A hug and a wink

The market finally embraces large caps with a nod to efficiency, leadership and transparency  

Large-cap indices are touching lifetime highs even as mid- and small-cap indices have slipped more than 20% from their peaks. The pace of gains of the benchmarks has been slow as against the rapid climb of their peers in other categories. Only a few components in the S&P BSE Sensex and the NSE Nifty 50 are driving the rally in contrast to the all-round surge in the discounting of the constituents of the tier 2 and 3 indices. Beyond the obvious, the stock movements are sending subtle signals about the state of the market. Those that have taken debt to grow, are in sectors that are subject to cycles, are facing increased competitive pressure and are confronted with changes in the market place due to scaling up of technology have been left behind. The leaders and laggards include promoter-driven as well as professionally run companies. Hopefully, the latest outcome should set to rest the fruitless debate on the effect of promoter holding in attracting investors. What matters are transparency, vision and leadership position. Missteps and corporate governance issues are not unique to any particular type of organization. Companies within Old Economy and emerging areas have scored differently. The market has recognized the foolishness in rushing to re- or de-rate a sector because of the stunning performance or misdeeds of one or two peers. Examples of resilience can be found even in the face of an epidemic such as economic slowdown or ballooning bad loans. Product innovations and efforts to reach the last customer can overwhelm even a crowded field. Prudent use of cash for diversification can unleash a sluggish stock. Conflict of interest can de-rail a promising counter.

An inescapable inference is that the benefits of the policy thrust on rural economy and infrastructure-building have yet to percolate to companies slated to be the recipients of the largesse. The lack of enthusiasm for these stocks is due to two factors. One, most of the spending is by the government with its downside of delay in approvals and payments. Second, many winners are lowest bidders: the top line gets a boost but not the margins. Despite their dominant market share, the demand for large companies in core sectors is lukewarm. The firepower of automobiles, usually in the forefront of any rally, seems to have been consumed to remain competitive amid rising input costs, fuel-efficiency norms and the coming transformative challenge of electric vehicles. The surge in the side counters hinged on the cost of money staying low to facilitate growth plans. The limits of efficiency in giving a bump to the financials have been exposed, with producers unable to take price hikes to stay in the game. Volumes had to compensate for healthy operating profit. Also souring the mood was the flurry of resignations by auditors, raising doubts about the numbers in the public domain.

Some stocks with a track record and brand recall escaped from the stampede. Clearly, the market concluded that, though expensive, these counters deserved the premium. Left unsaid is the inadequate supply of quality stocks. It also points to another problem: the subscription flood into mutual funds during a bullish period. Schemes have exposure ceiling.  Not many want to let the cash remain idle. The result is a hunt for counters that have a semblance of operations and an enticing spreadsheet of consumption projections in the hope they shape up and justify the trust.  A few companies abandoned by investors due to tighter regulatory surveillance are now buying back shares to support prices. The problem is there is hardly any headroom for most mid and small caps to maintain the 25% minimum public shareholding due to hefty promoter holding. Many owners dilute stake just so to stay listed. Price discovery is the casualty. Significantly, the Securities and Exchange Board of India recently relaxed the norms for delisting. Instead of a consensus price, a range will be offered to the investors. Despite the unease, there are three satisfying conclusions from the recent partial meltdown of the market. Companies in the services sector are majorly creating wealth for the investors. India is leaping into being a services economy, unlike China, due to near 35% millennial population, according to Morgan Stanley. Many services sectors are yet to get recognition in the headline indices. Retail, logistics, hospitality and healthcare have poor representation. Their eventual inclusion will be a powerful booster dose for the benchmarks. Second, those that have invested in brands are enjoying an edge. Third, the divergence in trends in gains and decline within and outside the sector- and  market-value-based grouping points to selectiveness that will cushion future shocks so typical of mid and small caps.       

-Mohan Sule

What investors want

Setbacks to growth plans are more likely to be forgiven than opacity and fudging of numbers

The initial reaction to a long-overdue correction dissolved into panic as the slide of mid and small caps that began early May continued over two months. Of late, even large caps seemed to be losing their stamina in their climb to catch up. An across-the-board secular direction irrespective of performance, usually indicating over- or under-valuation, troubles investors. They are braced up for alternate cycles of boom and bust as they know that policy makers will tighten liquidity to prevent bubbles and loosen money supply to borrow and spend. What investors are not prepared for is disturbing of established agreements. The flooding or starving the market of lubricants essential for smooth operations such as oil by oil producing and exporting countries unnerves them. They detest uncertainty. There seems to be no clarity as to how the US and China trade war is going to conclude. Nasty shocks throw them off-balance. The overhang of social obligations and political considerations in taking business decisions had not diminished investors’ enthusiasm for public sector bank stocks, considered the best vehicle to ride India’s growth trajectory. The magnitude of the investment risk became evident after the Reserve Bank of India narrowed the time-frame for recognition of bad loans from six months to 90 days, restricting operations of banks under prompt corrective action. Investors are prepared to live through turmoil if they know the outcome. Selective picking of mid and small caps by the market regulator for tighter surveillance to nip price manipulation appears right. What they are not sure of is the objective. The selection signifies corporate governance deficit and thereby a warning to keep away or an intervention to cool prices and therefore afford an opportunity to enter at a lower level.

Investors love road maps. Monetary authorities give indications of their approach on policy rates during the course of the year. The inclination is not to cause unnecessary volatility in the equity and debt markets. No wonder many governors of central banks assume rock-star status. Investors are attracted by policies creating higher consumer spending. What they are not reconciled to is to companies growing their sales because of limiting competition. Leadership position due to being first-mover is embraced but not monopoly status that does not encourage cost-efficiency. Long-term capital gains tax on equity is just when the principle is that all income must be taxed in a fair manner. The move is unjust when the revenues are spent on short-term measures such as loan waivers and hiking support prices for farm produce. Investors do display patience while promoters rehabilitate their company following errors of judgment. Inexcusable are issuing bonus shares and announcing grand expansion plans to divert attention from the shoddy performance and reckless raising of capital.

Missteps by companies in spending capital on expansion or downturns in an industry due to change in consumer tastes and technology are eventually forgiven. What are not are siphoning off funds, related-party transactions and window-dressing. The spate of resignations of auditors has spurred questions about the authenticity of numbers of even earlier years. The new accountants of a company that was hammered because the predecessor made an issue of inadequate disclosure of material information have found no evidence to substantiate the claim.  The result is confusion rather than transparency. The problem is while figures can be validated, the quality of governance becomes a victim of subjective assessment.  The failure of a bank chief to disclose conflict of interest while being part of consortium that granted loan to a company that had invested in a family member’s business can be viewed as an oversight as well as lapse of judgment. The market does not seem to have a uniform rule to weigh on such ambiguous matters. In contrast, shares of a jeweler whose co-promoter gifted some shares to a related party was beaten and so also of a tech company for investing in the ornament maker. What follows in an indictment of the entire group that share common characteristics with those found wanting of their fiduciary responsibility. No wonder investors feel irritated due to opportunity missed if the blacklisted category resumes its strides after a time gap. Like fast food, quick judgments, investors have now reckoned, are injurious to health. The valuations at which a public sector player will take exposure to an ailing private bank will leave ample space for capital appreciation compared with if it were to buy into a profitable venture. The long tenure of redemption of policies puts the insurer in a unique position to pluck such low-hanging fruits.

-Mohan Sule

Survival strategies

Companies respond to opportunities and threats in a manner that might seem contradictory but relevant to their predicament

To understand how Indian companies are strategizing to stay in the game as banks become selective, equity investors impatient and the debt market expensive, there can be no better instructive exercise than observing the Ambani brothers. When the RIL group was divided in early 2005, the younger sibling’s portfolio had a combination of new economy and traditional but emerging businesses. Refinery and petrochemical complexes and the nascent retail outlets were assigned to the elder brother. More than a decade later, Anil is divesting stakes. The huge power plants put up to benefit from the deficit are slow in showing results.  Reliance Energy has been sold and Reliance Jio is taking over Reliance Communications. Foreign investors have been offered substantial shareholding in the financial services, asset management and insurance companies. Mukesh, in contrast, is facing a different predicament: how to deploy the reserves accumulated through old economy operations to keep the shareholders happy. Believing wireless services to be as essential as oil, voice calling was offered for free and data at bargain tariffs to create a big bang. The contradictory styles of the two capture the current preoccupation of Indian promoters to survive and grow. Heavily-leveraged companies are shrinking their balance sheets to concentrate on their competency. Those on the leadership perch are darting back and forth to become a one-stop shop or diversify to boost the return ratios.

The important lesson is that companies’ cash utilization and leakage-stemming policies are responses to the evolving situation. ADAG slipped not solely because of misjudgment. Rather external factors such as the Supreme Court’s crackdown on irregular issuance of telecom licences and the subsequent chaotic regulations skewed calculations. At the same time, Tata Motors’ determination to pull off its Jaguar-Land Rover buy appears to be paying: Main market China is stabilizing and the euro region is recovering. The second outcome is if unbridled ambition can hurt a company so also too much cash. RIL has quelled investors’ revolt over the mediocre capital appreciation by its aggressive RJio posturing, possible only because of its liquidity chest. In contrast, tech companies are distributing bonus shares and resorting to buybacks as they navigate an uneasy transition to digital offerings from back-office support. The third take-away is that the idea of growth differs for different companies. A high-entry barrier requires huge capital and patience. These are the strengths of large groups who were prominent in bidding for spectrum and circles. For a mid-sized sanitary-ware maker, extending the presence in the kitchen to ride on the housing boom is less risky than integrating backwards to secure supply of inputs. The fourth draw-down is that if commoditization of brands poses a danger to some, it presents an opportunity to the others. Consumer durables and FMCG are turning into generics. On the other hand, the expiry of patents is a window to the developed world for copy-cat pharmaceutical producers.

The fifth inference is that regulated industries that attract due to the fat margins can also become graveyards. Some ambitious entrepreneurs want to be present across the commodity spectrum for pricing power though these sectors are susceptible to policy whims and are cyclical. The distressed core sector assets are a testimony of how aping the current fashion can lead to destruction. At the same time the fact that the interested parties are seeking consolidation rather than trophies indicate careful homework of the outlook. Many first-generation entrepreneurs have become millionaires by servicing the needs of the recession-proof healthcare sector that is, however, subject to intense scrutiny. Mines can be shut due to local agitation. Price caps are imposed on scarce and essential requirements. The sixth conclusion is, despite the captive audience, B2B players yearn for B2C presence to shield the core cyclical operations and gain a direct entry into homes. Retail lending, asset management and insurance are the flavor though most conglomerates have not been able to replicate the success achieved by their flagships. The seventh observation is that if the upside of India’s consumer markets is the rapid urbanization, the downside is intense competition. The churn in the mobile handset segment has not deterred new entrants. The eighth lesson is the nature of tie-ups is changing from expanding the market to preserving the existing share. Pooling of equity or know-how-access ventures between Indian and foreign peers are giving way to collaboration with competitors. Joint custody of assets and sharing of resources by rivals indicate the trend is likely to turn into a tide. The bottom line is that one size does not fit all when adapting to the changing environment. The key is to be ruthless in letting go and careful while spending.

-Mohan Sule

The riddle

Do institutional investors and auditors have different standards of due diligence?

Well-meaning investment advisers recommend ticking a long checklist before venturing to trade. A basic requirement is consistent growth in revenues and profit. Corporate actions such as dividends, bonus and stock-splits come next. Growth plans and capital expenditure, too, are important. Presence of foreign investors and mutual funds offer comfort. Valuations tell a story, either of sluggish earnings growth not keeping pace with price gains or yet not reflecting the potential. At the tail-end is corporate governance. Unable to pin a definition, the explanation ranges from timely release of quarterly results and holding AGMs to having independent directors on board as per regulations. With the exercise done with, the attention shifts to stock-picking. The preference is for high-growth mid and small caps due to the messaging that large caps are reliable but slow in appreciating. Amid the unrealistic discounting of the mid-cap and small-cap indices, some stocks stand out. Trading at an attractive P/E of 20 based on trailing 12-month ended December 2017 earnings compared with the hefty valuations of the BSE Mid-cap index, this particular scrip reported CAGR of 24% in sales and 28% in profit after tax in the five years till FY 2017. The dividends in the range of 7% and 10%, with FY 2017 seeing no payout, no doubt disappoint but are in line with a company undertaking expansion to grow: Rs 100 crore are being tapped from internal accruals for Rs 600-crore expansion to add a fifth plant. Importantly, finicky foreign institutional investors held a huge 39% stake. Mutual funds owned a reassuring 12% equity end March 2018.

External factors, too, are favorable. A scorching summer is set to be followed by a normal monsoon, thereby boosting the prospects of consumption-based sectors such as FMCG in which the company operates. Despite the alluring factors, there is a hitch. The auditor has refused to sign the accounts for FY 2018. In fact, the firm has quit, citing lack of access to material information. The dilemma for investors is if the halving of the stock price from its September 2017 peak following a 1:1 bonus issue opens a window to take a bite of the lucrative business of mango-flavored drinks or a warning to stay away due to a corporate governance issues.  Manpasand Beverages smashes all conventional theories of investing. Since debuting in the primary market, the reliance of the net debt-free company considering cash in hand is on equity for capital expenditure, indicating the confidence of the promoters in servicing the enhanced base. Yet, there were warning signs. Retail participation in the 40% over-subscription of the IPO was marginal.The shares listed nearly 11% below the offer price. Operating profit more than doubled in the year after listing but could expand only about 20% in the next year.  After mopping up Rs 422 crore in the run-up to listing in July 2015, a slightly higher amount was collected from institutional investors a couple of years later to set up bottling plants at two existing locations and another in a new geography.

As the outcome of the examination of the books by a new auditor is awaited, the episode triggers memory of another case of breach of trust. Welspun India, the largest supplier to the US and the second largest producer of towels and bed sheets in the world, has lost 60% of its market value since its high end March 2015 after a prominent US retailer, among the top five customers, terminated its relationship, accusing the company in August 2016 of wrongly selling Egyptian cotton bed sheets. Target refunded all customers who bought these sheets over two years. Walmart followed, though it did not cut off ties. Others such as Bed Bath & Beyond and JC Penney, too, launched probes. Two class-action suits have been filed. The bath and bed linen maker exports nearly all its produce, with the US comprising a major chunk, followed by Europe. Operating profit that had doubled in the previous three years rose about 12% in FY 2017. The 80% jump in other income seemed to have restricted the fall in the bottom line to half. Dividend plunged from 100% to a measly 3%. Though net profit crashed more than 40% in Q3 of FY 2018, institutional investors have not given up. FIIs controlled about 9% and mutual funds 6% stake end March 2018. The trailing 12-month negative return has disappeared since the past month. The consultancy firm hired to examine the issue is yet to submit its report. In the meantime investors are left to speculate if the market’s impatience to seek growth year after year prompts companies to seek shortcuts. Besides, the divergence in the due diligence between institutional investors and the auditors is a puzzle that needs to be solved.    

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Add to cart

Not all purchases are value accretive as the market differentiates between a good buy and a bad bargain

If any doubts lingered about the decisive turning of the economic cycle, the feverish shopping spree by companies should scotch them. Tata Steel offered nearly double that of its nearest bidder to snap up an ailing peer. Buyers have lined up for four more distressed steel assets. Close after agreeing to take over Century Textiles’s cement division, UltraTech Cement’s Rs 8000-crore interest for Binani Cement is likely to be successful. With the sector veering towards a duopoly, more mid-tier players will come into play as they struggle to match the firepower of the Aditya Birla group and Lafarge. Besides scale to pare cost of production, proximity to raw materials and market provides a crucial edge to both cement and steel producers. A spree of sell-outs and buy-outs have left three large services providers in the wireless business, with one of them the product of merger. Service providers are opting for an asset-light model by divesting their tower businesses. Since the introduction of the Real Estate Regulation and Development Act, 2016, the trend of weak players transferring their unsold inventory to those with staying power has accelerated. The problem of bad loans has triggered speculation of mergers among PSUs and between private banks. If pessimists tend to view every company on the block as a sign of a slump, optimists note the rush to grab as an indication of a bright outlook. 

The market does not have a thumb rule to judge takeovers and amalgamations despite the fact that the process leads to better bargaining power for the acquirer and provides an exit for the shareholders of the struggling player. Instead of applauding for getting a foot inside the world’s hottest market, investors of Walmart panicked after it scooped up Flipkart for a hefty price. For those critical of companies not doing enough to deploy cash to improve returns, the plunge in the US discount retailer’s market cap must be confounding. In contrast, Torrent Pharmaceuticals has appreciated more than 300% since it mopped up the formulation brands of Elder Pharmaceuticals end 2013 for Rs 2000 crore, that is, nearly 60% of its sales in the fiscal year ended March 2013. Sun Pharmaceutical Industries gained 150% in the three years to September 2010 that it took to wrest control of Israel’s Taro despite the US$37-million tag in anticipation of access to the lucrative US and Canada markets. The share price doubled in a year after merging Ranbaxy with itself in an all-stock deal in April 2014. In contrast, buying 23% stake by the promoter in Suzlon early 2015 did nothing for the debt-heavy renewable energy producer, who has shed half of the value since then. Hiving off Taj Boston in July 2013 has not helped Indian Hotels because the transaction value was just a fraction of the Rs 4000-crore loans in the book. Tata Steel went up nearly 10% in the four months after announcing an equal joint venture of its European property Corus with Germany’s Thyssenkrupp. The counter is back to the pre-September 2017 level on fears of cash drain: After collecting Rs 12800 crore through a rights issue, Rs 17000 crore will have to be raised to finance the Rs 45000-crore Bhushan Steel purchase. 

Ultra Tech spurted for a fortnight or so after agreeing to take over Rs 16000-crore debt of Jaiprakash Associates’s cement business but is down 5% over the 10 months that have passed on worries of the debt-to-operating profit ratio of 1.85, though down from a high of 2.4, worsening in the quest for consolidation.  Infosys is still smarting from three recent additions, with a whistle-blower claiming Israeli automation firm Panaya served an inflated bill. One was merged at low valuations and the other is yet to make a difference to the top line. The jury is still out on Tata Motors’ US$ 2.3-billion JLR adventure at the peak of the global bull-run. In the ensuing credit crunch, it took a decade for the scrip to double after losing 75% of its value in a year. Hindalco’s US $6-billion (compared with sales of US$ 4.5 million in FY 2007) conquest of Novelis makes sense now as aluminium prices are bouncing back. The shareholders, however, suffered in the two years since February 2007, seeing 60% erosion in wealth. Airtel’s operations in 15 African countries, picked from Kuwait’s Zain Telecom for nearly US$11 billion in 2010, started making money in the September 2017 quarter. The leverage of US$ 13 billion is pitted against the latest fiscal year’s annualized revenues of US$3.1 billion. The chairman recently admitted funds could have been better utilized to strengthen position in the domestic market. The two important lessons are the market distinguishes between a good buy and a disastrous bargain. Calculations can go haywire if the environment turns hostile.

-Mohan Sule

Oh, not again!

India’s e-commerce pioneer’s ownership change underlines Indian enterprises’ struggle to achieve scale

 The churn of big-bracket investors at India’s first digital marketplace continues. The price tag for 77% stake by the new buyer puts a valuation of over US$ 21 billion, making it more expensive than decades-old Old Economy companies such as Tata Motors and Coal India. In the absence of listing, the transaction size becomes a function of the buyers’ capacity for risk and projection of outlook for the business on one hand and the sellers’ doggedness to get the desired price or impatience to exit to cut losses on the other. After all at the turn of the century internet properties were assigned discounting based on eyeballs rather than cash flow. Foreign direct investment in multi-brand retail is not high on the current government’s agenda. At the same time, the fastest-growing economy in the world is too important to ignore by global companies in search of growth. Offline retailer D-Mart in fact is supposed to have mimicked the low-cost model of US peer Walmart, the new buyer of Flipkart, with great success. Despite keeping prices low, the net profit margins are near about 4%, highest for any discount retailer in the world, and are projected to increase 1% point and  the return on equity by nearly half in another three years. The sparkling performance is in stark contrast to the cash-guzzling and loss-making e-commerce pioneer. Interestingly, there was no panic selling in Avenue Supermarkets, indicating that competition from cyber space is not expected to affect D-Mart in the immediate term.

What the transaction instead does is trigger a tinge of regret that India is yet to produce a Jack Ma in the e-commerce space. Alibaba’s US$ 21-billion IPO four years ago is the largest capital-raising exercise so far. Hint of further capital infusion is as an acknowledgement of the Indian consumption story as much to the difficulty in cracking the market. Walmart is known to get is calls wrong. It had to wind up physical presence in Germany due to inability to understand local tastes. Its online investments in the US and China are more of counter-strategies to stave off Amazon and Alibaba. The coexistence of brick-and-mortar retailers with e-tailers highlights a strange paradox of post liberalization India: a nation ready to embrace innovations and at the same time conservative in accepting change. If the two-wheeler segment demonstrates the ability of local companies to beat foreign brands, the consumer durables space is a tale of meek surrender: regulations reduced domestic labels to assemblers of knocked-down kits. The typical reaction of an entrenched Indian enterprise that prospered on patronage to any threat to market share is to scurry into unrelated areas such as telecom, aviation and oil and gas.   

The many bright sparks in the non-digital space are mostly first-generation entrepreneurs. Their horizon is not restricted to the Indian borders. Naturally, they are from sunrise areas. Some degree of success has been achieved by generics makers exporting to the US. The old and new coexist in healthcare, but the money-spinning diagnostic centers have the stamp of start-ups. The personal-care segment is a testimony to the innovative spirit of Indian entrepreneurs so much so that even multinationals are looking at home-based remedies. Similarly, the food business is seeing a replay of David taking on Goliath, with a tilt in preference for Indian savories of regional brands over foreign labels. Though reminiscent of the crowded 2G spectrum era about a decade ago, the money-transfer business looks set to become the next big theme after private banks. More often, an unexpected success sees re-rating of the entire sector. The over 100% subscription and listing returns of Avenue Supermarts brought into fashion Shoppers Stop, V Mart and Future Retail. French giant Lafarge’s entry through ACC and Ambuja Cements prompted a relook at a mature market. The lining up of suitors for distressed steel assets is taken as a sign of recovery. Unfortunately, not all missions have had a happy ending. Many have succumbed under the weight of their ambitions as well as due to the hostile environment post the global liquidity crunch. Suzlon sold itself to Sun Pharmaceuticals, another new-age venture. The wireless business has proved to be a graveyard across generations of would-be telecom czars. Airlines remain work in progress as promoters without baggage of experience struggle with regulations and a brutal marketplace. Yet, the notable take-away from the Flipkart trade, representing 5% of the total assets of mutual funds end March 2018, is that deals in India are going to get bigger. Money is waiting. The question is if Indian promoters are ready to loosen their grip to let in big-ticket investors to achieve scale. Ma owns only 7% equity shares in Alibaba.   

-- Mohan Sule

The run-up

Despite lousy macros, the market’s near-quarter gain in slightly over a year to the last general elections was on hopes of a Modi win

The market returned more than 25% from mid April 2013 till the Lok Sabha poll results were announced. As the world’s most populous democracy begins the countdown to elect the next government, the question is how equities will move in the run-up. If history repeats, the benchmark will be near the 40,000 mark five months into next year. Stocks had surged despite the infamous policy paralysis that turned UPA 2 into a lame-duck government for the last two years of its term after a spate of scandals. The Supreme Court early 2012 cancelled the 122 licences for 2G spectrum issued in 2008. Over the first part of the year, CBI investigated if coal blocks allotted between 2004 and 2009 were by bidding. These scams came on top of the discovery of financial irregularities in the 2010 Commonwealth Games and that apartments in the Adarsh housing society in a prime south Mumbai location were given to politicians and bureaucrats instead of war widows and army personnel. There were allegations of a surreptitious environment tax to pass capital-intensive projects. Macro factors, too, had had turned hostile. The 10-year government paper yielded 7.75% and home loans were being disbursed at above 9.70%.  Oil had crossed US$ 100 a barrel. The fiscal deficit in the March 2013 quarter was 3.14% of the GDP (totaling to nearly 5% for the entire year). The current deficit was at 3.58%. The gloom did not restrict equities from scaling new highs. By the time the calendar year ended, the Sensex had crossed the 21,000 level, last seen before the global financial meltdown of September 2008.

A contributor to the rally was the US Federal Reserve finally initiating the anticipated roll-back of the liquidity injection that was introduced to prevent the US from sliding into recession due to the credit crunch as too-big-to-fail banks collapsed. Foreign investors were pleased with the victory of the BJP in Rajasthan, Madhya Pradesh and Chhattisgarh assembly elections, hoping that Narendra Modi as prime minister would pencil broad reforms to boost the economy. There are many similarities with the period five years ago. SBI’s base rate is about 8.7% and yields on government bonds are slightly below even though consumer inflation is at a five-month low of 4.28%. Brent crude is hovering above US$ 70 and looks set to rise further due to slide in output even as the global economy gathers strength. The stark differences include weakening of the rupee to the 66.40 level from 53.5 at end April 2013. The fiscal deficit is projected to decline to 3.3% in the year ended March 2018 from 3.5% in the previous year. Still off the original target of 3%, it is lower than 4% in FY 2015 and 1.5% points down from the penultimate year of the Manmohan Singh-P Chidamabaram regime. The current account deficit was 2% of GDP in Q3 and is expected to be 1.5% in FY 2018 from a low of 1.3% in FY 2015 but much more comfortable than what it was in FY 2013. After hitting a lifetime high of above 36,000 early 20018, the stock market corrected over 10% on higher bond yields in the US and India.   

Another striking dissonance is that small and mid caps have been at the forefront of the current rally. In 2013, investors preferred large caps. Implementation of the long-term capital gains tax on equity instruments and dividend distribution tax on equity mutual funds is a downside. Yet, mutual funds are replacing overseas funds in propping up stocks: their investment in equities was double that of foreigners in 2016 and 2017. Since the start of 2018, domestic institutions’ debt exposure has outstripped that of their non-local peers, who have been exiting from both equities and debt. The Sensex’s jaunty ride in 2016 and 2017 was as much due to global liquidity finding its way to high returns emerging markets as to the cleansing of the real estate sector, roll-out of GST and shepherding defaulters to insolvency by shortening the outstanding loan recovery process. Later reforms such as opening up coal mining and putting Air India on the block as well as forecast of good monsoon have not energized on concerns of what farmers’ loan waivers and guaranteeing minimum support price 1.5 times the cost of food-grain production will do to the fiscal health. High-growth stocks are expensive even after correcting more than 10% from their peak. As such the triggers for the market are more likely to come from the US (pause in the scheduled three rate hikes by the Fed) and China (maintaining the manufacturing momentum). Overriding economics will be politics. The tailwinds of the BJP passing the test in Karnataka can only get stronger if Modi wins the three-state sweep-stake at the end of the year.

-Mohan Sule