Natural gas fires up MGL and IGL

Natural Gas has emerged as the best performing financial asset of 2016. This has provided a huge impetus to companies such as Mahanagar Gas Limited (MGL) and Indraprastha Gas Limited (IGL), both returning 65% and 54% respectively since July 2016.

Source: Yahoo Finance

However, just because an asset/ sector has outperformed in a particular year is no reason why it will continue the winning streak. For instance, energy was the best performing sector in 2007 only to crash 39% the very next year. Also lower valuations for the under-performing asset class will see renewed fund inflows. In 2015 the energy sector was the worst performing sector only to emerge as the best performing in 2016.  It has led the pack after a gap of almost 9 years.

Excepting a few outlier years, sector returns almost resemble a W with outperformance in one or several years and then subsequent downturn only to head back up again.

As Benjamin Graham mentions in Security Analysis, "There are several reasons why we cannot be sure that a trend of profits shown in the past will continue in the future. In the broad economic sense, there is the law of diminishing returns and of increasing competition which must finally flatten out any sharply upward curve of growth. There is also the flow and ebb of the business cycle, from which the particular danger arises that the earnings curve will look most impressive on the very eve of a serious setback."

Further as Warren Buffet mentions, "We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business." In other words, when the security has moved ahead of itself in a very short time it may be time to sell the security. 

Investing in MGL at these levels could be a bit expensive given the 65% return in about 6 months.

Why FIIs can spoil NSE's party

National Stock Exchange of India (NSE) is planning to list its shares on the stock exchanges and has filed a DRHP with SEBI. It is the leading stock exchange in India and has 85% share in Equity cash trading and 94% in Equity derivatives trading. The nearest competitor, BSE, is miles away in terms of technology and trading volumes.

FIIs constitute a 20.9% client base in the Cash market segment and 14.4% client base in the Equity Derivatives segment. As is well known, FII investment can be quite fickle and can change their temperament in a very short period of time. Since Oct 2016, FIIs have been net sellers in the Indian market and have sold off equities and bonds totaling Rs. 76,673 crores. This is almost 6 times the amount sold off in Oct 08 - Dec 08, the height of the financial crisis. There may be several reasons for the FIIs exit, whether it be the Trump factor and subsequent US market jump or India's demonetization drive.

A key difference between the two periods is that in the 2008 period, FIIs were net buyers in the debt
market. However, in the current period they have turned negative on both equity and debt segments.

Trading income drives almost 63% of NSE's revenues. With a bearish FII sentiment towards India, this may come under pressure.

Apart from the recent SEBI probe and corporate governance issues, another aspect to consider would be the returns delivered by major listed exchanges over the past year and their valuations. Of the major exchanges, only LSE delivered positive returns of 6.20% over the past year. The P/Es ranged from 20.6 for the Deutsche bourse to 42.73 for LSE. For a comparative analysis, LSE had revenues of £1.41 bn for the year ended 31.12.2015, whereas NSE had revenues of £281 million for the year ended 31.03.2016.

Although there is not much domestic competition for NSE, what would really matter is the foreign appetite for Indian securities.

The Lure of the Celebrity Investment

India's Bollywood star, Amitabh Bachchan was in the news a year and a half back for buying a 0.51% stake in Nitin Fire Protection (NSE:NITINFIRE) for Rs. 42.99 a share. The stock saw frenzied buying on the news and surged 9.9% to close at Rs. 47.05.

Eighteen months later the stock is languishing at Rs. 23.50 a share. ( a notional loss of 49% for Mr. Bachchan's fans and 45% for Mr. Bachchan, if he has still kept the shares).

Investors in the stock would have done well to read the Annual Report and the Audit Reports. The Qualified Auditor's Report states "material weaknesses have been identified in the operating
effectiveness of the Company’s internal financial controls over financial reporting as at March 31, 2016 with respect to provision for diminution in the value of an investment; provision for a claim on a derivative contract; determination of terms of purchase of items of inventory and underlying documentation relating to internal movement of items of inventory .. which could potentially impact the related account balances when determined and/or recognised."

In short, we don't know why and what figures Management in their so called best estimate has managed to allocate to items in the financial statements.

The above Qualified opinion for 2016 was in continuation to the Qualified report for 2015.The 2015 Audit Report had mentioned that the Auditors were not able to comment on the impairment of investment in WNCPL worth Rs. 45.78 crores.


Further the Annual Report for 2016 mentions that the management is unable to comment on the above impairment and the carrying value was carried over to Non Current Investments. 

So if the Auditors are unable to comment; Management is unable to comment; what inference should the shareholders draw? Unable to stick with such a company?

The Economic Times recently had a series on celebs and their investments. The rational investor would do well to stick to the fundamentals and ignore the Bollywood "dhamaka".

PM Modi should explain the Rs. 1.72 lakh crores hole in his demonetization drive

Reserve Bank of India states that Rs. 11.5 lakh crores has been deposited in bank accounts during the first month of the demonetization drive. However, SBI states that the figure is inflated by 15%. So who is right? 

Both of them actually. RBI mentions the amount of currency received by them from various banks. This includes the notes exchanged outside the system by unscrupulous branch managers. Banks only show the amounts entered as deposits within the system. Hence while the RBI reports a figure of 11.5 lakh crores, banks report a figure of 9.78 lakh crores. This leaves a Rs. 1.72 lakh crores gap in Modi’s drive. 

Time and again various statistics are pointing to the failure of Modi’s much vaunted demonetization drive. However, the PM has chosen to completely ignore hard facts and figures and simply reiterates his rhetoric and urges the youth to use highly vulnerable mobile banking systems. The recent raids by ED were just a drop in the ocean and a publicity stunt. 

Actual black money marketers have gamed the system and in a matter of just a month made off with 1.72 lakh crores while the common man remains stranded for even Rs. 2,000.

Modi’s failed demonetization drive is showing

In less than a month’s time, the Reserve Bank of India (RBI) has been forced to cut the growth forecast by 50 bps from 7.6% to 7.1% for 2017. This has washed off the Government’s claims that demonetization would only have a temporary impact on the economy for one or two quarters. The Commerce Minister was even suggesting that the impact may not be felt beyond the present quarter. 

Coming within a few days of Nikkei PMI contraction to a 3 year low, this does not augur well for the economy or the Government’s claims. This reflects that further pain is in store for the economy on several counts.

The Reserve Bank has noted that the prices of wheat, gram and sugar are firming up. Limping back in the face of four years of droughts, the agricultural sector has been hit hard with the demonetization. A year of good monsoons should have seen food prices drop rather than rise sharply. The exact opposite has happened. Farmers were forced to delay sowing due to non-availability of cash. District Co-operative banks predominant in the rural areas are still not accepting old notes and new notes were not available. Banks were perennially out of cash for the vast majority of population, but had ready availability for certain influential sections.

Secondly, people got a glimpse of what it is like not being able to utilize one’s own money. It was a maze without exit for people with bank accounts. This will definitely have a huge psychological impact and people will think before spending money and may even prefer to save the cash withdrawn. The economy running primarily on consumer demand is likely to be hit further. Corporate demand essentially being non-existent, the economy is likely to take atleast 100-150 bps hit. This does not seem far-fetched given that the RBI was forced to revise its estimate for the entire 2017 within a matter of a month only.

Both the above factors will have a decidedly negative impact on demand and consumption. Infrastructure and B2B companies were anyways not in a great shape. Now B2C companies are likely to see their sales and profitability plummet.

As Dr. Paul Krugman mentioned the move is highly disruptive with negative short term impact and no long term benefits.

Study in Contrast

Dollar Tree and Tiffany riding high on Trump wave

A previous post had mentioned that some of the stocks to benefit from the new administration would be Dollar General (DG), Dollar Tree (DLTR) and Tiffany (TIF).

Less than a month down the line these stocks have gained an average 15% with DLTR leading the pack at 19% and TIF 14% approx.

It would seem a bit strange that both dollar stores and Tiffany would be gaining at the same time. However, both these classes of companies cater to distinct demographics which will see increased demand in the foreseeable future. Demand for luxury items is sure to increase with investment spending and tax cuts. While the middle class base would also continue to rise seeing increased footfalls in Dollar Tree and Dollar General.

Source: NYSE

Modi’s gamble leaves millions of Indians vulnerable to mobile banking hacks

Indian Prime Minister, Mr. Narendra Modi’s gamble to usher in a new era of banking through smartphones is sure to make hackers sit up and take notice.

A recent instance in Dubai wherein hackers obtained duplicate SIM cards and embezzled Dh 1 million through the smartphone mobile banking app should have been enough to make the Indian authorities stand up and take notice.  However, the Indian authorities seem to be blissfully unaware of the perils of mobile banking apps and are blindly urging Indians to switch to the mobile banking channel en masse.

A recent WSJ report mentions that the situation has turned serious enough for the FBI to start paying attention. Specific apps are being created to target the mobile banking channel. UK’s Three Mobile and Tesco were also targeted by cyber criminals recently. The recent hack of 3.2 million debit cards is still fresh in memory.

Given such a state of affairs, belligerent insistence on using mobile banking channel is sure to have serious repercussions for Indian consumers. In his desperate urge to usher in the digital revolution, Mr. Modi seems to have forgotten that robust cyber security and security laws are the only base upon which such technology can be ushered in and not merely upon empty words.