INR - Up or Down from here??


I have tried to put my views on Indian Rupee on two occasions before this one. For reference,I am putting the links to those discussions below along with the dates. 


INR headed to 50 - 25th Jan 2011

USD-INR Technical Perspective - 12th October 2011

I will use the second of these discussions as my starting point here.
For those who had tightened the belt, the rupee depreciation spree was not a surprise.We have not reached orbit yet, we have only taken off. 
Now whether this take off has enough to propel it to orbit or whether we are heading back to the ten year range is the moot question. Well I do not have the answer, but maybe we can put the probable drivers of the movement in future and try and make an educated guess. 


I will finish off first with my sense of the chartical position right now. What has essentially happened is that INR has broken into a new life time high by crossing the previous high of 52.18 which was set in March 2009. It crossed it with a lot of vigour. Having set quite a few heart beats racing, interventions did come in the form of actual dollar selling by RBI and severe restrictions on market participants (desperate measures, I thought).So broadly what is happening right now is that INR is taking a breather. 


Having made a new life time high, it is basically testing the previous high (this is classical pattern for charts making new highs, particularly life time highs) and as of now has not broken it. As long INR does not start trading below 52 and sustain there, I think its fair to assume that this is a breather and we are getting set for the next round of depreciation after some time.


But how do we decide that it is a breather and that INR will not relapse back to the previous 10 year range.As I said before I do not have an answer for that, but I will put up some drivers for the INR which can drive it below 52 and others which can drive further above 52.


DRIVERS BELOW 52:


- FIIs come in hordes into the stock market, which will probably require global situation to improve.
- Gold imports drop off dramatically (that is responsible for a big chunk of the current account deficit). Possible with the high prices of gold. How about gold exports?? I suspect that may happen if gold prices start dropping alarmingly in INR terms.
- Deluge of money comes in response to the hike in interest rates on foreign currency deposits.
- Crude oil cools off dramatically.
- Finally, Government does some sensible work.


DRIVERS ABOVE 52:


- FIIs pull out money big time. They have hardly sold in the Indian markets as of now.
- Crude oil marches upwards even further.
- Gold imports keep coming.
- Exports crash. First signs were visible last month and lets wait for the follow-up.
- Close to 80 bn USD of short term up for rollover in the next one year.Maybe 15-20 bn USD may not get refinanced.
- Government continues with the screw-up job.


What RBI has done off late is essentially a time-buying manoeuvre. That is not going to solve the basic problem. And it hopes that within whatever time it has bought with these moves, either situation improves globally or at least government starts the process of clearing up the mess.


There are quite a few parameters which can have a dramatic impact on the way the INR moves going ahead. And most of them are inter-connected as well.


So its a tough call.
With a gun on my head, I will put the odds in favour of INR depreciating further in 2012.


(As always, let me make it clear that I am no currency expert. Take these to be the opinions of an amateur currency analyst!!)

Will India export gold??


When India is the largest importer of gold, the title seems out of place. But with gold prices are where they are, is there a possibility that we will start thinking of exports?


Lot of analysis has gone into the effect of gold imports on the trade deficit that India has. Looking at that people have suggested that trade deficit is overstated to the extent that gold is not re-exported in the form gems and jewellery. My rough estimate is that the effect maybe roughly 40 bn USD. That is a big chunk of the trade deficit of around 150-160 bn USD.


People have argued that since gold is more an investment than a consumable, markets (particularly currency market) do not seem to be appreciating the value of the gold that Indians hold, which is estimated to be around 18000 tonnes.


Is the market really discounting such a big storage of gold? And if yes, why?
Generally markets are smarter than all of us put together. So, as of now, I will taking the safer option of being on the market's side.
I will try and reason, why the value of the gold in India is not exactly being appreciated and why currency markets are weakening the rupee when we are the biggest holders of gold globally?


First a little bit of history. Have a look at the following chart. This is gold prices in INR terms over the last 38 years.



Source : Bloomberg


Gold started at somewhere around 520 Rs per ounce (please use the relevant conversion numbers for per tola comparison) in 1973 and today quotes around 90000 Rs per ounce. That roughly corresponds to a return of around 14.3% CAGR over a period of 38 years. That is an astounding number!!!


And this happened when through the 1980s and 1990s, gold was in a severe bear market in practically all other major currencies!!
The major reason for this mind-boggling performance in INR terms is that India has been fiscally profligate country all through out.In fact it was only after 1997 that RBI stopped monetising government deficits.Thus all through out this period INR depreciated against all major currencies. Gold has stood out as a fantastic store of value for Indians as 14.3% CAGR will at least compensate for inflation over the time frame if not do slightly better.That being the case, it should not be surprising that Indians have kept buying gold in the face of ever rising prices.They have experienced that it sustains purchasing power over a period of time and use it as shield against the fiscal attacks that government mounts on them every year.


Looking at the present scenario,it is safe to assume fiscal prudence is not on the radar of the government right now.And as long as that continues, a combination of gold prices in USD and USD-INR conversion ratio will probably continue the mind-boggling performance of gold in INR terms.And it is more likely that Indians will keep importing gold, forget exporting it.


And if ever high gold prices were to attract selling by Indians, it should have happened at least to some extent in the last few years or today. But there are no signs of that yet. We are still importing and in large quantities.


Given the likelihood of gold imports continuing, I think markets are correct in discounting the presence of gold in India.
You do not value the home where you stay, since you never intend to sell it!!

Meltdown Coming??!!





Source : Bloomberg

Indian Consumption Story = FICTION??

In one of my previous articles I have already mentioned why I think the stocks related to consumption in India need to be sold or shorted. In this short note, I will just put a small number work to try and corroborate my point.

Have a look at the numbers below and notice the serious jumps in the sales volumes of most categories.Growth trajectory changed for quite a few of them.But all of that was accompanied by the ballooning fiscal deficit. Or should I say, it was a result of the ballooning fiscal deficit.

Now that the fiscal position of the government is totally messed up, it will probably also mean a serious brake on the growth rates. 

(I have not still forfeited my right to be wrong!!)

I call it the "Fiscally Induced Consumption Tale In Overpopulated Nation" which can be abbreviated to "FICTION"!!!!

Crisis = Opportunity


We ended the last article on the cautious note of every crisis being an opportunity. So I thought maybe starting with the same theme is a nice way to move forward.
As the headline suggests, I will need to define the crisis as well as the opportunity. 
I have pretty much given the contours of what I think is a crisis in a few of my previous articles. I will spend some time on finishing my argument on that and then try and convince what I think could be the opportunity arising out of the same crisis.


Putting my views in short, I think inflation is likely to remain high as long as we keep trying to grow beyond our means. That would essentially mean sustained high interest rates.Deficits of all kinds will exert their own pressure on various economic parameters.
Given the current global scenario, INR depreciation against the USD and CNY is very likely.In fact the crisis should take the form of rupee depreciation.


Thus I think the opportunity exists for sectors which are in a position to take advantage of a depreciating currency. The most obvious candidate that comes to mind immediately is IT sector.But their heavy dependence to the global financial sector is a dampener.


I think the sector which has the potential to make a killing is "manufacturing". 


China has been the biggest problem for all manufacturing setups anywhere in the world. It has now become the biggest manufacturer of the world overtaking USA. Years of cheap credit, labour and government subsidies in various forms (including currency) has meant that manufacturers elsewhere have struggled to compete against Chinese competition, for whom cost of capital is probably an alien concept. Lot of businesses have built models around Chinese outsourcing.
But it looks like things are changing.


- Currency - CNY has started to appreciate. The movement against the USD may not be huge, but the movement against the INR is very meaningful. After having traded on an average of 5.5 to the CNY, INR is now trading at above 7.5. That means a depreciation of above 35% against the CNY in the last 3 years.That should take care of a lot of Indian inefficiencies like infrastructure and labour productivity.
- Wage Inflation - As I have discussed in one of the previous articles, China is ageing fast and wage inflation is likely to be more of a structural phenomenon. 
- Given that we tend to consume much more than what we can produce, deficits flare up and currency is always vulnerable. To balance this situation out, either we start consuming lesser or start producing much more. So manufacturing is the way out of an imminent crisis.


Manufacturing in India is not an easy business. Government policies have ensured that labor,land and capital as well has become difficult to get and whenever you get them, they are expensive.All this has already and will in future continue to take a toll on the competitiveness of Indian manufacturing. 
Currency depreciation, which markets have forced upon us, will act to counterbalance these inefficiencies. It will make exports more viable across the board. Businesses in India which have been built based upon Chinese outsourcing, will find it increasingly expensive to import and sell. That should mean they would turn to Indian manufacturers at some point in time or put some some units themselves.
Given the difficulties in putting up manufacturing capacities in India from land acquisition to clearances, it will not be surprising to see existing manufacturers enjoy some real pricing power.For the past few years, companies built upon the outsourcing model have been highly valued by investors. 
If the above theory is correct, things could change over the next few years.I dont have any individual recommendations to make but I think its not a bad idea to at least do some ground work.


Things can change if the view on currency changes because of collapse of crude oil prices or something similar.But we will take that up whenever it happens.


No country in history has made it big without manufacturing. UK, US or China. As of now, that theory holds unless India proves otherwise and consumes its way to glory!!

Should we accept a lower level of growth?


Recently RBI came out with a report on how inflation impedes growth rates and they also published reports on the threshold level of inflation, from where it starts hurting growth.
Inflation does act as force against growth, but I was just wondering if it is not growth itself that leads to inflation.So inflation tends to act as a self correcting mechanism.But by repeatedly flaring up, as in the case of India, does it raise a red flag on the sustainable level of economic growth that can be targeted?


I dont know the answer but I will try to get a sense.
My analysis is very basic.I am neither capable nor equipped to do some hyper-mathematical regression to come up with a conclusion.

There are "n" commodities that go into making an economy and their weighted price index gives an indication of the inflation levels in the economy.

But I will concentrate on the basic commodities. Almost all other commodities are derivatives of these basic commodities and inflation in these basic commodities is what should generally be the driver of all other inflation.


The following is a table with growth rates for various basic commodities

Let us have a look at them:

Coal – We did well on Coal production before 2010-11. But last year was major disappointment. It looks like it will be worse this year. Looking at the overall scenario as of now, it is fair to asume that we are on are way to higher and higher coal imports.

Natural Gas – We were struggling to satisfy domestic demands and had a lot of hopes pinned upon the KG D-6 gas. It came in 2009-10. But now given recent problems, it looks like KG D-6 will struggle for production and so will India as a country as far as Natural Gas production are concerned. It should not be surprising that there are quite a few plans on the table to setup LNG terminals to enable import of LNG.


Crude Oil – That has been our weakest link in energy. Cairn Energy's find produced a bump in the production but now we are going to struggle again to grow it in any meaningful manner.

Except coal, we were always struggling with other energy sources.It had its own side effects of deficits and inflation but we somehow managed as global liquidity push helped India with capital inflows.
But now it looks as if coal is also going to go the crude oil way.

With limestone in abundance, we managed to get enough of our cement capacity in place.

Electricity - which is almost a derivative of coal in India, has done well. But with increasing problems in coal sourcing, it looks likely to struggle.

Steel has had a good going but even though we have abundant iron ore, we will have to import increasing amounts of coke to sustain steel production growth.

Fertilisers - that has gone nowhere. And no new capacities coming up, is likely to go nowhere.


Besides steel and cement, we will have to imports increasing amounts of all other basic commodities if we have sustain our growth momentum.

So where is the problem?


The problem is that all this leads to increasing trade deficits and we require higher amounts of foreign capital inflows to sustain our external balances.Higher Capital inflows helped us grow fast in the last decade.

But if we are going to struggle to produce enough of these basic commodities going ahead, our problems are going to exacerbate.And what happened in 2008 in terms of currency, inflation and growth shocks will keep coming back.Govt can try to induce growth with fiscal deficits. But given that we are a consumption driven economy, the govt effort leads to even higher trade deficits, inflation and currency fluctuations.And as govt tries to give a boost to a economy slowing because of inherent constraints and external issues, the next crisis becomes bigger.
Have a look at what happened in 2008 and later. The fiscal deficit went from the range of Rs.2 lac cr. before 2008 to more than 4 lac cr. And now this year it threatens to cross 5 lac cr. if we include the various subsidies being doled out.Inflation has been close to double digits for almost 2 years now even though we have not passed the full effect of the crude oil prices.
Rupee is back to 50 to the USD even before FIIs have sold anything substantial in the stock market.This is very unlike 2008 when Rupee did touch 50-52 to the USD, but after a heavy bout of selling by the FIIs.
(That does not necessarily mean that FIIs are going to turn big sellers in the Indian market, but I am just trying to say that the nature of the problem is more serious than it was in 2008.Or at least that is my feeling right now)

Agriculture - We are facing stagnant per capita availability in most agricultural products (except a few). In some cases the per capita availability is going down. This is happening at a time when the per capita incomes are going up. The resultant increase demand for basic cereals and proteins is pushing agri-inflation.As of now this looks like a structural issue, with the agricultural growth not keeping pace with rising incomes and the ancillary infrastructure around agriculture proving to be a bottleneck.Double digit food inflation for two consecutive years has already spilled over to higher wages.

Having put up this argument, it does come to mind that even China imports a lot of what it needs. But they have been able to avoid at least some of these issues.
Its true China imports a lot of the commodities, but I think there are some other differences when compared to India that helps it avoid these issues.

- Firstly consumption as a % of GDP is almost half in China. So they end up exporting a lot of what they import, which is reflected in their trade surplus.So they have current account surpluses instead of deficits. And thus their dependence on capital inflows is much lesser. In fact the trade surpluses can attract more capital in hope of taking advantage of a stronger currency. That this dependence on exports creates other issues is a different matter altogether.

- Secondly the massive infrastructure that they managed to build, a big chunk of which came in the 1990s and early 2000s when commodities were running at their lowest prices in decades.

 
- Thirdly productivity of almost all factors is higher in china except probably capital. It is routinely mentioned that India uses its savings much better.But China has used the capital to put up infrastructure which by definition is “low RoCE”. So they may have used capital a little less efficiently but then they have comparatively lesser inflation and bigger trade numbers.What we save on capital, we pay back I suppose by higher inflation and deficit problems.

Agriculture is probably the common place where both the countries face the same issues. Thus that part of the inflation is common to both.

Looking at at this very basic analysis, I would think there is a big fallacy with the Indian consumption led growth story. 

"We are wanting to consume much more that what we can produce"


What can change around the scenario:
- Collapse in global commodity prices, without having a big effect on the Indian export driven part of the economy. 
- Huge productivity improvements and removal of bottlenecks. (Basically taking advantage of the low hanging fruit)


I am not being critical of anyone, but just trying to put this as an neutral observer.

As of now, I think we would need to accept lower growth till we fix the systems or the commodity scenario changes. Slower growth is surely not acceptable to anyone. 

In that case it looks likely that markets will enforce lower growth on us through inflation and currency. That will be much more painful than a self-controlled slowdown.


There is a famous Indian axiom:
"Chaadar jitnee lambi ho, pair utne hi failaao".


But it is also true that a crisis is also an opportunity.

On that cautious note, I wish all a very Happy Diwali. And I hope everybody has a prosperous, happy and healthy New Year!!

USD INR - Technical Perspective

                                  Source: Bloomberg


USD was in bull market vis-a-vis INR from 1980 to 2002. Then its been a sideways pattern within a range of 40-52.
Only time will prove whether this was a consolidation of the previous 20 year bull market or whether we are going to be in this range for much longer or INR rupee will appreciate thus ending the USD bull market.
As of now I will lean towards it being a consolidation phase.If it breaks above the 50-52 barrier, then we have a renewed bull for USD against the INR.
And if that is the case, as they say in technical analysis, this is unchartered territory and targets are difficult to pin point.
If this analysis is correct, then tighten your belts,we might go into orbit. :)

Should Yuan appreciation be taken for granted?

Exchange rates for the Chinese Yuan has been a contentious issue for some time.Almost everybody other than the Chinese feel that the currency is undervalued. And some feel, by a huge margin.

USA constantly tries to impress upon the Chinese that they need to do more on the exchange rate front and probably to let appreciate Yuan much more and much faster.In fact a bill is being pushed in US Senate to allow USA to impose import duties on countries that undervalue currencies. Cannot think of any other major country, except China, against which this bill can be used, if passed by US and validated by International Law.

Basically its difficult to argue against Yuan appreciation, with all their reserves and trade surpluses across the board.

I am no currency expert, but just trying to put a few points together and see if Yuan appreciation should be taken for granted.

- After the 2008 crisis, Chinese banks, backed by the govt, went on a lending binge, the likes of which have not been seen before.That went onto create a real state bubble, or extend the real estate bubble and money went into projects which probably could not have been justified economically. Inflation came along and wages started to rise.

  Then, starting some time in 2010, they tried to control the bubble and its side effect, putting restrictions on lending, increasing reserve requirements on banks and increasing bank rates.And that is still going on.

  But it looks real estate in China has reached a point, where soft landing is not an option. A crash is more likely.The chickens have come home to roost.

- The low interest rates that are offered to the consumers, has also caused an "informal lending" system to take a stronghold in China. One of the signs of that is that the formal banking system has been seeing its deposit base shrink in the last few months. "Informal lending" offers higher rates to people,but how much of the system is actually legal is not known.

- The Govt has tightened credit through the banking system, for fear of taking the bubble even further. This has only added fuel to fast growing "shadow banking" system. The reserve requirements for banks is at an all time high.Inflation is still to be controlled.

- Given all this if the real estate does suffer a severe downturn, the whole banking system ends up in a huge mess. And the collateral damage on other ancillary industries will also be huge, further adding to the bad assets in the system.

- Lot of local governments in China have been running huge deficits funding questionable projects. some of these deficits are probably of the size same as Portugal or Greece. Local governments earn a significant chunk of the revenue from the real estate industry. Put these two things together, and it smells bad.

- Chinese demographics are turning towards becoming older. Their under-14 population has gone down from 28% in 1990 to 17% in 2010.The flow of new labour to the market has slowed down, one of the structural reasons for the rising wages.The rising wages are causing some other countries like Vietnam or Bangladesh to become relatively competitive. China's scale is not replicable in the near future and thus there is no immediate threat to its place as the world's leading manufacturer. Thus it is very likely that the deflation that China exported over the last 2 decades is unlikely to last.

Moreover with with an aging population, it is not going to be easy to replace export driven growth with domestic consumption driven growth. As is sometimes said "China will become old before it becomes rich".

All this would mean, they have to move towards higher value addition and technology, but that takes time.

- If the US and Europe go through another recession, then Chinese exports will also suffer.

If recession/stagnancy in the developed world combines with a real estate-cum-banking crisis in China, will the government launch another stimulus as it did in 2008?

Given that the present banking system problem and inflation is a result of that stimulus, its very unlikely, though nothing can be ruled out.

Can China be expected to keep appreciating Yuan, which will almost act as an "anti-stimulus"?

Commodities have already come down quite a bit fearing a Chinese slowdown. Thus argument of using currency appreciation as an anti-inflationary tool gets blunted.

Currency appreciation adds to the purchasing power of the domestic consumer, but in the aftermath of a Chinese real estate and banking crisis, a consumption led growth is also unlikely.And so currency appreciation may not serve that purpose as well.

In bad times, trade surpluses will also shrink.

Domestic interest rates are also likely to head down.

If its indeed a big banking bust in China, they might want to print more money and recapitalise the system.

Chinese Yuan is a controlled market, but generally all these factors would add to the depreciation pressure on a currency and not appreciation.

US Dollar and Euro, facing their own issues can get into a money-printing mode, more than what they have already done.Absolutely possible and changes currency dynamics. But then choosing a winner in a currency "race to the bottom" is tough, if not impossible.

I think its time I repeat myself. I am no currency expert. Its just an attempt to look at things with a perspective.

Let me know, if I have missed something very basic.

USDCNY = 6.36 today.

Underwear with holes??


In a recent edition of the DNA, there was an article titled "Underwear stands out as investors lose shirt". They had basically covered the underwear industry and written on the prospects of the industry.


Particular mention was made for Page Inds and the way customer has shifted to brands with Jockey being the most successful of them. The way the company reports numbers will surely make anybody feel that the business is really going great guns.


So I thought I will write down what I have understood from the numbers and otherwise.


- The promoters themselves offered their shares for sale in the IPO in March 2007. They probably got some 50 cr. from the sale of their shares. Company itself raised 50.8cr. from issue of new shares. Not too much to read into. But there was interesting point in all this. Company paid an issue expense of around 8.2cr. If it is for its share of the IPO, then that would have meant a fees of roughly 16% for the money that was raised. Since that number looks unbelievable I think its fair to assume that company paid for the expenses of the share sale by the promoter. Though its a small matter of 4 cr., it doesnt smell good. But anyways the amount is too trivial to be of interest to most.


- Lets have a look at the margin profile of the company:

Before 2006, the average operating margin for the company in the four years before would be around 12-13%. Company did the IPO in March 2007. So investors would have had maximum concentration on 2006 numbers. The operating profit margin changed dramatically in 2006 touching 19-20% range. And since then it has stayed there and thereabouts. That is interesting, isnt it?


- Now lets understand some inventory numbers for the company.In the table below I have just tried to come up with some basic inventory numbers. I have compared the Raw Material Consumed (RMC) in a given year with the year end inventory of the year and computed the inventory in terms of "number of days". I understand that inventory is for the future and not a reflection of the past performance, but here I am more focused on the trend than the absolute number itself.

As can be seen, the inventory has been going up almost one way, except for a dip in 2009. Given that growth rates of the company have remained in the 30-40% range throughout the period, it is very interesting that they had to support the growth with higher and higher inventory in terms of number of days.


- Now let us get onto something even more interesting.

Its just a simple calculation of the cumulative cash flows the company has generated since FY2007. As can be seen, the cumulative "PAT + Dep" number is 201.6 cr. That is for the cash inflows. Now if we add up the cumulative capex and cumulative change in working capital in the same time frame (229 cr.), it turns out the free cash flow generation has been negative. So even though  the profits have multiplied in these years, company has not been able to generate cash.
(Here the working capital changes have been calculated net off cash roughly)  


- Looking at all this, those who know the company might turn around and say how come the company has been paying dividends and has good payouts, when the cash flows were not existent?
Well, the answer to that is reasonably straightforward.

The approximate outflow on account of dividend since the year of the IPO, is roughly 100 cr. The total money raised through IPO and incremental debt in the same time frame is about 132 cr. So basically company has had to take debt to        
pay out the kind of dividends that they have paid. The difference of roughly 30 cr. between dividend paid (100 cr.) and total money raised (131 cr.) has gone to support the cash flow gap that I have explained in the point just before this one.


- And lastly, as of March 2007, promoters held 80.69 lac shares. As of June 2011, they held around 67 lac shares. They have sold roughly around 14 lac shares in the open market in these years at various prices. If I assume average sale price of 700 (CMP:2400), then they would have taken roughly 100 cr. by selling their shares in the market. In this time frame,their average holding of the company would be roughly 65%. So out of the cumulative dividends of 86.5 cr, promoters would have netted around 50-55 cr. And now if I add the share sale in the IPO of 50 cr., the promoters have netted anywhere between 200 cr to 250 cr. in these years.
As the promoters earned this money, the company has ended up with a debt of 115 cr, up from 25.3 cr., inspite of the having raised 42 cr. in the IPO.


I am finished with my numbers analysis of the booming undergarments business of Page Inds.


I just have one question to anybody who is reading this. Not exactly related to all that I have written above but nonetheless I will go ahead.


Have you ever worn an underwear with a hole? Does it last long?

Gold Glitters but gold loans......

Gold loan companies have had their share of limelight in the last 1-2 years. It had to happen with 50% RoEs and similar growth numbers.

But I am just wondering if these are actually such good businesses.

They charge an exorbitant interest rate on what is essentially AAA rated loan since it backed by gold with sufficient margin of safety in case of default.Agreed that gold loans are typically for people those who do not have access to formal sources of funds, but even then, the extraordinary levels of profitability in this business are little hard to digest.

I will try to give some food for thought for the two listed companies in the domain.



Manappuram:

- Gold loans typically have a duration of around 4 months on an average.Interest payment happens monthly. In that scenario Manappuram reports "Interest Accrued but not Due" entry in the "Current Asset" side of slightly more than 4 months. That is almost equal to the average tenure of the loans.Maybe Manappuram collects all the interest together. Highy unlikely though.

- It is only after 2006 that the company started to report such high RoEs. Almost as if they had figured out a magic formula. Numbers before 2006 were not flattering, to say the least. RoEs jumped for 2 years, lot of money was raised and now RoEs are down significantly from what they were at the point of making money. Some bit of it maybe due to the fact the leveraging process is still continuing and may improve later. Money raised in QIPs and placements now form 80% of the networth.I do not find it surprising that the "Accrued interest" entry that I discussed above came about only when the RoEs started to jump in 2006 and not before that.

Muthoot:


- I could not see anything interesting in the balance sheet of Muthoot that can be reported. But I have a more broader question on the business model itself.

They will probably end up roughly 22000 cr of AUMs FY12….

They claim to have an avg tenure of 4 months….lets take it to be 6 months….

That would basically mean they will disburse roughly around 40000 cr  in FY12….since they practically end up with a new book every 6 months….that disbursement figure is bigger than quite a few reasonable sized banks….and its all cash..

And of course similar quantum of collections as well…..

So they would roughly manage 80000 cr of cash in the year…

Just to get a perspective….

For M&M fin/Magma/Shriram…the tenure is roughly somewhere between 2-3 years…..

If we do a similar calculation for these three….the approx cash circulation they are managing is around 40-45K cr all the three added together….

So Muthoot alone does roughly twice the cash volume handling as all the above 3 put together…..when the avg ticket size of each of the three above is roughly 8-10 times that of Muthoot…

The challenge in this type of growth with this model is the same as what SKS Microfinance would have faced…..of course that Muthoot does secured lending is a big difference…..

And in all this to maintain margins….RoEs…..in the face of competition…..(In kerala every village junction has probably 3-4 gold lending shops within a radius of half a kilometre…excluding banks)

Gold prices have helped…value goes up without incurring any additional cost….

The physical enormity of the tasks to be performed boggles my mind....and as I said it is very "SKS-ish".

If Muthoot is managing all this, then they deserve their RoEs.


With the new RBI regulations on securitisation, these companies will probably out of that market. That should hurt RoEs substantially.

Their businesses are leveraged on gold prices. But since it is difficult to predict gold prices, I have not ventured into analysing effects of gold prices on the model. Broadly, rising gold prices favour the business.

A discussion on gold loans businesses should bring the colour "golden" to the mind....but I am more reminded of the colour (ever)"Green"!! :)

Is this the right time to sell/short high flying consumption stocks in India?


First of all, let me make it clear that I am not talking about HUL or ITC. It has got more to do with the likes of TTK Prestige or Page Inds. I will list out my short-selling stocks later.


Short-selling is an art in itself. Not too many in the world have done it successfully in a consistent manner.


So am I bearish on these stories? If yes, why?


- A lot of the growth that these companies have achieved over the last 2-3 years has been a function of government spending. Whether it is the 6th pay commission handouts or the collosal spending otherwise. The large fiscal deficit is a reflection of that. But now the government is itself running on financial resources.The fiscal deficit is still large, but has flattened out. And most of the increase in the deficit is now in subsidies rather direct payouts in the hands of the people. In fact, I dont think it would incorrect to say that the direct payout component will go down moving ahead. These handouts were one of the reasons why the consumer durable industry had such a good time in the last 2-3 years.


- Inflation has sapped the purchasing power of the people. With no government payouts in the offing, discretionary expenditure should see a cut.


- If the whole of Europe is in trouble, particularly the banking industry based there. Than it is very likely that the IT industry here in India will find it tough to grow. That makes it likely that graduates will find it difficult to find campus jobs or laterals may find it difficult to hop. And that might apply not only to the IT industry but also to other export facing industries as well.Generally speaking there could be an environment where there is a bit of scare and loss of confidence. These two things can really dent the psyche and postpone purchases.


- From a stock market point of view, these stocks are very richly valued. They are building in a lot of growth in the next 2-3 years. If the above factors are reasonably correct, then those growth expectations are not going to be met. That should lead to a fall in stock prices.


- There is a uniform consensus that the consumption story in India is going to continue strong, even though there are some indications that it may not be so. 4-wheeler sales are flattening out. Consumer durables did not report good numbers in their peak summer season. This uniform growth consensus, despite a few contrary indicators, has the potential to boomerang if things dont turnout the way people are expecting them to.



I am listing down the stocks that I think should be sold or shorted, in no particular order. I am also noting down the prices as of today in brackets.


- Page Inds (2515)
- TTK Prestige (2573)
- Jubilant Foods(870)
- Hawkins(1524)
- Whirlpool(225)
- Hitachi (162)
- Lovable Lingerie (462)
- Titan(205)
- Zydus Wellness(530)


I may have missed out a few more.


CAUTION: It is always advised, and very wisely so,  that going against the trend in a market is a fool's idea. Even if your thinking process is on the right track, it is famously said "Markets can be irrational longer than you can be solvent".


But trend reversals do take place. And I think there are enough indications for that to happen.
Of course, I can be wrong but then that is a part of being in the market and a part of the never-ending learning process.


Happy shorting!! :)

Is the Indian 10 year G-Sec headed for 10% yield?

I had written in January 2011 about why I felt there is a chance that Rupee headed to 50 against the USD. Today its around 49.5 to the USD. Though we are still to reach 50,I think we can fairly say that at least the thinking process was alright. But given the situation that has come up right I want to shift the goal post a little and see what effects it can possibly have on the government bond market. I am no bond expert but its just a calculated attempt.

I will touch slightly upon the rupee and then take its probable effects on the liquidity and inflation in India to justify my position on the G-sec market.

The situation in Europe is getting worse by the day. Banks are increasingly reluctant to even lend to each other. A corporate like Siemens has parked almost all its liquidity, amounting to roughly 6 bn Euros with the European Central Bank. Credit is getting tighter. US too is not going great. Banks across the globe are scampering to save as much as they in case of sovereign default at Greece and its contagion effects.

India's external debt is around 306 bn USD as of March 2011. I dont have the latest figures but will go ahead with the assumption that it will not have changed dramatically. The Indian forex balance is maintained by the inflow of money in the capital account, given that we are running a current account deficit.

Given the global scenario, it is very likely that inflows in the capital account, both debt and equity, might face a slowdown. In the worst case, a reverse flow may also take place for some period of time.

Given that banks are the ones which are going to be hit the most and our IT companies depend on them in a big way for their businesses, its also possible that IT companies themselves might suffer sales slowdown. That would not help the current account deficit problems.

Of the 306 bn USD for external debt, roughly 84 bn is to be paid within the next 12 months. So there is a need to get this refinanced. But if the banks in Europe and US are struggling, it will not be surprising to less than 100% getting refinanced.

The way rupee has moved from 45 to 49.5 in practically no time means that large FIIs investments are down 10% in USD terms and they havent had a chance to sell. This move has come about without any big scale sale by the FIIs. But if the situation continues, they FIIs will also have to liquidate some of their positions and that only adds to the pressure to rupee.

Current account deficit along with a slowdown in forex inflow will be a deadly combination for the INR to fight. I suspect if that happens, INR will depreciate even further. Maybe 55. Maybe 60.

Can RBI intervene to stabilise the currency? It can. But there is a price to it. It will have to suck out liquidity from the Indian banking system. That will be a blow to the system which in any case is in a liquidity deficit.Daily turnover in the forex markets is more than 8 bn USD on an average. So the intervention required to sustain INR will be reasonable. Thus there is also a limit on how much RBI can intervene.

Then what happens in case, the situation pans out this way.

With rupee depreciating that much, all commodities which are priced on import price parity basis will see their prices going up, unless the prices globally also go down to the same extent as the rupee depreciates.It is very likely that the depreciating rupee will have a inflationary impact.

Plus if the fore debt inflow is slowing down and refinancing is difficult, it might lead to more demand for domestic bank funding. That puts additional pressure on the liquidity situation in the Indian banking system.Banks may withdraw from their excess SLR commitments and lend it.

Inflationary impact of the rupee and bank squeezing their SLRs will have their impact on the yield. RBI intervention in the forex market will only add to the liquidity crunch and take the yields on all loans higher.

This scenario may not play out. Globally commodities, particularly crude oil may fall much faster than the pace of rupee depreciation (which is what happened in 2008). That eases pressure on the trade deficit front, but a global collapse of sorts will also make the FIIs press the sell button and will also reduce exports. Its difficult to quantify, which parameter will be dominant. But nonetheless there is always a chance that the rupee depreciation, if it happens, MAY NOT have the inflationary impact.

The other interesting thing that, there is almost a universal consensus that inflation and thus interest rates in India have peaked out. As I have discussed above, it MAY NOT be so. With the universal consensus being on the side of lower inflation, as of now it is surprising that government bond markets are yet to decisively move yield downwards. But things can change fast. the world is too dynamic.

I am not sure, how all this is ultimately going to play out but i think its worth to keep the above scenario as a part of the thinking process, so that it is not a surprise if we see G-Sec at 10% sometime in the near future. 10% is just an indication of the direction of the yield and not necessarily a target.

FM Pranab Mukherjee recently said its important for global leaders not to lose their nerves in these trying times. It applies to India equally if not more.

Where is India headed??

These are interesting times indeed. Europe and US seem to be having problems managing their fiscal situation and persistently high unemployment. Currencies are yo-yoing everyday. People in Middle-East are busy fighting their own masters. But majority people believe, Asia, led by India and China, will come out of the crisis in a relatively better shape.I dont know enough on China, so will not comment.

But is India as well placed as everybody believes it to be?

- India's average GDP growth for the last 10 years is roughly around 7.5-8% p.a.. We would have probably TREBLED Nominal GDP in the same time frame. I find it really amazing that with all this growth our currency "INR" is still where it was 10 years back against the "USD", which itself has been one of the weakest currencies in this time. That does not speak too well of the quality of the growth.

- After all these years, we are still running a huge Current Account Deficit. We require foreign inflows to keep our forex balance sheet from going haywire. Admittedly crude oil prices do not help, but then crude oil subsidies do not help either. Would we have grown this fast had governments not subsidised petroleum products and fertilizers? I seriously doubt it. Now that those subsidies have become huge, it is becoming very difficult to get rid of them. And they leave huge holes in the government's balance sheet and budgets. This is one of the reasons why the rupee is where it is. Had subsidies not been offered, we would have probably grown slower but would have been in a much better situation to handle the crude oil prices. Just imagine, if Rupee had been 40 rather than 48 to the dollar, the equivalent petrol and diesel prices would have been 20% lower. I know its easier said than done, but I am just illustrating here.

- A lot is made out the forex reserves of 300 bn USD. But India's external debt is more than that figure and more than 20% of the debt is short term in nature. Thus we are always susceptible to foreign money flowing out and creating currency headaches for us. Besides we are also dependent on FIIs to keep money coming in. And when in trouble thats the first money to go out. This is the second reason why the rupee is where it is. What happened in 2008 is a very strong reminder of how susceptible we are to capital flows. It required the government to come out with a big fiscal package to keep our growth momentum intact. That itself raises a question on the nature of the Indian Growth. Is it for real or is just one more liquidity driven story?

- Our political and bureaucratic system have proven to be a disaster. Just as an example, we have had record crops for 2-3 years in a row, but still food inflation is in double digits and people starve to death because we cant manage the food rotting inside our godowns. I dont think it can be explained by simply saying that we have infrastructure bottlenecks. Vested interests are to be equally blamed.One of the reason why inflation reaches double digits as soon as we start clocking closer to 8% GDP growth.

We have had "n" number of scams. These scams, besides denting our reputation as a country, have also drained the system.It is estimated the black money outside the country is more than the GDP currently but we dont have enough resources to put up the infrastructure required to sustain growth.

Look at the way public sector enterprises have been handled. BSNL, once the largest telecom operator of the country now struggles to compete in the market and has started to make huge losses, which, of course, will have to be borne by the tax-payer.

Indian Airlines and Air India have now run up a cumulative debt of around 40000 cr. And are incurring losses at the rate of 7000 cr per annum.

The situation in the 7th largest country in the world is such that industrialists are not able to get land for expansions. (They themselves are partly responsible for the problem)

The country with the 4th largest coal reserves in the world cannot produce enough for itself and has to import increasing quantities of coal. It almost gives a feeling as if, another "crude oil" situation is being made out of coal.

The second largest population in the world has labour shortage problems.Labour strikes are becoming more and more common.

All this probably can be added to the reasons for the situation of the INR.

With all this background, it is not surprising that INR has depreciated against USD in the last few weeks at a rattling speed. ( I had expressed my opinions on the same in my previous article. for those interested....http://rmbworld.blogspot.com/2011/01/is-indian-rupee-headed-for-50-to-us.html)

The way stock price reflects the state of affairs within a company, I believe the currency reflects the same for a country.

The way the world is shaping up, it looks headed for a tough year or two, at least. India wont be spared the pain. We will also suffer.The more important question is how do we come out of the crisis, if it comes. We would require some serious action on the part of the government and bureaucracy. Given the precarious situation of the govt, after all the scams, it is very likely that they will do more social welfare schemes than anything else.

This along with the currency scenario, will make it difficult for the RBI to reduce rates, because inflation MAY NOT go down substantially. That will only lead to slower growth. And 2 years down line, general election will be on the horizon.

So unless the government really comes out of their paralysis right away, the constraints today will be present 3 years down the line as well. Growth rates in this time will surely suffer. Stock markets, Job markets and general public, at large, are hoping to see much better.

There are few IFs :

- What if crude oil prices collapse and give us a lot of breathing space. But that would also lead to a lot of strife in the already tense Middle East. So a collapse in crude oil prices may not be orderly.

- Commodity prices also collapse and thus lower inflation in India. that will mostly happen when the growth in developed world really fizzles out. Given that a lot of sectors and companies in India are now globally correlated, I am not sure that is great news for that part of the economy though its definitely better off for the others. And a big slowdown and crash can also lead to foreign money outflow which is where we are really sensitive as a country. We have seen what happened in 2008.

The world is hyper-dynamic and things change reasonably fast nowadays, so difficult to take long term calls.

But as of now, I see the glass half empty.

Is the Indian Rupee headed for 50 to the US Dollar...again?

Now that I have got a few eyeballs (hopefully!!) with that headline, I hope to sustain the reading interest as well.

Not too much seems to be written about this topic nowadays. Or lets put it the other way, there are not too many bother points there. Newspaper/Magazine articles will generally follow only if there is an apparent problem caused by either more than anticipated depreciation or appreciation of the currency. As I write this 45.7 Rs are required to get yourself a US Dollar.

I will take the oft discussed parameters first, give my own very limited take on them(I am no forex expert) and then take up a topic which is a little off the routine track but which according to me may have a significant impact on how things shape up on the currency front.

Current Account Deficit(CAD).
We seem to be headed for the deficit of order of 50-60 bn USD. So roughly that is what is we require is terms of net capital inflows to balance things out. So FDI + FII +External credit flow has to be roughly in that range.
The CAD in our case if very sensitive to crude oil prices. Discussion on where crude oil prices are headed is beyond the scope of this write-up and of course, beyond the scope of my capabilities. So we are assuming that crude oil prices will remain in the range they are in right now i.e. 80-100$.
With FDI in the range of 15-25 bn USD, we will require another 20-30bn USD of FII flows. And that is where our well understood vulnerability to FII flows originates.
For the last two years, since the markets have bounced back, the discussion routinely figures around how the inflows will overwhelm the Indian system and lead to significant rupee appreciation. It did happen that way for the first few months. And rupee went to 44 to the dollar. After that it has taken a slightly different turn. The FDI bit slowed down. They were replaced by ECB flows to some extent.Oil prices went up from 60-70$ range to 80$. And rupee has turned back towards 45-46 range. So net net on this particular front the inflows outflows seem to be balancing out as of now.

FOREX RESERVES

Everybody seems to be very excited by the pile of dollars we have accumulated. Recently there was an article in a leading fortnightly business magazine which talked about the problems India faces with the bulging forex reserves and how it will head towards the 500 bn USD + mark over the next few years.
But what does not get the required attention is that the External Debt for India is as big as the forex reserves themselves. Its like showing cash on the balance sheet by borrowing and claiming to be in the pink of health. And good chunk of the debt also some from short term credit and thus will act as a pressure point for the Rupee when that is repaid.

With our CAD and policy paralysis which FDI hates, forex reserves have to come from borrowing and the so called "hot money", which has no longer term loyalty.

I think forex reserves are more a psychological relief than anything else.

So we have a had a look at the two most often discussed forex topics in the Indian context. Cant reach any definite conclusion, can you?
So where has the headline come from?
hmmm.....lets see if I can convince at least one of you. (I hope this is read by more than one, at least..:-) )

- I have written my opinion about the power industry in India in one of my blogs before. those interested may go here...
http://rmbworld.blogspot.com/2009/12/coming-power-ful-collapse-writing-after.html

I can tell you that the state of the SEBs in India has only gone much worse than what was mentioned in the article. Their losses this year are estimated to reach a figure closer to 100,000 cr(this is the ministry and planning commission estimate). Yes you read that right!! If so, that figure is bigger than the now famous oil subsidy bill.
Merchant power rates are probably down by 20-30% over the last one year.
There is a total of more than 100,000 MW under different stages of completion. Some are close to commissioning, some are half way through and some are designing their way up. At close to 5 cr per MW, we can roughly calculate the quantum of money that has gone into them or is going to go into them.
All of them are going to require coal, whether they import it or Coal India supplies them if yet to be seen. Coal India has already cut down its production estimates for FY12. Those who will import need to figure out where they will be able to source coal, at what price, which port has the capacity to import not far away from wherever they are?
Banks have funded these projects providing 70-80% of project costs.
Any problem in this sector is going to be a huge headache.
Banks are also funding SEBs with a total exposure of closer to 100,000 cr. I have no idea how SEBs are going to repay that money with their loss run rate. Are the state govts in a position to handle the total debt of these SEBs which now total up 300,000 cr.?

This has the potential to become India's "sub-prime". And if it turns out that way its not going to be funny.
And it has implications for the banks, infrastructure companies, financial markets, foreign flows and so for the currency as well.
And it doesnt look like that fiscal deficits are going to go down dramatically given the way govt wants to spend money in mostly non-productive purposes. In fact today more than 25% of govt revenues go into interest payments on the accumulated debt.
And in all this I am not discussing the oil subsidy bill, fertiliser subsidy bill and food subsidy bill.
Enough is already said about them.

And the other important thing is that these are domestic problems and have got nothing to do with external events.


What can go lead to rupee to appreciate or stay around where it is?

- Oil goes to 50-60$. But that would mean the one or two countries have gone bust and there is a global collapse or problem. That would also probably have taken the stuffing out of the indian markets and lead to serious FII outflows. So I am not sure that it is going to sustain the rupee.

- Overwhelming foreign inflows. Possible. But if the situation in the power industry turns out the way we have discussed above, then overwhelming foreign flows are difficult to imagine.

- Compression of CAD due to exports rising faster than imports. This scenario and appreciating currency probably hand in hand for too long, because an appreciating currency will have its impact on the exports.

- Phenomenal Dollar weakness. Cant rule that out . But against which currencies?

All this put together, I would bet that Rupee has a higher probability of depreciating rather than appreciating.
And my headline already makes my direction call clear.

Of course, I am no expert. But I am also ready for brickbats.