratios, while some prefer capital expenditure through internal accruals. Several investors look at the growing pile as an indication of bonus or higher dividends. A new breed of activists gets annoyed with promoters for not utilizing the cash for growth. The recent spate of deleveraging exercises is a testimony to how quickly the mood of the market can change. The cement sector, where footprints and capacity decide the margins, is seeing a second wave of consolidation. The first had players bunching up to gain pricing power. The second phase is seeing focus on core competencies by those who had entered the space for scale or diversification. Infrastructure player Jaiprakash Associates is being re-rated as the promoters are correcting their past mistakes. The DLF group, too, is becoming lighter after selling many ancillary businesses. At its prime, the north Indian real estate developer was included in the benchmark index. The stock’s fall reflects the market’s nervousness with its expensive expansion. The new Real Estate Regulation Act might prompt a second look. But when?

Mohan Sule

Growth drivers

DeMo and GST will increase the share of the formal sector in the economy, setting the stage for double-digit expansion

When an economic adviser to the UPA government cites anecdotal evidence of return of cash in horse racing post demonetization to support his critique, the obvious inference is the inability of the conventional thinkers to come to grips with a phenomenon that is so rare that there is hardly any research to draw upon to offer historical context. Similarly, when two Noble laureates differ on the after-effects, the conclusion is that the recall of high-value bank notes is not a random act but a bold initiative that had as much chance to succeed as to fail. Some have blamed plunging vegetable and food grain prices to sucking of liquidity by DeMo. A normal southwest monsoon after two consecutive years of drought is also responsible for farmers’ plight of plenty just as early rains and shift to other remunerative crops have fueled a surge in prices of select vegetables and not just the gradual normalization in money supply to the pre-DeMo levels. Perhaps it would be useful to rewind to the fiscal ended March 2009 (FY 2009), when then Union Finance Minister P Chidambaram took banks’ Rs 60000-crore exposure to the agriculture sector on the Central government’s balance sheet. It was the second such instance in the history of independent India but the first post liberalization. The February 2008 budget announcement followed despite an above-normal monsoon of 106% of the long-period average in the calendar year (CY) 2007 and the gross domestic product (GDP) was on the way to expand 9.3% in FY 2008, marginally down from the previous year. Importantly, there was no shocker such as DeMo in the preceding year.

In fact, the flagship program of the UPA government, Mahatma Gandhi National Rural Employment Guarantee Scheme, was to be rolled out in all districts of the country in FY 2009, after its initiation in CY 2005, with an open-ended allocation of Rs 16000 crore for the year. More than Rs 75000 crore was spent on the rural sector in the fiscal. The liberal cash infusion should have proved a booster dose for the economy. Instead, the GDP plunged to 6.7% in FY 2009. Fiscal deficit spurted to 6% of GDP from 2.7% in FY 2008. A contributor could have been the meltdown of the global financial system in September 2008. The common thread between the loan waiver nearly a decade ago and the spate of loan write-offs by some states now is good monsoon. The lesson is that farmers’ distress can arise due to crop failure as well as surplus output. DeMo was never intended to be a short-term solution to improving India’s fiscal health. It was one of the pawns to wean the country away from its cash addiction. It would have been surprising if there were no inventory pile-up as the tax-free wealth became useless or had to be declared. Rather than impatiently waiting for the Reserve Bank of India’s numbers of how much cash came back into the system and how much did not to assess the black money in circulation, the temporary slump in demand should be taken as a validation of the role of the parallel system in moving the economy without corresponding benefit to the exchequer.

Right now, only about a quarter of those filing returns declare income above Rs 5 lakh. The finance ministry has revealed more than Rs 2 lakh was deposited in 60 lakh bank accounts and Rs 25000 crore cash was found in dormant accounts. As many as 90 lakh new tax payers were added. The last-mile generator of cash is the link between the formal economy and the consumer. Following the implementation of the goods and services tax (GST) from 1 July 2017, part of the tax burden of the corporate sector will shift to the retail goods and services provider. Despite estimated to account for half of India’s output, the shadow economy does not get reflected in the GDP numbers. To avoid detection, refuge was sought in real estate and gold. Increased revenues from a widened tax base will allow more spend on infrastructure, a powerful propellant for consumption. Double-digit growth can be sustained even in a low-inflation climate. Though limits have been placed on cash withdrawals and deposits per account, no economy registers 100% cashless transactions. The effort should be to keep the share of physical paper to the minimal by nudging Indians towards digital transactions through fear or incentives. The raids following DeMo have put tax evaders on the edge. GST has offered the sweetener of input credit to suppliers if the receivers, too, become tax-compliant. Together, both are potent instruments to put India firmly on the growth track.

By Mohan Sule

Grounded in reality

Going by past record, privatization of Air India looks difficult and that of banks is fraught with perils

Apart from the decision of the Modi government to privatize Air India, reports that the Tata group and Indigo have shown interest in purchasing the debt-ridden airline are surprising. Modalities of the sale and valuations are still not clear. Why would anyone want to buy a company with Rs 52000-crore debt is a puzzle. No foreign operator has shown interest. It is difficult to comprehend how any budget air carrier will be able to digest the catch unless it is the attraction of overseas flying rights and real estate. Sliding prices of crude enabled the PSU to make an operating profit in the fourth quarter of the last financial year. The track record of private participation in such sales is disappointing. Two hotels in Mumbai, owned by AI’s subsidiary, were disposed of to strategic buyers by then NDA regime at the tail end of the bear phase early 2000s. The airport property was re-sold to the Sahara group within months at a fat profit despite a two-year lock-in. An investigation by the UPA government into the proceedings did not find evidence of any wrong-doing, confirming the theory that the discovery price is always a function of the prevalent market environment. The Asset Reconstruction Company took possession of the Juhu outfit, which ceased operations in 2010, due to the inability of the new owner to service debt. An auction early 2014 flopped. The Tatas bought 25% holding for a mere Rs 144 crore in VSNL, a provider of international telecom connectivity, and subsequently increased the ownership to 45%. After morphing into Tata Communications in 2008, it could take possession of the 740-acre land, whose transfer had been stalled, in 2001, when it was valued at Rs 6156 crore. HUL got rid of Modern Bread to a PE firm for an "undisclosed amount" 15 years after the purchase. There has been no response from the private sector to schemes such as own-your-wagon and dedicated freight corridors of the Indian Railways.

Privatization is a difficult path for any government, particularly of a developing economy such as India that has assigned the public sector to the pedestal of "commanding heights". Profit-making enterprises have become vehicles to finance fiscal deficit. The 1991 liberalization largely ignored the issue of stake-sale in government entities. The first NDA government set up the disinvestment ministry. Many were listed by parceling off bits and pieces. No government of a developed economy digs oil wells. The thrust on solar energy is paying off. The plan to switch to electric cars over the next one-and-half decade is to keep the commitment of reducing pollution made at the Paris Climate Accord by curtailing consumption of fossil fuels. Elimination of subsidy on petrol and diesel and daily revision in their prices make the oil and refinery sector ripe for complete withdrawal of the government. Entrepreneur Anil Agarwal bought 51% equity in sick Bharat Aluminium Company  in 2001 and nearly 65% in Hindustan Zinc a year later. He is interested in mopping up the residual government stake and why the transaction is not happening is a mystery. Coal blocks are being auctioned without restriction on use for captive consumption. Eventually, the mining landscape should be devoid of government presence as prices are dictated by market forces.

The Make-in-India campaign pivots around private domestic and foreign investment to make defence gear. Banking is a segment that remains firmly in the government’s grip. There was talk of bringing down its stake to 51% to make the behemoths responsive to the market. Setting up of the Board of Banking Bureau to appoint professional heads and capital infusion, though inadequate, have given the impression that there is seriousness in nursing banks to health before their disposal. The bad debt problem of Corporate India and the inability of banks to pass on the interest rate cuts due to risk-aversion have given momentum to the demand to privatize banks. Not all, however, are convinced, particularly so since the revelation in the last couple of quarters that even private sector banks have non-performing assets. Wrong judgement calls, cronyism and slowdown are not exclusive to the public sector. Financial inclusion cannot be left to profit-oriented private banks. The success of the zero-balance Jan Dhan accounts to receive subsidies and Digital India, an important component of the initiative to crush the parallel economy, hinges on the un-banked having accounts. Despite the mounting pressure, the Modi government should refrain from mass-scale fire-sale of nationalized banks and instead focus on putting them back on track by minimizing interference. The Vajpayee government lost election after introducing on its eve a voluntary retirement scheme to slash PSU banks’ flab.

Mohan Sule

The low-low land

 

The central bank should stay further policy action till clarity emerges on the economy

Riders swishing on pre-BS IV disposed of scooters and mobikes, buyers frenetically clicking on keyboards to fill their shopping carts with goods with slashed MRP, middle-income home owners pirouetting to outlets with cool-priced ACs and refrigerators, vacationers kicking heels to book low-fare flights. The Indian economic landscape is resplendent with light-footed consumers making the most of slim price tags before the music ends. Housing finance is at a six-year trough and along with the interest subvention is attracting buyers of the thin-margin affordable housing. Cement prices are flat as capacities outstrip incipient demand. Fossil fuel-based power is aplenty but most state electricity boards do not have funds. Solar power prices have plunged with more players rushing in for the tax breaks. FMCG companies have lost the pricing edge due to a crowded market place and finicky users. US clients of tech companies want the discounts offered during the slowdown to be a norm rather than an exception. Airlines are capping costs to keep their noses above water. If the carrot of regional connectivity is a boon or a bane will be known a few years down the line. Free introductory services by a newcomer have resulted in telecom data prices sliding.  Garment makers are catering to the low-end market. Streaming services and brisk sales of large-sized Led screens going cheap have put pressure on multiplexes. Metal prices have softened as China’s growth engine slows. Even pizza makers are facing the brunt of diners’ resistance with digestible food grain and vegetable prices. 

Low inflation is the conclusion of circumstances: Global credit crunch since 2008 and good monsoon in 2016 after two years of drought. Surprisingly, prices have not spurted despite accelerating foreign investments due to a surging Wall Street. Some of the restraint displayed by producers might be voluntary. Slipping crude oil and metal prices have shaved off manufacturing input costs. Many others’ might not be. Tighter emission norms resulted in destocking of two-wheelers at throwaway prices. The specter of higher GST rate prompted retailers of white goods to liquidate their inventory in a hurry. A few might have refrained from taking price hikes on concerns of buyers’ backlash: makers of dairy products. The markets, however, do not appear unduly perturbed by the turn of events. Equities seem to betting on recovery in demand to protect the margins going ahead. Another outcome that is anticipated is consolidation. As such, even valuations of small companies are soaring in the hope of these entities growing their market or being eventually taken over. The debt segment is in a buoyant mood in the belief that coupons have scope to come down by 50 basis points to one percentage point before the festive season starts. Credit also has to be given to DeMo for sucking out excessive liquidity and nudging a significant portion of the population to divert part of their unreported holdings to tax liability. The exercise was timed perfectly: post normal monsoon and festive season that had seen the informal economy making good gains. The next step in the value chain to tame inflation is GST. The regime is going to pull down prices of essential items from the present level. Savings are to be passed on to the consumers. As such, retail inflation is unlikely to climb up. Some of the surplus might even go to higher tax segments such as restaurants and consumer durables that might be reluctant to increase the tab to maintain the cash flow.

The danger is that a low-cost economy propels savings into unproductive assets such as gold and real estate in search of higher yields and as a hedge. The central bank is not in an enviable position. The crucial issue is if a rate cut at this delicate stage will hasten the economy’s passage into deflation or boost consumption. Will Corporate India embark on risk-taking, unsure of the returns? Many distressed assets on the block are not finding buyers. Massive redevelopment plans in Mumbai are stuck for developers. Higher support prices to farmers and waiver of their loans mean increased borrowings by state governments with depleted treasury, putting pressure on liquidity. A thriving economy needs benign inflation. The present real rate of interest of around 4% is moderate. Hasty action either way can trip the economy. Reduction in lending rates will boost equities and bonds into bubble territory. Status quo will create volatility. Instead, the monetary authority should announce a freeze of six months to a year till the next policy action. By then clarity will emerge on the direction of the economy. The move will instill confidence in businesses to utilize their capacities as those waiting for prices to decline further might be willing to open their wallets.

Mohan Sule

End of speedy trials

  

Absence of a trend in the current bull phase means recognition of the danger of treating events in isolation

The bulls have been flitting from metals to power T&D to construction to consumption to refineries to financial services, unlike in the past when an idea or two fueled the rally. Tech, ICE (internet, communication and entertainment), private banks, real estate and PSUs attracted attention at different points. There was an unbelievable period when the market was assigning discounting based on the promoters’ proximity to government as coal mines and telecom spectrum was being sold on a first-come-first-basis. Fortunately, the era came to an end in May 2014. There is no dearth of hot-button topics, however. Increasingly, there is a tendency to pass quick verdicts to tie up the loose ends and move on to the next explosive theme. The most controversial is the determination if the market is correctly valued, over-valued or still under-valued. Like in politics, data can be selectively mined to suit a prejudged outcome. Previously, returns in rupees and then in dollars over varying time-frames were deemed adequate to decide if more juice could be squeezed out. Now, the average of historical earnings to justify the conclusion can be as little as for three years to as long as 10 years. The period for the pace of growth in earnings and prices, too, is picked differently by different interpreters. If the parameters still do not produce the desired results, forward earnings are compared with markets near and far that might have nothing in common with the Indian economy. Drill down, and the rush for pronouncement is noticeable for sectors and stocks. A few quarters of subdued performance, and an obituary is written for the entire bouquet. The conflict over interpretation of an asset turning sour between a bank and the regulator is labelled as under-reporting. There is no patience to see if a telecom services provider struggling with debt is able to reschedule the payment timetable before rushing to declare its health beyond repair. 

The grim picture of a meltdown of tech companies creaking under outdated business model of back-office support has turned out to be far-fetched as also reports of mass layoffs, with the recovery of the main markets, the US and Europe, no longer in doubt. The real issue here is that the industry like the FMCG sector has matured. The growth in the margins will not be as voluptuous as in the past. After acting as cheer leaders for the export potential, the market is realizing that pharmaceutical producers have only a 120-day period to make profit from the generic version on expiry of patent before the gates are opened for other copycats. Banks and policy makers have repeatedly asserted that a non-performing loan does not necessarily mean a write-off. An account on the verge of default will cease to be so after the completion of a transaction that will ensure cash flow. Restructuring of debt and interest payment, change in regulatory policies, shedding off non-core assets and transformation in the marketplace can pull out a troubled enterprise. The charging for services by the disruptor and the stabilization in the churn of subscribers offer hopes for lenders of struggling telecom players. Companies have accused downgrades not taking cognizance of the effects of reorganization that are likely to be felt going ahead. In fact, the government’s economic adviser has publicly scolded international rating agencies for refusing to upgrade India despite significant improvement in the fiscal indicators.

Absence of a trend or fluctuation in the mood every few days can be a welcome development. The behavior could be taken as recognition of the importance of the value chain. Government spending on infrastructure boosts consumption as well as initiates risk-taking in the private sector. A benign tax regime favors compliance and, at the same time, reduces the government’s need to borrow from the open market and lifts pressure from interest rates. In short, events and their impact cannot be packaged in convenient boxes. Is the dollar’s appreciation due to lack of investment option or reflection of the strength of the underlying economy? Thus, the recovery of the US economy can be a cause of concern for exporters as well as relief. A power deficit spells increase in capacity utilization of generators on one hand and lack of industrial demand on the other. The fallout is frequent opportunities to enter and exit at valuations comfortable to investors. Another is the tendency to spread investable funds across sectors rather than risk concentration. The downside is the moderation in the duration and speed of gains. Instead of bench-marking against a sector or an index to gauge performance, investors would be better off fixing targets for internal returns to gain from the rally.

Mohan Sule

Fairly valued

If equity market is the yardstick, the three years of the Modi government have been rewarding, with upside potential

While campaigning for the Lok Sabha polls, prime-minister candidate Narendra Modi would urge the audience to give him a chance after 60 years of Congress reign. Implicit in the appeal was a hint of a different style of governance and a confidence that his five-year stint will be a striking contrast against six decades of a legacy spanning post Independence to post liberalization in spite of the fact that most structural reorganizations take years to produce benefits. The electorate will of course pass its verdict at the end of the term, most probably after answering the question how better off it is compared with pre-May 2014.Nonetheless, an assessment at mid-point is useful to notice the style and substance of policy making: populist with an eye to winning the next election around the corner or thoughtfully crafted to push towards a desired aim. The ability to inspire despite short-term discomfort needs to be scrutinized to distinguish the quality of leadership. Importantly, efforts taken to implement the platform that propelled Modi to lead the nation should get the highest weight. The exercise is, however, fraught with risk. Governments are not held up or run down solely based on comparison of the track record with the earlier regimes. Often, casting of ballots is swayed by sentiments as in the trading ring.

The stock market supposedly reacts after absorbing all tangible and intangible information. The number of times an issue gets subscription is a reflection on the promoter, the business model and outlook. For the first in nearly 30 years, a political party could form government without coalition partners. After moving sideways, the market has picked up speed, mimicking the behavior of a stock that investors realize is undervalued. The momentum could be in response to some of the measures being taken to drain out a system clogged by subsidies, corruption and cronyism starting to show results. The broad market is perfectly poised: not expensive based on historical averages. For the critics, absence of a hefty premium might signal uncertainty about the government’s capability to introduce and execute reforms. The rulers might see in it validation of the actions taken. The initial hesitation and then acceptance by the market of the progress on the three promises of development, minimum-government-maximum-governance and corruption eradication seem to have stemmed from the realization that the outcome cannot be captured in a time-bound and traditional manner. For instance, the premise that the organized sector has the responsibility of job creation, ironically being propounded by those who till a few months ago were emphasizing the importance of the informal sector in the economy, is being vigorously challenged, by noting the fund disbursals by venture capitalists, private equity and Start-up India. Auctioning of government resources has eliminated the discretionary power of ministers and bureaucrats. Though not a perfect method for price discovery, it is at the moment the only practical solution to let market forces prevail. The satisfying aspect is the breaking of quid pro quo sought by influencers. Linking Aadhaar to receiving benefits including tax rebates and subsidies is a bold attempt to plug benefit leakages and the opposition to it from the privileged class has enhanced rather than diminished its indispensability.

An important metric to judge a company is the variance between guidance and performance. The rollout of GST has been missed by a quarter or so. The progress of the development agenda includes bounce-back of the foreign portfolio and direct fund inflows, stabilization of the fiscal health, softening of inflation, elimination of power deficit and expansion of the electrification program, spread of cooking gas connections, easy availability of urea for farm use, constructing highways on war footing, scrapping of the FIPB and putting FDI in most sectors on auto pilot. A government can afford to remain a benign shadow only if laws are respected. As persuasion and repeated amnesty schemes have met with lukewarm response, the DeMo treatment was necessary to change the habit. The bad-loan legacy and the tepid risk-taking by the private sector are overhangs similar to an enterprise that is seeking debt to grow and resorting to reducing weights to maintain volumes and protect the margins during challenging times. India absorbed the pain of high-value note recall just as long-term investors with faith in the management stay put during a company’s travails due to external conditions. Peer comparison, too, helps. The surge of equities in the run-up to completion of three years is understandable when there-is-no-alternative Modi is pitted against India’s entitled dynast and coalition of corrupt.

Mohan Sule