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.