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The Baseline
11 Nov 2016
Delhi's smog risks new investments, queues continue across the country at ATMs and banks
  • Long queues have formed at ATMs across the country, as banks struggle to meet demand for new notes from Indians caught by surprise at demonitization. By 11 am ATMs had run out of cash in most places across major cities. This is despite the limit of Rs.2,000 imposed by RBI till the 18th of November. Many ATMs are currently dispensing only Rs. 100 notes as the machine platforms get reconfigured to carry the new size Rs. 2000 notes. 

  • Modi's Japan visit has sparked annoyance among the Chinese, with the Chinese government warning that 'India needs to be careful of neighbor concerns' when aligning with Japan. Modi visited Japan to sign a nuclear deal and strengthen ties amid China's growing assertiveness in the region and Trump's election, which throws existing alignments between US and the world into doubt. Japan is also hoping to sign more high-speed rail deals with India after winning the first billion dollar deal last year. China and Japan have been competing for rail contracts across Asia - China beat out Japan for Indonesia's high speed rail project last year, and the two are currently competing for a rail link contract that connects Singapore and Malaysia. 

  • Delhi's smog has put several billion dollars of new investment into the capital at risk according to Assocham, with companies reviewing their plans and considering re-routing the funds to other Indian cities. The local government has taken steps to reduce traffic congestion and withdrawing the licenses of diesel vehicles older than 15 years. But local groups are insisting that these steps are not enough - without a crackdown on waste burning and pollution in the city, Delhi is at risk for a repeat event.

  • Stock in spotlight: Idea Cellular has seen the largest drop from its 52 week high among largecaps, and the December quarter results are unlikely to lift the stock with continued competition from Reliance Jio. The company is seeing a drop in voice revenue per minute and lackluster data growth despite a cut in prices. 

  • Photo of the day: Customers wait in line with their IDs to deposit Rs. 500 and Rs. 1000 rupee notes at a bank in Amritsar. AFP/Narinder Nanu

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The Baseline
10 Nov 2016
Hussain replaces Mistry as TCS Chairman, Paytm and digital wallets are winners in the black money crackdown
  • Tata Sons, the majority shareholder of TCS, has replaced Cyrus Mistry with Ishaat Hussain as interim Chairman of TCS. Hussain interestingly was one of two board members who did not vote for Mistry's ouster, choosing instead to abstain.  TCS and JLR are two of the most successful Tata firms - the dividends from these two firms fund the rest of the Tata group. A board meeting was not required in this particular case as since the Articles of Association allow the majority shareholder to nominate a Chairman. However, displacing Mistry from the other company boards as Chairman - particularly India Hotels and Tata Motors - will not be so easy. 

  • Banks are accepting old Rs. 500 and 1000 notes today, with deposits above Rs. 2.5 lakh inviting scrutiny and potential tax evasion penalties of 300% in case of income mismatch. Wallet providers, sensing an opportunity, have been taking out full-page ads in newspapers encouraging readers to add money to digital wallets. Paytm has seen a 200% jump in app downloads since the announcement. The grey market and hawala traders have also jumped in on the opportunity according to sources, offering to trade invalid black money notes for gold - at a charge of 30% of the amount. 

  • Stock in spotlight: Tata Steel, which leads the top gainer screener today morning. Tata Steel called a board meeting yesterday about investor concerns - the company has been facing a mounting deficit and yesterday discussed closing Tata Steel UK's 15 billion pound british pension scheme to help plug its deficit. 

  • Photo of the day: New notes that will be issued by the RBI, with new Governor Urjit Patel's signature. The notes will carry pictures of Gandhi and the Red Fort. The Finance Minister also announced that new Rs. 1000 notes will be issued. Source: RBI

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The Baseline
09 Nov 2016

If 2016 has a theme, it is this one: voters are rejecting establishment wisdom in elections, because they think it has failed them. Donald Trump’s win beat all the polls and defied the widespread belief that a recovering US economy and a popular Democrat president would be enough to elect the Democratic candidate into the White House.

Voters in the western world are favoring anti-trade, anti-immigration outsiders

One of the most interesting photo ops during Trump’s election campaign was Trump with pro-Brexit champion Nigel Farage - two isolationists standing together, two men who targeted trade deals (on the argument that it took away jobs) and immigration (arguing that it took away the jobs of citizens).

Trump with Brexit champion Nigel Farage on the campaign trail

Photo: Trump with pro-Brexit champion Nigel Farage on the campaign trail (AFP)

A similar dynamic is also playing out in France - where the xenophobic, far-right candidate Marine Le Pen is contesting the Presidential elections -  and the rest of Europe. These candidates became popular at a time of rising anger among the working class, who see the policies of their countries hurting them personally and economically. While this may not actually be the case - economists have argued for example that in the case of both the British and the US economies, trade has created more jobs than it has taken away -  the bloc of working class voters are looking for a recognizable villain in a time of increasing poverty, and lower-paying work.

Those trends of lower income, rising poverty are not going to change with these political shifts. Neither Donald Trump nor the Brexit enthusiasts have a clear economic argument in their favor, and that will eventually hurt the politics they champion. But it will take time for that understanding to peter down.

What does this mean for India?

In the meantime, markets worldwide, including India, have taken a pessimistic view of this development. As it became clearer that Trump would win, world markets fell in a reaction similar to Brexit, before beginning to recover. Dow futures fell 750 points as Trump inched closer to victory. Markets are collectively recognizing that democratic forces are coalescing around anti-trade, anti-immigration views, and businesses will have to realign accordingly.

Trump has for instance, said that he would like to ‘scrap’ H1B visas. He has expressed strong views against trade overall, and suggested implementing large tariffs against countries exporting to the US. This would hurt India’s IT services - already struggling in the wake of Brexit - further, since the sector gets about 60 percent of its $110 billion yearly revenue from the US. India’s pharma industry which has viewed the US as an important and growing market, would also be hit, as would sectors such as textiles.

Trump also wants to crack down against US companies that have moved their operations abroad, like Ford, threatening to impose a 35% duty on Ford cars made outside the US. Ford has manufacturing facilities in 3 Indian cities - Pune, Chennai and Gujarat, as well as a $135 million business and tech centre. Other carmakers in India who export to the US - like Hyundai, Suzuki Motors and Volkswagon - would also be hit by tariffs. 

In essence, the election is another data point telling us that political turbulence is here to stay, and will continue to play out in the short term across the developed world. The concerns that these voters are expressing are real, and fearmongers tend to draw first blood when voters are angry. Markets are in for a rocky ride as democracies grope for solutions.

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The Baseline
09 Nov 2016
An unprecedented crackdown on the black economy, markets cower as Trump draws close to US Presidency
  • It's a turbulent time for markets today, with Trump defying polls and inching closer to winning the US elections, and Prime Minister Modi's surprise announcement scrapping Rs. 500 and 1000 notes with instant effect - like Cinderella, some people are no longer princes and princesses at midnight. The announcement - targeting corruption and the black economy - is likely to bring down prices of real estate markets and gold sales for a while, as the economy re-adjusts. The RBI will start issuing new anti-counterfeit 500 and 2000 rupee notes tomorrow. 

  • Sensex is down 900+ points (-3.5%) and global indices are tanking as a Trump presidency becomes increasingly likely. Gold is seeing the biggest rally since Brexit. The Republican candidate ran an anti-immigrant, anti-trade campaign that seems to have resonated with large parts of the US electorate, especially the white working class who formed his core constitutency. If Trump wins, investors should prepare for a continued slump tomorrow. 

  • Stock in spotlight: DLF Limited, a bellweather stock for real-estate, lost 20% of its value since markets opened and is the top losing stock today, a result of the crackdown on the cash economy. 

  • Photo of the day: Supporters of Trump cheer as another state is called for the Republican candidate. Reuters

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The Baseline
08 Nov 2016
Softbank marks down Ola and Snapdeal, Cognizant results in more gloom for Indian IT
  • Cognizant's results have only deepened the depression in India's IT sector, after the company - a US firm with most of its employees in India - announced weaker-than-expected quarterly earnings and for the third time cut its growth forecast for the year, stating that Brexit is driving a fall in customer spending. The company has also been investigating corruption in some payments in India, and said that the amount in question would be around $5 million - less than what investors had feared. 

  • Six months ago, Softbank had seemed bullish on its Indian investments Ola and Snapdeal. But now the company has cut its valuation of both companies, writing down the worth of these shares by over $550 million. While half of the markdown comes because of the appreciation of the yen, the rest of it is Softbank turning bearish on these startups just as Ola is struggling to raise more funds. Both Ola and Snapdeal are fighting for market share against Uber and Amazon, who are focusing on the Indian market and pouring in money. 

  • Gold is losing its luster in India in the legal market amid smuggling and higher prices, and demand has fallen 29% since last year. One of the drivers for this has been the new government requirement to disclose high-value gold purchases, increasing the shift of gold buying into the black market. 

  • Stock in spotlight: After weeks of decline, Tata Motors is the top gainer stock today among largecaps, boosted by upbeat results for Jaguar Land Rover.  

  • Photo of the day: Clinton takes a selfie with supporters on the last day of campaigning before votes. UPI/Barcroft Images

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The Baseline
07 Nov 2016

PNB Housing Finance's Rs.3000 crore IPO was India's second-largest this year, after private life insurer ICICI Prudential Life Insurance (which raised over Rs 6,000 crore).

PNB Housing Finance was oversubscribed 29.55 times during October 25-27. Public sector lender Punjab National Bank (PNB) had a 51% stake in PNB Housing Finance, which drops to around 35% post the IPO. The shares of the company, whose issue price was Rs. 775, rose as much as 16.1 percent on their market debut today. The stock opened at 860 rupees on the National Stock Exchange, and rose to a high of 900 rupees, and is currently trading at Rs. 893.

Big IPOs: Retail investors need to break the habit of jumping ship

This is as good a time as any to caution retail investors: don't jump ship too fast. One problem for retail investors is their short-term outlook towards the big IPOs. Let’s take the example of Mahanagar Gas, which debuted in June earlier this year and saw a 23% gain on listing day. If you look at the shareholding pattern, Mutual Funds and FIIs increased their stake in the company since IPO by 1.4% and 8% respectively (September filings).

By September however, three months after IPO, retail investors had halved their stake, from 10.66% to 4.69%. Investors exited the stock on listing gains despite strong profits and margins in the June quarter.  Since September Mahanagar Gas has gained another 20% in price (Chart 1).

MGL price gain since listing.

                Chart 1: Mahanagar Gas’ issue price was Rs. 421 and is now trading at Rs. 721 a share.

A similar story is playing out with Advanced Enzymes, which debuted at 35% over its issue price of Rs. 896 per share. The stock is now trading 116% above its issue price (chart 2), and again, its retail investors that are reducing their stake in the stock since its IPO - Mutual Funds and FIIs have expanded their holdings.

Advanced Enzymes price gain since listing

                  Chart 2: AdvEnzymes has gained over 100% of its issue price since listing in June

Retail investors need to look beyond listing gains for IPOs with strong fundamentals. The short-termism among retail investors results in a loss of potential stock value.

PNB Housing Finance, the newest kid on the street, has a strong balance sheet, and had reported a growth rate of 68% in its loan book between FY 13-16. Even accounting for a more bearish housing market today, the company is likely to see double digit growth in the coming quarters, with analysts of the housing finance space predicting a 20-25% expansion in the coming periods.

The housing finance space has low penetration, and companies including PNB Housing are now expanding into the West and the South, with a focus on smaller loan sizes to expand the customer base. This large under-penetrated housing finance market is likely to keep PNB Housing’s balance sheet well in the green.

For companies with strong fundamentals, it is the announcements and quarterly result events that drive real stock price gains, rather than the listing momentum. A message to retail investors would be - hold off from the itchy fingers, and keep the faith in the good ones.

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The Baseline
07 Nov 2016
Catching fire: PNB Housing makes an upbeat debut, Jio LYF phone explodes
  • This is not a smartphone feature you want to copy: Another phone explodes, this time a Reliance Jio LYF phone. The user Tanvir Sadiq claimed on Twitter that the phone, bought at a Reliance Retail outlet, exploded and caught fire, resulting in a narrow escape for him. The pictures he posted show its charred remains. This is the second LYF phone that is said to have exploded, after the first incident on September 6.

  • PNB Housing Finance had a stellar debut today, listing on stock markets with a 11.4% premium after being over-subscribed 29.5 times. The stock, the fifth largest housing loan company in India, had received near-universal 'Subscribe' recommendations from analysts. Punjab National Bank, the biggest shareholder of the company, however reported lukewarm quarter results, with a fall of 11.5% in its Q2 profit. 

  • The GST is being turned into a complex regulation, thanks to five tax tiers and multiple exemptions.  A five-slab structure of 0%, 5%, 12%, 18% and 28% has been finalized by the committee. In addition some 'demerit' goods will be taxed above 28%, and cesses applied on them. 

  • Stock in spotlight: Lupin Limited is among the top gainer stocks today, with shares rallying over 6% after the company received USFDA clearance for its Goa plant. The company had lost 15% of its value over the last three months after news of legal tussles with US drug maker Horizon over patent ownership of a drug, and is still trading below an average broker target Rs. 1741.

  • Photo of the day: A walk in a public park may not be so healthy, on a smoggy Delhi day. Adnan Abidi/Reuters

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The Baseline
04 Nov 2016

Indian Pharma took a beating in stock markets on the latest news about US legislators Bernie Sanders and Elijah Cummings demanding a federal investigation into price fixing by generics. Both American and Indian generic firms could potentially face charges if regulators take up an investigation.

The US legislators presented some data showing rising prices for insulin, used to treat diabetes and whose patent expired 75 years ago. They included a chart showing that the price spikes for Humalog and Novalog seemed to happen together over the last twenty years.

Since the news, Sun Pharma, Glenmark,Aurobindo and Dr. Reddy’s stock prices collapsed (Chart 1), with Sun Pharma falling the steepest - more than 11% during morning trading. Sun Pharma and Dr. Reddy’s have been issued subpoenas from the US Justice Department, which requires them to attend a court to testify.  

Chart 1: Drop in Pharma stocks in today's trading on news of the Justice Department investigation

However, price collusion is a difficult charge to prove, especially in a market which depends on insurance payments. US pharma companies have already released statements denying the charges, saying that when one company raises prices the others follow through, since it allows the company to also raise the insurance rebate for the patient. The companies thus see increased profits without passing on price increases to the patient - since the insurer covers the increase. However, the price of medicine has emerged as a political issue during an election year, compelling legislators to pay attention to the price shifts in drugs.

The downward pressure on stock prices present investors a buying opportunity on solid pharma stocks. The first three quarters of the 2015 calendar year were bad for Pharma earnings, but earnings have picked up in the past one year. Nifty Pharma aggregate earnings are up 65% in the past 12 months, even though stocks have fallen in the market overall over the past year.  The sector may be therefore ripe for a re-rating upwards.Valuations are at two year lows, while market valuations in other sectors are at a peak.

Individual stocks- Dr. Reddy's, Glenmark, SunPharma, Aurobindo Pharma

Dr. Reddy’s stock had soared recently on the announcement of its alliance with the US firm Gland Pharma to develop drugs for the US markets. The company’s sales are expected to grow over the next financial years with launches of new drugs like gGleevec and gCopaxone - generic versions of anti cancer and multiple sclerosis drugs, both large multi-billion dollar drug segments.  

Glenmark in particular, may also be less prone to headwinds from the continuing US investigation - its focus is on more niche sectors like oral contraceptives, skin treatments and respiratory care, where it faces less competition. Its debt/EBITDA has improved from a high of 4.6x in FY09 to 2.5x in FY16 as it has expanded its market beyond US and India and to Asia and Europe. And Sun Pharma’s latest quarter results beat expectations on both export and domestic earnings - recent research reports consequently raised recommendations and targets on the stock (Chart 2)

Chart 2:  Sun Pharma saw its targets revised upward in research reports (see the brokerage reports list)

At first glance Aurobindo Pharma also looks strong, with recent approvals for selling multiple generics in the US, including blockbuster drugs to treat osteoporosis and HIV. However, a recent recall of drugs supplied to US market in September due to mixing of two different drugs in a bottle, raises the question of process quality in the company’s Mahboob Nagar plant.

Overall however investors looking for a good entry point into these stocks may very well pick the present, as US legislators with an eye on public sentiment release aggressive remarks that spook markets. Pharma has always been a defensive sector and with the broad market coming off its peak and with today’s meltdown, there may be opportunities in the coming days.

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The Baseline
04 Nov 2016
Pharma stocks fall under threat of US investigation, 11,000 Indians sign up to be citizens of space nation
  • Threat of a possible proble by US regulators for price collusion has driven down prices of pharma companies on markets today. Glenmark, Sun Pharma and Dr. Reddy's have all lost at least 5% in trading. The Nifty Pharma P/E is now below its two year average. 

  • Over 11,000 Indians have signed up to be part of the first 'space nation', Asgardia.  A group of scientists and space experts based out of Russia, Romania, Canada and the US want to make this country - based outside Earth - a reality with a fully formed government structure, including a council of 12 ministers. 

  • The government is planning to sell its shares in L&T, selling a 3%bstake worth Rs.4,000 crore. The stock is trading down and at high volumes on the news - more than 58 times its average monthly volumes. 

  • Stock in spotlight: Hindalco Industries, which is up 167% from its 52 week low of Rs. 58.85 and is now trading in the Rs. 150 range. 

  • Photo of the day: Worrying about weight - a panda cub is weighed at a zoo in Austria. Reuters

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The Baseline
03 Nov 2016
Signs of growth recovery, Mistry is still Chairman of Tata Power and Tata Motors
  • Are we seeing a recovery in demand?: India's manufacturing services activity has grown pretty rapidly in October, thanks to rise in both domestic and foreign demand. Indian factory output is at its fastest pace since the last two years. If this trend holds, RBI may cut interest rates further next month.

  • Government services - exams, driving licenses, passports - are going to be more expensive, now that the Finance Ministry has asked departments to raise charges to cover their costs. "Self-sufficiency" is what the Central government is now pushing for, marking a shift in thinking away from the view that these services should be subsidised. 

  • While Cyrus Mistry is out of Tata Group's holding company, he is still the Chairman of Tata Power, Indian Hotels and Tata Motors. Tata Sons doesn't have enough stock to evict him from those companies. The dual power structure is likely to make the Tata Sons' successor's job a lot more difficult. 

  • Stock in spotlight: Bharti Infratel, whose price has crossed above its 200 day SMA on news of stake sale by the parent company. 

  • Photo of the day: A police officer shows schoolgirls the workings of a gun during Raising Day celebrations in Chandigarh. Reuters/Ajay Verma