Neutral interest rate cycle.

RBI in their recent credit policy stated that, they will go “Neutral” as against the “Accomodative” stand that they were in, while this move triggered a huge surge in bond yields, affecting the debt investors who were taken by surprise. This move has made fund managers to shift their stance and look for lower duration’s in their investments. And this will take some time to settle. The bond yield charts show that, though there might not be a bigger damage coming, chances of Bond yields reaching 7.00 which there are some rumors about have a fairly good chance. And from there, it should take a fall.

 

While, that is the region where the opportunity will come in, interest rate cycle will bottom out and then our economy will witness interest rate rise cycle. Now, this throws up a lot more interesting thought. If interest rates move up, what will happen to the economy which is soon to settle into the lower single digit interest regime, (an expectation), if we have to become an economy that is at par with the western peers. Will this mean the transformation will take longer period?

As of now the questions don’t get a clear answer, probably the up cycle can also be the reason for the end of bigger growth for India.

Strongest stocks turn the weakest…..

Our portfolio had higher exposure in the financial sector followed by Sugar, Paper and Cements. All these businesses were doing very good growth on their sales and profits and that showed in their stock prices. Having these high growth stocks helped us achieve 8.50% gains in the month of October.

Following the demonetisation and Trump win in the US elections, the very same high growth sectors went into the receiving end. Pressure on liquidity brought various kinds of pain to the businesses in these Industries.

A couple of articles published in ET after the event showing the impact of currency on the sectors.

 

Nov 17 2016 : The Economic Times (Bangalore)

NBFCs Recover Some Ground, but Gains may be Short-Lived

Anandi C Mumbai

VALUATIONS HIGH Non-banking financial cos’ loan against portfolio book expected to be squeezed due to demonetisation; valuations still rich given prospects hazy

Non-banking finance companies on Wednesday got a break from the sell-off on the bourses post the government’s demonetisation move that has dragged their shares down by 13-20% in a week. Shares of the financiers such as Bajaj Finance, Cholamandalam Investment and Finance and LIC Housing Finance, among others rallied 3-10% on Wednesday but the gains could be short-lived amid worries about rising bad assets and rich stock valuations.

Non-banking finance companies (NBFCs) have been among the best performers on Dalal Street in 2016 as rising consumption and increased demand for housing led to voracious appetite for loans especially in Tier 2 and 3 towns. Since March 01, when the market rebound began after falling in January and February, Bajaj Finserv soared 81%, Bajaj Finance jumped 51%, Dewan Housing Finance rose 50% and Can Fin Homes gained 46%.

Now, with demonetisation expected to result in a decline in property prices, the loan against portfolio (LAP) book of NBFCs will be squeezed, resulting in higher bad loans.

“Finance companies which have bet big on LAP and mortgage loans in last couple of years and expanded their balance sheet rapidly will be among the most impacted because many of them will start seeing pressure on asset quality,“ said Ritesh Jain, chief investment officer, Tata Mutual Fund.

Dewan Housing, Repco Home Finance, Shriram City Union, CanFin Homes and Capital First have fallen 17% in a week. Companies lending to commercial vehicles could be among the biggest hit by the demonetisation move.

“commercial vehicles would be affected as they heavily rely on cash.This short-term cash mismatch could impact their business in the coming two quarters,“ said Siddharth Purohit, senior equity research analyst, Angel Broking.

Valuations of many of these companies have moderated after the recent sell-off but they are still rich given their hazy prospects, said fund managers.

“The valuations of many of them are quite steep at current levels and any bounce back would be temporary ,“ said Jain of Tata Mutual Fund.

Analysts said that it would take more time to determine the right valuations which had inflated over the past one year.

“Only if the prices correct quite significantly compared to the past five years’ rise can we say that meaningful corrections have come in,“ said Paras Bothra, president equities, Ashika Stock Broking.

 

Nov 17 2016 : The Economic Times (Bangalore)

A Real Estate in Pain is Bad News for Cement Cos

Rajesh N Naidu & Ashutosh R Shyam
ET Intelligence Group

CREDIT SUISSE has cut EPS projections for UltraTech, Ambuja & ACC by 16-27% for FY18 after govt’s demonetisation move

The government’s demonetisation drive has affected cement companies badly as they rely a lot on the real estate sector, which is bearing the brunt of this initiative. Analysts have cut the earnings per share (EPS) estimates of cement companies for the next two fiscals between 10 and 20%.

The annual volumes growth of the cement industry is pared to 5-6% in the next three years, compared with 8-9% earlier -in FY16, the total cement consumption was close to 278 MT. Given these factors, cement stocks are likely to fall further and more downgrades are expected.

In the past few years though, cement companies had caught the fancy of investors as it was believed that utilisation levels would go up to 90% by 2020 from 69% at present. It was estimated that cement companies would record superior operating margins as seen in the last upcycle during 2004-2009.

Besides, increase in infrastructure spending, no significant capacity expansion and the ability of these companies to maintain and increase prices in most regions, except east India, helped improve their valuations. Before the recent correction, cement firms were trading at a 15year high EVEBITDA.

But now with the government’s decision to do away with high-denominated currency notes, the demand for housing is likely to take a hit as builders stare at a cash crunch. And the government’s infrastructure projects aren’t enough to negate the possible slowdown in the sector.

This is because the governmentsupported projects -roads, irrigation and railways -consume only 6% of the total cement produced.What’s worse, this comes at a time when input costs are rising as pet coke and coal prices are rising.

Foreign brokerage Credit Suisse has cut its EPS projections for UltraTech, Ambuja and ACC by 1627% for FY18, which has led to a lowering of their target price in the range of 7-20% for these firms.

 

 

 

Jhunjunwals’s portfolio drops 15%. So was ours, many of the stocks in his portfolio also adorned ours and we are holding on for our tables to confirm their exits.

 

Nov 17 2016 : The Economic Times (Bangalore)

Jhunjhunwala Loses Rs 1,480 cr in Just 16 Days

Jwalit Vyas Mumbai:

MAXIMUM VALUE erosion of Rs 397 cr in Titan, where share price fell 15% in Nov

Rakesh Jhunjhunwala, the big bull of Dalal Street, has seen value erosion of over $200 million or `1,478 crore since November 1, 2016 on his portfolio.This does not include the value erosion on the investments in his recent top pick DLF, which is down over 30% in the last 15 days, as his exact holding in the company is not public.

Maximum wealth erosion in terms of value for Jhunjhunwala has been in Tata group owned jewellery company Titan, which saw share price fall 15% since the beginning of the month, leading to a total value erosion of `397 crore.From the peak in August this year, Jhunjhunwala’s holding value in the company is down by `840 crore.Holding value in the other Tata Group stocks such as Tata Motors and Rallis have also come down significantly.

In terms of percentage, the big gest loser in the big bull’s portfolio is the casino company Delta Corp, whose shares plummeted over 40% in the last 15 days.

Jhunjhunwala was bullish on the Indian real estate sector.Other than DLF, he holds 3.2% in Dewan Housing Finance, which lends money to the real estate de velopers and home buyers. The stock tanked 28% in the last 15 days, wiping out al most `100 crore for the big bull.

Other real estate stocks in his port folio include Delhi-based Mumbai-based D B Anant Raj and Mumbai-based D B Realty and Man Infraconstructions, stocks down 15% to 33% in the last 15 days. The only exceptions in his portfolio are MCX and CRISIL, which have remained flattish in a falling market. He owns 3.94% and 1.7% in the two companies, respectively .

 

 

 

We don’t own CAPF, while the stock is in our buy list and the entry price has been consistently moving down following the drop in the stock’s price.

 

Nov 17 2016 : The Economic Times (Bangalore)

ET NOW Q&A – Only 1.5% of LAPs Paid Back in Cash: Capital First

 

In an interview to ET NOW, Capital First chairman V Vaidyanathan, said that in the loan against property book, only 1.5% is collected in the form of cash and that the issue about loan against property (LAP) is overdone.Edited excerpts:

What’s the first hand experience of demonetisation at Capital First?

We should distinguish between a liquidity issue and a solvency issue.Right now, it is only liquidity issue.Basically, traders which are a substantial part of the people to whom we lend, small shopkeepers, traders, entrepreneurs, etc., they have the cash. They go and deposit the money in the bank. They are unable to withdraw it because of withdrawal limits and therefore, they are in a situation where they might have a temporary mismatch in terms of being able to pay. It is not ability to pay issue. In our case at Capital First, 100% of our customers can pay us in the form of PDCs, or electronic clearing instruments. Only the customers who return their cheque, which is the about 10%, when we go back and collect from them which is also close to about 5% That means about 5% pay by cash. Clearly, the moment cash comes back in people’s hands, the repayment cycle will start again. If this issue stretches on for three or four or eight months or something like that, that could become a solvency issue.

Your MSME segment operates mainly on the LAP book. What kind of an impact could we see there?

In our loan against property (LAP) book, 98.5% of our collection is coming through electronic instruments, that is only 1.5% is collected in the form of cash. In LAP, we should not forget it is not the property that is paying you, it is cash, it is the businesses that are earning money and paying you back.So as long as liquidity comes back, solvency remains same, customers will pay. This issue about loan against property is overdone.

But considering property is a critical factor do you not feel that there will be some cases where payments would bounce?

Usually about 90% customers clear their instalments in the first attempt.That leaves 10% of them. As I said, about 8.5% pay you back again in the form of cheques again that is 1.5%. I am saying it is not really a big deal.

This sudden change in our markets due to two most important events have left almost all the businesses in our country stare at huge loss of business. December Quarter results are going to be a washout, and it will take more than 4 months to get back to normalcy. With more than 10 lakh crores of cash moving into the banking system, which will increase the liquidity in the economy, interest rates are likely to fall by about a percent from here and that will be 6% interest on bank deposits.

Excess liquidity in the system, as there is no much demand for credit from the corporate will move into G Sec’s which will propel high government spending in the coming year and propel the economy to bigger growth.

As we are in the mid of the 3rd quarter, till results are out, much decision on the churn of portfolio will not be likely apart from a few stocks moving out and getting replaced by new one’s. The impact on portfolio performance is going to be prolonged.

 

 

 

 

 

 

 

 

Will `October Effect’ Play Out Again on D-St?

Mark Twain QuoteWhen there is fear in the mind, everything you look around gives a bigger challenge. The comment Mark Twain had given here shows that very clearly. After weakness in the market since August, post China Crisis and Volkswagen Scandal, now media is searching all possible fear thoughts to intensify the situation.

If there is fear of losing, not only October, every month will be a disaster, one who has such thoughts will end up not having great wealth while his friends and family live a happy life taking  a little extra risk on their investments.

There was an article in Economic Times on 1st October 2015 with the following headline “Will `October Effect’ Play out Again on D-St?”

October FallsInvestors generally tend to become nervous in October because the biggest market falls in 1929, 1987 and 2008 happened during this month

And there is a supporting table showing downward moves in the month of October on the SENSEX.

If October has a historical downward effect, why has it not occurred in all the years? Apart from 1997 to 2000, where there was higher falls in October which was continuous, there is a lot of gap and it does not have any pattern.

1997-2000 was a prolonged bear market for India, and it is because of such a long base formation that we have had the tremendous rally post 2003, which has taken the SENSEX to a 600% gain in the next 15 years.

2008-09 falls was a correction after the phenomenal rise and after 2010; 2011-13 were almost flat years which has helped the next rally that is happening now.

In the years that had weaker October’s, there was reason for this thought to hold good. Markets had on a overall manner gone into tightness following adverse news flows. Prior to every such weakness, the markets have had maniac runs. In 1929, rapid growth in Bank Credit and Loans made people take huge loans and invest into stocks, where actual valuations were far below, collapse was huge. In one year markets lost 90%.

In 1987, on a single day, market dropped 22.60%, this was again because of maniac buyouts and mergers using liquidity created by sale of Junk Bonds by the corporates. People were buying into companies that had literally no assets, all of the price rise was happening due to the rush to buy something that is available and at whatever price it was available at.

More similar to what is happening now in the Startup space. Fortunately, we don’t have any of the almost zero value loss making e commerce businesses listed in our exchanges, while it will soon come up. For now, the start up space is raining funds. Those people who earned fancy salaries in tech companies have loads of cash and are chasing every idea that is coming in the markets, as it is, in just about 2 years, there is some tiredness seen in this space. Whereas, this rush will not end here, it will take away more greedy minds by getting listed in the markets. And that will happen in the next 3-4 years, till then India is safe. The moment you witness junk companies coming out with IPO’s and they getting subscribed multi-times, close your wallet for investing and open your bank account to receive the sale proceeds of your stocks.

Without second thought liquidate all holdings. Wait!, it is still way to go to reach that situation, until then capitalize on the rally, it will for sure be a maniac rally, the difference is that we are just in the beginning, which gives a lot of scope for multiplying your savings.

The 2008 crash, again happened due to excess lending for home sales, financial assets tumbled, some big names like Lehman Brothers, Bear Sterns, AIG, Black Stone vanished into thin air

Will it happen again this time and this october?

No! in FDIAt the macroeconomic level, it is not. At present we are just in the beginning of a bubble, the Startup bubble, it has a long way to go. And with this bubble burst India’s growth story will come to an end. So, the intensity of the crash will be pretty severe, more than what China is facing now. Whereas, before this crash happens, there is a wonderful opportunity available to make profits that can serve us for a couple of generations.

What is happening in our economy now, why are we having weakness?

There was a lot of expectation on the new government to deliver, which has not happened to the extent thought off. While, the ground work is seriously on. Some indications for strength that India has, have been seen in the recent developments.

Capital from the US and other developed economies are showing high interest to invest in India.

This week when Modi visited US along with Li Xinping and Nawaz Shariff, India has got the highest attention. Businessmen across the US have shown great interest to invest in India.

Facts show that India is attracting highest FDI among emerging markets. All of China’s losses have got added to India. When so much money is coming to India, it is obvious that there is going to be some phenomenal activity in our economy.

RBI has surprised with a twice the expected interest rate cut, which will begin to show up in the economy as the banks lower lending rates & industry begins to borrow and grow business. Due to the drop in interest rates, home buying will show an uptick, car sales will go up and many similar growth patterns can be seen.

Post China Currency issue and Volkswagen Scandal; it will take some time to show strength, it may take another 2 months, while the next biggest global growth story is going to be in India.