Busy Season Credit Policy

Busy Season Credit Policy is out and RBI keeps key policy rates unchanged. Cuts, CRR (Cash Reserve Ratio) by 25 basis points to 4.25%.

RBI actions are on expected lines considering rise in inflationary pressure due to increase in diesel prices.

Market, had already discounted this possibility as a result was trading in narrow range of 18600 to 18800 levels. However, retail investors reactions are more eminent with policy announcements which as a result has plunged Sensex around 1.50%

Going forward, market may also en-cash this opportunity for corrections, which may happen in intraday today itself. Having said that BSE has strong support at 18440 & NSE at 5600 levels.  FII (Foreign Institutional Investors) are overweight on NSE-50 Stocks –so as Large Caps are flavor of the moment.

We are strongly recommending to en-cash current opportunities by participating in same, and there-after if opportunity multiplies.

Fresh participation in Debt market is also benefited with the postponement of interest cut, leading to comfortable 9% annualized TAX FREE – RISK FREE returns. 

Season Greetings

Right time to enter market:

Strong message has been sent from Govt. last month. Same is time and again getting clearer and louder. Markets have moved to new trading zone. However market swing to tune of 3%-5% downward is never ruled out due to unprecedented event or knee jerk reactions to negative news. Undertone is bullish and Long term investor should buy with each fall.  

Low trades were seen in last couple of weeks, due to inaction from BULLs so as BEARs who are weighing each other next move visa- Vis market sentiments. In market parlance, its termed as consolidation before new trend sets in. The upcoming RBI Busy season credit Policy is expected to initiate rate cut directly or at-least indirectly to fuel growth.

However, for those who don’t want to take any risk, there is always risk free avenue (Debt Funds) since opening of economy in 1991-92 -A solid alternative to Bank Deposit yielding Tax Free returns of 8% plus with 100% transparency and liquidity option.

The Government’s FIRST STEP IN RIGHT DIRECTION enough cause for optimism

The Government seems to be pushed to the walls as they have restarted some economic reforms once more, come what may be. We are convinced this is the dawn of a new age of reforms in India, potentially as momentous as the ones in 1991. However still many amongst us reacts decidedly ho-hum, and who think that the government has done little and quite late and will actually be able to operationalise little of what it has announced.

There’s some truth in both views and from here on. The government measures announced so far will only take care of 25 to 35 per cent of the diesel losses. The other announcements, if and when followed up by actual changes in laws and regulations, might will entice some foreigners to invest.

Everything else, like the softer attitude on retrospective taxation and GAAR are some time from fruition. And the less said about myriad issues from infrastructure to inflation the better. The investment markets are operating on hope or softer interest regime & retrospective higher bottom-line for India inc., along with the news from the US and Europe that their currency would be depreciating going forward for long time to come.

All of which still means that the outlook is still much better than it appeared to be a week or two back. Investors are eternal optimists, and a promise of some real reforms, some chance of actual implementation, plus some hope of liquidity—that adds up to cause for a great deal of optimists.

Awakening of Stock Exchange on back of goodies:

·         Govt. Bold Policy Measures

·         Ex-gratia of Stimulus announce by Federal

·         Expected low interest regime going forward

·         Bear Panicky – Short covering

·         Setting of Bullish under-tone

All these doesn’t means market will not look backward – reasons

1.       Once bear Short Covering is over – collectively they will try to pull back again & with them so called Bull would be accompanying resulting – CORRECTION – to the extent 17500 BSE / 5300 NIFTY is not ruled out going forward before real bullish undertone sets in say by couple of months time frame if other parameter remains constant.

2.       Euro zone crisis handling not on expected lines or slowdown of US recovery – i.e. if sustain +ve wibes are not pouring in, Indian Market can’t march only on its own credential in isolation.

3.       Govt. rolling back policy measures on account of Ally / Opposition pressure.

Our Submissions:

·         Initiate SIP as much as possible as it has proven track record in all adverse scenario with Long Term objective.

·         Wait for correction we have not missed the Bus. Having said that buy with each fall.

·         Short Term Income Fund has and should continue delivering 8.50% Tax Free returns whether interest rate cut is immediate or if postponed to adjust inflationary pressure by increase in diesel prices.

Why hate Indian Economy - (when its delivering 8.50% Tax Free returns to investors year after year after year...)

SERIES - 1

Corporate Margins at 8-Year Low Signal Earnings Bottom:

Indian equities have attracted the highest foreign flows in the region as global investor believes that the worst (SENSEX) may be over for the nation’s biggest companies after profitability slumped to an eight-year low.

Offshore funds plowed a net $12.3 billion into Indian shares till date, the most among 10 Asian markets outside China tracked by Bloomberg. The average profit margin before interest, taxes, depreciation and amortization of the 30 companies in the BSE India Sensitive Index, or Sensex, narrowed to 19.5 percent in the June quarter, the lowest since December 2003, data compiled by Bloomberg show.

Earnings forecasts this year are being cut at a faster pace in Brazil, China and Korea, while profit for companies in the MSCI India Index has stayed stable, Deutsche Bank AG said in an Aug. 24 report. Government data last week showed Asia’s third- largest economy unexpectedly rebounded from the slowest pace of expansion in three years after the Reserve Bank of India cut borrowing costs to support growth.

With China’s growth slowing, India looks the best among BRIC countries year to date. India’s economy is less dependent on exports to Europe than China and Russia

Slowing down:

The last time profit margins for Sensex companies were this low, in 2003, the benchmark index soared 73 percent as economic expansion exceeding 8 percent lured foreign inflows of $6.7 billion into equities. This year, the gauge has climbed 12 percent, compared with the 0.2 percent gain in Brazil’s Bovespa (IBOV) Index. The Shanghai Composite Index (SHCOMP) has fallen 7.1 percent after China’s economy grew at the slowest pace in three years last quarter.

Overseas funds were buyers of local stocks for 23 straight days through Aug. 30, the longest stretch of net buying since a record 41-day streak through Oct. 27, 2010, according to data compiled by Bloomberg.

Funds have flowed into India even as Prime Minister struggles to revive his reform plan amid a logjam over attempts to open up the economy, corruption scandals and elevated inflation. The $1.8 trillion economy expanded 6.5 percent in the year ended March, the slowest pace since 2003, government data show.

India’s main opposition party has stalled parliament for 11 days, demanding Singh’s resignation after the chief auditor Aug. 17 said the government may have lost $33 billion awarding coal blocks without holding auctions. Singh was relying on the parliamentary session to pass legislation to allow foreign investments into retailing, aviation, pensions and insurance.

‘Terrible Macro’:

Foreign investors are decoupling macro from the micro. The macro has been terrible in terms of the GDP growth, but in the micro you can still find good quality, long-term stories. We are not breaking the big news but we think India will do well relative to the other emerging markets.

Bottoming Out:

Earnings forecasts for the MSCI India Index have been cut by 2 percent this year, compared with a 15 percent reduction for MSCI Brazil and 5 percent for MSCI China indexes, according to Deutsche Bank. Sensex earnings grew 14.6 percent in the June quarter, exceeding Bank of America Corp.’s estimate of a 13.7 percent gain.

Falling margins have driven downgrades in the past 18 months, and we reiterate margins may be close to bottoming out. Earnings will be slow and there will be downgrades but lower than what we have seen in the past five quarters.

The Sensex trades at 13.7 times estimated earnings. While that’s 30 percent more than the MSCI Emerging Markets Index’s valuation of 10.7 times, it’s still below the 15.8 multiple the gauge traded at in February, data compiled by Bloomberg show.

India has always traded at a much higher multiple versus China or even some of the Asian or other BRIC markets. Globally sentiments are not as negative about India as we have developed being Indian.

Cooling of Inflation:

Government data on Aug. 31 showed gross domestic product grew a faster-than-expected 5.5 percent in the June quarter as the Reserve Bank of India cut interest rates in April after raising them a record 13 times from March 2010 to October last year. Wholesale-price inflation eased for a second month in July to a 32-month low, spurring forecasts that the central bank may pare funding costs when it reviews policy on Sept. 17. SBI has already announced cut in borrowing rate with maximum of 8.50%.

A combination of slowing revenue growth, falling EBITDA margins and rising interest costs has caused earnings growth to slow. Macro indicators are showing positive change for these drivers and hence, incrementally, a better earnings picture.

FII's loving India as never before

Currently, little about India looks promising. From rating agencies to heads of state, everybody’s commented on the policy paralysis and the anemic growth. Corporate India’s growth in the quarter ended June was the slowest in years and profitability has never been under more stress. Despite this, foreign institutional investors (FIIs) have invested $11.26 billion in Indian equities since January. Even as they sell in other Asian markets, large global funds are continuing to invest in Indian equities.

The theory doing the rounds is disguised as FII inflow; this is actually Indian money being routed back into the country through Mauritius. However, data suggests a new breed of foreign investors is bullish on India. Manishi Ray Chaudhuri of BNP Paribas says more than 50 per cent of the flows have come from Asia ex-Japan funds and global emerging market funds. “On a year-to-date basis, exchange-traded funds have contributed little (three per cent), while India-dedicated FII funds have been sellers. Almost half the flows seem to have come from ‘other’, that is, unexplained sources comprising sovereign wealth funds, sector funds, hedge funds, etc. This could lend credence to the oft-repeated conspiracy theory that a lot of FII flow into India is, in reality, Indian money disguised as FII money.”

Even if this is true for half the funds, the remaining half is from global funds that are overweight on India by 0.5-1 per cent. Historically, when FIIs sold equities in other Asian markets, they sold in India, too. However, data suggests during April and May, when FIIs were selling across Asia, net selling in India was not significant. Of the $8.5 billion FIIs invested in India till July, $2.62 billion has come from Asia ex-Japan funds, while $1.7 billion was from global emerging market funds.

So, why are FIIs investing in India, despite all the talk of slowing growth and faltering profits? Analysts say despite all the inertia, corporate profitability has held on. Raychaudhuri of BNP Paribas says while earnings forecast for the rest of the region declined over the past few quarters, the worst of the pressure on earnings seemed to be behind India. And, unlike previous phases, when FII buying was strong, this time, they are focused on the top 15-20 stocks that have better revenue and earnings visibility. So, even if there’s selling, the pressure would be on specific stocks, not the broader market.

Reforms – Why it is so very Important to moot for it.

For India to try to get back on the growth path the following may need to happen

1) Inflation moderates
2) Interest rates soften
3) Growth picks up

For this to happen, the reform process needs to be re-kindled. People are talking about renewing reforms but why are reforms vital?

Let's say there is a small factory that is manufacturing goods and services.
The population of the town buys everything from this factory. As the population grows, the demand for goods also grows. Naturally, the factory raised prices because of the excess demand. This is how inflation steps in.
So how does one fight inflation and bring prices down?
One way may be to reduce the amount of money people have so that they buy less.
To make this happen the Central Bank will increase interest rates.
This way, money is less and prices are controlled.
But people may not be satisfied because they cannot buy much.
But if money is supplied cheaply, prices could go up and inflation could be back.
So what does the government do?
The government may need to make it easy for people to set up more factories and increase supply.
To set up more factories, entrepreneurs would need
1)Land
2)Good quality people
3)Reasonably cheap capital
4)Good infrastructure
In order to make the above available the government has to initiate reforms as explained:-
•Land: To get land, the government has to make policies so that both buyer and seller of land are happy.
•Labour: To get good people, the government has to make policies that will encourage entrepreneurs to set up educational and vocational colleges. This would also include FDI in the Education sector. Since we need to be efficient and competitive with the rest of the world, our labour needs to be productive. For this to happen, we need Labour Reforms.
•Capital: To get reasonably cheap capital the government can do one of the following:-

1. Frame policies to encourage people to invest so that capital is formed. However, people will invest if they have sufficient funds and if they are optimistic about the future. To have adequate funds, money should be available cheaply which means interest rates should be low. But if interest rates are low without commensurate economic production, inflation is likely to step in. Nevertheless reducing interest rates can spur investments.
2. Frame policies that attract foreigners to invest in India. When foreign capital comes in, the value of the rupee goes up and inflation is kept at bay. With inflation at bay, the government can take measures to reduce interest rates. However, the profits arising out of foreign investments have to be shared with them. Either people share and move forward or stay standstill. Hence the need of reforms in the retail sector such as FDI in retail.

•Infrastructure
To be competitive, the manufacturer may need to be efficient; gets supplies in time and can deliver finished goods in time and needs to hold minimum inventory. This is possible on the back of good infrastructure like roads and railways, storehouses, refrigerated vans etc. For infrastructure to come up, we need land reforms so that people are clear what they will get when they hand over their land for infrastructure projects.

So when we have reforms in place, more factories will come up. When more factories come up, the country will produce more goods. When more goods are produced, more money can be printed without losing value.

When more money is printed, the interest rates can be reduced. When interest rates are reduced more entrepreneurs jump into the fray creating more production and more jobs. With more jobs, people have more money and are in a good position to consume the additional production. This gives rise to more investment and thereby a virtuous cycle kicks in.

With adequate supply, inflation is kept at bay even as people have cheap money for investment and for consumption. With interest rates low, inflation low, value of rupee stable, high production, the GDP of the country improves. With higher GDP, more jobs and prosperity in place, the tax collection increases. With higher taxes from higher GDP the situation turns win – win.

People don't mind paying more taxes because they are earning more. Higher taxes help the government keep its fiscal deficit in check. In the meanwhile, the government is in a good position to invest in bigger infrastructure projects and improve the productivity of the nation.

The moot point of the above explanation is that if the country wants to get a glimpse of utopia, it must reform its policies to infuse efficiency and productivity in the system.