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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