Currency crosswinds due to liquidity injection and withdrawal and differing interest rate policies are complicating stock selection
By Mohan Sule
Those who were disappointed that the Union Budget 2015-16 did not produce a Big Bang will find plenty of fodder in the new fiscal to stock up the cannon. The moot question is whether the explosions will light up the landscape or trigger a bush fire. The era of a market throwing up only gainers, with all the stocks across the spectrum turning gold, during a bull phase is perhaps past us. This is because of crosscurrents of monetary policies as each region struggles to tailor the environment to suit local requirement. Even as the US Federal Reserve phased out its bond-buying and is poised to increase interest rates on signs of a recovering economy, the European Central Bank has embarked on a euro1-trillion liquidity infusion to revive confidence in the euro region. China, too, is expected to follow Japan’s example of loose money policy to stem the slowing of its GDP growth. India is on the path of low interest rates and massive infrastructure spending. Unfortunately, the fallout is not confined to the borders. The ripples are felt across the globe in differing magnitude. A prominent casualty of the declining consumption of energy by the euro zone and China is crude oil, which slide below US$50 a barrel at one point. Instead of cheering, most developed countries are worried how to stop the spiral of disinflation. The fallout is a slippery gold, a comfort investment to fend off inflation.
Withdrawal of foreign funds from the emerging markets when yields on US bonds become more attractive than dollar returns from equities could be a blessing as stocks cool down and the rupee weakens. For the Reserve Bank of India, however, this is a recipe for disaster: how to shore up the currency and at the same time keep interest rates low to keep the liquidity tap open. A strong dollar is a prominent manifestation of the complex global scenario. Nothing seems to soften the Teflon currency, even fears of recession in its home market. On the contrary, signs of uncertainty boost the greenback for its safe haven status. The mighty dollar is neutralizing the slide in oil prices for emerging markets. The net result is that neither fuel prices have fallen to the level they should have nor are the wobbly export markets bringing relief. Not surprisingly, the RBI is under increasing pressure to reduce interest rates and thereby let the rupee depreciate further to provide the winning edge to Indian exporters. The prevailing uncertainty has not dampened global markets, which are hitting highs in the belief that the problems in different corners of the world are not insurmountable. After the success of the US Fed, pump-priming is viewed as a solution to all economic ills. This is in contrast to the view last century, when distressed borrowers were bluntly told by multilateral institutions to tighten their belts. The rebellion by Greece and the cold caught by markets around the world subsequently has reconfirmed the premise that the penalty for splurging is injecting more money rather than imposition of fiscal discipline though it was living beyond means that was responsible for the mess in the euro zone.
If the inflows from the US slow down, the floodgates of the euro zone have been thrown open. If China is no longer attractive, there is India, despite no noticeable ground level change in the ease of doing business. The drumbeats heralding the country as the next financial hotspot has already begun, with the ADB and the IMF joining the chorus of various foreign brokers and rating agencies in revising up the growth forecast. Yet no one has been able to assert with any degree of finality that not only foreign money will stay but the inflows will continue in spite of the ramping up of interest rates by the US. As a result, tech stocks roar every time a Fed official reiterates sticking to its roadmap of hiking interest rates from June and falter on weak US job data. In the same way, banks and auto shares’ fortunes fluctuate with the unpredictable consumer price index as the RBI takes one slow step at a time to slash domestic rates. Evergreen FMCG scrips are no longer oases, wilting and blooming with the monsoon’s mood. Pharmaceutical stocks’ health depends on US regulatory approvals and crackdowns. Power and capital goods counters with plenty of potential are yet to share the enthusiasm for Make-in-India due to the overbearing public sector’s influence on their orders and bottom lines but cement companies, projected to be the beneficiaries of government-sponsored low-cost housing and infrastructure projects, race ahead of earnings. No wonder the market is looking like a game of Russian roulette more and more.
Wednesday, April 22, 2015
Wednesday, April 8, 2015
Breaking away
Lessons from the ex-PM's summons, the land bill, the Sebi-Sat spat on DLF and the resistance to the FTIL-NSEL merger
By Mohan Sule
Out-of-season rains is one of the banes a farmer faces in his long journey from tilling his field to reaping the crops and selling them to the government or private distributors. Yet the disruption in pattern underscores the importance of rules, be they made by nature or man. The heat generated over the summons to Manmohan Singh by a Central Bureau of Investigation court in the coal allotment scam demonstrates India's reluctance to break from the past of differential treatment to the rulers and the ruled. Congress president Sonia Gandhi marched to his residence to announce that the entire world knows of the former prime minister's honesty and integrity. The argument offered in his support is that he did not make any money from the process. In the earlier age of innocence, railway ministers were known to resign, owning up moral responsibility for any major train accidents on their watch. Home ministers have been shunted out for terrorist attacks or due to law-and-order situation spinning out of control during their tenure. If bureaucrats can be questioned and a minister and a beneficiary who happened to be a member of parliament could be sent to jail for their roles in the second-generation spectrum allotment case, then surely a former head of the government can appear before a judge. The opportunity should be used by Singh to clear the air if he assigned coal blocks because of his belief in the end use or he was helpless because someone even more powerful than him had a say in the arbitrary allotment.
The outrage instead should be reserved for the action of those who have tried to influence the due course of law by applying covert populist pressure. Thankfully, our judiciary is made of sterner stuff as seen from the woes of Subrata Roy, who was in the habit of issuing full-page ads in the newspapers in response to the Supreme Court's summons in the case filed by the Securities and Exchange Board of India for misappropriating more than Rs 30000 crore of investors' funds. His attempts to try his case in the court of public opinion flopped. The Sahara kingdom provides employment to thousands of people and sponsors sporting events. That, as the firmness of the SC has shown, should not be the criteria for leniently dealing with a law-breaker. Even after a year in jail and employing the best legal eagles, the boss has not been able to raise Rs 10000 crore for bail. The rallying of opposition to the land acquisition bill is similarly an attempt to mislead: it is not so much to ensure fair compensation to farmers as to try to protect Rahul Gandhi's ownership of the Act. As per the consensus of chief ministers, including those ruled by Congress, the law in its present form is not practical. The prime minister noted the fact during the bill's introduction in the budget session of the parliament. Instead of modifying a harebrained legislation, propaganda that the bill is anti-farmer has been whipped out despite spelling out the kind of projects including defense and infrastructure projects in the public sector and education institutions and hospitals in the private sector for which the consent of the land owner will not be acquired, while maintaining the level of compensation.
Along with a country’s development, the level of urbanization increases. Those in agricultural jobs shift to manufacturing because the number of hands required to farm fall due to genetic modification, mechanization and improvement in yield on deployment of pesticides. Many farmers are keen to switch to another profession as their land's productivity decreases over the years. Breakup of families means fragmentation of the land parcel. Not all members might want to continue with farming. The most convincing argument against allowing status quo is that no investment has come in due to this shabby legislation. In the same wayy, there is an urgent need to change the mechanics to resolve regulatory tussles in the capital markets. Sebi banned DLF from issuance of capital for three years for inadequate disclosures in the IPO document seven years ago. The Securities Appellate Tribunal found the punishment harsh. This is not the first time that Sat has overturned the market regulator. This back and forth should be increasingly replaced by consent decrees. The promoters save face but pay monetary fines. Banning fund raising can scotch genuine attempts to turn around the company just as delisting blocks investors' exit route. The disclosure of payment of penalty in the offer document should alert investors as should the fact that a major portion of the revenue of the flagship is derived from a subsidiary with opaque business practices. If the shareholders of the parent can partake in the good times, surely they should be willing to make good the Rs 5600-crore hole in the balance sheet of a wholly-owned subsidiary. The division over the FTIL-NSEL merger should prompt investors to pay attention to consolidated accounts, which provide a window to corporate governance and how revenues are earned or siphoned off.
By Mohan Sule
Out-of-season rains is one of the banes a farmer faces in his long journey from tilling his field to reaping the crops and selling them to the government or private distributors. Yet the disruption in pattern underscores the importance of rules, be they made by nature or man. The heat generated over the summons to Manmohan Singh by a Central Bureau of Investigation court in the coal allotment scam demonstrates India's reluctance to break from the past of differential treatment to the rulers and the ruled. Congress president Sonia Gandhi marched to his residence to announce that the entire world knows of the former prime minister's honesty and integrity. The argument offered in his support is that he did not make any money from the process. In the earlier age of innocence, railway ministers were known to resign, owning up moral responsibility for any major train accidents on their watch. Home ministers have been shunted out for terrorist attacks or due to law-and-order situation spinning out of control during their tenure. If bureaucrats can be questioned and a minister and a beneficiary who happened to be a member of parliament could be sent to jail for their roles in the second-generation spectrum allotment case, then surely a former head of the government can appear before a judge. The opportunity should be used by Singh to clear the air if he assigned coal blocks because of his belief in the end use or he was helpless because someone even more powerful than him had a say in the arbitrary allotment.
The outrage instead should be reserved for the action of those who have tried to influence the due course of law by applying covert populist pressure. Thankfully, our judiciary is made of sterner stuff as seen from the woes of Subrata Roy, who was in the habit of issuing full-page ads in the newspapers in response to the Supreme Court's summons in the case filed by the Securities and Exchange Board of India for misappropriating more than Rs 30000 crore of investors' funds. His attempts to try his case in the court of public opinion flopped. The Sahara kingdom provides employment to thousands of people and sponsors sporting events. That, as the firmness of the SC has shown, should not be the criteria for leniently dealing with a law-breaker. Even after a year in jail and employing the best legal eagles, the boss has not been able to raise Rs 10000 crore for bail. The rallying of opposition to the land acquisition bill is similarly an attempt to mislead: it is not so much to ensure fair compensation to farmers as to try to protect Rahul Gandhi's ownership of the Act. As per the consensus of chief ministers, including those ruled by Congress, the law in its present form is not practical. The prime minister noted the fact during the bill's introduction in the budget session of the parliament. Instead of modifying a harebrained legislation, propaganda that the bill is anti-farmer has been whipped out despite spelling out the kind of projects including defense and infrastructure projects in the public sector and education institutions and hospitals in the private sector for which the consent of the land owner will not be acquired, while maintaining the level of compensation.
Along with a country’s development, the level of urbanization increases. Those in agricultural jobs shift to manufacturing because the number of hands required to farm fall due to genetic modification, mechanization and improvement in yield on deployment of pesticides. Many farmers are keen to switch to another profession as their land's productivity decreases over the years. Breakup of families means fragmentation of the land parcel. Not all members might want to continue with farming. The most convincing argument against allowing status quo is that no investment has come in due to this shabby legislation. In the same wayy, there is an urgent need to change the mechanics to resolve regulatory tussles in the capital markets. Sebi banned DLF from issuance of capital for three years for inadequate disclosures in the IPO document seven years ago. The Securities Appellate Tribunal found the punishment harsh. This is not the first time that Sat has overturned the market regulator. This back and forth should be increasingly replaced by consent decrees. The promoters save face but pay monetary fines. Banning fund raising can scotch genuine attempts to turn around the company just as delisting blocks investors' exit route. The disclosure of payment of penalty in the offer document should alert investors as should the fact that a major portion of the revenue of the flagship is derived from a subsidiary with opaque business practices. If the shareholders of the parent can partake in the good times, surely they should be willing to make good the Rs 5600-crore hole in the balance sheet of a wholly-owned subsidiary. The division over the FTIL-NSEL merger should prompt investors to pay attention to consolidated accounts, which provide a window to corporate governance and how revenues are earned or siphoned off.
Wednesday, March 25, 2015
Lighting a fuse
By Mohan Sule
Ever since the deregulation of the London financial markets by Margaret Thatcher in October 1987, every reform is expected to produce a Big Bang. Following the opening up India’s economy by the P V Narasimha Rao-Manmohan Singh duo in 1991, every budget since then is viewed as a make-or-break occurrence. The urge for lofty deliverables stems from the fact that the country is always in a crisis mode. The causes may vary, ranging from lack of rainfall, runaway public expenditure, galloping inflation to the after-effects of global catastrophes. Consequently, the collective will of the nation imposes on those at the helm mythical powers to bring order to the chaos, not one day at a time but at the stroke of a pen, unmindful that magnificent edifices that can withstand time are built brick by brick. There has to be a reason to undertake destruction to raise a new architecture. Britain was losing its preeminence as a global hub for doing business due to the outcry system for executing trades and fixed brokerage. India was on the verge of default and had to pawn its gold for foreign exchange to meet its import requirement. In present times, the corruption and the populist policies of the UPA government had turned off investors, plunging the currency to a new low. Hence, the hopes of a quick turnaround by those who had lost more than two years of their lives fighting price rise and stagnation had reached unrealistic proportions by the time Narendra Modi ascended to power. The report card so far: the Wholesale Price Index near zero, bidding for natural resources, infra projects on the fast-track, and initiatives such as Make in India, Digital India and Swatch Bharat launched to make India an attractive destination.
If the first budget of the new government in July 2014 was crammed with good intentions like cleaning the Ganga, setting up smart cities, running bullet trains and making India a magnet for religious tourism, this budget’s four cornerstones are financial inclusion, creation of jobs, building up of infrastructure to improve the quality of life, and tax transparency. The approach is to treat the root cause of inequality rather than the symptoms by offering curatives such as subsidies and guaranteed wages for digging holes leading to nowhere. The rural employment scheme has not been abandoned. In fact, the allocation to it has been increased, probably necessitated not only due to wider coverage of road and irrigation projects but also to make up for the deficient rainfall last year, which had led to slump in sales of consumer durables. As such, the pumping of more liquidity in rural areas could act as quantitative easing for FMCG, automobile, cement and steel makers and telecom services providers. An indirect fiscal stimulus will be cash transfers in lieu of subsidies and providing health, medical and pension benefits for a nominal premium. The idea of universal insurance coverage is path breaking like the Jan Dhan Yojna, the universal banking system. Similarly, the intention to bring in a bankruptcy code is a historic development. It will aid in creative destruction and evolution of new opportunities, so vital for a dynamic economy.
Clearly influenced by the role of venture capitalists in nurturing and sustaining Silicon Valley ideas, the Mudra Bank is a concept whose time had come. Despite the inroads by microfinance agencies, unorganized businesses have very few bankable avenues to rely on. The pampering of the poor and the marginalized is not at the expense of big companies. Another game changer is the offer of five 4,000-MW ultra mega power plants, with all clearances in place, to bidders. Other infra projects, usually victims of the crossfire between the industry and environmental ministries, too, can benefit from this novel concept. The scrapping of wealth tax and replacing it with surcharge on the income tax of the super rich will result in better compliance. An important step towards stability of the tax regime is the cut in corporate tax by 5% over four years in return of elimination of tax exemptions and doing away with retrospective taxation. The 2% increase in service tax along with higher freight for coal, cement and steel, will be inflationary in the short term but is a transition to the era of goods and service tax, which is 14%, from April 2016. Besides, GST will replace all other existing Central and state levies. If a realistic roadmap is drawn to nip benami transactions, it will indeed be one more visionary feature of the budget. The stock market, comfortable with cold numbers, appeared confused at a vision statement instead. It need not. The fallout from the budget will gradually gather momentum to create a transformational change in the way we are governed.
Monday, March 16, 2015
Opportunity in setbacks
The AAP win and the spy scandal in the capital should be used as springboards to illustrate the power of competition
By Mohan Sule
The sweep of the radical Aam Aadmi Party cloaked as an anticorruption crusader in the national capital has spooked the market. The impact was particularly severe on the two power distribution companies servicing the region. During its short stint a year ago, AAP had demanded an audit of the discoms by the Comptroller and Auditor General of India. The idea was to spot instances of inflating profit to prod them to cut their consumer bills. The inference the market drew was that the statutory auditors could not be relied upon. Stocks of energy explorers suffered a setback on revelations that their officials were caught ferreting out policy papers from government offices. The episode revealed the pervasive role of the government in influencing the fluctuations in the bottom lines of oil and gas producers. The fear is that, in the aftermath of these two developments, caution could subsume courage. The fallout could be a slowdown in the pace of rollback of subsidies. Already the moderate increase in the minimum support price to farmers’ crop this year is being blamed for BJP’s poll debacle in an urban region like Delhi instead of acknowledging its contribution along with soft crude prices and deregulation of diesel to bring down the wholesale price index to below zero and the consumer prices index to the 5% level. Populist pressure is forcing the government to rethink the amendments to the land acquisition bill to ease buying of farmland to put up transport and industrial corridors through public-private partnership.
On the positive side, the crackdown on companies’ spies will accelerate the process towards transparency by both the government and the corporate sector. Companies will have to work out the cost-effectiveness of acquiring the rights to dig out natural resources. Service and pricing will determine the margin rather than monopoly status. With a healthy inflow of tax receipts due to more players, the government can concentrate on its social obligations. HDFC boss Deepak Parekh will not have room to complain about the difficulty in doing business even after the Modi Sarkar completing nine months. In fact, the prime minister can point to the changes in the housing finance sector to emphasis the point that market forces can be the best leveler. Atrocious practices like pre-payment penalty have faded and barriers to transfer the loan to another lender offering better terms have come down. Players have realized that lobbying with the government for favors and to create artificial controls to curb competition will not attract good discounting despite a bulging bottom line. A steel and power producer, with the promoter close to the erstwhile UPA regime, saw its market cap plunge after the Supreme Court cancelled coal blocks allotted since 1993. The stock has bounced back after the company won the bids for the same blocks it had to surrender. Many companies have reworked their business models to stay on top of the game. The IT sector has focused on exports. Had it concentrated on the domestic market, PSUs would have been the main clients. Pharmaceutical companies chained to tight controls in the domestic market have used their copycat skills to become cheap producers of generic drugs for the developed markets. Facing the onslaught of foreign competition, Bajaj Auto shifted gear to cater to overseas customers.
On the other side, the failure of the 2G spectrum auction in November 2012 to attract any bids for regions with a high base price is a reminder to the government that there is a limit to milking the corporate sector to bridge the fiscal deficit. The increase in tax revenue as the market expands due to healthy competition in the marketplace is a better solution to widen the tax base. Competition in buying coal and supplying electricity will moderate tariffs and also ensure uninterrupted supply the same way competition to buy land to put up projects in the healthcare, education and infrastructure space will benefit farmers rather than a law that makes it time-consuming to even put up a bid. The symmetric opportunity for wealth creation will boost valuations, like those of e-tailers, rather than by accessing confidential information. Consumers, too, will realize that competition and not subsidies will lead to efficiency, enabling reform-minded political parties to reclaim the space from fringe parties. Elimination of waiting lists to procure two-wheelers and telecom connections post reforms is the best illustration of the power of a level-playing field. The Delhi election results show that a lot of work has to be done to transform the prevalent socialist mindset accumulated over the last six decades of government being the provider of all essential services and at the same time keeping taxes low and using PSUs to provide lifelong low-paying jobs.
By Mohan Sule
The sweep of the radical Aam Aadmi Party cloaked as an anticorruption crusader in the national capital has spooked the market. The impact was particularly severe on the two power distribution companies servicing the region. During its short stint a year ago, AAP had demanded an audit of the discoms by the Comptroller and Auditor General of India. The idea was to spot instances of inflating profit to prod them to cut their consumer bills. The inference the market drew was that the statutory auditors could not be relied upon. Stocks of energy explorers suffered a setback on revelations that their officials were caught ferreting out policy papers from government offices. The episode revealed the pervasive role of the government in influencing the fluctuations in the bottom lines of oil and gas producers. The fear is that, in the aftermath of these two developments, caution could subsume courage. The fallout could be a slowdown in the pace of rollback of subsidies. Already the moderate increase in the minimum support price to farmers’ crop this year is being blamed for BJP’s poll debacle in an urban region like Delhi instead of acknowledging its contribution along with soft crude prices and deregulation of diesel to bring down the wholesale price index to below zero and the consumer prices index to the 5% level. Populist pressure is forcing the government to rethink the amendments to the land acquisition bill to ease buying of farmland to put up transport and industrial corridors through public-private partnership.
On the positive side, the crackdown on companies’ spies will accelerate the process towards transparency by both the government and the corporate sector. Companies will have to work out the cost-effectiveness of acquiring the rights to dig out natural resources. Service and pricing will determine the margin rather than monopoly status. With a healthy inflow of tax receipts due to more players, the government can concentrate on its social obligations. HDFC boss Deepak Parekh will not have room to complain about the difficulty in doing business even after the Modi Sarkar completing nine months. In fact, the prime minister can point to the changes in the housing finance sector to emphasis the point that market forces can be the best leveler. Atrocious practices like pre-payment penalty have faded and barriers to transfer the loan to another lender offering better terms have come down. Players have realized that lobbying with the government for favors and to create artificial controls to curb competition will not attract good discounting despite a bulging bottom line. A steel and power producer, with the promoter close to the erstwhile UPA regime, saw its market cap plunge after the Supreme Court cancelled coal blocks allotted since 1993. The stock has bounced back after the company won the bids for the same blocks it had to surrender. Many companies have reworked their business models to stay on top of the game. The IT sector has focused on exports. Had it concentrated on the domestic market, PSUs would have been the main clients. Pharmaceutical companies chained to tight controls in the domestic market have used their copycat skills to become cheap producers of generic drugs for the developed markets. Facing the onslaught of foreign competition, Bajaj Auto shifted gear to cater to overseas customers.
On the other side, the failure of the 2G spectrum auction in November 2012 to attract any bids for regions with a high base price is a reminder to the government that there is a limit to milking the corporate sector to bridge the fiscal deficit. The increase in tax revenue as the market expands due to healthy competition in the marketplace is a better solution to widen the tax base. Competition in buying coal and supplying electricity will moderate tariffs and also ensure uninterrupted supply the same way competition to buy land to put up projects in the healthcare, education and infrastructure space will benefit farmers rather than a law that makes it time-consuming to even put up a bid. The symmetric opportunity for wealth creation will boost valuations, like those of e-tailers, rather than by accessing confidential information. Consumers, too, will realize that competition and not subsidies will lead to efficiency, enabling reform-minded political parties to reclaim the space from fringe parties. Elimination of waiting lists to procure two-wheelers and telecom connections post reforms is the best illustration of the power of a level-playing field. The Delhi election results show that a lot of work has to be done to transform the prevalent socialist mindset accumulated over the last six decades of government being the provider of all essential services and at the same time keeping taxes low and using PSUs to provide lifelong low-paying jobs.
Thursday, February 26, 2015
Timid love
The RBI’s cautious stance on interest rates has set back India’s recovery timetable
By Mohan Sule
The market is sensitive. At all times it looks for clues to determine future trends. Savvy stock pickers are alert to developments around the globe. A bumper wheat crop translates into soft prices, benefiting companies packaging foods. The rebuilding efforts following natural disasters lead to higher usage of metals and cement. A growing economy would be a copious consumer of fast food and talk time as well as decorative and industrial paints. Nowhere is thinking on the feet so essential than while tracking the yield curve. Supply and cost of money is vital to keep the wheels of the economy moving. Due to global integration, intervention by a central bank anywhere could have a positive impact at home but reverberate adversely elsewhere. Not surprisingly, central bankers are under round-the-clock scrutiny of the market. More subtle is their speech, more is the anxiety to uncover the nuances. However, of late, the statements are becoming ambiguous and open-ended. They seem to rely on historical data than act in anticipation of certain events. This is similar to treating a patient after falling sick rather than taking preventive action to ward off the illness. The US Federal Reserve, for example, has been repeating it will keep interest rates as low as possible till the need arises. The worry about the sustainability of the recovery of the domestic economy comes out clearly. The fall in oil prices will slow down or even stall the pace of growth of inflation to the targeted level of 2% by June to trigger a spike in interest rates. In the emerging markets, however, the pronouncement has been greeted with relief as dollar inflows in search of better yields will continue. But, for exporters, the volatility in the US economy is a cause of concern.
There is comfort that the Fed has spelt out its roadmap to raise interest rates. In that sense there is certainty about its action. However, the helplessness in charting the trajectory of growth and inflation due to confluence of international events is evident. The concern about the unpredictable undercurrents in the global economy is also on display in the actions of our central bank. It unexpectedly cut the lending rate by 25 basis points a couple of weeks before a scheduled policy meet after the wholesale price index slumped to near zero and consumer price index touched the 5% level in December. The market saw the action as the beginning of the rate-cut cycle. Yet, the Reserve Bank of India did not act at its sixth bimonthly review of the monetary policy early February. Instead it reiterated the old message that further easing of monetary policy would depend on data about disinflationary pressures. Also, the quality of fiscal consolidation as well as easing supply constraints of key inputs such as power, land, minerals and infrastructure would be key factors in determining future course. The first condition is understandable in view of the budget to be presented a few weeks later. What is puzzling is the second caveat. Infrastructure modernization is always a work in progress and has long gestation. Does this mean that, unless these two important criteria are met, the central bank will continue to tinker with reserve requirements of cash and government bond holdings?
Reading between the lines it is clear that the RBI has put the onus of economic revival on the government. Nonetheless, it has revealed why it decided to pause in carrying out further rate reduction. Banks have not passed on the earlier cut to customers. Their priority is cleaning up the balance sheet. Many have had to make higher provisions as some loans are beyond recovery. Another reason for the cautious stance was the looming hike in interest rates by the Fed, which could see tapering of inflow of foreign portfolio funds. Hence, the frenetic rush to build up the foreign currency chest. The market is not convinced. It believes rate cuts would enable hard-pressed borrowers to repay some of their loans. This would free funds of banks for lending. By lowering the statutory liquidity requirement of banks, the central bank seems to have acknowledged this problem. Whether banks will feel embolden to lend to infrastructure projects again when they are busy tackling their previous sour loans to this sector is debatable. Instead, another 50-bp cut in the lending rate might have prompted them to pass on at least some of the relief to new clients and at the same restructure a portion of the existing bad loans at softer rates to steadily chip at the mountain of non-performing assets. Improvement in market sentiment due to increase in consumption as a result could have attracted foreign investors. Buoyant equities would have fetched PSUs lined up for divestment better valuations, helping to bridge the fiscal deficit. By its timidity, the RBI has set back India’s recovery timetable.
By Mohan Sule
The market is sensitive. At all times it looks for clues to determine future trends. Savvy stock pickers are alert to developments around the globe. A bumper wheat crop translates into soft prices, benefiting companies packaging foods. The rebuilding efforts following natural disasters lead to higher usage of metals and cement. A growing economy would be a copious consumer of fast food and talk time as well as decorative and industrial paints. Nowhere is thinking on the feet so essential than while tracking the yield curve. Supply and cost of money is vital to keep the wheels of the economy moving. Due to global integration, intervention by a central bank anywhere could have a positive impact at home but reverberate adversely elsewhere. Not surprisingly, central bankers are under round-the-clock scrutiny of the market. More subtle is their speech, more is the anxiety to uncover the nuances. However, of late, the statements are becoming ambiguous and open-ended. They seem to rely on historical data than act in anticipation of certain events. This is similar to treating a patient after falling sick rather than taking preventive action to ward off the illness. The US Federal Reserve, for example, has been repeating it will keep interest rates as low as possible till the need arises. The worry about the sustainability of the recovery of the domestic economy comes out clearly. The fall in oil prices will slow down or even stall the pace of growth of inflation to the targeted level of 2% by June to trigger a spike in interest rates. In the emerging markets, however, the pronouncement has been greeted with relief as dollar inflows in search of better yields will continue. But, for exporters, the volatility in the US economy is a cause of concern.
There is comfort that the Fed has spelt out its roadmap to raise interest rates. In that sense there is certainty about its action. However, the helplessness in charting the trajectory of growth and inflation due to confluence of international events is evident. The concern about the unpredictable undercurrents in the global economy is also on display in the actions of our central bank. It unexpectedly cut the lending rate by 25 basis points a couple of weeks before a scheduled policy meet after the wholesale price index slumped to near zero and consumer price index touched the 5% level in December. The market saw the action as the beginning of the rate-cut cycle. Yet, the Reserve Bank of India did not act at its sixth bimonthly review of the monetary policy early February. Instead it reiterated the old message that further easing of monetary policy would depend on data about disinflationary pressures. Also, the quality of fiscal consolidation as well as easing supply constraints of key inputs such as power, land, minerals and infrastructure would be key factors in determining future course. The first condition is understandable in view of the budget to be presented a few weeks later. What is puzzling is the second caveat. Infrastructure modernization is always a work in progress and has long gestation. Does this mean that, unless these two important criteria are met, the central bank will continue to tinker with reserve requirements of cash and government bond holdings?
Reading between the lines it is clear that the RBI has put the onus of economic revival on the government. Nonetheless, it has revealed why it decided to pause in carrying out further rate reduction. Banks have not passed on the earlier cut to customers. Their priority is cleaning up the balance sheet. Many have had to make higher provisions as some loans are beyond recovery. Another reason for the cautious stance was the looming hike in interest rates by the Fed, which could see tapering of inflow of foreign portfolio funds. Hence, the frenetic rush to build up the foreign currency chest. The market is not convinced. It believes rate cuts would enable hard-pressed borrowers to repay some of their loans. This would free funds of banks for lending. By lowering the statutory liquidity requirement of banks, the central bank seems to have acknowledged this problem. Whether banks will feel embolden to lend to infrastructure projects again when they are busy tackling their previous sour loans to this sector is debatable. Instead, another 50-bp cut in the lending rate might have prompted them to pass on at least some of the relief to new clients and at the same restructure a portion of the existing bad loans at softer rates to steadily chip at the mountain of non-performing assets. Improvement in market sentiment due to increase in consumption as a result could have attracted foreign investors. Buoyant equities would have fetched PSUs lined up for divestment better valuations, helping to bridge the fiscal deficit. By its timidity, the RBI has set back India’s recovery timetable.
Thursday, February 12, 2015
Tale of 2 companies
The out-of-form TCS and HUL reveal the urgency of better deliveries by the central bank and the government
By Mohan Sule
At first glance, they do not even resemble chalk and cheese. One is an Indian company that is becoming transnational. The other is the Indian outfit of a multinational company. One has a dominant presence in an emerging sector, offering back-office tech solutions, while the other is an old warhorse persuading buyers to upgrade their lifestyles by consuming its products. TCS is known as a leading outsourcing supplier; HUL has outsourced most of its manufacturing to local enterprises. The fortunes of one swing with the movement of currency, while volatility in crude oil prices boost or cut the input costs of the other. Yet there are similarities in their operations. Both apparently run businesses that are called defensive by market folks. Banks need their ATMs to function even during a bear phase just as ordinary folks have to brush their teeth and bath irrespective of an economic downturn. Both are constituents of the broad market indices of the NSE and the BSE. They are run by professional managers. In quest of growth, both are rapidly expanding their footprints across geographies: one overseas, another at home. Of late, the two companies are increasingly changing their complexions to become cyclical plays. A slowdown in its export markets affects the prospects of one, while poor monsoon and high inflation result in resistance for the products of the other. With the economies across the globe getting tightly integrated, both encounter a bull and bust phase at the same time. Also, the foreign exchange market and the oil market are increasingly getting linked. Fall in oil prices bolsters the economies of the developed countries, the main market of TCS, as well as the domestic economy, the domain of HUL. At the same time, the local currency appreciates on good growth prospects, hurting the revenue of exporters. A strong currency encourages imports and intensifies competition in the domestic market.
The December 2014 quarter amplified the woes of TCS and HUL as both got caught in the crosscurrents of the global and local economies. Loss of consumer confidence was the major reason for the slowdown of the US and the Indian economies for the better part of 2014. However, the causes of the manifestation were different. US buyers had become risk averse after the collapse of home prices, while Indian users saw their disposable income shrink after spending on costly food items. TCS’s revenue was near flat over the September 2014 quarter and HUL’s volume growth slipped to 3% over the year. The software major had last recorded such a performance five years ago and the FMCG giant two quarters ago. HUL had to focus on volume rather than on pricing to drive even this tepid growth, while the highest attrition rate in six fiscals kept TCS afloat. The software services provider blamed the holiday season for the lackluster show. The consumer staples maker, which could increase its margin by a percentage point solely due to fall in price of an important input, attributed the late onset of winter and intense competition for the personal-care category nearly halving sales. Both the companies find themselves at a crossroads. Their markets have become price conscious after the turmoil in their economies.
The poor form of the two leaders in their categories, one a play on the export market and another on the domestic market, reflects the state of the economy. The Reserve Bank of India will have to accelerate its rate-cut cycle. This will encourage consumer spending and discourage short-term foreign investors from parking their funds in the country for higher yields. The upward pressure on the Indian currency will ease and give breathing space to the central bank instead of being overwhelmed by the dollar deluge, necessitating a mopping up operation to maintain the rupee’s competitiveness, which could trigger inflation. The delicate nature of recovery will reign in the finance minister from tampering with personal or capital gains taxes in the coming budget. With the rural market losing its growth momentum after deficient rainfall, there will have to be determined efforts to bring investment into these areas. The rural employment guarantee scheme has been modified to funnel money only into productive assets. The haste in passing the land acquisition ordinance now appears appropriate. If the PSU divestment program succeeds and a good amount of money collected from the telecom spectrum auction, there will scope for reduction in personal taxes. Falling oil prices have provided room to clean up the country’s balance sheet. The recent price correction could be an opportunity for investors to take a fresh look at these companies, which have the scale to claw back their way to leadership roles.
By Mohan Sule
At first glance, they do not even resemble chalk and cheese. One is an Indian company that is becoming transnational. The other is the Indian outfit of a multinational company. One has a dominant presence in an emerging sector, offering back-office tech solutions, while the other is an old warhorse persuading buyers to upgrade their lifestyles by consuming its products. TCS is known as a leading outsourcing supplier; HUL has outsourced most of its manufacturing to local enterprises. The fortunes of one swing with the movement of currency, while volatility in crude oil prices boost or cut the input costs of the other. Yet there are similarities in their operations. Both apparently run businesses that are called defensive by market folks. Banks need their ATMs to function even during a bear phase just as ordinary folks have to brush their teeth and bath irrespective of an economic downturn. Both are constituents of the broad market indices of the NSE and the BSE. They are run by professional managers. In quest of growth, both are rapidly expanding their footprints across geographies: one overseas, another at home. Of late, the two companies are increasingly changing their complexions to become cyclical plays. A slowdown in its export markets affects the prospects of one, while poor monsoon and high inflation result in resistance for the products of the other. With the economies across the globe getting tightly integrated, both encounter a bull and bust phase at the same time. Also, the foreign exchange market and the oil market are increasingly getting linked. Fall in oil prices bolsters the economies of the developed countries, the main market of TCS, as well as the domestic economy, the domain of HUL. At the same time, the local currency appreciates on good growth prospects, hurting the revenue of exporters. A strong currency encourages imports and intensifies competition in the domestic market.
The December 2014 quarter amplified the woes of TCS and HUL as both got caught in the crosscurrents of the global and local economies. Loss of consumer confidence was the major reason for the slowdown of the US and the Indian economies for the better part of 2014. However, the causes of the manifestation were different. US buyers had become risk averse after the collapse of home prices, while Indian users saw their disposable income shrink after spending on costly food items. TCS’s revenue was near flat over the September 2014 quarter and HUL’s volume growth slipped to 3% over the year. The software major had last recorded such a performance five years ago and the FMCG giant two quarters ago. HUL had to focus on volume rather than on pricing to drive even this tepid growth, while the highest attrition rate in six fiscals kept TCS afloat. The software services provider blamed the holiday season for the lackluster show. The consumer staples maker, which could increase its margin by a percentage point solely due to fall in price of an important input, attributed the late onset of winter and intense competition for the personal-care category nearly halving sales. Both the companies find themselves at a crossroads. Their markets have become price conscious after the turmoil in their economies.
The poor form of the two leaders in their categories, one a play on the export market and another on the domestic market, reflects the state of the economy. The Reserve Bank of India will have to accelerate its rate-cut cycle. This will encourage consumer spending and discourage short-term foreign investors from parking their funds in the country for higher yields. The upward pressure on the Indian currency will ease and give breathing space to the central bank instead of being overwhelmed by the dollar deluge, necessitating a mopping up operation to maintain the rupee’s competitiveness, which could trigger inflation. The delicate nature of recovery will reign in the finance minister from tampering with personal or capital gains taxes in the coming budget. With the rural market losing its growth momentum after deficient rainfall, there will have to be determined efforts to bring investment into these areas. The rural employment guarantee scheme has been modified to funnel money only into productive assets. The haste in passing the land acquisition ordinance now appears appropriate. If the PSU divestment program succeeds and a good amount of money collected from the telecom spectrum auction, there will scope for reduction in personal taxes. Falling oil prices have provided room to clean up the country’s balance sheet. The recent price correction could be an opportunity for investors to take a fresh look at these companies, which have the scale to claw back their way to leadership roles.
Saturday, February 7, 2015
Changing lanes
To counter the possibility of slowing foreign inflows, the focus has to shift to boosting consumption to justify the rich equity valuations
By Mohan Sule
Is consumption going to replace liquidity-driven investment as the pivot for the economy to spin? Symptoms of the change in the mood of the market became noticeable after the equity market crash on 6 January 2014. Overriding the fears of the US Federal Reserve raising interest rates following the 5% growth of the US economy in the third quarter of last calendar was oil’s fall from grace. It pointed to the slowing of the world economy, particularly China, and triggered worries about what it meant for oil producing countries. Remittances from NRIs in the Gulf region form nearly 6% of India’s foreign exchange inflows. The contagion effect of the slowdown in consumption of oil could be as devastating as the 2008 meltdown of the financial markets, when credit dried up as lenders saddled with exotic derivatives, composed of home mortgages of varying degrees of default risks, were left with worthless securities on their balance sheets. The withdrawal of liquidity decelerated the growth engines around the world. The conclusion was that however attractive an economy, it needed inflow of cash to keep its wheels turning. Low interest rates in the US after the dotcom bubble bust at the turn of this century allowed investors to borrow cheap and stash the funds in high-interest rate emerging economies. Quantitative easing or the bond-buying program of the Fed following the collapse of some too-big-to-fail banks injected liquidity in the market when traditional avenues of borrowings had closed down.
The market did sulk after the announcement of the gradual phasing out of the QE programs. However, the Fed’s vow to keep rates near zero till the US economy was on an irreversible path of growth blunted concerns of credit turning scarce. Money poured into assets with the potential to beat inflation in the local economies and low interest rates in the developed world. In India and China, the flow was mainly into stocks and property. As a result, Shanghai and Mumbai were among the best performing markets in the emerging economies in 2014. Due to the Reserve Bank of India tightening lending norms to developers, the property market may not have a crash-landing like it is feared will happen in China, infamous for its financial institutions’ dodgy book keeping. The dangers of investment-led growth, without the backing of consumption, are now becoming evident in both the countries, which share the common trait of high savings rate. In India, manufacturing growth is lagging as reforms are yet to percolate to the grassroots. China is facing a slump as domestic consumption is unable to fill the gap created by the comatose exports markets. India’s wholesale inflation, majorly comprising the manufacturing sector, is down to zero, while retail inflation is sliding as the specter of drought and famine has receded despite deficient southwest and northeast monsoon.
Consumption falls when prices of goods and services increase at a pace faster than economic growth. Interest rates are hiked to cool inflation. The artificial barriers on supply results in underutilization of capacity, created during the boom period. Lowering of interest rates should indicate that the economy is not in a good shape and it needs liquidity injection. Instead, investors view the development favorably for stemming the outflow from equities. It is considered positive for sectors whose top line depends on borrowings by consumers. Hence, the beginning of the softening of interest rates sends a strong message that the central bank wants consumption to increase. Both China and India seem to be on the same page on this issue. After consistently ramping up interest rates, China’s central bank executed a U-turn in November. Another round of reduction is due anytime now. The RBI, too, has signaled its readiness to begin its cycle of rate cuts from this year. An important player in determining the cost of money is the government, which comes to the market to meet its expenditure needs. The success of the current phase of PSU divestment, therefore, is important as it will remove the presence of the elephant from the room. Even the forthcoming telecom spectrum auction is receiving attention for its ability to improve the country’s balance sheet. However, bagging licenses at reasonable rates is the key to ensure competition, so vital to increase usage. The government’s idea of allowing consumers to choose their power suppliers will be a step up the pyramid, the bottom being the unleashing of competition in the consumer staples and discretionary space. Improved consumption will moderate valuations of heated stocks, enabling more investors to enter and better price discovery. For all these reasons, investors should go out to eat, play and buy.
By Mohan Sule
Is consumption going to replace liquidity-driven investment as the pivot for the economy to spin? Symptoms of the change in the mood of the market became noticeable after the equity market crash on 6 January 2014. Overriding the fears of the US Federal Reserve raising interest rates following the 5% growth of the US economy in the third quarter of last calendar was oil’s fall from grace. It pointed to the slowing of the world economy, particularly China, and triggered worries about what it meant for oil producing countries. Remittances from NRIs in the Gulf region form nearly 6% of India’s foreign exchange inflows. The contagion effect of the slowdown in consumption of oil could be as devastating as the 2008 meltdown of the financial markets, when credit dried up as lenders saddled with exotic derivatives, composed of home mortgages of varying degrees of default risks, were left with worthless securities on their balance sheets. The withdrawal of liquidity decelerated the growth engines around the world. The conclusion was that however attractive an economy, it needed inflow of cash to keep its wheels turning. Low interest rates in the US after the dotcom bubble bust at the turn of this century allowed investors to borrow cheap and stash the funds in high-interest rate emerging economies. Quantitative easing or the bond-buying program of the Fed following the collapse of some too-big-to-fail banks injected liquidity in the market when traditional avenues of borrowings had closed down.
The market did sulk after the announcement of the gradual phasing out of the QE programs. However, the Fed’s vow to keep rates near zero till the US economy was on an irreversible path of growth blunted concerns of credit turning scarce. Money poured into assets with the potential to beat inflation in the local economies and low interest rates in the developed world. In India and China, the flow was mainly into stocks and property. As a result, Shanghai and Mumbai were among the best performing markets in the emerging economies in 2014. Due to the Reserve Bank of India tightening lending norms to developers, the property market may not have a crash-landing like it is feared will happen in China, infamous for its financial institutions’ dodgy book keeping. The dangers of investment-led growth, without the backing of consumption, are now becoming evident in both the countries, which share the common trait of high savings rate. In India, manufacturing growth is lagging as reforms are yet to percolate to the grassroots. China is facing a slump as domestic consumption is unable to fill the gap created by the comatose exports markets. India’s wholesale inflation, majorly comprising the manufacturing sector, is down to zero, while retail inflation is sliding as the specter of drought and famine has receded despite deficient southwest and northeast monsoon.
Consumption falls when prices of goods and services increase at a pace faster than economic growth. Interest rates are hiked to cool inflation. The artificial barriers on supply results in underutilization of capacity, created during the boom period. Lowering of interest rates should indicate that the economy is not in a good shape and it needs liquidity injection. Instead, investors view the development favorably for stemming the outflow from equities. It is considered positive for sectors whose top line depends on borrowings by consumers. Hence, the beginning of the softening of interest rates sends a strong message that the central bank wants consumption to increase. Both China and India seem to be on the same page on this issue. After consistently ramping up interest rates, China’s central bank executed a U-turn in November. Another round of reduction is due anytime now. The RBI, too, has signaled its readiness to begin its cycle of rate cuts from this year. An important player in determining the cost of money is the government, which comes to the market to meet its expenditure needs. The success of the current phase of PSU divestment, therefore, is important as it will remove the presence of the elephant from the room. Even the forthcoming telecom spectrum auction is receiving attention for its ability to improve the country’s balance sheet. However, bagging licenses at reasonable rates is the key to ensure competition, so vital to increase usage. The government’s idea of allowing consumers to choose their power suppliers will be a step up the pyramid, the bottom being the unleashing of competition in the consumer staples and discretionary space. Improved consumption will moderate valuations of heated stocks, enabling more investors to enter and better price discovery. For all these reasons, investors should go out to eat, play and buy.
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