Stocks
Recent Rally May Not Be Sustainable: Report
The recent run-up in the Indian market seems very pleasing to investors. But is it sustainable? According to a report by Kotak Securites, ‘growth’ stocks continue to trade at rich multiples based on the market’s views of continued low global yields, while ‘value’ stocks have seen a large expansion in their earnings (and corresponding increase in stock prices) due to improved fundamentals over the past two years.
 
However, the Indian market’s rich multiples may not find much support from global or domestic interest rates, according to the report. The recent rally in emerging markets may have largely been driven by the weakness in the US dollar, but global economic data suggests continued economic recovery, which may result in higher global bond yields and monetary tightening by global central banks -- higher short-term policy rates and lower bond buybacks. “Global bond yields have already moved up but uncertainty about the strength of economic recovery in the US and fiscal and trade policies of the US have resulted in broadly stable rates,” says the report. 
 
The Kotak report also argues that “valuations of the Indian market appear quite full at current levels and earnings upgrades look difficult. Domestic macro factors might not see further meaningful improvement given the sharp improvement in the same over the past two years. Interest rates may have scope to fall 25-50 bps on the back of an expected decline in inflation, after declining 175 bps from a peak of 8% in early 2015 when the RBI started cutting rates in the current economic cycle. But the RBI may have limited room to cut rates as core CPI inflation continues to be fairly sticky and it would be quite difficult to bring down CPI inflation to below 4% on a sustained basis. However, an improvement in NPL cycle, finalization of GST rates and favorable monsoon forecasts may be potential positive triggers for the market.”
 
Kotak also believes that the market seems too complacent about the impact of demonetisation and the forthcoming Goods & Services Tax on discretionary consumption demand. There might be some upside risks to inflation from the conversion of large parts of the informal economy to the formal economy due to demonetisation and GST, says the report. The informal sector players may have to raise prices of their products to offset the impact of higher taxes (GST and corporate/income tax) on their overall costs, if and when they become part of the formal economy and start reporting their true incomes and paying full taxes. 
 
“The continued strong inflows into domestic equities by insurance and mutual funds and passive FPI inflows may support the market’s high valuations, even if fundamentals may be less supportive. Liquidity conditions and expectations can only result in temporary ‘mismatch’ between valuations and fundamentals,” the report forecasts. This has led to a rally in emerging markets, which might not sustain.
 
Talking of the banking sector, the report mentions that banks have largely recognised the bulk of the bad assets in the large corporate book and thus, Non-performing Loans (NPLs) may be peaking. “However, the resolution may take time given the magnitude of the problem and limited options.” Kotak believes that there are large risks to the profitability of the cement sector, given large supply-demand imbalance and the impact of demonetisation. “The larger companies continue to lose market share to their smaller but more aggressive peers, which might bring about consolidation in the industry.”
 
Finally, as regards consumer staples, “input prices have increased sharply over the past few quarters and companies have not taken commensurate price increases as yet due to weak demand conditions. A few consumer companies may get some benefits from lower taxes under GST if the GST Council classifies their products in the 18% rate category rather than the 28% one.”

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COMMENTS

Ramesh Bajaj

3 days ago

I had hoped that there would have been a uniform GST, but as events are panning out, it seems inevitable that there will be differential rates if GST. I be

‘Modest growth is expected in Indian exports’
Trade deficit in January  stayed  stable  at  USD10 billion,  the same as in the previous  month,  with  oil  deficit  deteriorating  but  non‐oil  balance improving. Barring engineering goods, which are showing good traction, helped by a favourable base, several other categories, such as leather goods, garments, gems and jewellery moderated during the month. 
 
These are the primary observations of a research note from Edelweiss. Meanwhile, non‐oil/non‐gold imports maintained pace at 6% year-on-year. Going ahead, Edelweiss expects trade balance to hover around current levels. Recovery in the global economy is a boost to exports, but base effect is turning adverse. Thus, stable to modest improvement is the most likely scenario for exports.    
 
A similar trend was observed in imports. Overall, imports growth improved to 7% in January 2017, compared to 6% in December 2016. Non‐oil and non‐gold imports showed a similar pattern. Just as with exports, base effect and rebound in global commodity prices seems to be at play. Specifically in January, gold imports were flat at USD2 billion, while crude oil imports jumped, reflecting rising prices.
Edelweiss observe that it is worth noting that while global industrial activity has picked up, one is yet to see visible pick up in global trade volumes. If one looks at global trade, it has recovered in nominal terms in the past 3‐4 months, but world trade volumes have barely improved.  

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Venture Capitalists of a Different Era
In India of the late-1800s, there was backbreaking poverty, occasional famines, and age-old cultural practices. But, by the early-1900s, major railway lines linked the ports to the interior as well as to the main cities and towns; steamship moved cargo and people along the coasts; and three Presidency Banks offered business loans. There were two stock exchanges—the Bombay Stock Exchange established in 1875, the second in Asia after Tokyo, and the Ahmedabad bourse that came up in 1894. The Calcutta Stock Exchange came up in 1908. 
 
The US Civil War had turned India into a major source of cotton for the mills in Lancashire which created a small group of extremely wealthy Parsi and Gujarati merchants in Bombay. They had ambitions to set up spinning mills and composite textile mills in Bombay and Ahmedabad. The Crimean War (1853-56) forced the flax mills in Dundee to switch to jute grown in east Bengal and the Scottish businessmen soon realised that gunny bag and cloth could be more profitably manufactured along the banks of the Hooghly around Calcutta. This is how India’s textiles industry took birth in the west and jute industry in the east. There were many other business opportunities. In the words of Omkar Goswami’s Goras and Desis: “Railway lines had to be built and operated across the country; sugar to be manufactured from cane that was being grown in the Punjab, the United Provinces and the Bombay Presidency; and tea to be cultivated, processed and exported from plantations in Assam, Darjeeling and the Dooars. None of these activities required great manufacturing skills and technology. There were steady profits to be made.”
 
By this time, Calcutta, Bombay and Ahmedabad had enough wealthy urban Indians who were willing to risk a part of their wealth to a welter of new businesses that were sprouting, given the then rapid technological change. India also had a contractual and legal system and courts for adjudicating on commercial matters. Time was ripe for entrepreneurs to dream big. But they still needed something more: an organisation that could “attract risk capital and arrange the manufacturing resources.” The managing agency came into being. 
 
A typical managing agency was a “partnership or a closely held private limited company that leveraged its connections and entrepreneurial reputation to float different businesses across India.” Managing agents controlled the businesses in textiles, sugar, transportation, jute and so on. Gillanders, Arbuthnot & Company, which started as a partnership of FM Gillanders and GC Arbuthnot, was in construction. Mackinnon & Company, Mackenzie was in inland and coastal shipping; Bird & Company was in coal and labour contracting for railway lines; and Andrew Yule & Company controlled six jute mills, 11 collieries, 10 tea plantations, a steamship company and several smaller firms. 
 
The managing agencies spotted new opportunities and raised the initial capital. Then, they floated a public issue. Their reputation attracted public money. Riding on growth opportunities and light regulation, over the next few decades, managing agencies came to control vast sections of Indian businesses and continued well into independent India until Indira Gandhi decided to axe them in 1970. The raison d’être of managing agencies was obvious. More than 100 years ago, when there were no developed markets for accessing finance and spreading the risk, what could have connected risk-takers or financiers to business opportunities? It had to be a form of organisation that could take the risk of assessing new business opportunities, fund business enterprises and maintain control by holding legal and financial strings. In some form or the other they have existed “in the US up to the Great Depression; in the UK till the end of World War II; in France, Italy and Spain till much later; in Japan and South Korea till the 1980s; and in much of emerging Asia right up to recent times.”
 
Omkar Goswami, an economist and raconteur par excellence, brings the story of managing agencies alive by narrating their rise through a cast of highly colourful characters. He starts with prince Dwarakanath Tagore, the creator of the managing agency idea, grandfather of Rabindranath Tagore, a risk-taker, a fabulously wealthy man who went bankrupt and died in London in 1846. And ends with the scamsters Haridas Mundhra and Ramkrishna Dalmia; Tata, Birla, Wadia, Sarabhai, Lalbhai, Walchand Hirachand and others appear in between. It’s a fascinating slice of India’s business history.

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