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The grim picture of a meltdown of tech companies creaking under outdated business model of back-office support has turned out to be far-fetched as also reports of mass layoffs, with the recovery of the main markets, the US and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