Saturday, April 1, 2017

Domestic Equity Investments Rs 63,000 crore per year (~$10B).

To give you a scale of this money, during 2016, the net investments that foreign institutional investors (FIIs) made in India was Rs 20,568 crore. In the year before that, this number was Rs 17,808 crore. Of course, earlier, there have been years with much higher FII investments, but at this point in time, domestic individual mutual fund investors far outweigh FIIs.

Note that unlike FII money, or even the episodic investments in equity by domestic individual investors, SIP investing is steady. Whether the market rises or falls, investors continue with their SIPs. And that's not all in terms of guaranteed inflows - there's the EPFO, too, and the NPS. The EPFO is now investing in equities at a rate of Rs 13,000 crore a year. NPS data is harder to come by because of the diversity of plans on offer but it should be at least Rs 2,000 crore. Obviously, both these are even steadier than SIPs and will also grow steadily. The increasing work force and salary increases will ensure that.

So we now have a base of steady domestic equity investments of a minimum of Rs 48,000 crore + Rs 13,000 crore + Rs 2,000 crore = Rs 63,000 crore per year. This is a historic turn of events for Indian stock markets, and it's something that affects equity investing profoundly.

Contrary to investors' first reaction, it turns out that large steady inflows may be a problem disguised as a blessing. It will take constant effort to do well in the coming years.


Saturday, March 11, 2017

ACIL Interview

Calcutta, March 5: Assam Company India Ltd is set to take full control of the Amguri oilfield in Assam after the Arbitral Tribunal Board gave an award in favour of the company in an ownership dispute with the government of India.

The board declared Assam Company the owner of the 60 per cent stake held at present by public sector ONGC on behalf of the government.

The Calcutta-based company already held 40 per cent in the discovered field in the Assam-Arakan basin.

Aditya Jajodia, managing director of the company, said the field might go back to production by the middle of this year.

“With the use of latest technology, we should be able to produce much higher than what we used to do before,” Jajodia told The Telegraph over telephone.

The Amguri field used to produce 1,600 barrels of oil per day in 2010 when it was in production.

According to the award of the board, the production sharing contract between the government and the company will be extended by five years and run up to 2033.

Moreover, a sum of $3.54 million, or Rs 23.61 crore, has been granted to Assam Company as damages/compensation along with an interest of 6 per cent per annum from March 2011 till the day of payment.

Arbitral proceedings worth Rs 1.25 crore will also be given to Assam Company.

Since 2006, Assam Company along with it’s earlier partner Canaro Resources Ltd had operated the Amguri field, which was a discovered and producing field. The production stopped since December 2010 after the operatorship and participating interest of Canadian oil explorer Canaro Resources was terminated by the government over a breach of contract.

Jajodia said the production sharing contract had stated that a non-defaulting party should have got the stake of the defaulting party but the government decided to auction the interest.

“Despite having rightful claim and fulfilling all the conditions as confirmed by the GoI and its nodal agency, the directorate general of hydrocarbon (DGH), ACIL (Assam Company) was continuously denied its legal and rightful claim to possess 60 per cent participating interest and operate the field to maintain the production of oil and gas,” a company official said.

Assam Company invoked the arbitration proceedings in this regard against the government in January 2012.

Jajodia declined to comment on the possibility of bringing in a fresh partner to further develop Amguri.

“The area has potential. Just look at the aggressive bidding that took place recently for the smaller marginal fields,” Jajodia pointed out.

The Assam Company stock rallied over 10 per cent after the award of the tribunal board. The stock, with a face value of Re 1, closed at Rs 7.86 on the BSE on Friday.


Friday, March 3, 2017

Deep Industries: FY17 revenue growth of 70%.

May 20, 2016, 01.31 PM

See revenue growth of 70% continuing in FY17: Deep Industries The promoters of the company have plans to increase the stake to about 75 percent, says Paras Savla, CMD of Deep Industries.

The newly secured ONGC gas dehydration business drove up the profitability and the topline growth of the company, said Paras Savla, CMD of Deep Industries . FY16 saw a revenue growth of 70 percent and Savla expects the trend to continue for both revenue and profit margins in FY17. With the current orderbook being around Rs 875 crore (80 percent from ONGC alone), the company awaits the results of more bids worth Rs 600 crore. The promoters of the company have plans to increase the stake to about 75 percent, he added. Below is the verbatim transcript of Paras Savla’s interview with CNBC-TV18's Reema Tendulkar.

Q: A very good quarter for you. Your topline has gone up by 142 percent year-on-year (Y-o-Y). Your profits are up by 184 percent. You have seen some improvement in your margins. Could you tell us was there any element of one off in the quarterly numbers and what is the sustainable revenue and profit growth going forward?

A: The main driving factor of the profitability and the topline going was the new gas dehydration business that we secured. That has brought immense growth in the company. With just a single contract last year our company got doubled. We currently have the order books on that account from ONGC. The margins as I said has been relatively quite good. We have been almost at a profit after tax (PAT) of almost around 24.07 percent. Q: What is the current order book? A: The current order book we have is around Rs 875 crore.

Q: Any new contracts that you are likely to win?

A: We have bidded quite a few projects. We are expecting the outcome of those projects to come in next month or so. So, with those expectations it is expected we get more orders on our hand.

Q: Could you give us how many contracts have you bid for, what is the total size of the contracts that you won. Just to get a sense, the future visibility of the company?

A: If you see the last year standalone the orders that we received from ONGC were for two gas dehydration projects and the drilling rigs. So, all these orders combined two drilling rigs and the dehydration units were closely around Rs 650 crore odd. So, we had to get some of these projects - I am unable to guide the numbers going forward but the numbers would also be in similar lines.

Q: The promoters have been hiking stake in the company. My colleague has just highlighted how in the last three years you have seen the promoter holding go up from nearly 60 percent up to over 70 percent as of the March 2016 shareholding. Do the promoters want to increase the stake up to 75 percent, do they have plans to keep the company listed at all, explain what the promoters plan is because they have been consistently increasing their stake?

A: We have been increasing our stake. It is very hard to comment at this point what we would be doing going forward but yes, we do have plans to increase our stake because we are very confident of the business we have. Q: But increase your stake only up to 75 percent? You can't go beyond that? A: We can't go beyond, yes.

Q: So, you will go up to 75 percent?

A: Yes.

Q: Will this revenue run rate that you have enjoyed in FY16 be maintained because you have seen your revenues go up by nearly 70 percent last year?

A: Looking at the order book that we have it is quite possible that the growth would be on similar lines that we expect even this year to go ahead.

Q: What about margins, what would be the sustainable margins?

A: Margins would be in the similar lines because it is services business, we have a straight line revenue and expenses coming in. So, we think the margins and percent of profits would be on similar lines of the topline that we get for the current financial year.

Q: You told us your order book is Rs 875 crore. What percent of that comes in from ONGC?

A: Around 80 percent of that comes from ONGC.

Q: And is ONGC is a long term contract, is there risk of the contract coming to an end. Because you have got clearly a lot of client concentration risk?
A: The biggest contract that we have received last year were the 10 years, three years and five years. So, the contract that we have are long term contract. So, we have very few contracts which are on getting expired in this financial year. But they are very few numbers. The largest content is of gas dehydration business and drilling rigs.

Q: Even the new contracts that you bid for right now, are they from ONGC or they are from other operators?
A: They are from ONGC and other oil and gas companies as well. They are from public sector undertaking (PSU) as well as private oil and gas players.

Read more at:

Saturday, May 30, 2015

Lanco Infratech - Puts hold to Divestment.

Loss-making Lanco Infratech, which has been in the market to sell assets across businesses to reduce debt, has decided to put on hold all divestment plans in India by another two years on hopes of better valuation as it believes the business environment is improving. 

The company has been on the lookout for investors for its roads and power projects and has also been in talks for selling its land bank to raise funds to pare debt. But now, it sees signs of recovery in the economy and hopes that valuations of these assets will improve by 2017, when it can consider divestment. 

"We were looking for divestment opportunities but now we don't want to sell any Indian asset for another two years. We feel that problems in power sector are getting resolved and there would be a pick-up in road toll collection and this will improve valuations of our projects," Chief Operating Officer T Adi Babu, told ET. 

The company will go ahead with its plans to sell stake in its Australian coal asset Griffin. "We are in talks with a strategic partner and would like to sell not more than one-third of our stake. Coal prices have fallen almost 40-50% from their peak levels, so we don't want to divest more at these valuations," he said. 

Lanco has been reeling under huge debts, mounting losses as its power projects were running below full capacity due to lack of fuel, it has huge outstandings with state-owned discoms, and in its road projects too, the company had seen muted toll collection. 

Last month, Lanco Infratech completed the sale of its biggest power plant, Udupi Power Plant, to Adani PowerBSE 0.65 % in a deal which pegs the enterprise value of the Udupi Power plant at Rs 6,300 crore, making it the biggest in the power sector. With the sale of this projects, the company's debt stands at Rs 34,000 crore. 

"We now have gas available to run one unit of our Kondapalli power plant. We are focusing on getting all power projects on stream over the next two years so that we could go for an initial public offer for our power holding company," Adi Babu said. 

Lanco Infratech is one of the companies that have secured gas supply for its stranded 1,108-mw Kondapalli plant under the government's initiative to make cheap imported R-LNG available to gas-based projects so that they can at least run at 35% capacity. 

Adi Babu said that the company hopes to complete the stake sale in Griffin soon so that it has enough liquidity to take forward its plans for the mines. 

In 2011, Lanco Infra acquired the Griffin Coal in Collie, West Australia, for Aus $750 million. Although the mine's operations and financials were in poor shape, Lanco believed that with an investment of Aus $1 billion, it could turn around the business and expand production from the mine which has reserves of 1.1 billion tonnes. 


Sunday, April 12, 2015

GMR Infra - Equity Dilution in Progress.

GMR Infrastructure Ltd is making a considerable progress in shedding debt. As the company completes a series of fund-raising activities, its consolidated gross debt is estimated to fall from Rs.45,800 crore in September last year to less than Rs.40,000 crore in two years.

One is the Rs.1,400 crore rights issue, which is under way right now. The second is conversion of preference shares worth Rs.1,137 crore in September this year. The third is the conversion of 18 million warrants allotted to promoters by February 2016.

The company does not have large capital expenditure plans in the near term. It plans to use most of the new funds to repay debt. If the conversions into equity shares take place as scheduled, there will be a commensurate rise in GMR Infrastructure’s net worth, easing the overall debt to equity ratio, which in September 2014 stood at 3.7. Apart from this, it plans to pursue asset divestment and monetization efforts.

In the first nine months of 2014-15, the company’s finance costs exceeded its operating profit (Ebitda, or earnings before interest, taxes, depreciation and amortization) by Rs.730 crore, resulting in a loss. If these measures actually lead to debt reduction, there is a good chance that financial pressure will ease.

Markets, however, have given a mixed reaction. As GMR Infrastructure announced the rights issue, the stock lost 11% in March. One reason is the 15% discount it offered in the issue.

The other is the fear that power assets will remain a sticky problem. The segment is losing money for some time now. Despite the recent positive developments, it is not yet clear when the troubled assets will turn around.

One-fourth, or 623 megawattS (MW), of its current operating power capacity is idle. If one includes the 768MW GMR Rajahmundry Energy Ltd plant that is waiting for fuel to start operations, the non-operating power capacity can be substantially higher.

The new scheme from the government can light up these plants. It, however, supports only 30% of the capacity and is not a long-term solution. Also, companies are not allowed to provide return on equity, which means value accretion from these plants can be low or limited for now.

The other grey area is the 1,370MW GMR Chhattisgarh Power Project. The project—which has gained coal blocks in the recent auctions—is able to tie up 45% of the capacity through power purchase agreements (PPAs) till now.

Government rules stipulate that a company sell the majority (85%) of the power generated from bagged coalfields through long- or medium-term PPAs. With state electricity boards slow in clinching the pacts, GMR Infrastructure can face a challenge in finding a solution in the medium term. “The only problem with GMR is that it has to quickly hunt for PPAs as only 15% of the coal allotted can be used for merchant capacity and the balance if not used under PPA will have to be sold at a loss to Coal India,” Antique Stock Broking Ltd said in a 17 March note.

Overall, it is good that GMR Infrastructure is deleveraging its balance sheet. But shareholders may see notable value when the power segment stops making losses or is on a definitive revival path.


Sunday, March 22, 2015

Shale Oil - Production Numbers.

The main reason I characterize shale oil production as a Ponzi scheme is because of the fast decay of shale oil wells as compared to virtually all other oil production. One chart is enough to give a good indication of the progress and problems of oil from shale:

Here we have a compilation by the EIA for production of the average well in the Eagle Ford shale, but it serves well as a model for shale oil in general. Two very interesting points should be immediately clear:

1. The rate at which oil comes out of freshly drilled wells has greatly improved in the last five years since 2009.

2. The amount of oil that shale wells deliver is substantially front-loaded. More than 50% of all the oil you will see from a shale well is recovered in the first two years and the greatest proportion of that will appear in the first six months.

Ultimately, and far sooner than most analysts believe, U.S. shale production will consist of ever-less productive wells that cost more to drill, take longer to pay for themselves and generate less oil. The EIA believes that nothing like that will occur for at least the next 25 years. I think that the peak of U.S. shale potential will be reached in the next 10 years, if it hasn't been already -- and that is when the pyramid will begin to fall apart.

Meanwhile, oil companies have to scramble to generate ever more investment to drill ever less productive wells, just to keep up with production targets. That ever ramping chase of capital just to stay even sounds more than a bit familiar. Shale oil does share many of the characteristics of a Ponzi scheme.


Friday, January 23, 2015

Stay away from Suzlon for next 1-1.5 years.

Suzlon, A classic case of why you need to be a Bond Holder.

Due to the the FCCB and loan pressure, Suzlon was forced to sell of Senvion Aquisition that they made. Even after all the goodies being presented in the article below, the Suzlon stock will remain around Rs 15 for around 1-2 year, until all the foreign currency convertible bonds valued at Rs 3,000 crore (Rs 30 billion) is converted into equity next year.

Stay away from Suzlon for next 1-1.5 years.

Suzlon group chairman Tulsi Tanti outlined the company’s plans and debt-reduction strategy in a conference call from Davos.

Edited excerpts:

How will the deal help reduce Suzlon’s debt? When will the company turn profitable?

Suzlon has a total debt of Rs 16,500 crore (Rs 165 billion).

We are raising about Rs 7,200 crore (Rs 72 billion) through sale of Senvion.

About Rs 6,000 crore (Rs 60 billion) will be used to repay loans and Rs 1,200 crore (Rs 12 billion) will go to fund operations.

We have issued foreign currency convertible bonds valued at Rs 3,000 crore (Rs 30 billion) and we hope this will be converted into equity next year.

The balance Rs 7,500 crore (Rs 75 billion) debt includes low interest dollar denominated debt worth Rs 4,000 crore and Rs 3,500-crore (Rs 35-billion) worth working capital loans.

There will be no principal payments till 2019.

By the next financial year, our interest costs will reduce 50 per cent to Rs 800 crore or Rs 8 billion (from Rs 1,600 crore or Rs 16 billion now).

Suzlon will be making profit in the next financial year.

Our interest cost will reduce, sales volume will go up.

Our break-even level has come down and we expect the cost structure to improve further.

The deal valuation is in line with current market estimates.

This is a European asset and I believe we got a reasonable valuation.

We are happy with it. When we acquired Senvion, one Euro was equal to Rs 60; now it is Rs 72.

There is an appreciation of 20 per cent in the exchange rate.

We purchased Senvion for 1.4 billion Euros and now we get about 1.1 billion Euros (1 billion Euro in cash sale, an additional 50 million Euros based on the company meeting certain performance criteria and technology for offshore wind farms valued at about 650 million Euros).

I do not see it as a major loss for the company.

What will be the key focus area of Suzlon now?

Our focus will be on India, the US and other emerging markets including China, Brazil, South Africa, Turkey and Mexico.

We will focus on all high growth markets and there will be no restriction on us to enter any other markets.

The Indian government wants to add 10,000 MW of wind capacity each year.

We have not been able to tap opportunities earlier because of liquidity crunch and now we will be able to address it.

We have 2500 customers in India and abroad and we will address their requirements and grow our market share.

The deal helps us to strengthen our balance sheet. It is a win win for us. We have manufacturing and project execution capabilities and we are confident we will be able to deliver without making much capital expenditure.

Will Suzlon sell its non-core assets. The company also has plans for solar business?

We planning to put plants in Rajasthan, Andhra Pradesh and will sell some of the production capacity which is not very useful.

We have developed competencies in renewable energy and we want to leverage it for solar business.

We will introduce hybrid solar-wind projects.


Monday, March 31, 2014

Yuan Internationalization in Progress.

(Reuters) - Britain and China signed an agreement to set up a clearing service for renminbi trading in London on Monday, days after Germany clinched a similar deal in the race to capture a share of the fast-growing Chinese foreign exchange market.
Britain said last week it was on course to be the first country outside Asia to set up a clearing service with China. But that was before a deal on Friday which made Frankfurt the first centre of such payments in Europe.
China is a focus of the British government as it tries to boost the country's exports, including those from its powerful financial services industry.
Analysts say London - despite the competition from Frankfurt and other European centres such as Luxembourg and Paris - looks best placed to become Europe's main offshore yuancentre given its role as the world's biggest foreign exchange hub.
Spencer Lake, global head of capital financing at HSBC, said Frankfurt pipping London to a deal would soon be forgotten.
"London is already recognised, along with New York, as one of the biggest financial centres globally. It has made a lot of progress positioning itself as a renminbi hub. Frankfurt and Paris are following suit," Lake said.
London's ambitions got a boost last year when China gave British investors the right to buy up to 80 billion yuan of mainland stocksbonds, funds and money market instruments directly using its currency.
But development of a yuan bond market has been slower to take hold, and more bondshave been listed in Luxembourg than London.
The renminbi is jostling with the Swiss franc as the world's seventh most-used currency for payments, according to global transactions organisation SWIFT.
The market in "dim sum" bonds, designed to be traded outside China, is growing fast and is likely to exceed 750 billion yuan ($120.62 billion) by the end of 2014, according to Standard Chartered.
Analysts say the potential for growth is huge, given how tightly China has controlled the market so far.
Hong Kong is by far the largest centre for offshore yuan deposits, according to consultancy PwC. Deposits in Taiwan, Singapore and Macau also dwarf those in Luxembourg, Paris or London. New York lags far behind Europe.
HSBC's Lake estimated the proportion of Chinese trade conducted in renminbi will grow to 30 percent in the next three to five years, from 18 per cent at present.
The Bank of England said the institution that will act as the clearing bank in London will be named "in due course."

"The move towards greater internationalisation of the renminbi by the Chinese authorities is one of great importance that the Bank strongly supports," BoE Deputy Governor Jon Cunliffe said in a statement. ($1 = 6.2122 Chinese Yuan) (Additional reporting by Steve Slater and Carolyn Cohn, Editing by William Schomberg and Angus MacSwan)

Saturday, January 18, 2014

Why the West sells gold and China buys it.

A number of readers and bloggers have recently suggested there must be collusion between America and China over the transfer of physical gold (COMEX:GCG14) from Western capital markets. They assume that governments know what they are doing, so there is a bigger game afoot of which we are unaware.
The truth is that China and Western capital markets view gold very differently. You will hardly find anyone in the London Bullion Market who regards gold as money; and for them if gold is no longer money Chinese demand for it is not a monetary issue. Instead it threatens the bullion banks' business that a useful financial asset, capable of earning many times its physical value in fees, commissions, turns and interest, is being leeched out of the market by Chinese aunties.
It is clear that nearly all Western central bankers share this view, believing that gold will never play a monetary role again. We also know that Marxist-educated government advisers in China have been sheltered from the Keynesians' antipathy against gold and instead have been brought up on Marx's belief that Western capitalism will eventually destroy itself. It therefore follows they believe that western paper currencies will probably be destroyed as well.
Otherwise we can only speculate, but the following conclusions about why the Chinese are accumulating gold seem to make most sense:
There is a fundamental view in China that gold is ultimately money, so it is always worth accumulating by selling potentially worthless foreign currency.
• Encouraging her citizens to accumulate gold achieves two objectives: If they have real wealth to protect it makes them potentially less rebellious in difficult times; and secondly private buying of gold reduces the trade surplus, which in turn reduces the accumulation of foreign currency reserves.
• Gold is generally accepted as superior money throughout Asia, which is China's long-term regional interest.
• The Chinese Government (and/or the Communist Party) is buying gold for itself. Assumptions it will use gold to beef up the renminbi makes little practical sense, beyond perhaps some window-dressing for currency credibility. Instead she appears to be accumulating gold for unstated strategic reasons.
Keeping the West short of gold gives China huge leverage in today's currency cold war, and even more if the currency war heats up.
The idea that America is colluding with China in the gold market must therefore be nonsense. The truth has everything to do with different philosophies about gold.
Advanced western economies have survived without using gold as money for a considerable time. Currency and credit inflation have created a modern finance industry wholly dependent on fiat paper and everyone in mainstream finance is conditioned to believe in the profitable world of fiat currencies. They are therefore predisposed to dismiss gold as never being money again.
That is why the West is less worried about losing physical gold than it should be, and China is glad of the opportunity to buy it. And she can be expected to continue to do so whatever the price, because she knows that in the final analysis gold is the only true money.


Tuesday, January 7, 2014

QE Ending is Good.

Every time the stock market falls, I read that it’s because investors fear higher interest rates. This is just such rot. Why would they fear rising long-term rates? Higher rates are supply-side monetary stimulus – which is just what the world needs now, after five years of the evil twin, demand-side monetary stimulus.
So what’s the difference and why does it matter?

It’s all about how central banks manipulate money supply – the fuel for economic growth. Central banks create the monetary base – notes, coins and reserves. But banks create the bulk of M4 money supply. Through the fractional reserve banking model, they lend their reserves many times over, and this loan growth is what drives broad money growth.
So if you want more lending, you either you make banks more eager to lend – boost supply – or you make borrowers more eager to borrow – boost demand.

Throughout modern history, central banks have used supply-side policy. They’ve adjusted reserve requirements and nudged overnight lending rates to make banks more or less eager to lend as need be. Since 2008, they’ve used demand-side policy. They’ve bought huge amounts of long-term gilts and US treasuries to push down long-term rates and make folks more eager to borrow. The infamous quantitative easing.

The problem is that supply-side factors matter more than demand-side. Don’t believe it? Imagine long rates were zero. Everyone in the world would want to borrow. But banks wouldn’t lend a penny, ever. Low long-term rates might make borrowers more eager but make banks less so.

Banks’ core business is borrowing from depositors at short-term (lower) rates and lending at long-term (higher) rates. The spread is their profit. When short rates are fixed near zero and long rates are held down, profits shrink and banks don’t lend. They’re not charities.
This is why QE fails. Banks won’t take risk for no reward. When yield spreads are as small as they have been, banks lend only to the most solvent borrowers. Hence why small business lending spent the whole of British QE in free fall and M4 fell two straight years. When yield spreads widen, the risk/reward trade-off improves, and banks are keener to lend to iffier prospects.

Borrowers are still keen, too. Pretend you want a home and have good credit, so you can get a 10-year fixed-rate mortgage for 4.5 per cent. That home is £240,000 – your monthly principal and interest payment is £2,487. If rates rise half a point, your monthly payment rises by £58. Do you back off? No! You love that house! Besides, cost is just one variable. Is your income good? Your job? Do you expect your life to improve or worsen?

Or pretend you run a high street shop. You need a loan for a long-term project. Your return on investment is 7 per cent, and you have good credit, so you can borrow at 5 per cent, or 3 per cent post-tax.

If rates rise to 3.5 per cent, your profit is still 50 per cent (3.5 divided by 7) if revenues continue. So you look forward. Do you have confidence in the economy? Expect strong demand? Are your order books already bursting? If so, you’ll still take the loan. If not, you won’t and probably wouldn’t have done so at lower rates either.

Borrowers like low rates, but most don’t actually need them. You know this – UK borrowing costs have risen all year, but so has loan demand, according to the Bank of England’s credit conditions survey. Demand now is stronger than during the UK’s QE nightmare! Growth is speeding on all fronts, so businesses and homebuyers are more confident, more eager to borrow. With profits up, banks are more eager to lend. M4 is finally growing apace.

Expect the same in the US when their idiotic QE ends. QE hurt the US, just like it did Britain. Loan growth slowed and M4 is up only 2.8 per cent since QE began – and it fell for a year and a half along the way. Banks lent less, created less money. The economy had less fuel. That it grew anyway is a marvel.

The fog is already clearing. Markets are discounting QE’s end. At the end of May, the yield on 10-year Treasuries was 1.68 per cent. By the end of September, that had risen to 2.54 per cent. Bank lending rates rose too. Yet household borrowing rose 1.1 per cent during the third quarter – the first rise this year. Consumers knew it was OK to borrow even as rates rose. Businesses did too – business lending grew 1.2 per cent. M4 is growing faster.

Once QE stops, the party will really start. Wider spreads will make banks more eager. Long shutout business owners will finally get what they need – money to invest in new technology, equipment, R&D, facilities, inventory and employees. Five years of pent-up demand will be unleashed to work its magic throughout the world’s biggest economy.
And the best part? No one is expecting it! Everyone thinks higher rates will cause lending to crumble and GDP to go into free fall. They’re in for a colossal shock – just what stocks love.

Wednesday, December 18, 2013

Government elected in May 2014 will have just 90 days to get its act right.

With politics in election mode, there is uncertainty over short-term economic performance. But there is no guarantee we will have policy clarity even after the elections in April-May 2014. 

Even assuming we have a pro-growth, pro-reform government, the window of opportunity available to it will be open for a very short time: just 90 days. This is because governments in India have to be in election mode almost every other year. Remember UPA-2, which was re-elected with a better mandate in 2009? Within one year, it had lost its footing, and has never recovered from that. 

The government elected in May 2014 will have just 90 days to get its act right because the rating agencies will be holding a gun to its head. And it will have to act fast despite knowing that the outgoing UPA has booby-trapped the economy by legislating all kinds of bad laws. 

Both Moody’s and Standard & Poors (S&P) have warned of a rating downgrade once the next government comes to power. 

Moody's gave India a warning two weeks ago that if growth does not revive, inflation does not come down, and the fiscal deficit is not contained, India's sovereign credit rating will be downgraded. More specifically, it warned that the government should not be adopting policies that harm fiscal prospects or make banks run up more bad loans. 

Earlier, S&P said that it was holding back on a likely downgrade to see if the next government was able to come to grips with the country's economic problems. If it does not, India’s rating will move below BBB- the lowest investment-grade rating, below which Indian borrowings will be treated as junk. 

When a country's investment rating falls below BBB-, large foreign pension and mutual funds cannot invest in these markets, and lenders will start charging more from Indian borrowers. This will raise borrowing costs for everyone, and slow down growth further. What this boils down to is this: the next government will have to behave as though it is 1991 and act very fast. In its very first budget it will have to signal major economic liberalisation and big policy changes. This could mean freeing oil, gas and coal prices, opening up foreign investment in more areas, selling off majority stakes in government companies, and reducing government rules and regulations, among other things. If this is not done, a rating downgrade will be like a noose around the next government’s neck. 

Any government, whether it is one led by the BJP, the Congress or even a regional party, has to do everything in its first budget - which can be expected around July 2014. Otherwise, it will miss the bus. This is because even before it settles down, it will be up against the state assembly election cycle, making unpopular decisions impossible to implement. 

For example, soon after the Lok Sabha elections will come the Maharashtra assembly elections in October, where the BJP will find it difficult to win if the Thackeray cousins – Raj and Uddhav – are going to be fighting one another. The Jharkhand elections are also due in December 2014. In 2015, there will be the Bihar elections, where the BJP will be trying to oust Nitish Kumar. And so on. If the next government does not signal a dramatic enough change in economic policies in its first 90 days, the window of opportunity will close. 

No government today can hope to have a honeymoon period of more than six months to one year when the electorate will forgive tough decisions. This is why UPA-2 faced enormous problems after wasting its entire first year (2009-10) doing nothing. After that one scam after another was unearthed, and soon the government lost control of the economic agenda. 

Even in the 1990s, when PV Narasimha Rao and Manmohan Singh earned their reputations as reformers, the 1992 budget signalled the slowing of reforms. And after the Congress party faced state-level electoral reverses in 1993, reforms were brushed under the carpet. The moral of the story is simple: given India’s regular appointment with state-level elections, new governments at the centre have very little time to perform. If the big decisions are not taken in 90 days after a new government is formed, it will face the same troubles as UPA-2. Speed is the only way to reform and economic rejuvenation. With every passing year, public patience is shortening. Honeymoon periods for governments are shortening. 


Sunday, December 15, 2013

Circling back to silver fundamentals.

Beyond the typical underlying changes in money supply there are very important elements of demand that continue to push the price of physical silver higher and higher. This is despite the fact that silver has been money for much longer then gold.

One element is the elasticity of demand for silver, particularly in the manufacturing of electronics. Silver is the best conductor of electricity known to man and even at a current prices, it is very inexpensive for use in consumer electronics.

Silver Inelasticity

Silver cannot and will not be replaced by the industrial sector as a conductor of electricity for two reasons: 1) it is relatively inexpensive, and 2) it is the best product for the job.

When a computer manufacturer begins to source components to build its consumer products, the company buys tons of glass, pounds of silicon, and tiny amounts of silver.

When you buy a computer that costs $500-$1,000, it contains, at most, 1 gram of silver. Most computers contain fractions of that amount, for a maximum cost of $.60.

Even if silver were to explode in price from $18 per ounce to $180 per ounce (which is a dramatic change) the price of the silver component in a computer would grow from $.60 to $6.

Thus, even after silver explodes in price, the computer manufacturers will still be very much willing to use silver since $6 on a $500 computer is just 1.2% of the price.

Technological Improvements

Silver's demand can easily be contrasted with the emphasis on technology during the past half century.

Prior to World War II, very few homes owned electronic devices and silver's industrial use was limited to only photograph development.

In contrast, the post-war family owned microwaves, TVs, toasters and other appliances including washer and dryers – which all contain silver.

And even in the past decade, the average consumption of silver by the average person has grown.

Today, each person owns a cellular phone, TV, computer, monitor, printer, router and a myriad of computing peripherals that all contain silver.

It is without question that demand for silver as an industrial metal has exploded with technological achievements - but the biggest use for silver is just now being uncovered.

Government Stockpiling

Many argue that gold is held by government and central banks by proxy, as the line between the two becomes evermore foggy. Therefore, gold is the better monetary asset. Central banks and governments don't stockpile silver - mainly because there is not enough to accumulate. More importantly, silver isn’t stockpiled because the resulting price adjustment could break the financial system.

What is fascinating is that, even in the realm of vast money creation and decades of dangerous policy that threaten the world financial system and underlying economy, central banks are still held to such a high standard. In effect, they are deemed immutable. The fact is that central banks fail right alongside the currencies they create from nothing.

Today's biggest technological feats are all painting a pretty picture for silver. They also serve to aid in the establishment of a much higher market price in the future - with or without monetary inflation or the stockpiling of central banking gone awry.


Saturday, December 14, 2013

Bungalows versus flats.

Assuming that one has the financial wherewithal for this to be an option at all, the question of whether to invest in a bungalow or a flat is indeed pertinent. As always, location plays an important role. 

In an established area of a large city like Pune, a bungalow costs a lot more than a flat. This means that the rental market for such a property shrinks proportionately. However, the income segment that remains can definitely afford to rent such a unit, so demand would remain more or less consistent. Moreover, bungalows in established locations have a high chance of attracting long-term corporate leases. 

Bungalows Established Vs. Upcoming Locations 

Investing in a bungalow in an upcoming location usually involves a lower (though still sizeable) capital investment. The rental yield is lower, but the size of the rental market for such a property increases proportionately. 

Investment in a bungalow in such a location can make a lot of sense if the area, despite being non-prime, is still well-connected to some of the city’s major economic drivers, such the airport or employment hubs such as IT parks and manufacturing zones. One major advantage of investing in a bungalow in an upcoming location is that it will gain steadily in value as the area’s profiling in terms of social and civic infrastructure improves. However, regardless of location, the maintenance costs and property taxes involved in a bungalow are a lot higher than those of flats. This long-term financial implication must necessarily be factored while investment in a bungalow is considered. 

Share Of Land 

If we set the considerations of location, ticket size and potential rental yield aside, the primary advantage of investing in a bungalow rather than a flat is that one secures more land. In any location, it is the value of land which determines the value of built-up property. Unlike a flat, a bungalow and its compound lock in a significant piece of tangible land. This fact gives a bungalow a higher value in real estate terms. Also, the investor must have a suitably long investment horizon and not be looking for short-term returns. 

Investing in flats 

Flats offer a slightly different value proposition than stand-alone units such as bungalows. In the first place, the share of land that is legally allotted to each flat in a project is much lower than that of a bungalow. The primary value of a flat lies in the space that it occupies, which is why larger configurations such as 3 and 4 BHK attract higher rents. As before, location will dictate the ticket size as well as rental income. The rental market for flats is much larger than that of bungalows, so finding tenants is easier even if one factors in a certain degree of tenant churn. However, one must ensure that one is investing in a flat whose size dovetails with the median income profile of the location. The highest demand will always be from the locality itself, and from people working in offices and industries close to the area. Buying a flat whose size puts it out of the largest local demand profile can be a self-defeating and costly mistake. Generally, the 1, 2 and 2.5 BHK configurations are the safest investment bet in any area, since the rental demand for them is always the highest. With ultra-premium flats as a logical exception, maintenance and property tax for apartments is significantly lower than for bungalows. 

Flats Established Vs. Upcoming Locations 

In terms of location, investors into flats must consider all the pertinent factors carefully. Flats in established locations are costlier and involve a higher capital expense. They will attract rental interest from a segment of higher economic profile. However, it must be borne in mind that capital appreciation of flats in centrally located projects is slower than in many upcoming areas. This is because high-end locations tend to hit an appreciation plateau, which can persist for long periods. Upcoming locations appreciate faster because their market viability is being enhanced with increasing accessibility as well as social and civic infrastructure. They attract more people, since any city’s growing population tends to move into areas which are affordable. For that reason, emerging locations also tend to attract a lot of commercial establishments which further boosts the residential segment. To ensure that growth factors such as assured infrastructure and social amenities are indeed locked into place, investors into apartments should ensure that they choose projects that fall within the local municipal limits. If a project falls outside the city's corporation limits, there is no guarantee that the location will receive proper infrastructure such as roads and regular water and electricity supply. Without such infrastructure, a location does not appreciate thereby rendering it unsuitable for smart property investment.


Saturday, November 23, 2013

China may do a lot Better.

There is one news which appeared today - Brokerage house UBS has cut its rating on India to "neutral" from "overweight and while India rating went down, it upgraded China to "overweight" on the bet that the dragon country is due for a re-rating.

And therein lay the entire story for India. Today, the Indian markets are celebrating China"s reforms but little heed is being paid to the direct repercussion to India or this downgrade by UBS, which could be a harbinger of things to come. A little background first…

Well, in 1980"s China unleashed the biggest economic reform, changing the entire economy of the world and the perception of China in the entire world. It's party had then chalked out reforms to make China the factory floor of the globe, which is what China is essentially today. And with things slowing down , China is working out a slew of new reforms, just like in 1980, which many say could once again change the entire dynamics of world economics.  In 1980, the theme of the reform was investment led and this time around, it is consumption led. 

The Communist Party plenum, known as the Third plenum, even before it could officially release the data, news was "leaked" out, a "first of sorts" for China too. 

The news leak was about the one-child policy, which now stands relaxed - couples can have two children if one the parents is an only child. This relaxation is not because China has got a grip on its population but because it now has an aging population and if needs to sustain this growth momentum, it needs to have a much younger or productive population. 

The Third plenum also relaxed the hukou system or the household registration system which in turn in expected to increase mobility of labor and encourage further urbanization. Under the hokou system, those migrating to cities for work, had to give up their various welfare schemes and that prevented many from migrating. Thus relaxation will mean more movement of labor. 

Being a communist country, all land in China is owned by the Govt and the farmer has the right to only work on the soil but there is news that this has been changed wherein farmers will now be allowed to own, use, transfer and also use their contracted land as collateral or guarantee. This is a landmark reform as it will indeed mean more cash now in the hands of farmers and this will lead to a consumption led growth story. Housing prices are also expected to get affected as demand for homes will now go up as urbanization takes wings. Yes, land reform will be the biggest and most significant reform, which will change the country from being merely a factory to users too. 

In the financial sector, Chinese Govt plays the main leading role but the Third Plenum hopes to relax that too. It has announced sweeping changes in the financial sector, like a deposit insurance system by early 2014, privatizing the banking sector, reduce controls on pricing of water, electricity and natural resources. Most important and which could change the entire capital markets there - revamping the system for Initial Public Offerings (IPOs), which has drawn a lot of flak from foreign investors and has been dead for over a year now. 

Now all these are ideal and wonderful reforms, taking China towards a more market driven economy. This is not going to happen overnight, it will be long drawn plan but nevertheless, it"s great news for the Chinese. 

And that is where India needs to watch out. In the emerging markets, foreign brokerage houses will now flock to China as the country is getting more organized and opened up. Most of the reforms have come in areas where foreign investors have always complained about and citied as one of the reasons why they are queasy about going all out into China. But with these reforms, China playing as per the rules of the world, we could see a lot of money now going to China. On the other hand, India and its economy will stay paralyzed for almost 8-10 months, till elections do and appointment of a new Govt. So when the choice is between one country which is improving and promises more growth and the other which is in a limbo, with dirty politics and bad economic taking center stage, do the foreign investors really have any debate over choice here? 

Yes, we could say that FIIs will now start looking anew at emerging markets and when money gets allocated to China, some will come to India too. But is that what we will get – leftover crumbs? Indeed emerging markets will look anew post these Chinese reforms and India continues the way it is presently, the "I" in BRIC might very soon get replaced.  Thus India now needs to worry more when QE easing happens. 

FIIs are not faithful husbands; "till death do us apart" types. They are rich Casanovas and whichever market is more attractive, they will go and park themselves there. It is only Ram Leela and no Amar Prem. So does India look attractive today? 

Saturday, November 2, 2013

Indian Consumers - Packing Matters!!

Nivedita Jayaram Pawar
"My family was flabbergasted when I told them I wanted to sell vada paav with my MBA degree," laughs Dheeraj Gupta. But his dream paid off and it's the young entrepreneur who is laughing all the way to the bank. Gupta is the owner of the Jumboking brand of vada paav in India and is now on the verge of opening his 54th outlet.
But becoming the 'king' of vada paav wasn't a cake walk. Hailing from a business family, it was a foregone conclusion that Gupta would become a businessman. Soon after he acquired an MBA degree from a Pune institute, he decided to brand Indian mithai overseas. Unfortunately, the idea didn't catch on and Gupta learnt an expensive lesson.
Big Bite
Then, he ran into a franchisee of Burger King while on a trip to London and he figured he would take another bite out of the food business. "I was reading up on entrepreneurship and was particularly inspired by a book on the founder of McDonald's," recalls Mumbai-based Gupta.
So he decided to promote the vada paav as the Indian equivalent of the burger and set about researching the market. "Mumbai and Thane consume over 2 million vada paavs every day. At a market price of Rs 10 apiece, that's a market of over Rs 700 crore per annum in these two cities alone. It is a very large but unorganised market, and this is where branding the vada paav as 'Jumboking' came in," Gupta reveals. He figured that branding the product and serving it in a hygienic setting, with a transparent kitchen and stainless steel equipment would do the trick. It didn't.
With Rs 2 lakh borrowed from his father and a spot near Malad railway station which belonged to the family, Gupta took the plunge in 2001. He operated the outlet with his wife and four employees, but in the first six months, experienced a turnover of only Rs 3,000-4,000 a day. "It was very frustrating as we were unable to convince customers that we were hygienic and different," remembers Gupta.
Second Time Lucky
Not one to give up, he decided to have a second go at the vada paav -- this time serving it in a wrapper just like the McDonald's burger it was modelled after. Sales doubled, and Gupta launched his second store in Malad after 18 months and the third one in Andheri. The fourth store became Jumboking's first franchised store and, ever since, the brand has followed the franchise model. Next, Gupta infused further innovations, with automation, wrapping, using round bread, a bigger and flatter vada instead of the traditional round one, and a variety of flavours.
Revenue Model
Jumboking has 53 stores in eight cities including some metros and smaller cities. The company runs a 100-per cent franchise system. Products across all outlets are standardised as as they are manufactured in a central kitchen and transported to the outlets, where the vada paav is assembled using standardised equipment.
Jumboking is essentially a vada paav brand and the product and its variations contribute 80 per cent to the total sales. The balance comes from beverages like colas and lassi. The average spend at a Jumboking store is Rs 25-30 per customer.

Saturday, October 12, 2013

State govt. ignores MPNG on oil rules.

Not withstanding the directive of the Ministry of Petroleum and Natural Gas (MPNG) to the government of Nagaland, to rescind/withdraw the Nagaland Petroleum and Natural Gas Rules 2012; the NPF-led DAN government has decided to proceed with signing Memorandum of Understanding (MoU) with five firms short listed.

It may be recalled that the Union Ministry of Petroleum and Natural Gas, had on June 8,2013 written to the state government to rescind the NPNG Rules 2012 as Article 371(A) did not provide powers to the state assembly to frame its own laws “ to regular and develop mineral oil”.

It may be noted that on March 10, 2010 union minister of state for petroleum and natural gas R.P.N. Singh asserted in the Lok Sabha that Nagaland government has the power to frame its own laws on the matter under Article 371(A).

The state assembly passed a resolution  on July 26, 2010  to Article 371(A), Clause VII-(iv) wherein “ownership of land and its resources” would include minerals, petroleum and natural gas etc.

(According to sources, the resolutions  of the state assembly on Article 371(A) required the nod or assent of the President of India to become constitutionally valid.) 

Subsequently, following the cabinet resolution on September 13,2012, the state government introduced The Nagaland Petroleum and Natural Gas Regulations,2012 which was passed by the state assembly on September 22,2012.

The state then floated tender for Expression of Interest (EoI) for oil operations in Nagaland under the Nagaland Petroleum and Natural Gas Regulations 2012. 

However following the directive of the union ministry of petroleum and natural gas on June 8,2013, the process for finalization of firms and signing of MoUs for oil exploration came to a halt.

In response, the state government organized a consultative meeting with a wide spectrum of present and former legislators and MPs, public leaders and tribal organizations over Article 371(A) on July 12,2013. 

The tone of the resolution later echoed in the state assembly on July 22,2013, wherein it resolved to protect the rights of the Nagas as enshrined under Article 371(A). 

After the assembly resolution on July 22,2013, the state government decided to go ahead with the oil operations under NPNG Rules 2012.

It was learnt that there were 23 bidder for the Expression of Interest (EoI) floated in national dailies  after which the Gas Board (the second in the three-tier structure) opened the bids on January 10,2013 ahead of the February 23,2013 assembly election. The list was then narrowed it down to seven and finally to five.

According to sources, the five that were short listed included-- Assam Company India Ltd (which bid for Wokha and Mon); Prize Petroleum Ltd (no specific zone); Deep Industries Ltd. (for Wokha, Mokokchung and Mon) and Shivani Oil & Gas Exploration Ltd. (no zones specified ) and Jubilant Oil & Gas Exploration Pvt. Ltd (made conditional offer that if Wokha was not given, then its offer for Peren and Dimapur would be invalid). 

Interestingly, according to one report, M/s Metropolitan Oil & Gas Pvt.Ltd (MOGPL) which did not figure among the last-five selected firms, was tipped to get Peren and Wokha zones. MOGPL was not among the short listed firms. 

The report claimed that MOGPL was found to be “ a very newly constituted company and does not have any presence in the Oil & Gas sector in India, particularly in exploration and production activities.” 

Interestingly, the report claimed that shareholders of MOGPL were SRM Exploration Pvt. Ltd.,( which was under liquidation) and Spice Energy. Another firm was tipped to get Mokokchung and Dimapur though it was not among those short listed. 

The selected companies have been invited to submit permit fee and Corporate Social Responsibility reports and given 21 days from the date of issue of offer letters for negotiations. 

After that, the firms will sign MoUs with the Ministerial Group, headed by the Chief Minister for issue of permits. 

The landowners of oil bearing lands in Peren district have objected to issuance of  by the Zeliangrong Baudi. 

While Kyong Hoho is under crisis, the Ao Senden has rejected any oil activities in Mokokchung district. On Dimapur, the interesting point is which hoho, if at all, will issue NoC?