Worms Digest 17 September 2014

Good Morning !!!

Sensex: 26492 (-1.21%), Nifty: 7932 (-1.36%)

Dow: 17132 (+0.59%), S&P: 1999 (+0.75%)

Nikkei: 15930 (+0.12%)\

The Old Adage Comes True : "In national elections people vote for the Party while in local election people vote for the Candidate"

The earlier the warning the better it is. Alarms bells have rung loud and clear for the national ruling party of India that after winning with absolute majority at the Center they cant afford to rest their laurels. They had to face a humiliating defeat in Uttar Pradesh by-polls with Samajwadi Party & others wining 8 out of 11 seats. The Congress had a morale boosting wins with 3 in Gujarat which is local base of prime minister Narendra Modi. Rajasthan was the most shocking with congress wining 3 seats and BJP diminished to 1 seat.

The Indian stock market latched on to the excuse and slipped 1.4% in last 4 hours. The broader market saw even more blood with large caps declining anywhere between 4-7% and mid-caps hitting lower circuits. 

Hope, the by-elections results help shed any over-confidence and lethargy set in post emphatic victory and instill a sense of urgency to bring in much awaited reforms. 

Action Agenda : Use the correction to build positions in equity markets. 

SBI has cut deposit rates in 1-3 year bracket by 25bps

Justifying the move with downward trending inflation, India's largest commercial bank has cut deposit rates by 25bps to 8.75% for term deposits on 1-3 year term. Though the real reason could be an act of correcting ALM mismatches or desire to lower costs sighting ALM surpluses or as a lead bank providing direction to market, more importantly it adds to our confidence of yesterdays stance - "Bet Against the Central Bank" http://newsthatmovesindia.blogspot.in/2014/09/worms-digest-16-september-2014.html

M&M eyeing for Peugeot's Scooter Business 

New reports suggest that M&M is in advanced talks to acquire Peugeot's scooter business. The fact that M&M didn't out right deny the news means certainly talks are on but whether the same fructifies or not remains to be seen. 

The transaction could be a win-win for both the parties as Peugeot gets rid of loss making scooter business freeing up resources to focus on its strengthening car business. It will also help Peugeot pare down Euro1.1bn debt on the books. 

Mahindras, on the other hand, will gain access to a credible brand, differentiated product portfolio with distinct designs and latest world-class technology in scooter market. 

Though its strategic for Mahindra 2-wheeler business, as of now it does not materially impact or change company profitability. With strong balance sheet of Mahindra acquisition price wont be burdensome for the company. 

However, the smarter investors would be keenly watching M&M's execution and strategy is 2-wheeler space which if failed could raise serious questions about capital allocation policies at the Company. This is the biggest hidden danger in this acquisition as many people believe M&M has no right to be in or win in 2-wheeler space. 

Stock market corrections, although painful at the time, are actually a very healthy part of the whole mechanism, because there are always speculative excesses that develop, particularly during the long bull market.

Have a Great Day and Happy Investing !!!

 

 

Worms Digest 16 September 2014

Good Morning !!!

Sensex: 26816 (-0.9%), Nifty: 8048 (-.78%)

Dow: 17031 (+0.26%), S&P: 1984 (-0.07%)

Nikkei: 15897 (-0.32%)

WPI Inflation falls to 5 year low of 3.74%

Inflation is trending well below RBI expectations with WPI hitting a low of 3.74% for the month of August. RBI still continues to be cautious with a view that falling prices could be a temporary phenomenon, but it could well be Wrong!!!. 

There are 3 primary elements of inflation index - 

i) "food articles" named  primary articles (weight 20%) which includes stuff like fruits & vegetables, food grains, milk, eggs and chicken

ii) "fuel & power" (weight 15%) which includes items of transportation like diesel & petrol, electricity used for residential and commercial purpose and LPG, kerosene which are used for cooking foods.   

iii) "manufactured goods" (weight 65%)

Food articles are experiencing relatively lower level of inflation mainly due to base effect. The late recovery of monsoon deficit has helped improve sentiments and lower food prices. The high levels of reservoir should yield strong Rabi crops.

Crude Oil and natural gas prices are trending lower compared to last year and the current wisdom suggests that chances of sharp uptick from the current levels are unlikely.  

Manufactured goods prices are today essentially driven by cost pressures than demand pull. Given the low consumer sentiments and excess capacities ability and willingness of management to raise the prices of manufactured goods is limited. In fact, the gradual decline in global liquidity and outflows from commodities market suggest the commodities prices could remain suppressed at least for next 6-12 months. So there will be no cost pressures for companies to hike prices of manufactured goods. In fact, prices could come down to provide a boost to demand.

The only devil in the pack is turmoil in currency markets. Hopefully after the crash of 2013 when for the first time US Fed indicated withdrawal of QE, the market has gradually well priced in that risk and any acceleration on that front would be non-destructive for currencies. The fact that Raghuram Rajan is preparing war chest for any eventuality on that front is a cushioning factor.

In summary, if all goes well, India is well poised to see low to reasonable levels of inflation which is a great news for businesses. 

However, whether the same translates into interest rates cuts by RBI will be a function of how RBI governor perceives i) threat on currency front ii) change in view of 'temporary fall' in prices iii) surprise element which the bank wants to maintain for the market.

Action Agenda - Bet against the Central Bank. Go long G-sec and PSU Banking stocks.

Other Key News Bytes

• RIL re-enters the fuel stations business as diesel deregulation becomes more of a reality 
• Hindalco's 5 bauxite mines have been ordered shut by Jharkhand Government following Shah Commission's report on illegal mining 
• Tata Motors shares could see weakness as August JLR sales decline by 9.7% (though some of the decline could well be attributed to the phasing out of Freelander) 
• MCX has received conditional renewal of license from SEBI till September 2015. However it needs to meet condition of minimum networth of Rs.100crs in 3 months time in order to introduce new contracts. This is a confusing state of affairs since networth of MCX as per its reported accounts already stands at Rs.1160crs. However SEBI claims it to be just Rs.56crs. In any case, the resolution of the matter should not be a big issue. 
• Cognizant, in its biggest ever acquisition and to strengthen its healthcare business has acquired TriZetto for US$2.7bn in all cash deal. Cognizant expects US$1.5bn of revenue synergies from the combined entity and acquisition to be EPS-accretive in the first year itself.
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"In reality no one knows what market will do; trying to predict it is a waste of time and investing based on that prediction is a speculative undertaking."....Seth Klarman

Have a great Day!!!