Macro

16 Mar

Musings on the market

With state elections out of the way, the stock markets will stay focused on the ongoing Russia-Ukraine conflict and energy prices and its implications for domestic and global growth and inflation (interest rates).

We hope for diplomatic breakthroughs to end the ongoing Russia-Ukraine conflict and no further sanctions on Russia’s oil/natural gas exports. This could limit further damage to global supply chains and prices of materials and foodstuff. The decline in share prices in the last month has made many stocks attractive to long-term investors. We believe that even when diplomatic solutions are found, the world will not go to the situation as it existed before Russia entered Ukraine. Material costs will stay higher for longer, consumption will be reduced and interest rates will move up in 2022. Lockdown in China’s Shenzhen and Jilin province amid a surge in fresh cases may impact industries such as chemicals and automobiles. Issues with respect to the ports causing delays with shipping may hurt the global supply chain.

For the past few months, foreigners have sold Indian stocks in large quantities. Indians have continued to buy but not in equal strength. We believe that Indian indices may not fall sharply in the next few months if global conflict does not worsen. We think investors should now start to invest in a mix of defensive and pro-cyclical sectors now.

Sector Business Outlook
Pharma Steady growth in India. International business momentum picking up. Restarting of US FDA inspections may lead to quicker approvals, adding to topline growth.
Consumer Revenue and Margin growth will be challenged for the next few quarters.
Software Services The demand outlook is robust for the next 2-3 years. Winners will be focused on Digital solutions for clients.
Insurance Increasing demand as income levels rise. Increased supply of shares may cap the valuations for the next few months.
Defence The importance of having strong local manufacturing for defence needs is underscored by recent global developments.
Financial Services Increasing demand as COVID fears fades, stronger margins as the size of bad loans fall, sufficient new worth due to recent capital raising.
Auto and components A mixed outlook as supply constraints may ease over the next few quarters. Demand may suffer due to rising petrol prices.

 

Jason Leach points out that statistics abound showing that market corrections without recession are buying opportunities. Outside of recession, and after declines of 10%+, the US S&P 500 Index is higher one year later approximately 90% of the time with an average return of 25%+ (32 corrections since 1980 – source: LPL Research).

Data also shows that market corrections outside of recession around geopolitical tensions are buying opportunities. Outside of recession, only once since 1939 was the US S&P 500 Index lower one year after a domestic political or geopolitical shock (29 occurrences), with a median one-year return of 13% (source: Deutsche Bank).

Does this mean investors should be fully invested now? Not so fast, we think. Jason Zweig reminds us that glaringly obvious big fears, like the risk of nuclear war, can blind investors to insidious but more likely dangers, like the ravages of inflation. Second, investors need not only the courage to act (continue with regular investments in stocks) but the courage not to act—the courage to resist (not giving to the temptation of new products, hot IPOs).

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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19 Nov

Essar Steel Judgement Discussion by panel

Update on the Indian Equity Market: 

On Monday, NIFTY50 ended marginally negative at 11,884 (-10 bps). Bharti Airtel (+4.6%), Tata Steel (+4.4%) and UPL (+3.7%) were the top NIFTY50 gainers while Yes Bank (-4.3%), Bajaj Auto (-2.0%) and Britannia (-1.7%) were the worst-performing NIFTY50 stocks. NIFTY Metal (+1.8%), NIFTY PSU Bank (+1.4%) and NIFTY Pharma (+1.2%) were among the gainers. NIFTY AUTO (-0.4%), NIFTY FMCG (-0.4%) and NIFTY Financial services (-0.1%) were the top losing sectoral indices.

Essar Steel Judgement Discussion by the panel
Excerpts from the interview of Mr Rashesh Shah, Chairman and CEO, Edelweiss Financial Services; Mr Arijit Basu, MD, State Bank of India; Mr Bahram Vakil, founding partner, AZB & Partners; and Mr Shardul Shroff, executive chairman Shardul Amarchand Mangaldas & Co and dated 18th November 2019. Source: Livemint

The Supreme Court’s judgment awarding Essar Steel Ltd to Arcelor Mittal has strengthened the Insolvency and Bankruptcy Code, empowered the committee of creditors and set a precedent for other similar cases, participants at a panel discussion said. 

Mr Rashesh Shah, Chairman, and CEO, Edelweiss Financial Services: Edelweiss Asset Reconstruction Company (ARC) has over ₹ 7,000-8,000 crs of exposure in Essar Steel Ltd.

  • According to him, it will take a couple of weeks for the recovery to come through.
  • Edelweiss ARC will receive 25% of the payment while the balance will go to the respective banks.
  • According to him, the important thing is not only Essar Steel judgement, but there are at least another 8-10 cases which are also hinging upon the same principles which were raised on the Essar Steel case and those will also quickly get released.
  • He thinks between now to March 2020, there is a fair amount of liquidity that will get released in a lot of these NCLT cases because of the clarity of the judgement and the clarity on the grounds on which how all these NCLT cases will be resolved.
  • Edelweiss is expected to receive the money in two-three weeks’ time. This will require some paperwork, to make sure that due process is followed in allocation to avoid any kind of missteps in execution. This account is a large one with payment of almost US$6 billion.

Mr Arijit Basu, Managing Director SBI: State Bank of India (SBI) was to get around ₹ 12,000 crore

  • Mr Basu said, “We are working on the process, we would like things to move very fast now that everything has been now cleared by the Supreme Court. Let us see how it goes, I think the expectation is that things should move very fast.”
  • According to him, it is not just about Essar Steel but he feels that this judgement will bring in finality to the entire NCLT and the IBC process as was set up in 2016.
  • Various NCLT and NCLAT courts were giving diverse judgments and were leading to a lot of confusion.
  • The previous ruling of the Supreme Court: the amendments brought by the government in the IBC code itself now and this final judgment will lay down not only the rules for Essar Steel but will also give a very clear idea as to how everyone has to move forward including the committee of creditors.
  • Mr Basu thinks that an assessment has to be made which SBI is trying to work out of course regarding how much of more such cases are exclusively dependent on clarity coming in the NCLT process and how much of it is due to other delays which are happening because of the resolution process itself. So, maybe in a couple of days, SBI will be able to frame that.

Bahram Vakil, founding partner, AZB & Partners:

  • He said, “23rd October 2018 was when National Company Law Tribunal (NCLT) Ahmedabad approved it. So it is not a small amount of time, I have not done the internal rate of return (IRR) calculation, but we have lost from October 23 till November 15, so just over a year if they had accepted it then.”
  • Recovery rates have been doubled from 25% to 46%, this judgement will probably take it to 48-49%, but the best in class worldwide is in the 80%.

Mr Shardul Shroff, executive chairman, Shardul Amarchand Mangaldas & Co.:

  • The NCLAT has to go both by letter of the law and the spirit of the law. It is unequivocally clear that the Supreme Court has reiterated the fact that the decision of the Committee of Creditors (CoC) is final, they have the primacy and there is no authority in law for the NCLAT to substitute the judgement of the CoC by their own judgement.
  • According to him, now the question which will survive if at all is that if the CoC has made a decision which is contrary to the IBC, therefore for example if they have miscalculated the liquidation value or if they have not followed the requirement of ensuring that the operational creditors get the first bite at the cherry, those kinds of things if they are wrongly done by the CoC, those are the issues which will go by remand.

Consensus Estimate (Source: market screener website) 

  • The closing price of Edelweiss Financial Services Ltd was ₹ 129/- as of 18-November-19 and traded at 1.5x /1.3x /1.3x the consensus BVPS for FY20E / 21E / 22E of ₹ 85.7/95.7/102.0 respectively. Consensus target price of ₹ 157/- implies a PB multiple of 1.5x on FY22E BVPS of ₹ 102/-.
  • The closing price of State Bank of India Ltd was ₹ 325/- as of 18-November-19 and traded at 1.3x /1.2x /1.0x the consensus BVPS for FY20E / 21E / 22E of ₹ 251/280/319 respectively. 
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27 Sep

It is a golden opportunity for the global business community to partner with India in its journey: PM Narendra Modi

Update on the Indian Market:

On Thursday, Nifty bounced back after Wednesday’s fall and ended the September F&O series above 11,550 level. Nifty was up 131 points at 11,571.20. All sectoral indices, except IT, traded in the green on NSE, led by Nifty Metal (4.32%), Nifty Media (2.29%) and Nifty Auto (2.43%). Yes Bank, Indiabulls Housing Finance and Infosys were among the biggest losers. Vedanta, M&M and Coal India were the gainers.

It is a golden opportunity for the global business community to partner with India in its journey: PM Narendra Modi

The key takeaways from the interview by PM of India Mr. Narendra Modi at Bloomberg Global Business Forum in New York:

  • Prime Minister Narendra Modi urged global businesses to “come to India” as the current government has set a roadmap to build a $5 trillion economy by 2025.
  • PM Modi has met the energy company CEOs in Houston and has planned to meet more than 40 companies at the forum hosted by Michael R. Bloomberg, the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.
  • The recent move of the corporate tax cut in India is called as a revolutionary movement by PM Modi.
  • The cut in corporate tax will not only help India compete for investments with other destinations in Asia but also help boost private investments and lift economic growth in Asia’s third-largest economy.
  • Attracting investments is key to revive the economic growth and put the nation on the path to becoming a $5-trillion economy by 2025, According to him.
  • Inviting foreign investments in sectors such as infrastructure, start-ups, defense and real estate, the prime minister said his administration has decided to invest $1.3 trillion in modern infrastructure.
  • He added that the Government would be taking necessary modifications on a regular basis on tax-related laws and bring tax on equity investments on a par with global tax regime. This could be referred to as the abolition of term capital tax and dividend distribution tax.
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26 Sep

India should aim to become largest FDI recipient: Ravi Shankar Prasad

Update on the Indian Market:

On Wednesday, Indian stock markets fell sharply. Sensex declined over 500 points (-1.29%) while NIFTY fell nearly 150 points (1.28%) and breached the 11,450 mark. Nifty Midcap and Smallcap indices plunged 2 % each. All sectoral indices, except IT, traded in the red on NSE, led by Nifty Auto (-3.84%) and Nifty Realty (-3.1 per cent). Biggest Nifty losers were SBI and Tata Motors, each of which was down over 6%. Other major losers included Maruti Suzuki, M&M, HDFC and Tata Steel.

India should aim to become largest FDI recipient: Ravi Shankar Prasad

Key takeaways from the interview of Mr Ravi Shankar Prasad, Communications and IT minister

  • Communications and IT minister Ravi Shankar Prasad expressed that India should aim to become the largest foreign direct investment (FDI) recipient globally as the country offers a huge market and investor-friendly policies.
  • With the recent announcements on tax-relief for manufacturing, India is now at par with the tax regime of countries like Vietnam and Thailand.
  • He also mentioned that country offers a huge market for companies like Apple and others to make for India and export while adding that the far-reaching decisions taken by Government of India has also been heard by Apple. Apple has started production in India in a very effective way.
  • He assured that he will make his team open and accessible for foreign investors as we need investments.
  • The minister said India has become the 5th largest economy globally and FDI has seen a jump over the last few years and grossed USD 64 bn in FY19.
  • Telecom sector attracted FDI worth USD 2.67 bn, and in electronics, computer software and hardware, the amount stood at USD 6.4 bn.
  • He further said India has been leveraging technology not just for benefits to economy and commerce but also digital empowerment.
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25 Sep

More needs to be done

Update on the Indian market:

On Tuesday, NIFTY lost its winning streak. It closed -0.10% lower. Among sectoral indices NIFTY PSU Banks (-2.34%), NIFTY BANK (-1.25%), NIFTY Financial services (-1.9%), NIFTY Auto (-0.38%) and NIFTY Metal (-1.63%) closed lower while NIFTY IT (+1.98%), NIFTY Pharma (+0.44%) NIFTY FMCG (+0.62%) ended on a positive note. The biggest gainers were Infosys (+3.88%), Zeel (+3.66%), Tech M (+3.11%) whereas Eicher motors (-3.84%), State Bank of India (-4.06%), JSW steel (-4.19%) ended with high losses.

Excerpts from a panel discussion with R.C. Bhargava, chairman, Maruti Suzuki India Ltd; Pawan Goenka, managing director of Mahindra and Mahindra; and Rajiv Bajaj, managing director of Bajaj Auto Ltd with CNBC TV18.

  • Finance Minister in a totally unexpected move reduced corporate tax on Friday. Effective tax rate now stands at 25.17%, inclusive of surcharge and cess. This move will help companies to increase their profitability. FM quoted that it will lead to revenue loss of ₹1.45tn.
  • Speaking about further discounts in auto sector, Mr Bhargava (Chairman, Maruti Suzuki) rules out the scope of further price cuts out of the tax savings. He says if we take a look at savings from the tax cut it is about one-fifth or one-sixth of total tax payment.
  • Mr Bhargava believes, it is better to pump benefits back in the company in the form of capex, more investments rather than more discounts in an environment where the discounts are at a peak.
  • Mr Bhargava says, Manufacturing in India has never grown at a high rate. The tax cuts will make manufacturing industry competitive. Moreover, customers don’t buy during uncertainty. Now that GST overhang is out of the way, we can see people making decisions.
  • Mr Bhargava believes, coming October will see much better retail sales than in the previous months.
  • Mr Goenka (MD, Mahindra & Mahindra), also praises the corporate tax cut as it will make Indian companies globally competitive.
  • He says, a wrong expectation has been coming out in the last two-three days that because of this, auto companies would be able to reduce prices. Tax cut is a stimulus which will help in mid and long term in the form of higher capacity, increase in employment rate.
  • On discounts he believes that even if entire benefit is transferred, M&M will be able to reduce vehicle price by about 0.5%, which means on a ₹8 lakh car by about ₹3,000.
  • Mr Goenka believes that there is a sentiment boost in the market which was needed in current scenario.
  • Mr Rajiv Bajaj (MD, Bajaj Auto) is also of the same opinion that this will benefit in the long run. Talking about its immediate effect on Bajaj Auto, the heavy investment in consumer offers and media spends that they have undertaken in a quarter will be reimbursed because of the lower tax rate.
  • Taking about reduction in tax for new entities, he says it might help Bajaj as it is about to sign-up with Triumph. How it turns out is a matter to look at.
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05 Aug

Budget 2019-20 highlights that matter for individual investors

Dated: 5th July 2019

Impacting individuals:

· Income tax slab rate unchanged

· Additional deduction of Rs 1.5 lac on interest payment on the loan is taken for purchasing electric vehicles.

· Additional deduction of Rs 1.5 lac on interest payment on home loan under the affordable housing category. This deduction is applicable for loans taken before 31st March 2020.

· TDS of 2% on cash withdrawal exceeding Rs 1 crore in a year from a bank account.

· Surcharge for individuals earning Rs 2-5 crore a year and individuals earning more than Rs 5 crore will increase by around 3% and 7% respectively.

· Pension benefit to be extended to around Rs 3 crore retail traders and shopkeepers with an annual turnover less than Rs 1.5 crore under Pradhan Mantri Karam Yogi Man Dhan Scheme.

Impacting Banking, NBFC and HFC sectors:

· Rs 70,000 cr will be provided to Public sector Banks to boost capital and increase credit.

· Regulating authority over housing finance companies to be returned from NHB to RBI

· Government will provide one-time 6-month partial credit guarantee for the purchase of high rated pooled assets of financially sound NBFCs up to Rs 1 lac cr in FY20. This measure is in response to the funding issues faced by the NBFC sector.

Impacting Capital markets:

· Asked SEBI to consider raising the threshold of public shareholding in listed companies from 25% to 35%. If the change is made, listed companies will have to issue fresh equity or undertake stake sale to comply with the new rules.

Other highlights:

· Special Additional Excise duty and Road and infrastructure cess raised by Re 1/litre each on petrol and diesel.

· Import duty to be hiked on gold and precious metals to 12.5%, from the current level of 10%.

· Corporate tax rate of 25% for companies with an annual turnover below Rs 400 cr. The previous threshold was Rs 250 cr.

· Proposed GST rate cut for Electric Vehicles from 12% to 5%.

What the market did not like:

· No relief on the Long term capital gains tax.

· Corporate tax reduction is proposed for companies below Rs 400 cr turnover. Larger corporates get no benefit.

· Special Additional Excise duty and Road and Infrastructure Cess each by one rupee a litre on petrol and diesel. This might have negative implications for the already weak auto demand.

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