Saturday, February 20, 2010

Unlock value by delivering fast track justice


Sum applauds quasi judicial model of consumer courts and propagates a similar model for other categories of civil disputes.
Consumer courts as a model of providing fast track justice and reducing the burden on traditional courts have been hugely successful. Both consumers and producers are happy as consumers get fast track justice and producers are ensured speedy resolution of cases and less time spent on unproductive services like litigation etc.
I would like to see similar quasi judicial model to be extended to other areas of litigation like family disputes, property and inheritance disputes and similar categories of civil disputes. A lot of value can be unlocked if these areas are addressed through fast track justice delivered through specialized courts.

Friday, February 19, 2010

Will the FM bare it all ?


Sum scans FM's mind ahead of his budget speech.

There’s something in the air and in the stock market which is not normal. This is especially true, when the budget is approaching. Market insiders do manage information in bits and pieces from their “moles” in the ministry and try to benefit from it. There is no budget rally, so I’m expecting a major roll back of fiscal incentives. Also since there is no interim fuel price hike, I foresee a moderated version of market price mechanism for fuel pricing in the budget. Diesel car owners in particular are on the radar, and they can expect a tequila shot from the FM. He would test the waters and not really go for a firm measure, maybe by giving a feeler of the market pricing mechanism scheme this time and leaving the bigger and more comprehensive implementation to a future budget. Still I’m sure government is firm footed to roll back part financing of my long drive with my date. With a heft subsidy on petrol I sure am enjoying longer and crisper drives with my girls (of course they are partly financed by the FM, No doubt why the girls love him so much).
I’m fond of this FM and his negotiating skills, especially in not yielding ground to the opposite parties on the negotiating table. He’s proved to be a hard negotiator with the states on GST implementation and I see some moderated steps in this direction. He’s also tested the market feedback on Direct Tax Code, so I foresee some positive news and a time frame defined for its implementation.
I’m expecting FM to act like Bipashu Basu on the 26th. While he will stop short of baring it all, expect him to leave little for imagination, and in the process grab everyone’s fancy.

Thursday, February 18, 2010

Bharti's Erectile Dysfunctioning



Why Bharti’s desperation for overseas acquisitions ring a bell?

Bharti is getting desperate for overseas acquisitions after a failed swap merger with MTN. Is this reason enough to ring a bell? Well it is. As an investor it gives me a signal that Bharti insiders feel that there are little growth opportunities for its telecom operations in India. Market is saturated no doubt, but Bharti is caught with its pants down in this market.

Overseas acquisitions make sense if they are at right valuations in growing economies. Buying a piece of asset in Bangladesh or suburban Africa shows the desperation of a company which has established itself as a hallmark of service in the telecom space. As an analyst I disagree with Bharti’s philosophy going forward. It failed to innovate and divert funds for R&D at the peak of its life cycle. It is now blessed with huge reserves and assets, but like an old man the company is facing an erectile dysfunctional.

I would like to see Bharti going out and buying startups that can give it an opportunity to change the rules of the game, not only in highly regulated and competitive Indian market but innovative and fast changing global marketplace. Go Bharti Go! Opportunities abound, and the future is bright, but don’t play around with shareholders money.

Saturday, February 13, 2010

Powerless Punjab: How do we get it Right?



How to balance Punjab's "Free Power" equation?

Punjab has no power, still it promises free power to its farmers. And what do the farmers actually get? Power for about 2-3 hours a day, yup that's it. Anything more than that is a luxury. Wudn't it be a better idea to charge farmers the market rate of power and ensure them stable power supply in return. The can of course be compensated by increasing the MSP of produce they bring to the market. This eliminates power subsidy, introduce free market pricing for agricultural produce (though with a premium), and prevent bleeding of state power corporations. Dead weight loss is eliminated and everyone is better off. Agreed increasing the MSP for agricultural goods might spike food inflation, but since everyone is better off, inflation can be brought under control in the medium and long term. Anyone ready to take a bold political decision and stick their neck out? "No one".

Equity Markets: Budget Blues



Equity Markets: Where do we go from here?

The market is tired after a swashbuckling rally of last year. P/E multiple of 20-21 for BSE Sensex still shows market is overvalued. See more downside in the run up to budget and some recovery immediately there after as the market might discount a bit too much for fiscal consolidation before Feb 26. Go short the Nifty Futures for Feb settlement and long the commodities (particularly food and non food, leave out the metals though).

Wednesday, February 10, 2010

Problems with the "Indian Growth Story"


Sum evaluates chinks in the Indian Growth Story.
(Key Inputs taken from "Money Morning")

For one thing, the Indian government - which tends to run budget deficits even in the best of economic times - engaged in substantial fiscal "stimulus" in 2009, an election year. And while the central-government-budget deficit appears tolerable at 8% of gross domestic product (GDP), provincial governments also run budget deficits - in amounts equal to an additional 4%-5% of GDP.

With a consolidated budget deficit of 12%-13% of GDP, India's fiscal position is up there with such international bad actors as Greece, Britain and Ireland. And it's substantially worse than the U.S. position. India's saving grace may be the fact that its public debt level is relatively low at around 60% of GDP, and is largely domestically held, primarily in the banking system, much of which is state controlled. (Public Debt for US, UK and alike is in excess of 150 % of their GDP)

That pinpoints a problem. Since investors around the world have become worried about Greece, there's every chance that they'll one day become just as worried about India.

So if India's budget deficit gets too high it relies on foreign financing - both debt and equity - to bridge the gap. While the Indian growth rate is so high and observers generally so bullish, that is not much of a problem. But any slowdown in growth could widen the budget deficit still further and cause a crisis of confidence.

Another problem is inflation. India undertook monetary - as well as fiscal - stimulus in 2009. The Reserve Bank of India lowered its repo rate to 4.75%, which may not appear all that low except that India's inflation rate ran at 10.7% in 2009. The upshot: Real interest rates are sharply negative.

As in the United States, this has done wonders for the stock market, but it has also created a bubble-like atmosphere for investments that is rapidly widening the country's current account deficit and stimulating inflation. Since food prices are currently rising at a rate of 17% p.a. , because of the drought, the effect on India's poor is severe. The effect of rising food prices on the budget is almost equally severe because of India's wide range of subsidies on food products.

Markets sense the problems ahead. The Bombay Sensex Index has not again approached its January 2008 level of 21,000; its most recent peak - at 17,686 - was reached in December 2009. Since then, the index has dropped roughly 10%. But even at that reduced level, as I remarked earlier, India's stock market is hardly a bargain.

It appears that India is headed for the economic equivalent of a one-two punch - a simultaneous monetary crisis and fiscal crisis. Inflation will get uncomfortably high while the government struggles to fund its budget deficit and "crowds out" small- and medium-sized business borrowing while doing so. A period of government-spending austerity would alleviate both problems, but is pretty unlikely as the currently governing Congress Party has a history of heavy public spending constrained only with difficulty. Either way, there is likely to be a period of considerable retrenchment among India's business and consumers.

Given this prognostication, a heavy capital investor such as Tata Motors Ltd. should be avoided, in spite of that company's recent remarkable recovery from 2008 difficulties that stemmed from a lack of available capital. Look, instead, at such non-capital-intensive exporters (the exchange rate is likely to remain relatively weak) as the software company Infosys Technologies Ltd. or the drug company Dr. Reddy's Laboratories Ltd.

Both stocks are currently somewhat expensive: Infosys is trading at 23 times the consensus forward earnings estimate for the year that ends in March, while Dr. Reddy's is trading at 20 times the consensus earnings estimate for the current year. However, both companies should be bought for their long-term-growth potential, plus the possibility of additional profits from a manufacturing base linked to a weak rupee.

Nevertheless, at some point India is likely to run into crisis. That's when you should buy the market, because the long-term-growth prognosis is unquestionably positive.

Tuesday, February 2, 2010

Evaluating India's Current Account position

Sum evaluates the following questions:
Why Emerging Economies like India have Current Account Deficit?
How Capital Account Surplus Balances out the Current Account Deficit?
What are the Risks inherint in India's Current Account Deficit?

Current Account Deficit is one of the most misunderstood concepts among the common folklore. India has a Current Account Deficit (Exports – Imports) and this is often frowned upon when ever the numbers are out. Current Account Deficit (CAD) is common for an emerging economy wherein the economy is on a high growth trajectory and domestic infrastructure and resources are insufficient to support the high growth. This results in more imports than exports. The domestic industry in the emerging economy is in a rapid growth stage and it looks for imports particularly of capital equipments to boost domestic production. The production possibilities frontier shifts to the right and the resource gap is bridged by imports. So far so good, high real growth makes imports more than exports and thus a current account deficit. But how does a country spend more than it earns or in other words how is the current account deficit balanced?
The current account gets balanced with capital inflows i.e. when the foreigners buy real assets in the economy. Capital Inflows finances the current account deficit and the equation balances out. So an emerging economy with a stable investment climate and investment grade sovereign ratings on domestic currency attracts capital inflows which finances the excess of imports over exports required by the economy to maintain its high growth trajectory.

This all sounds so good and rosy for an emerging economy and there is no cause of worry as of now. But what happened with Thailand (during Asian crisis) in a similar situation is what India needs to be aware and wary of. During Asian Crisis, Capital Inflows into Thailand suffered because of which its current account deficit was exposed and the balance of payment equation went haywire. The current account deficit could not be financed out of capital account surplus and the reserves were inadequate to cover the gap. Result was large depreciation of Thai Bath in the Foreign Exchange market. The depreciation of Thai Bath led to further widening of current account deficit in the short run but made Thai Exports competitive in the long run and thus Thai Exports increased and Imports decreased thus once again restoring the Balance of Payment Equation with a Current Account Surplus, Neutral Capital Account and Creation of Reserves. The Asian Crises and the events that led to huge depreciation of Thai Bath left a bad taste in the mouth and destabilized the economy from a high growth trajectory to a subsistence level of growth.
Can it happen to India? I hope not, but I would not be surprised if some extraordinary events precipitated by external / internal forces initiate a flight of capital from India thus threatening capital account surplus to support current account deficit and depleting our resources. The policy response needed to avoid such a situation is to channelize the capital inflows into the productive sectors of the economy which fuel real factor growth and improve productivity. Such real growth makes current account deficit and capital account surplus sustainable productive. In the long run current account will be in surplus, capital account in deficit and reserves will be created.