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No beating about the bush.
Morgan Stanley Mutual Fund’s exit says a lot about India’s regulatory regime, as much as about the fund companies
Given the fanfare that marked the Morgan Stanley India Growth Fund’s arrival in India, in January 1994, its decision to throw in the towel exactly 20 years later, by selling out to HDFC Mutual Fund, ought to have attracted far more media discussion. That it has attracted less attention than Fidelity Mutual Fund’s exit, a couple of years ago, reflects that sorry state of India’s mutual fund industry. Of course, Morgan Stanley (MS) has itself to blame. It played on the ignorance of Indian investors to launch a whisper campaign in the ‘grey market’ that its units would soar like equity shares. People stood in long, serpentine queues to submit their applications and many even paid a premium for the forms.
Far from opening at a premium, the net asset value of the close-ended scheme did not touch the issue price for over a decade. Investor anger about Morgan Stanley was so high that this fund house had little prospect of launching another scheme to increase its AUMs (assets under management), for a long time.
Morgan Stanley’s cowboy ways were not restricted only to this scheme. When the economy opened up, MS first entered India though a 50:50 collaboration with SBI Mutual Fund (SBI MF) for an offshore fund. The two parted ways a little after executives of the State Bank of India (SBI) found that they were lulled into signing an agreement that gave veto powers to MS over investment decisions. The clause had been quietly slipped into the fine-print and was only discovered much later, when the first disagreement cropped up. The giant SBI discovered, to its shock, that it was the junior partner in the equal deal that they thought they had signed. After that, it was only a matter of time before they broke up. But Morgan Stanley executives, who were treated like movie stars by India’s political establishment and had easy access to India’s top bureaucrats and businessmen, were too cocky to learn any lessons. However, angry investors taught them a hard lesson that culminated in the sale of its business, exactly 20 years later.
It is debateable as to how much of the rupee depreciation gains on margins are likely to be retained by companies going forward, says Nomura
Nomura analysts are positive on the demand outlook for FY15F in the IT services sector in India. While top IT companies are big exporters, translation of US macro improvements into better US demand, especially in discretionary spend areas, would be keenly watched. This will reinforce Nomura’s expectations of FY15F being a better year than FY14F in terms of demand. This is the key observation by Nomura analysts in their research note on the IT services sector. The analysts believe Europe and IMS/BPO momentum should stay strong and better US growth should provide the kicker for the sector in FY15F.
According to Nomura, Tier-1 IT companies saw 250-300bps quarter-on-quarter benefit on margins in 2Q on account of rupee depreciation. Nomura analysts’ are skeptic on sustainable margins going forward due to possible reinvestment towards growth and passage of benefits to clients/employees. Nomura believes that this is an area where street upgrades can happen, as the margin gains in the last leg of rupee depreciation are likely to be stickier.
Based on well-performing IT companies, Nomura analysts are overweight the IT services sector on: 1) continuation of strong growth momentum in IMS/BPO/Europe; 2) macro improvements in US raise the possibility of higher discretionary spend and better growth in FY15F; and 3) reasonable stock valuations supported by strong EPS growth. HCL Technologies and Cognizant remain top Buys in the stock market; Nomura prefers TCS over Infosys within other Buys.
The performance analysis of TCS and Infosys with special remarks is given below:
According to Nomura, demand has slowed down quite substantially post a relatively strong festival season, however, margins for automakers would hold on due to recent price hikes
December auto sales were below expectations, especially for commercial vehicles (CVs), while the decline in car sales was somewhat arrested by Maruti Suzuki India Ltd. "As per our discussion with the companies and dealers, demand has slowed down quite substantially post a relatively strong festival season. However, margins would hold on due to recent price increase," said Nomura in a research report.
According to the report, car industry volumes declined by 5% in December marginally above Nomura's expectations of a 7-8% decline led by strong performance from Maruti Suzuki. The report said, "Maruti Suzuki's domestic volumes increased by about 6% while we were expecting a 4% decline. Strong growth in low-end petrol segment and D’zire led to the positive surprise, we believe. Maruti Suzuki's market share was around 55% in December 2013 – the highest in the past four years. This is quite positive especially considering increased competitive intensity from global original equipment manufacturers (OEMs)," Nomura added.
During December for other unlisted companies, Hyundai’s volumes were up 6%, while Honda’s volumes increased by about 30%, led by its Amaze variant. Other global OEMs like GM and Ford saw double-digit volume decline despite new launches.
Nomura said during the month, volumes in the medium and heavy CVs declined by about 25% as against its expectations of 20% decline. Volumes for Tata Motors declined by 22% while Ashok Leyland saw 26% decline in MHCV volumes and Eicher’s CV volumes fell by 34%, the report said.
Volumes in two wheeler increased marginally by 2%, led by Honda Motorcycle and Scooter India Pvt Ltd (HMSI). HMSI reported another strong set of numbers (up 36%) as its scooter volumes increased by 54% while bike volumes increased by 18%. During December Hero MotoCorp’s volumes declined by about 3% while Bajaj Auto had a weak month with domestic motorcycle volumes down around 30%. TVS’ volumes were flattish while Yamaha saw a strong 58% growth partly due to the lower base effect.
"Within our coverage, only Maruti Suzuki reported stronger-than-expected volumes. If the current trend continues, we see downside risks to our FY14F volume estimates for Bajaj Auto and CV OEMs – Ashok Leyland and Tata Motors. There could be some upside risks to our volumes estimates for Hero MotoCorp," Nomura said.