A lot can happen in a business – VG Siddhartha, Founder, Cafe Coffee Day, commits Suicide!

VG Sidhartha founder of Café Coffee Day (CCD) commits suicide due to debt pressure. One more big name to fall in the Indian corporate world. 8000 crores of debt at stake, where almost all the banks have exposure except Bandhan Bank. Along with them a handful of Mutual funds too.

In his last letter to the employees and board, he states that, all his debts are backed by assets. Then why should this drastic step be taken?

Don’t know how much is true of the values that are taken into account on the assets. Even if there is assets, most of it is real estate and plantation assets. Real estate is an asset which puts the holders into very bad situations when it has to be liquidated. Yet people throng to real estate because of big numbers, only to succumb to greed.

It is the same here too, liquidating all the assets to pay back liabilities will not be possible in short period and at a period where real estate has taken a back seat.

In the meantime, pressure mounts for honouring commitments and kills, some physical and many in mental manner.

Such big name collapses and having them on a continuous basis, there seems to be some basic systemic process failure in our country that has triggered this gloom.

Siddhartha says that, pressure from a PE investor and a DG in the Income Tax Dept were causing him to give up. As the news came out, both the parties are showing themselves as the cleanest now. There can be deals struck between all these interested parties who would have made big chunks of money, now they show up as the real good boys.

The financial system of our country is very poorly equipped to take the country to the next level. Till there were defaults happening and they were not caught or not made responsible, banks kept banks are starved of business, when there is some avenue available, all of them want a share of the pie.

Due to this rush, they compromise quality & also take a share of the lent money. Get a good name for the bank, by showing a good loan book at par with competition and also pocket a good sum of the lent money as kick backs from promoters who have weak balance sheets.

End of the day, none of them have an intention to cheat. Only that, they had high hopes on a weak horse. Promoters expecting that, they could manage the challenges and come out of the financial trap. Bankers having hopes that these already beaten down & tired promoters will continue their run which will some how get the loans paid back.

Finally hopes go into thin air, bankers happily blame the promoters and corporates fold.

Till IL&FS issue came out our financial system was re-financing debt and keeping the books in good condition. In this period if the promoters had some challenges, they borrowed from other sources and made good of their commitments. Now, funding has totally stopped, all of a sudden the lending community shut shop & went vigorous on collections, which they themselves know will kill them eventually, as the exposures are with very thin line of cover.

With promoters running from pillar to post to help keep their commitments with the lenders, attention to business has eventually come down. In an already slowed market, lower attention will further deteriorate growth.

There is a possibility of some more big names going down before we see a fruitful solution to the financial crisis that India has entered into.

Car Sales Slow down effects the Indian Economy

Luxury car segment has registered 25% decline in sales, which is a big surprise to the industry. Luxury car sales have lost more than the rest of the industry, which was not the norm. Financing issues that are significant for the regular market is not a requirement for the luxury market. They generally tend to outperform.

So far it was assumed that due to elections people were postponing purchases. Whereas the trend now states something different. Looks like there is a shift in the buying decision itself.

Now that the taxes on the super rich has increased substantially, they will continue to postpone their decisions or some may even drop their plans of changing their cars.

On the general market side, OLA’s & Uber’s along with troubles in parking, increase in fuel costs have made users think of not owning cars. It can be even a few percentage. The resultant impact on the economy – all the major manufactures have reported double digit negative growth, have announced plant shut downs.

Auto sector has been a major contributor on employment. Now, it will have serious impact. With a considerable number of employees getting displaced from jobs, it will create a circle of events, triggering further slowdown of the economy and bringing challenges to some of the connected industries.

FMCG sector has slowed down since the last 3 quarters,  which is due to part reactions from the Auto slowdown.

Contraction even luxury segment is worrisome to the industry. So far about 245 auto dealerships have shut shop. Thereby creating further pressure on employment. How are we going to accommodate these labour force that is getting out?

There is a big challenge the government has at it’s hands.

Above 50 EMA Index

This blog post talks about one of the big picture features available on our website, the Above 50 EMA Index.

What is the use of the Index and how to interpret its signals?

This index tracks the number of stocks that are trading above their 50 Day Exponential Moving Average.

Why 50 days and not more or less?

50 days represents 10 weeks of market activity, which forms almost 20% of the year. It is a shorter term strength guidance for a stock. So, if a stock is trading above 50EMA it is termed to be bullish and below the EMA the stock is termed to be bearish.

How to use this Index?

When the index moves above 75 market is likely to turn down and when the same goes below 25, the market is likely to turn up. When such instances come up, traders can look to identify stocks that have made a base at the bottom for going long or stocks that are forming weakness at the overvalued zone to go short.

When the index is at 75, investors can use the signal to exit some of their long term holdings which are finding it tough to move up. They can even be good stocks, which are facing resistance in price moves on the short term. By selling and buying back when they get a little cheaper, you get an opportunity to reduce the weakness in your investment portfolio when there is a correction in the markets.

What is the logic behind this thought of 75 & 25?

If the index moves above 75, it means 75% of the stocks in the market are bullish. At the same time, not all of them are at the same levels of bullishness. Some of them would have up even when the market was down while some would been early risers, which were the ones that ticked the index to move up. These old timers and early birds would have completed their journey when the index reaches above 75.

When most of the market is bullish, some early investors and institutions who are holding big positions running for a long period would want to book profits. Some of the stocks that went up due to fundamental strength will begin to slow down on their growth, triggering a downward price move. At the same time some stocks would have run up on expectations of big results where the companies would not have met the expectations and have triggered a selloff.

All of the above happens at the top and thereby qualifies as a selling level when the index moves above 75.

The same happens with buying when the index goes below 25. As more and more stocks turn down, those that began the downward move would have completed their bottom and base formation. After drop in prices, company’s earning would look attractive on the stocks valuation. Turn around will trigger institutional buying. Along with this the common adage,’ when there is fear in the market, go ahead and buy, you will make the biggest gains’.

Many such instances of turn around from the bottom can be seen in the chart. July 2019, Oct 2019, Feb 2019 & Mid-May 2019. Now it is again below 25 on 12thJuly 2019. Exactly 1 year from where it also had a similar pattern.

It is time now to look for stocks that have bottomed on their prices. Stocks having bullish divergence on the MACD or histogram on the daily charts. Stocks that are showing strong bullish patterns in the weekly chart and come down in price to reach value zone. These are stocks that will have big rally on a turnaround.

One can easily find a minimum of 5 stocks with the above qualifies and most of them end up giving above 3 times the risk exposed on the positions.

The Above 50 EMA index chart is published on our website with weekly updates. It has been populated on Weekly updates to have a smoother chart, else it will be more crowded if it is populated with daily data.

 

Budget 2019 – 1.34 lakh crore lifeline to NBFC sector

Government promising to bear the first loss of up to 10% of high rated pooled assets purchased by state run banks brings the much expected lifeline support to the NBFC sector, whereas banks will only be funding high quality NBFC’s. Big players who already have a good clout in the industry have continued to have good business growth.

Like Bajaj Finance, Bajaj Finserve kind of companies already have good growth and more over they are not much dependent on domestic borrowings. Most of the top NBFC’s have moved to foreign borrowings which gives them added cushion of lower interest rates.

Even considering currency risk, they are still at a good advantage when compared to their smaller counterparts who have to borrow at higher rates both due to their own performance issues on ratings as well as due to local borrowings.

The current move of lifeline by the FM, is not going to give a boost to the industry as a whole. It will make the big or quality players more bigger. In fact, this is what is required. “If you are genuine, I will help you get more rich.” This kind of approach by the government, for a shorter period may be against the economy as bad players will be left to die their own death. In the long run, it is going to be a huge positive to the industry and our country.

Liquidity issues in the market is likely to ease at a slower pace because the lifeline is less than half of what is required. And expecting government to bail out all kinds of corporate mess-up is not a good thought too. Let the industry figure a way out, through some support from the government.

Quality NBFC’s which are already enjoying very high valuations in the market will continue to attract capital from investor. So, if you are holding Bajaj Finance, Chola Finance kind of stocks, continue to hold, it will continue to go up for a long time.

TITAN – Biggest single day fall in 11 years

TITAN, one of the darlings of Indian stock market investors and fund managers favourite gave back 13% in a single day, following downgrades from 3 brokerages, Morgan Stanley, Credit Suisse & HSBC. These downgrades come as a surprise after the company reported a slump in jewellery sales due to increase in Gold prices.

Six months of rise in prices which happened at a slow pace was destroyed in 2 weeks. That is stock markets, it is said that ‘Bulls climb by the stairs, Bears jump out of window’. One more classic example for this saying in real time.

Why such a big crash of confidence on the stock, that is the only brand which has international presence from India. That much is the confidence we have on our companies. Gold prices have been going up since beginning June 2019 following tensions in the middle east between Iran and the US.

AS THE STOCK PRICE CRASHES, MEDIA COMES OUT WITH REPORTS THAT THE BIG BULL RAKESH JHUNJHUNWALA HAS ALSO BEEN REDUCING STAKE IN TITAN. THE BIG BULL HAS BEEN HOLDING TITAN FOR DECADES NOW AND THE REDUCTION IN HIS HOLDING IS ONLY 0.04% EACH OF THE LAST 2 QUARTERS.

How media disturbs viewers mind? Here is one good example for it. Last week before the budget who was saying that our market is bullish, it is climbing peaks, getting strong. I 2 days after budget and market turned down, the same media is now crying bearishness.

For long term investors in Titan, the sky will not fall down. This is one of the best managed businesses of India. It has a marketing strength that no other consumer facing business has in our country. It can see some periods of tightness in price, while in the long run, it will still play out strong.

Investors can be rest assured that even their grand children will be using Titan products with price. I remember a beautiful experience from this company’s AGM in its very early days. When JRD Tata chaired the AGM, some of the investors attending the AGM asked why the company did not give any gift to its shareholders, which used to be a norm those days. JRD’s answer was,” your company is creating products that will be cherished by the world, you cannot expect to get them free of cost just because of being a shareholder.”

In the last 30 years since this event happened in its small facility in Hosur, Tamil Nadu, TITAN has grown to be a brand that every Indian prides to have.

Budget 2019 – More public ownership of listed companies

In the Budget 2018-19, FM, Nirmala Sitaraman announced a very profound decision. To increase public holdings in listed companies to 35% from the existing 25%. After this announcement, market turned down due to fears that many corporates will now be forced to offload promoter stake to meet the requirements.

Added to the decision was a 20% tax on buy backs, which means that, it is going to be costlier for companies to buy back their own shares.

I would say this to be one of the landmark decisions in the recent past. Market’s reaction though was pessimistic, whereas it was a very good decision. If companies use profits to buy back equity and reduce capital, it is in no way going to be beneficial to the country. If capital is not deployed or put to best use, economic activity slows down, employment takes a hit.

Western world is sinking today because of this reason, most of their companies are not investing to add capacities, they are buying back shares and killing the economy. If we don’t learn from their mistake, we will also face the same condition. At least for them, they have capital, which the governments are investing into other economies and give social security to their citizens.

In our country we are yet to come out of deficit financing to run our economy, where is the possibility of deploying capital in other economies. And we are country with huge population, if employment dwindles economy will die.

In our country we have many promoters who were hell bent, not to bring down their holdings in their company’s even to the previous requirement of 25%. Examples were big names like Uday Kotak of Kotak Bank, RK Damani of DMart, Wipro, TCS, HDFC Life etc. Now they face even more challenge. Markets turned negative after the announcement because there will be more supply of shares in the market which can dampen demand.

It will only be a small time challenge, in the long run it is actually good. Today our Mutual Fund market has matured. People are moving to financial saving in a big way. Monthly SIP’s are at 8000 plus crores, which means 1 lakh crores of investments are coming into the market every year. What to buy with this money?

Fund managers keep adding the same stocks more and more to their portfolios. We don’t have many listings happening in our country even though India is the heaven of start-ups. Listing issue can be because most of them are yet to earn any revenue and those who are having revenues are not yet profitable.

If supply of good stocks is less, PE expands and then comes valuation issue.

We need more shares in circulation to absorb the funds that are hitting the markets, else we will get into a bubble and burst killing all of them in one go. In our country any thing good is done, it is always welcomed on a bad note. All because of short term thinking. We are more worried about today’s meals not bothered whether we are living tomorrow.

This comes due to poor confidence on our own selves, which is a big topic to discuss.

Why are promoters are willing to dilute? The only reason is ‘selfish’, that they want a big pie of the riches their companies are going to generate. On one side world is talking big giveaways in the name of philanthropy, in our country we are still hoarding.

IN fact we should not encourage these kind of promoters to do business, they get business from the citizens of the country whereas reluctant to share wherever possible.

Buy into these stocks that will liquidate promoter holdings if they are fundamentally strong and have a close watch on them, as there can be other possibilities where these promoters can short change due to their greed.

 

BUDGET 2019 – Auto industry to change fast

With the increase in excise duty on petrol and diesel and the GST cut on Electric Vehicles will is going to be a big blow to the Auto sector, which is already reeling under huge pressure of declining sales.

The message is getting out clear that, manufacturers have to speed up with EV launches, else they perish. Tight cash flows in the market due to closing of funding tap of the NBFC’s, has impacted Auto sales to a very large extent.

In the last 3 months, almost all the companies in this space have registered continuous decline in sales numbers. Many of the big names have shut down their facilities for short period to adjust for the inventory build up at the distributor level.

Now the next step will be offering discounts to clear off inventories. It will be a better decision for the manufacturers which will reduce cost of funding these unsold inventory. Buyers will enjoy getting their favorite vehicles at a discount.

Yet, as the message from the government is getting more clear about the fast pace expectation to switch to EV’s. Buyers will prefer to delay their purchases, though not on a big scale, it will impact sales.

The biggest threat will be to Auto anciliary businesses. EV’s don’t require all the parts that are presently used in an automobile. Either they fast pace their production to include products required for EV’s or perish.

Auto stocks are already down to their bottoms, now it will go down even further. If you hold any auto stocks in your portfolio or find exposure to auto in your Mutual Fund portfolio, take exit. It will deteriorate further.

SENSEX rises from 20k to 40k, but no income rise for the equity mutual fund investors

SEX is reaching new high’s, investors portfolios are not going up. Reasons why it is not? Only a handful of stocks are moving up in price, why it is so? What is happening to the broad market? SEBI, recategorization, high valuations along with why fund managers were forced to park money in small & mid-cap segment in 2017. Why they are now parking funds into large cap, which has been doing well and taking SENSEX up. Not to have concentrated exposure, diversification is good. India is poised for big growth, keep off worries and take advantage of growth.