Nifty chart: a mid-week update (Dec 18, ‘13)

RBI governor surprised the market positively by maintaining the status quo on interest rates. He probably banked on the ‘December effect’ of lower food prices to cool inflation. Despite a couple of interest rate hikes earlier in the year, inflation has shown no signs of abating.

The consensus estimate of economic experts was a 25 bps rate hike in Dec ‘13. As often happens, the consensus estimate proved incorrect. Bulls broke off the previous 6 days’ bear shackles. Nifty jumped up and stayed above the 6200 level – forming a higher bottom in the process.

The bullish pattern of higher tops and higher bottoms from the Aug ‘13 low continues. The 50 day EMA provided support to the index. In last week’s update, the zone between 6100 and 6200 was indicated as a good support zone.

Is Nifty going to touch a new high soon? Let us see what the chart below is telling us.

Technically, there is no reason why the Nifty should not move higher. The 200 day EMA is rising, and Nifty is trading above all three EMAs. The correction has improved the technical ‘health’ of the index. Bulls are regaining control.

Daily technical indicators are beginning to turn bullish. MACD crossed below its signal in positive territory, but has stopped falling. RSI has just moved above its 50% level. Slow stochastic is about to climb out of its oversold zone.

Fundamentally, things are looking less bullish. A silver lining is the long-awaited entry of a multi-brand retailer like TESCO of UK, which has joined hands with the Tata group. Carrefour of France is apparently waiting in the wings. May be the retail revolution will take place after all. The potential for job prospects among the less educated youth is high.

Notes from the USA – a guest post

News and views coming out of Europe and USA generally paint a gloomy picture of the economies on both sides of the Atlantic. Europe is still struggling under recessionary conditions. USA has got its neck above the water, but growth has been painfully slow.

In a guest post full of interesting and revealing insights, KKP presents a ground-zero view of where the US economy is headed and how small investors can gear up for the unfolding scenarios.

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Macro Level: Good, Bad and Ugly of the US Economy

The best predictor of economic times is the overall results, i.e. GDP. But underneath that layer there is a key measure, and that is manufacturing. Of course, the US GDP at 2.0% and the softness in GDP prediction for Canada says it all…….OK, let me say it: It is weak GDP numbers by all measures, and in the 70’s or 80’s or 90’s, Greenspan would have started lowering the rates to boost production.

Bottom-line is that without manufacturing an iPad, Car, Refrigerator, Engines, Parts etc. there would be no service industry. Manufacturing is key to any GDP number. It is best to follow this truly leading indicator that shows the slow-downs, turn-ups and turn-downs as a great predictor of the times ahead with some level of comfort and confidence. Mix it up with others in this write-up and we will get to know the Good, Bad and Ugly of the situation.

Housing is stronger right now, although Existing Home Sales is weak and has never recovered due to upside-down mortgage situations of thousands of people. Building permits is another great leading indicator.  It is costly to get a building permit, so it involves a real commitment.  Steven Hansen has a nice analysis of this report (on the net), showing the data from various perspectives.  This is the chart that I think is most helpful, so we know that there is hope ahead and America is not doomed for a crash and burn, as many are hoping and predicting. 330 million people are going to be creative, generate productive hours and produce something that they themselves need, and possibly others in the world might use (iPads, Drugs, LEDs, Biotech seeds, etc.).

Recent Retail Sales were much stronger, and not consistent with the onset of a recession, which is what makes such analysis very good, since it gives contrary opinions and indications, and it is the human mind that has to decipher it to come to a single conclusion. Are we headed for a recession or slow growth era or a depression? My view is that we will muddle along at the 1% to 2% GDP growth, which is nothing to write home about! The next 2-4 months are going to provide telltale signs of the real happenings since that is when we will be past the Christmas shopping season, and the Elections in the US.

Review this new Recession Resource Graphic which explains many of the concepts people get wrong and what the current status of the US economy is under the covers:

Chinese economic growth is worse than you think, and it is the second most watched economic data since so much of China is humming based on American demand.  This week's data may have seemed positive on first blush but the problem is that China uses year-over-year reporting rather than a quarterly report with seasonal adjustments.  It is quite possible that China's GDP growth had a "six handle" in Q2, although there might now be a rebound.  Stephen Green from Standard Chartered finds the strong export growth is not so impressive either. Green runs his own seasonal adjustment on the data to find it’s sluggish for the pre-Christmas ordering period.

There is a sizeable seasonal effect in September, likely related to Christmas exports. Thankfully, despite their difficulties, the Americans and Europeans still appear to be on track for celebrating in December. The picture looks less impressive in seasonally adjusted (SA) terms, though, and it is worrisome.

The Financial Times has a totally awesome graphics department. Check out this beauty, showing various aspects of China’s economic shift, and the picture speaks a 1000 words here on China:

In conclusion, things have improved on a comparative year over year basis, but we are at the delicate point where we need to come out of the cave and show our might, and if we cannot do so through the Christmas season with a strong President, we are doomed to get back into recession, and drag the entire world into it also. Companies like Tata, Infosys/Wipro/TCS, Auto-parts, Call Centers etc. are going to see the immediate effect of it. Also, the USD taking a nose dive will start to affect the currency translations, and hence create a second domino drop. Once we foresee this happening, news of a GDP reduction in India and China will start circulating and take the markets down with it. So, it is the Ugly that we need to be afraid of since we have the Good and Bad out there now, but, we do not want the Ugly to show up, and just let the Good and Bad shake hands and keep the US economy at the 1% to 2% GDP levels for the next 1-2 years. You draw your own conclusions from the data above, and be ready to make the right moves in the Indian and US market.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

About FDI in Aviation and multi-brand retail – a guest post

When the UPA government first proposed introduction of FDI in multi-brand retail about a year back, the BJP opposed it vehemently and Mamata Banerjee’s TMC threatened to pull out of the UPA alliance. The government back-tracked and postponed the issue.

Now that FDI in Aviation and multi-brand retail have been re-introduced, the usual suspects are doing their song-and-dance routine once more. Will the government succumb again to their pressure tactics, or will they try to push through the much-needed reforms? Only time will tell.

In this month’s guest post, Nishit presents his point of view about how FDI in Aviation and multi-brand retail may benefit India and some Indian companies.

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TV channels and newspapers are abuzz with the policy decisions of the Government in the past week. Let us look at a couple of decisions. FDI in Aviation and FDI in Multi-brand retail.

FDI in Aviation means foreign companies/airlines can hold up to 49% stake in Indian airline companies. Indian aviation sector is bleeding and there are airlines like Kingfisher which are on the verge of closing down. The main reasons for this are high Aviation Turbine Fuel (ATF) charges and price under-cutting by competing airlines.

Why will a foreign airline be interested in an Indian carrier? India is one of the fastest growing aviation markets in the world. Airlines like Emirates have flights from major cities in India to Dubai. They have not been able to penetrate Tier-2 cities, which have a lot of potential for out-bound travel. Now, if they take a stake in a domestic carrier they will be able to attract the customers of the domestic carrier for their international routes. E.g., if Emirates have a flight from Chennai to Dubai, then passengers from nearby smaller cities like Madurai can fly to Chennai on a domestic carrier in which Emirates has a stake before boarding the international flight to Dubai. They can also bring international best practices to optimise domestic business.

The companies most likely to benefit from FDI in Aviation could be Jet Airways and SpiceJet. In the unlisted space, GoAir stands a pretty good chance as well. Indigo has the option of going public to raise funds. Kingfisher has too many problems for anyone to be seriously interested.

FDI in multi-brand retail is a contentious issue. Opponents argue that it will hurt the Indian farmer and local ‘kirana’ stores. Contrary to this, it will hurt the middle-man and the trader community who make fat profits by buying vegetables very cheap from the farmer and selling it at expensive rates to the consumers. Peas, which the farmer sells at Rs 8, retail at Rs 32. The price hike is due to the commissions of the middle-men.

There are several safeguards in place for allowing FDI in multi-brand retail. Such stores can only be opened in cities with population exceeding 10 lakhs. There are only 53 such cities (out of 8000) across the country. Other safeguards include investment in cold chain, countervailing duties against cheap imports. Also, it would be too expensive to import vegetables. The farmer may gain thanks to contract farming. Consumers will gain thanks to cheaper pricing. An example is that of packaged products. The local grocer sells a packet of Brooke Bond Red Label tea to me for Rs 330. The mall gives it to me for Rs 289.

Organised retail already exists in the country, and their market share is a meager 4%. It also generates employment for semi-educated youth. ‘Kirana’ stores are existing side-by-side with large malls. Large amounts of agricultural produce rots every year because of insufficient transportation and storage facilities. FDI in multi-brand retail is expected to improve back-end logistics and systems that will reduce wastage and loss to farmers. Ultimately, old and inefficient ways of doing business have to make way for more modern and efficient processes.

In retail stocks, one can look at Pantaloon, Shopper’s Stop and Trent. Pantaloon is the best positioned as it has structured its business in such a way that it can have multiple tie-ups.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan).

Related Post

Will FDI in retail be good or bad for India?http://investmentsfordummieslikeme.blogspot.in/2011/12/will-fdi-in-retail-be-good-or-bad-for.html

How FDI has helped 6500 farmers in Bengal

From the responses to last Thursday’s post, it is quite apparent that there are a lot of apprehensions about the benefits of FDI in multi-brand retail among educated citizens. The big show of opposition by the BJP was expected – not because they are concerned about the ‘kirana’ stores becoming defunct, but because small traders and businessmen form a big part of their vote bank. The Marxists opposed it because that gave them some thing to do. They have become irrelevant otherwise.

The timing of announcing the much-expected policy reform could have been better. With some important state elections round the corner, even ruling party stalwarts voiced their doubts. But objections from allies in the ruling coalition forced the government to back-track and postpone implementation of 51% FDI in multi-brand retail. The policy flip-flop got wide coverage in the international press and hasn’t gone down well with FIIs, who headed for the exit doors.

What got lost in the brouhaha was that there was no opposition to the announcement of 100% FDI in single-brand retail. Why? Because 51% FDI in single-brand retail was already a fait accompli. That means good news for IKEA, Rolex, Tommy Hilfiger but bad news for Tesco, Carrefour, Walmart. Instead of getting into the pros and cons of 51% FDI in multi-brand retail, let me relate what is happening to 6500 farmers of West Bengal. It was front page news in The Telegraph two days back.

There is a potato crisis in Bengal. The crop is harvested during Feb-March and kept in cold storages for selling through the year. While a third of last year’s crop is yet to be sold, bumper harvest in Punjab has led to a flood of potatoes into the state. Farmer’s prices have dropped to 90 paisa per Kg against the usual Rs 3.50 per Kg. Middlemen, who ‘buy’ from the farmers and store the crop, pay the farmers only after they sell. With prices crashing lower, they are refusing to pay the farmers at the higher rate.

But 6500 farmers in Howrah and five neighbouring districts have cocked a snook at the antics of the middlemen. All of them supply their produce to the potato-chips factory of PepsiCo in Sankrail, Howrah. This is how the system works. PepsiCo, a multinational giant, has appointed 150 registered ‘vendors’ and help them to get loans to enable them to buy seeds, pesticide and sacks for the farmers. The farmers produce special chip-grade potatoes with less sugar and water content than the local variety, for which the vendors were paid Rs 6.10 per Kg by PepsiCo in Mar ‘11. The vendors pay the farmers promptly.

The vendors’ job is to coax more farmers to join the scheme because PepsiCo plans to increase their procurement by 50% from the current 40,000 tonnes. Due to the higher rates paid by PepsiCo and the prompt payment from vendors, these 6500 farmers hope to make a profit upwards of Rs 20,000 per acre as opposed to the likely loss of Rs 10,000 per acre that farmers of local variety of potatoes may face if they get paid at 90 paisa a Kg.

The prosperity that is spreading down the chain is remarkable. Some of the farmers who joined the scheme a few years back have replaced their hutments with ‘pucca’ structures, have bought more land and are sending their children to schools. Some of the top vendors, who have several hundred farmers under contract, make Rs 5 Lakhs per year.

Most multi-brand retailers overseas sell branded products as well as ‘house’ products, i.e. products manufactured by local vendors which they sell under their own brand name. These products are sold at a slightly lower price than competing branded products, but earn better margins. Even local multi-brand retailers have adopted the practice. For example, Spencers sells Kellogg's cereals as well as their own branded cereals. If and when the Tescos and Walmarts are permitted to open retail stores, they will find it profitable to engage local vendors in their procurements. Some are already doing it for their overseas stores.

A champion of small farmers has argued that initially the foreign retailers may pay top prices for local produce, but over the long term they will squeeze the small farmers for lower prices. The example of such a practice in the UK has been cited. The learned gentleman needs a lesson in geography. The entire UK will probably fit inside the state of UP in terms of size. India is a vast country in comparison. To reach the stage where all the small farmers get contracted to foreign retailers and then get squeezed in the long term is unlikely to happen even in the distant future.

Will FDI in retail be good or bad for India?

Let me make it clear at the outset that the people of India should respond to that question. Or, at least a small subset of the people of India who have access to the Internet and may read this post. In other words, you, dear reader, get a chance to voice your opinion.

An opinion based on gut feel, or hearsay, or belief does not count for much. So, I’m going to present some cold, hard facts (from a reasonably reliable though may be a biased source – the current Secretary General of FICCI – published in a newspaper article today). Please read the facts, and then decide.

1. The idea of FDI in retail was proposed by the NDA government 7 years back. (It also found a place in BJP’s election manifesto in 2009. Yes, the same BJP which is now making a song and dance about opposing it and stalling Parliament proceedings.) The UPA is finally taking steps to implement this important economic reform.

A very uncomfortable Yashwant Sinha, when cornered by a TV journalist about the above, said: “Lot of water has flown down the Ganges. I have become older and wiser.” (Why is it that people become wiser when they are no longer in power? It’s a rhetorical question – no need to answer it!)

2. The retail market is expected to double from its current size of $490 Billion to $1 Trillion over the next 20 years. The current share of organised retail (including foreign ones) is expected to quadruple from 4% to 16%. That means, the market size for the ‘kirana’ type stores will go up from the current $470 Billion to $840 Billion over the next two decades. (Forget about job losses!)

3. Large format retail stores with FDI will be permitted in cities and towns with a population of 10 Lakhs or more. About 53 such cities and towns will make the cut today. This number is expected to increase to 76 in the next 20 years. (Not likely to be a plunder of the country like the East India Company did.)

4. More than 30 Crore people are expected to migrate to urban locations from the hinterland over the next two decades. The ‘kirana’ stores are unlikely to be able to meet the extra demand or employ a significant percentage of the influx.

5. To maintain India’s GDP growth rate at 9%, 1.2 Crore additional jobs will need to be created every year for the next 15 years. Such a large number of jobs are unlikely to be created by manufacturing units (which rely more and more on automation) or IT services (which is reaching growth limits).

6. Despite presence of large format retail stores like Spencers, Big Bazaar, Reliance Fresh, Trends - ‘kirana’ stores haven’t gone out of business. Both small and big format stores are co-existing.

7. The real differentiator in retail business is not at the front-end, the actual stores where we go to buy clothes or lipstick or kitchenware. It is the back-end operations involving logistics, supply chain management and sophisticated computer systems. These require knowledge, experience and large investments.

Large format retailers in India have managed the front-end well, raising the shopping experiences of Indians. But they have fallen way short in the back-end operations.

You have the facts. Now, it is your turn to opine. Will FDI in multi-brand retail be good for India, or will it be bad?

Related Post

Is Organised Retail a Great Business or a Mediocre Business?

Is Organised Retail a Great Business or a Mediocre Business?

Organised retail business is a comparatively new phenomenon in India, and is still in the process of finding its feet in terms of location, size, format, product ranges, and segment targetting.

Before figuring out whether organised retail is a great business or a mediocre one, let me digress a bit and relate an interesting bit of news that appeared in the local newspapers.

South City Mall is one of the flashy new edifices in Calcutta's retail industry, with flagship large-format stores like Pantaloon and Shopper's Stop. With the city's four-day annual celebration of Durga Puja round the corner, the Mall has been teeming with shoppers of all ages.

Many shopper's were confounded recently by a closed Pantaloon store. Several smaller stores were also closed. Even the food court had most shutters down. This, at a time of peak shopping in the city.

The next day's papers were all agog with the inside scoop. Reportedly, the mall authorities had turned off the power supply to the Pantaloon store for non-payment of a large electric bill. The smaller stores and the food court - which apparently were part-owned by Pantaloon - had shut down in 'sympathy'.

Turns out that the mall authorities had agreed to lower the 'astronomical' store rents for a few months because of the economic down turn, after representation by a group of retailers allegedly led by Pantaloon. Raising of the rents back to the earlier levels caused the non-payment of bills. Wonder what they were thinking, when they agreed to the high rents before moving in!

That Pantaloon is badly in need of money, and they are not finding anyone who will give them a loan, is not news any more. (All their 'profits' are accounting fiction - negative cash flows from operations on each of the last 4 years paint the true picture.)

Neither is the story of losses incurred by the likes of Shopper's Stop, Subhiksha, Spencer's, Vishal Retail. Even a big company like ITC is incurring losses on its retail garment stores.

What went wrong? Organised retail was supposed to be the ideal service industry for the future of India, with a huge potential of employment of an unskilled but literate work force.

Several things. The most basic being the business fundamentals. You need to spend several Rupees to earn one. Real estate has to be purchased or leased at exhorbitant rates in large cities - where small format stores are not viable. In smaller towns with cheaper real estate, large format stores may not draw adequate footfalls.

Stores need to be air-conditioned, well lit, frequently remodelled. New products and fashions have to be constantly introduced and the older models and shop-soiled garments sold off at highly discounted prices.

Margins are wafer thin. The constant requirement of cash sooner or later overwhelms the business because of the large interest burden. Add to that, the competition from mom-and-pop outfits that have lower infrastructure costs and have long established customer relationships.

Highly streamlined bulk procurement processes, tight inventory control, live assessment of customer preferences are some of the ways by which some actual profits can be generated. Such activities require expensive computer hardware and software, further adding to the cost.

The banning of overseas retail businesses - except in single product stores - has ensured that Indian retail companies will not benefit from established processes at Walmart, Krogers, Asda, Costco, Target.

Is there any hope for organised retail businesses in India? Will they ever make any real profits?

What do readers think?

Stock Market News, Financial News - Mar 6, 2009

Asia stocks slide as Wall Street hits 12-year low

By Eric Burroughs

HONG KONG (Reuters) - Asia stocks slid on Friday after a warning from General Motors' that it may need to file for bankruptcy drove Wall Street shares to 12-year lows and highlighted the severe troubles of major U.S. companies and banks.

World stocks struck a six-year low as Japan's Nikkei average fell about 3 percent in early trade, with shares in the country's big exporters and banks taking the biggest hit. (More...)

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Banks' retail lending model can't handle rate shocks, slump: IBA

By Financial Express Bureau

Retail lending model followed by Indian banks is either unsustainable or dependent on high economic growth. It was not designed to withstand interest rate shocks, or the slowdown in the country's economic growth rate.

A recent report released by Indian Banks' Association (IBA) titled 'Retail Lending Balancing Concerns in Difficult Times' has identified few weaknesses in the retail lending model of the Indian banking sector that need to be addressed. (More ... )

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Parsvnath launches affordable housing project in Lucknow

By Financial Express Bureau

In what can be termed as a major price correction, real estate player, Parsvnath Developers Ltd (PDL), which has is present across 50 cities and 17 states in India has launched an affordable housing scheme in Lucknow.

Branded Parsvnath Royale Floors, the project would be part of the group's integrated township called Parsvnath City and would target the economy-class buyers. (More ... )

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GSK to focus on RandD, new launches

By Kakoli Chatterjee, Indian Express Finance

GlaxoSmithKline Consumer Healthcare India is going ahead aggressively with its plans around development and launches of new products. In the next 12-18 months, the company will be launching new products in three categories in the health and nutrition segment, at an investment of Rs 10 crore upwards.

"In a couple of years' time, we are expecting the Horlicks brand to contribute around 15% of the topline of GlaxoSmithKline Consumer Healthcare", Shubhajit Sen, executive vice president GlaxoSmithKline Consumer Healthcare said. The company launched Horlicks nutribar about a week back in three flavours--cereal 'n' milk, choco crispy and nuts 'n' raisins. Priced at Rs 15, the nutribar is placed in the nutritional snack category and targets the 'on the go consumer' for out of home consumption. (More ... )

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Subhiksha to shut 20% of its outlets, enlarge board: MD

Indian Express Finance

Crisis-ridden retail chain Subhiksha said it will explore options to induct more independent directors into the company's board. It will also close down 20% of its outlets due to a liquidity crunch and will renegotiate with owners on rentals for another 30-35% of its stores. The retail chain, whose operations have come to a standstill in the wake of severe liquidity crunch, has already seen the exit of five board members in the last six months.

"The company is a board-managed one and will continue to be so. We will seek an even wider representation on the board so that we gain from the wisdom of all," Subhiksha Trading Services managing director R Subramanian told PTI. (More ... )

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Parle Agro, Dabur gear up to take on multinationals

By Lalitha Srinivasan, Indian Express Finance

In a bid to take on multinational giants, home-grown brands Parle Agro and Dabur India are drawing up aggressive growth plans to pump up volumes. Dabur India is entering into sub-contract manufacturing arrangement with local companies in order to increase its production capacity. "To counter the multinational competition, Dabur is gearing up to foray into the branded fruit drinks sector within a month," said Amit Burman, vice-chairman of Dabur India Ltd.

On the other hand, the Rs 950-crore Parle Agro Ltd is heavily investing on building up its retail visibility through various merchandise, to promote its water brand Bailley, which directly competes with Coke's Kinley and PepsiCo's Aquafina in the Indian market place. "Defying the economic slowdown, the Rs 85,000-crore Indian FMCG industry is steadily growing. With increasing competition between MNCs and swadeshi players, the sector will further grow this financial year," said an industry analyst based in Mumbai. (More ... )