Something big round the corner..

So confused right now that cant even think of a apt title for this article. Have left that exercise for the end.

Confusion is with what the markets seem to be suggesting.I am talking about the currency and equity markets.As of now USD-INR is 54.8 and Nifty is around 6100. Both looking placed at technically critical points, moves beyond which are generally not the garden-variety ones.

Last 3-4 weeks have seen some interesting movements in the global commodity markets which have significant ramifications for the Indian economy and markets, both currency and equity.
First gold prices have crashed to 1400 $ levels and second, oil prices have also corrected. While oil prices may not have crashed but even 5-7% correction helps.And you never know whats in store!!

Both the above developments are both unequivocally huge positives for the Indian economy. Lower gold prices helps reducing current account deficit and benefits of lower crude prices are also obvious.The other good news,though one-off, is the huge 5 bn USD open offer coming up in HUL by the parent company.

Before all this happened, INR was trending between 53.6 and 54.6 to the USD and the Nifty was around 5500-5600 levels.
Not unexpectedly markets reacted positively to all these developments and USD-INR moved towards the lower end of the range at around 53.6 and Nifty went closer to 5900-6000 levels in Nifty.
But in the last few days, things have changed slightly and the markets are now running in what can probably be called contradicting directions.

In the face of huge FII inflows in the stock markets, Nifty has moved forward and now standing around 6100 levels.But at the same time, USD-INR has made a move in the opposite direction and now stands at 54.8.
This currency depreciation as stock markets are getting within touching distance of the life time highs is what is really CONFUSING!!

I had articulated my opinion on the USD-INR in some previous articles.

Treadmill

60-65 on the Cards

Obviously,environment in which those were written have undergone changes, which are mentioned above.So what to expect now??

Logic would suggest that,given the changed environment,INR should appreciate with external deficit coming down and FIIs pumping in money like never before.I have certain reservations with that thinking. Rupee appreciation would mean all commodities where prices are USD denominated will see downtrend in INR terms.A possible deflation or very low inflation scenario. While that seems anything but negative,in the article below we have discussed the huge negative side effects deflation or very low inflation could PROBABLY have on the Indian economy.

Low Inflation - Good for India?? 

So if INR appreciation does come about,I think there could be huge negative side effects. And the above article has actually not discussed about effect of appreciation on trade deficits.That is unambiguously negative.

So while stock markets may do well, underlying economy and financial systems may come under increasing stress and thus slow down the Indian economy even further from what we are witnessing right now. That in turn would cause corporate profits to suffer and stock markets should logically react negatively to that, right??

But appreciation didnt come, at least not as of now. Stock markets went up and INR depreciated!!!

Confused??!!!

I am not sure this opposing movements can last very long. One of them has to concede and start reversing. So either INR has to start appreciating or stock markets have to start their downward journey.Obviously its difficult to predict if this will happen and in case it happens which market will reverse.
Trade fundamentals dont justify rupee appreciation but fund flows can change the arithmetic.

With so many moving parameters in terms of commodity prices,slowing global growth and crazy money printing leading to humungous fund flows into markets,there are no clear bets.


But I would go with what I think is fundamentally correct. That would be INR to depreciate and stock markets to give up their gains.

Either ways, I think a big move maybe coming....in both the markets.

There is something round the corner....

(Standard Disclaimer : The probability of my opinions going horribly wrong are closer to one than to zero!!)

Pizza Mania!! (Part - 3)

This is third in the series...and the shortest!!

Have already written this....

Pizza Mania Part - 2

(The above article also has the link to the first one)

Jubilant Foodworks today declared the Q4 and Full Year results for FY13.

Since I have already discussed in detail a lot about the model in the previous write-ups, here I just wanted to kind of top it up with something new.

-    The capital expenditure for the company in the last 3 years has been 70 cr, 120 cr and 185 cr for FY11, FY12 and FY13 respectively. (Numbers have been rounded off approx.) And now for FY14, 250 cr is the number being guided for.

      As can be seen,the capex is just ballooning with each passing year.And since there is limit to the number of stores that can be opened in a year, increasing amounts is being spent on non-stores capex. This basically relates to money spent on commisaries/factories to supply to stores in a given region.

      The total expenditure on these factories till date cumulatively would have been maybe 100 cr. This is a rough estimate.And these are supporting the 570 odd stores that the company operates.But now we are talking about spending a similar quantum of money in one year itself!! And this when the store opening in the year would be of the order of 125.Interesting!!

-    The other interesting part of this ballooning capex story is the tax benefits it is generating for the company.Lets see how.

      In FY13, company provided for deferred tax of about 13 cr. Assuming 30% tax rate,the additional depreciation that company would have claimed in the tax books is around 40 cr, which will be over and above the 55 cr already claimed in the accounting books. So company has claimed around 95 cr depreciation in the tax books when  the capital expenditure in the year was around 185 cr.!!

      For FY14 they have suggested a capex of 250 cr. And have also confirmed that there will another deferred tax entry similar to the one in FY13 and probably a bigger one.

      When asked about the deferred tax, it was clarified that the tax books had "leasehold improvement" expenses being shown as revenue expenditure and thus claimed. Clearly the same were being capitalised in the accounting books.

      That also means the profit claimed in the tax books is at least lower by that much i.e. around 40 cr.

      So there is a double benefit.The profitability declared to investors is 'inflated' to that extent and tax outflow is lower to the extent of deferred tax claimed in the books!!

  

In other observations, the Same stores sales growth being guided is lower at around 10%, which is on expected lines given the sluggish economy.

Hope you found the observations interesting enough!!

(Standard Disclaimer : The probability of my opinions going horribly wrong are closer to one than to zero!!)