Midnight strike at Rural India

The effects of Mr. Modi's decision to demonetize Rs. 500 and Rs. 1,000 currency notes are slowly creeping in. First and foremost to be affected are the farmers and small traders in rural India. 

A midnight strike at the peak of the sowing season has left them bewildered and helpless. While the people in urban India have access to multiple banks and branches, rural India doesn't have such access. Even the RBI agrees that banking penetration is very poor in the hinterland with most of the banking happening through the unorganized sector. Coupled with the decision to restrict co-operative banks from accepting the old notes, rural India is squeezed from multiple sides.

The urban elite can keep on harping at the "grand gesture" but the sad truth is that rural India has been left to fend for itself. With only 10-15 days to go for the sowing season and with the nearest bank branch miles away, the small Indian farmer has taken the maximum hit from this move. This does not augur well for the Indian economy or even India as a whole. To weed out a few people the entire country has been forced into unnecessary trials and tribulations.

The people of India would have appreciated and welcomed the demonetization move if certain prior steps were taken:

1. Food and drug adulteration
Just ask yourself one question: Are you a 100% sure that the milk you are drinking or the medicines you are taking is genuine? Pretty sure that no one can claim as such. This only reflects the extent of food and drug adulteration existing within the country. Concrete steps and strict punishment should be enforced to ensure that the guilty are not spared. 

2. Target the specific individuals
It is common knowledge and the officials are very well aware where corruption exists. The Slum Rehabilitation Agency in Mumbai is a hotbed of corruption. Everyone is aware of that. Rather than target the specific individuals and government agencies, carpet bombing was resorted to without any specific actions targeted at specific individuals. 

3. Indian manufacturing sector
The past 5-7 years have seen the Indian manufacturing sector reel under intense competition from China and other countries. Rather than support the manufacturing sector, the economy was opened up to foreign pharma and retail giants. To compound the matters, in several areas foreign companies are given contracts giving Indian concerns a go-by. Empty slogans do not go a long way in boosting investments. For instance, firms in Maharashtra were given raw land without even basic amenities such as roads or electricity.

4. Job creation
 Mr. Modi was not able to deliver on his promise of creating lakhs and lakhs of new jobs as he had promised in his election speeches. To divert public attention from burning issues, this step seems to have been introduced.

5. Basic Infrastructure
Rather than create smart cities and bullet trains, the need of the hour is to create basic infrastructure within the country. The effects and use of allowing free wi-fi  in railway stations is well known. Is this the sort of climate that the Modi government wants to create? Traffic discipline is almost nil in his hometown of Varanasi and he wants to convert it into a smart city?

People would have been more amenable to Mr. Modi's moves had they seen actual changes happening at the ground level.  


Rural neglect and job loss are burning issues around the world including US. At a time like this to neglect genuine concerns is a self-goal the opposition will greatly appreciate. But what the hinterland will gain from all this remains in doubt.

Rail high-fliers bite dust

Stocks such as Kalindee Rail (NSE: KALINDEE), Titagarh Wagons (NSE: TWL), Texmaco Rail (NSE: TEXRAIL), once the high-fliers of the Indian Railway sector have bitten dust. Low-cost competition from Chinese and Spanish firms has forced these companies to enter new lines of business and look for other measures to boost revenues.

These stocks have underperformed the CNX Midcap index an average 35% since Mar 2015. 

Once the favourite of analysts, these stocks do not even find mention nowadays.

The biggest reasons for their fall are the cost-cutting drive initiated by the Indian Railways and the Chinese competition.

In a recent contract awarded by the Nagpur Metro Rail Corp, a Chinese company CRRC was chosen over the Indian manufacturers. At a time when the Prime Minister is touting Make in India, it is a concern that although the Indian manufacturer had outbid CRCC, the contract was awarded to CRCC.

In addition a Spanish company, Talgo, was allowed to make trial runs from Delhi to Mumbai without the permission of the CRS. The Commission of Railway Safety which oversees safety in rail travel and train operations was not even consulted on the trial runs.

This haste to export Indian manufacturing jobs overseas does not augur well for the Indian economy. Job losses and middle class neglect were significant reasons Trump triumphed. Rather than actively promoting job growth within the country, the Railway Minister and the Prime Minister seem to be solely focused on cost-cutting at the expense of quality and passenger safety. A recent project by Talgo in Saudi Arabia ran into trouble and was scrapped.

Mr. Modi would do well to keep the overall interests of the nation in mind and ensure that Indian manufacturing jobs stay within the country.

Adios Dodd-Frank

With the new administration proposing to water down Dodd-Frank, banking stocks have zoomed an impressive 10% over the past two days. Wells Fargo has in fact recovered from the account opening scandals to zoom 13% and is up 7% over the last three months.

What may be good news for the investors may not necessarily be good for the consumers. With significantly watered-down banking and consumer regulations, the average consumer may find himself at the receiving end. With stagnant real wage growth and zooming student loans (above $1 trillion mark), future demand may get significantly affected. Dollar General and Dollar Tree could see substantially increased footfalls. Already Dollar General is up 6.7% over the past two days.

However there may be good news for companies selling luxury goods and services such as Tiffany & Co. (up 6.1%). Cruise liners may be another area to watch out for.

While many Investment Advisors advise a wait and watch policy, the party seems to have already begun for the banks with their WMDs.

Do STFC Bond yields justify the premium?

Shriram Transport Finance Co. Ltd. (STFC) is a NBFC providing finance for commercial vehicles. Its Bonds and stock are listed on NSE and BSE (NSE:SRTRANSFIN). One of its bond tranches Y3, par value Rs. 1,000, 10.75% coupon is trading at Rs. 1,120 on NSE. The yield works out to 9.59% as against the bond premium of 12%. So, does a 9.59% yield justify a 12% premium. Atleast in case of STFC it does not.

One of the main reasons is the deteriorating liquidity and profitability. The net working capital which was Rs. 21,263 crores in 2008-09 has declined to a negative Rs. 259 crores. Simultaneously the current ratio has declined from 9.48 to 0.99. Cash and bank balance as a percent of current assets has declined from 23.9% in 2008-09 to 10.2% in 2015-16.

Declining Liquidity

Meanwhile, provisions and write offs as a percent of Advances have increased from 1.66% to 3.23% . All this has affected the net profit which has declined to 11.47% in 2015-16.

 

Increased Provisions and Reduced Net Profit

Bond premiums can be quick to disappear. For instance, the series Y3 bonds trading at Rs. 1,200 on 16^th September are now trading at Rs. 1,120. A loss of almost 6.67% in one and half months or 53% on an annual basis. 

A second important reason is the market illiquidity of STFC Bonds. For instance, the Y3 tranch was traded on only one out of three trading days with total trading of Rs. 50.47 lakhs in the last three months being 0.867% of the bond value outstanding of Rs. 58.22 crores.

Imagine an investor wanting to liquidate his holding of Rs. 5 lakh bonds. To offload these in the market would entail significant costs and time during which his holdings value can get significantly eroded. The only option remaining with the investor would be to hold the bonds till maturity and bear the exposure to deteriorating financial conditions. With the bonds maturing in Oct 2020, it certainly does not seem a viable option.

Investors reaching out for yield would do well to keep the financials and liquidity in mind.