Thursday November 14, 2019
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Allow Markets to Run their Course before Entering Them

It also made Ladakh a Union Territory without an Assembly

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It all began with the Rajya Sabha and then the Lok Sabha scrapping special status under Articles 370 and 35A for Jammu and Kashmir and making it a Union Territory with an Assembly. Pixabay

The week gone by had plenty of action and played out on expected lines as mentioned in the previous weeks article. It all began with the Rajya Sabha and then the Lok Sabha scrapping special status under Articles 370 and 35A for Jammu and Kashmir and making it a Union Territory with an Assembly. It also made Ladakh a Union Territory without an Assembly. The divide right across the centre of the principle opposition party Congress was clear. It lost the chief whip in the Rajya Sabha on the issue. Further, a large number of ex MPs from the Congress from the NextGen who incidentally had all lost the Lok Sabha battle this time voiced their view against the party line. Fearing another split, on Saturday night the Congress made Sonia Gandhi the interim Congress President. This after the party had said that the next President would be a non-Gandhi.

Wednesday saw RBI deliver the expected rate cut and break tradition by reducing rates from the conventional 25 basis points to 35 basis points this time around. Repo rate now stands at 5.40 per cent which is the lowest rate in nine years. All six members voted in favour of a rate cut while four agreed with a 35 basis point cut and two supported a 25 basis points cut.

Thursday and Friday, we heard about the Finance Minister holding consultative meetings with captains of industry, chambers of commerce, automobile association and members of the capital market including FIIs and FPIs. All of this led to the market believe strongly that the recent surcharge on income tax applicable to FPIs could be rolled back or done away with. Markets rallied strongly and the mood on Dalal Street seemed significantly different than what it was over the last five weeks since the budget was presented. No matter how coincidental it may seem, FPIs were net buyers on Friday against their constant selling.

BSESENSEX gained 463.69 points or 1.25 per cent to close at 37,581.91 points while NIFTY gained 112.30 points or 1.02 per cent to close at 11,109.65 points. The broader indices saw BSE100, BSE200 and BSE500 gain 1.12 per cent, 1.18 per cent and 1.19 per cent respectively. BSEMIDCAP was up 0.91 per cent while BSESMALLCAP gained 1.63 per cent. The benchmark indices gained on three of the five trading days and lost on the remaining two. The low on the BSESENSEX made on Monday was 36,416.79 points while on NIFTY it was 10,782.60 points. These could be significant levels on any negative news flow in the market in the coming weeks.

Markets, Course, Action
The week gone by had plenty of action and played out on expected lines as mentioned in the previous weeks article. Pixabay

The top performing sector was BSEAUTO which was up 2.73 per cent whilst the worst performing was BSEMETAL down 3.03 per cent.

The Indian Rupee was under pressure and lost Rs 1.22 or 1.75 per cent to close at Rs 70.80 to the US Dollar. This weakness was partly due to China devaluing its Yuan to trade above the 7 Yuan to the dollar level. Dow Jones lost 197.57 points or 0.75 per cent to close at 26,287.44 points.

In primary market news, shares of Affle (India) Ltd listed on Thursday. Trading was very volatile with shares touching a high of Rs 958.37 and a low of Rs 751.05 before closing at Rs 875.10. Shares gained 17.46% from its issue price of Rs 745. Delivery volume on day one was over 87 per cent of the non-anchor portion which is indeed very high. HNIs who had subscribed their portion by 198 times lost money as the cost of funding was between Rs 215-220. The share never reached these levels during trading. While on one hand it could be said that a large number of people who were allotted shares sold, on the other hand it could be said that shares have been bought and gone into strong hands. The coming days would tell what happened.

The primary issue from Spandana Sphoorty Financial Ltd was just about subscribed. The QIB portion was subscribed 3.11 times while HNI and Retail remained undersubscribed at 0.55 times and 0.09 times respectively. The issue was overall subscribed 1.05 times.

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The issue from Sterling and Wilson Solar Ltd which was an offer for sale for Rs 3,125 crore was subscribed technically. The offer for sale saw the company allot 1.80 crore shares to anchor investors and then the QIB portion was fully subscribed. This saw the QIB portion which was 75 per cent of the total book receive subscription for 3.03 crore shares which was 75.78 per cent of the overall issue. The HNI portion was subscribed 0.89 times and Retail portion subscribed 0.30 times. The overall book was subscribed 0.9225 per cent. The issue being an offer for sale was subscribed and full allotment would be made to all valid applications.

The week ahead has two trading holidays on Monday and Thursday. This would break any momentum which would have built up last week. There is expectancy post the meetings that various segments of industry and capital markets had with the Finance Minister. While not much is expected to happen immediately, some decision on the surcharge needs to be taken. If nothing is forthcoming, there could be yet another round of selling in the markets which seem to have just made some sort of a base.

Markets would be volatile in a short three-day week and swing wildly. Expect some clarity on pending issues shortly, may not be on Monday or Tuesday. Allow markets to run their course before entering them. (IANS)

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There’s a lot in a Coupon! (Column: Behind Infra Lines)

A quick review of investment styles promoted by the acolytes of value investing

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The Indian economy gradually works towards resolving issues in the real estate space, both on the physical inventory side as well as financial instruments space. Pixabay

Trends, both global and Indian, across the financial markets often reaffirm and, more importantly, remind us of the basic principles of business and investments. The word “basic” here implies the fundamental underpinning of business, rather than a casual reference to simplicity. Both current issues and opportunities that confront India must be analysed in terms of how capital has flowed into different sectors with varying capacities to generate income and the “risk perception” that investors have about the income- Column: Behind Infra Lines.

A quick review of investment styles promoted by the acolytes of value investing, summarised in the essay titled ‘Buffett’s Analytical Framework’ by ‘The Private Investment Brief’ (a specialist investment newsletter) is useful. Viewing an asset through the spectrum of the capital required to acquire the asset, and the consequent income the asset can generate as the yield, provide the necessary framework required. Additionally, the potential growth rate of the income streams from the asset must be factored in, to get a basic structure that can be utilised to compare asset returns.

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The potential growth rate of the income streams from the asset must be factored in (Column Says). Pixabay

As the Indian economy gradually works towards resolving issues in the real estate space, both on the physical inventory side as well as financial instruments space, it is worthwhile viewing real estate investments through the simple framework mentioned above. Analysing income streams is especially true for the residential segment. While solutions are being worked upon, the crucial aspect that merits attention is for the capital allocated to distressed real estate segments, what income or cash-flows can be generated and how is this income expected to grow in the years to come.

The framework mentioned above, while simple, throws light upon precisely why the residential real estate segment is still struggling to generate the requisite investment. Fundamentally, an asset that is yielding two to three per cent of income, not adjusting for any other risks, at best is unable to compete for capital with different segments in the Indian economy, and for that matter globally. Lowering home-loan rates is a welcome step. However, such moves do not address the core issue at hand that current asset prices might still need further adjustment to truly get demand going unless one can foresee an unlikely scenario of residential rental yields doubling soon.

Additionally, an even more troubling question for the real estate sector and the policymakers to bear in mind is, why such a situation arose in the first place. Markets overshooting valuations in the face of exuberance is part and parcel of the game, but the degree of such overshooting must be reduced through cleverly designed policies to reduce the kind of over-drag the residential real estate segment has lately seen in India. Land prices, valuations at which land is available for residential real estate development, and the policies that drive the decisions need an urgent relook.

A quick comparison between the fate of the commercial office real estate segment in India versus the residential real estate segment provides a valuable insight into how vital the income component is to assets trying to attract investments. The commercial office real estate segment has seen robust investor interest over the last five years as the annual yields the assets generate (capitalisation rates) have gradually come down from the low teens to around eight to nine per cent. While the actual return varies with asset type, the key takeaway is that commercial office real estate segment in India has seen investor interest because the returns generated adjusted for the risk undertaken are competitive versus other investment avenues.

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India must be analysed in terms of how capital has flowed into different sectors with varying capacities to generate income and the “risk perception” that investors have about the income (Column Says). Pixabay

More importantly, the back of the envelope framework stated above is the one that lenders need to be mindful of. Of all those involved in financing projects lenders are the ones who are most dependent on project cash-flows to generate returns as opposed to dependency on speculative capital gains. The “attractiveness” of an asset from an income generation perspective needs to be kept in mind because it allows both the generation of a sensible rate of return and the creation of assets that are competitive across a multi-asset spectrum.

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As the Indian economy looks to provide the next phase of investment-driven growth and tide over a real estate led developer and NBFC crisis, an eye on the cash-generative capacities will be essential to ensure a sustainable and value-generative investment environment. Going forward, investors must assess the income-generating ability, and so must the lenders, while the policymakers must look at framing policies that help improve the attractiveness. (IANS)