The company 2019 kept

How Corporate India’s moments of pride, greed, envy, lust, gluttony, wrath and sloth played out in the year that was

Self-interest prevailed unashamedly and unambiguously in the year that was.  India walked away from the Regional Cooperation Economic Partnership with Asia-Pacific nations to protect domestic farmers and industry from a flood of cheap imports. Survival superseded consensus. The surgical strike on corporate tax by eight percentage points propelled India into the competitive league despite some dissent of cash handout being a better incentive to propel consumption and investment. Strike-back replaced compromise. Energy producers, staring at bankruptcy due to state power distributors’ reluctance to pay, took the lenders to court for clubbing them with other sectors to determine their solvency.  Self-preservation overrode commitment. Auditors and financial heads of several companies preferred to quit rather than acquiesce to dodgy numbers. Nationalism co-existed with political correctness. As capital of Rs 70000 crore was being infused into non-performing public sector banks, the Reserve Bank of India was pulling them up for under-reporting of their bad loans. The wealth destruction accompanying the auto sector’s painful transition to new emission norm to face the challenge of climate change was met with resigned acceptance by investors even as the contention that the plunge in sales was also due to buyers’ resistance to the ramp-up of retail prices gained some traction. With survival at stake, companies adopted desperate strategies to stay relevant. Telecom players grappled with issues such as the duration of the ring-tone and if the originator of calls should pay any fee to the receiving service provider. The drying up of liquidity following the collapse of IL&FS late 2018 torpedoed the transmission of the central bank’s rate cuts, with NBFCs mopping up funds above the benchmark. 

Pride suffered a blow. The fastest-growing economy was toppled from the pedestal by small economies in the neighborhood. The smugness that foreign investors have little option but to invest in India was busted when the first budget of the re-elected government hiked the surcharge on the tax on the super rich. The decision of a committee that the RBI should hand out a bigger payout to the treasury deteriorated into a contest of greed versus prudence. The access to funds was viewed as a lazy option to expend on fiscally damaging but socially relevant programs without taking the difficult road to grow revenues. On the other side of the coin was relief that the government’s market presence would be curtailed, leaving room for private borrowers. The wrath of the lenders, who refused to grant more roll-over of their repayment schedules, grounded a full-service air-carrier on the promoter’s reluctance to cede control. Among the receiving end of investors’ ire were mutual funds signing standstill agreements with borrowers unable to service their debt and the market watchdog for absolving fund managers by allowing separation of toxic paper to protect the NAV. The gluttony of two promoters of hitherto thriving enterprises in the banking and media space to add to the top line by pledging their shares dragged down their stocks and eventually led to their departure from their ventures nurtured from scratch.

IPOs, good and mediocre, got bumper subscriptions, capturing the lust for quick gains. Who was the suitor and who was wooed was a topic of speculation following Saudi Aramco agreeing to take up to 20% stake in RIL: the Saudi government-owned oil explorer had to justify to subscribers of its IPO the intended US$2-trillion valuation, at a time of down-trending crude prices, with additional income streams. The Indian oil-to-retail conglomerate needed to pare debt to raise more resources to drive the telecom business, a potential cash-cow. In contrast, the other marriage of convenience was forced than voluntary. Ten PSU banks were merged into four to make them attractive to prospective suitors. Envious of its unique entrepreneurial model, a construction conglomerate launched a hostile bid for a tech solutions provider that was rocked by stake-sale by one of its cash-strapped promoters to service the debt of his floundering quick-service restaurant chain.  Angry whistle-blowers played no small part in the regulator refusing its nod to a housing financier to merge with a legacy private bank and knocking down the valuations of an IT solutions provider and a drug maker, two heavyweights of the headline marker. How sloth can result in miscalculation was illustrated by telecom services providers who threatened to close down when asked to pay their share of under-reported revenues to the government instead of cutting flab and admitting that their business model of relying on voice calls at the expense of data had misfired. Indeed, the mainline indices hitting record highs even as mid and small caps languished as 2019 came to an end told a tale of a year that was disruptive yet riveting.    

 -Mohan Sule

What the market knows

The stock-surge that is discounting the lag effect can be torpedoed by richly-valued IPOs and governance issues

Mainline indices galloped amid evidence tumbling out of the economic slowdown worsening. An optimistic outlook might have justified the surge. That is not so. Global and domestic institutions seem to be in a race to slash growth forecasts. The divergence in the market’s behavior from ground realities should ideally be a cause of concern. It is not for two reasons. First, the market is aware of the lag effect. The inflow of foreign funds, fattened on the profit skimmed from the US markets recording new lifetime-peaks, has benefited mainly large and mid-cap biggies. The liquidity that will come from booking capital gains will percolate to small caps. As such, there is scope for front-line stocks to let off steam without causing an all-round collapse. Second, the underlying stress is providing a trigger to restructure the economy. The reduction in the base corporate tax rate to 22% has placed India among the most competitive countries to attract FDI. The big-bang reform is comparable to the opening up of closed sectors to private investment by the cash-strapped Narasimha Rao government in the early 1990s and setting up of a divestment ministry by the Atal Bihari Vajpayee government in September 2001 following the dot-com bubble burst at the turn of 2000. Now the Narendra Modi government might be giving up control of banks and withdrawing from the oil and gas sector. Unlike rating agencies basing their projection on past performance, the market is discounting the path the Modi government is going to travel to make India a US$5-trillion economy. Standard & Poor’s seems to have read the signals correctly. It sees India outperforming its peers going ahead.

The market recognizes that some companies can outperform the country. Reliance Industries is hitting new highs irrespective of gloomy macro indicators. The Bajaj financial services twins are in a fine fettle even as the NBFC space is struggling. IPOs of IRCTC, India Mart InterMesh, CBS Bank and Ujjivan Small Finance Bank got good response despite risk-aversion. The market is sensitive of the collateral damage caused by governance issues. The IL&FS default has had a cascading impact on lenders including companies, banks, NBFCs and mutual funds. Heavily-leveraged DHFL has become the first financial services firm to undergo the resolution process. Promoters of Yes Bank and Zee had to shed stake and management control. The issue of divergence in reporting of bad loans turned off investors from private banks. The market’s distaste for small caps lingers more than a year after the auditor of Manpasand Beverages quit, setting off a chain of resignations. In a throwback to Satyam Computer Services’ accounting scandal, the board of CG Power and Industrial Solutions confessed of manipulations by its head. The market fears whistle-blowers for the wealth destruction they inflict. The recovery of Infosys, Indiabulls Housing Finance and Sun Pharmaceuticals has not fully made up for the value erosion caused by allegations of malpractices. The market is watching how the issue of misuse of client funds by stock broker Karvy is handled by the regulators as such scams can put off investors for a long time as happened after broker Ketan Parekh was found in 2001 to have manipulated prices of 20 stocks. The market knows that the standstill agreements executed by mutual funds, allowing borrowers to roll over their repayment and quarantining such paper, have resulted in loss of confidence in debt funds.

The market is aware that the frenzy in the primary market can result in a stampede to exit if a richly-valued IPO disappoints. Reliance Power debuted in February 2008 at a 17% discount and never ever crossed the offer price. It accelerated the meltdown of the primary and secondary markets that was gathering speed as the housing mortgage market in the US was coming under increasing strain. The market has realized that the world is flat. The over year-long US and China trade-tariff tiff and the tortuous course that Britain is taking to exit from the EU are overhangs on the direction of the global economy. Central banks have to track the Federal Reserve’s moves to determine their policies. Would the Reserve Bank of India have taken a pause if the Fed had not hinted that it would not undertake any more rate cuts next year? At the same time, the market has now understood that inter-connectivity and supply-chain links are fragile. The US has demonstrated that an inward-looking economy can triumph over free trade. Not surprisingly, India’s rejection of the Regional Comprehensive Economic Partnership, covering the Asia-Pacific region, did not create any ripples in the market.

-Mohan Sule

Never say never again

No matter your attitude or mood, stocks have the capability to surprise you by their turnarounds

Every rally and pullback amazes and stuns. Stocks dismissed with contempt spring back and those viewed with awe stumble. Two recent instances confirm that investors should never, never say never again. A few days after the market welcomed its impressive quarterly results, Infosys dragged down the mainline indices by slipping 16% in two days following a whistle-blower’s complaint of financial irregularities. The IT bellwether is up about 9% since Chairman Nandan Nilekani asserted to the NSE that such a possibility is remote due to fail-proof safeguards. Rating downgrades and resignation of three independent directors were the beginning of Yes Bank’s travails. The Reserve Bank of India in October 2018 refused to give the founder-CEO an extension beyond March 2019. The new-gen private bank’s slide thereafter spilled into the open the top manager’s leveraged position. It shed more than 90% before the promoter divested most of his stake but nearly doubled from its low after an NRI agreed to pump in US$ 1.2 billion. The automobile industry captures the dilemma if the worst is over or there is still more pain for a sector. The pile-up of inventory and the resultant production cuts by manufacturers are turnoffs for slowing the growth momentum. Low prices are viewed as an opportunity by the contrarians because the disruption due to the transition to BS VI norms from April 2020 is expected to last for a couple of quarters more before a refurbished industry is ready to roar. Backers of PSUs for the comfort of controlling government stake are in a better place today. Savvy investors recognized that the acknowledgement of bad loans, creation of an insolvency vehicle and consolidation are carefully calibrated steps to the eventual privatization of nationalized banks. The recent Supreme Court judgement that creditors take precedence over operational facilitators in bankruptcy proceedings has fortified those who believed in these lenders. The Nifty PSU Bank index has appreciated 7.6 % from end August, when Rs 70000-crore capital was loaded upfront.

Discerning observers who understood Aramco’s buy of RIL’s 20% stake as a forerunner to the opening up of the oil and gas sector would have felt justified after the government put its entire stake in BPCL on the block. Debt-laden Vodafone Idea and Bharti Airtel were written off after a price war and the Supreme Court’s demand to pay backdated revenues. The  decision to differ the installments payable for buying spectrum in the next round for two fiscal years and principal competitor RelianceJio’s plan to start levying tariffs on voice calls rekindled hope of a second coming. At the same time, a sudden adverse turn by counters that have been creating wealth year after year can shake up complacency. Graphite makers capitalized on China’s clampdown on polluting industries and recovery of user industry steel. Graphite India returned 1,401% and HEG 2,808% in the 20 months till August 2018.The over 80% plunge in Graphite India’s net profit in the latest quarter was a shock but not a surprise as the US-China trade war sparked more than a year ago dampened demand. In fact, HEG had started showing signs of stress in the June 2019 quarter, with the bottom line sliding 70%. The removal of the anti-dumping duty on Chinese imports was a double whammy. Both have shed nearly 70% in 15 months.

 Buying into a company that has been unstoppable so far is as much a gamble as trying to catch a falling star. There is no knowing when overvaluation will burst the bubble or when the bottom will be reached. For Titan, with P/E of about 72, growth-driver gold turned into an obstacle as prices pierced the resistance level. The jeweler has declined 15%, while the mainline index has inclined 3.5% in the past month. Those sticking with ICICI Bank amid mounting bad assets and the Videocon loan scandal might feel vindicated as it has gained about 80% in the near 14 months following the installation of a new CEO and MD. Faith imposed in Indiabulls Housing Finance on its proposed merger with Laxmi Vilas Bank might seem misplaced now as the deal did not get the regulatory nod despite the group divesting most of its real estate assets. It has given up 80% in the ensuing six months. The confidence in Zee, on the other hand, might be bearing fruit as the overhang of pledged shares is disappearing, with the promoters offloading most of their holdings to pay their loan obligations. The many divesting from the NBFC space wholesale after the collapse of IL&FS in September 2018 might be stumped at the resilience of Bajaj Finance, amassing 90% on its October 2018 low even as peers are struggling. To modify the soundtrack of an old James Bond movie, no matter your attitude or your mood, the stock will surprise you.

-Mohan Sule