Trade Deficit at a record high in FY12

Expanding Trade Deficit

Trade deficit hit almost 10% of GDP in FY12, the highest in the last several years as per this chart. This shows a key vulnerability of the economy. Our imports are relatively inflexible, while exports are exposed to global slowdown.

Software exports (which comes in services) and remittances (classified in ‘invisibles’) normally bale us out. Absolute level of trade deficit was $185bn for FY12. Software exports were around US$100bn for FY12. A recent World Bank release pegged remittances to India at around US$64bn for 2011. That is $164bn. Of course, we import services as well. Overall, the services surplus and invisibles will balances out only about 6% of the trade deficit, leaving us with a current account deficit of over 3%

CAD is expected to hit a record high of 3.5% of GDP in FY12. Thats close to $70bn. This gap needs to be filled by capital imports. Thankfully, FIIs are investing so far this year. At best though FIIs will contribute $10-15bn. The rest needs to come from FDI. With the government fighting cases with Vodafone, Telenor etc, FDI is unlikely to be strong in FY13.

Now, if FIIs start pulling out, then the  rupee’s had it. Rs 55 to the dollar is certainly possible, or more. But all thats good for exporters – IT and Pharma, to some extent, for metals.

 

How government is crowding out private investment

The government released its borrowing program for fiscal’13. While the targeted borrowing figure is about Rs 479,000 crore ($96 bn), expectations are this will be overshot by 10%.

As we have written earlier, government borrowings have ballooned in UPA govt’s regime since fiscal’09, when the government got the excuse of global slowdown to go on a spending binge. See the chart below.

See how crazily borrowings have shot up after ’08, about 4x in 5 years. This is absolutely criminal, since this is seriously straining the financial system. (state govts may be further adding to this).

The line, with its axis to the right, divides govt borrowings with annual change in banking assets, since they are the main source of govt borrowings (small savings like ppf and insurance sector make up maybe 15-20%). Till even fis’09, this ratio was within the sum of CRR+SLR, which is typically around 30%. Now, this ratio is touching around 45%. This is where pvt sector will get hit.This show there is very little room to cut rates, since govt may end up sucking more than the statutory levels from the banking system. Or what else? A sovereign bond?

Since govt spends never go down, fiscal deficit and govt borrowings arent doing down in a hurry either. The UPA curse will linger on us for a long time indeed..

In light of the above, now read this line from Manas Chakrabarty’s article today in Mint. He says ‘The Bloomberg data show that total market capitalization for the Indian market, in US dollars, has shrunk by 33.5% between the end of 2007 and 27 March 2012′.- This is when the govt’s spending binge started.

Manas also says, ‘That’s in spite of India being relatively unscathed by the crisis and despite the much higher growth in the Indian economy‘. – I think this is what most people are getting wrong. We did not come out unscathed. We have paid a heavy price for the govt’s stupidity. All that spending – what has it achieved? Infra progress is heavily behind schedule. Power sector is a joke. Business confidence is dented. And we are trapped in systemic inflation and structurally high interest rates.

Private Equity investments in India aggregates over $11bn in 2011, Four-S reports

2011 PE activty data from Four-S

Mumbai, January 3, 2012: The year 2011 saw 427 PE/VC deals worth $11.19bn compared to investments worth $7.96bn across 328 deals in 2010, shows data with research and financial consulting firm, Four-S Services. With drying-up of the public market as well as debt becoming costlier, India Inc. turned to PE investors for fresh funding.

The year also saw a surge in number of high value deals – there were 30 deals above $100mn in value (worth $5.91bn; 53% of total investments) compared 19 deals (worth $3.46bn) in 2010. Correspondingly, the average deal size for the year went up by 16% to $32.9mn.

The largest PE investment during the year was the $851mn commitment by Bain Capital and Singapore’s GIC to Hero Investments, the Hero group holding firm which is to buy out Honda Motors’ 26% stake in listed two-wheeler maker Hero Honda. This was followed by Apax Partner’s $480mn investment in NASDAQ-listed iGate Corp to buy Patni Computers. In another mega deal, Apollo Global Management invested $290mn in Welspun Corp as a part of its $500mn commitment to the Welspun Group. Blackstone Group’s owned Sithe Global Power invested around $261mn investment in SKS Chhattisgarh Power Generation. TPG committed $259.9mn to Shriram Capital, rounding up the top 5 investments of the year.

Infrastructure (including power) continues to remain one of the key investment themes for PE players. The sector topped the investment chart accounting for 27.8% of investments with a deal value of $3.11bn. The scale of deficit and government commitment to fund infrastructure projects, makes private participation in the sector one of the most compelling investment themes leading to growing PE’s interest.

The manufacturing sector occupied the second slot in terms of PE investments and totalled $2.02bn across 66 deals; this translates into 18.1% share. The sector was marked by some high value deals, including the largest transaction during the year – Bain Capital, GIC’s $851mn investment in Hero Investments.

The BFSI sector came next with $1.36bn investments across 40 deals. Fund managers believe that there are enough opportunities for private equity in virtually every facet of the financial services industry considering the rising income levels, focus on infrastructure spending, emphasis on financial inclusion, emergence of wealth managers and expected growth of the insurance industry.

However, the year was not so good for private equity exits. Against the backdrop of a difficult public market, PE exit volume fell 35% to 80 deals while value fell 49% to $2.69bn. This is in sharp contrast to 2010 when exits hit a record and there were 124 exit transactions worth $5.30bn on the back of robust capital markets. Fund managers were unable to match their exit timing with desired returns, and held back their portfolios.

Table: PE/ VC investments in India

	2007	2009	2009	2010	2011
Investment ($bn) y/y growth (%)	19.20 157%	11.16 -42%	4.25 -62%	7.96 87%	11.19 41%
No. of deals	382	344	250	328	427
Average deal size* ($mn)	57.2	38.8	20.9	28.4	32.9

* calculated over disclosed transactions

Source: Four-S Services

Table: Top 5 PE deals in 2011

Investors		Target	Stake (%)	Amount ($Mn)	Sector – Industry
Bain Capital, GIC	Hero Investments		29	851	Manufacturing – Auto
Apax partners	iGate Corp (Patni acquisition)		NA	480	Services – IT/ITeS
Apollo Global Management LLC	Welspun Corp		NA	290	Manufacturing – Metals
Blackstone	SKS Chhattisgarh Power Generation		NA	261	Infrastructure – Power
TPG	Shriram Capital		15.0	260	Services – BFSI

Source: Four-S Services

WPI data – 44 weeks and counting..

WPI seems steady in a 9-10% band for about a year now

I have written about this earlier, about how remarkably steady WPI data seems to be, above 9% but never crossing 10%.

Now it is really getting unreal, 11 months in a row! WPI has been above 9% and below 10%. Since this is now monthly data, this is equivalent to 44 readings in a row, if you compare with the earlier series which used to be weekly. WPI became a monthly release since Nov’09.

Leads one to suspect if there is a directive from the FM – dont release a double digit number!

Sharply polarised FY11, Investment theme gets dumped

Index return in FY11

The table shows the returns various indices made in FY11 (1 Apr 2010 to 31 March 2011). Note the humongous difference between Nifty and NSE Midcap – a mind boggling 16%.

In sectors, clearly sectors related to investments got dumped, while consumption and export themes did well. The UPA government is hellbent on driving consumption thru large fiscal deficits, while capex goes nowhere. This isnt good. No wonder we have no control on inflation.

Realty is one amazing sector – real estate companies raised equity early in FY11, promptly rigged product prices, saw demand plunge, and underperformed.

Earnings yield chart shows markets should go down

Earnings versus bond yields (adj for tax) for India

The data series here does not go too far back (really hard to get data in India). But it seems to suggest that earnings yield do not spend too much time below bond yields. Only at the peak of the bull market in Jan 2008 was there a was a large gap where bond yields led earnings yield. But by and large, India could be a risk averse market, where investors will switch to debt (or atleast out of equities) if earnings yield are lower than bond yields.

Now, earnings yield have once again fallen below bond yields, beginning Sep’10, thats when the Sensex crossed its Jan’08 peak. Market has pulled back about 15% since then. From this chart, it appears markets could fall another 15% from here, if not more.

One big reason is – bond yields are set to rise even further. This data ends on 7 March, when the pre-tax bond yield was 7.55% (for 1 year duration, the normally used 10-year doesnt make too much sense here). This could rise 100 basis points in the next 6 months. RBI isnt quite done with tightening yet. Inflation is not going to go away easily, no matter how many statements FM and Montek make. This itself is good for 10% correction in equity markets. Add to this the fast lessening expectations of growth for FY12. Sensex should fall below 17K anytime in the next 6 months, Nifty below 4900

Budget FY12 – the numbers that don’t go down. And those that don’t make sense

Key Numbers for India Govt Budget

Making numbers tally for a country as poor on data as India must be a tough task for the government, particularly when you one of the oldest guys in the cabinet as the FM, and a airy fairy guy  like Montek on the planning commission. Perhaps the others before them have been not much better, but look at the numbers this year, and you get a sense that this was a huge opportunity missed.

The FM and this govt screwed up big time. I am talking of FY11 numbers (not the projected FY12 ones). Lets see what happened in FY11 –

• Revenue was much better than what the government projected in Feb 2010. Compare column 7 to column 6. Revenue receipts were greated by about Rs 100,000 crore over budgeted. This was a lot due to the 3G income
• Now this is a large number. To make sense of this, you need to compare it to the figure in Row 7, Col6. This is the figure for projected borrowings for fiscal 11, which was Rs 381, 408 crore. This is a good 26% of the projected borrowing for the year gone by. This is also about 1.3% of FY11 nominal GDP.
• But what does the FM do? He ups spending even more. The result is, actual borrowing by the government is just over Rs 400,000 crore, despite a massive boost in the form of unexpected revenue.
• What could the government have done? What if the spending had not gone up? Borrowings would have been less by Rs 100,000 crore, and so would the fiscal deficit. As a % of GDP, fiscal deficit would have been 3.8%, instead of 5.1%. This would have been the lowest in a long time.
• How would a low fiscal deficit have helped India in fiscal’11? Interest rates would be lower, both of retail borrowers and corporates. FIIs would have loved the low fiscal deficit number, and would still be investing, instead of selling.
• We would have had a GDP growth of 7%, inflation perhaps 2-3% lower than what it is, interest rates lower by atleast 100 bps, if not more, and Sensex at 25K.

And some funny numbers..

There is no dearth of funny numbers when it comes to govt data. Check the last 4 rows, where I have back-calculated nominal GDP and its growth, subtracted real GDP growth from it. I have done a simplistic thing of subtracting the two to get the deflator, but the actual value cant be too different. So look at the GDP deflator number for FY11 – 12%! It has been high in the last 2-3 years as well, whatever the govt may claim on inflation otherwise.

The projected  figure for FY12 is much more sensible though

2010 was a good year for Indian equities

Year of the Monkey

2010 ended up a very good year for Indian equities. Not only did the headline indices record decent gains, what is more important is the advance – decline ratio for the year. Check some data:

Index Gains (%)

Sensex	17.6
Nifty	18.0
BSE Midcap	16.5
BSE500	19.3

Advances

Gains>0	62.0
Gains>15%	50.0

So 50% of traded stocks (we took companies with mcap > Rs 100 crore) gained more than 15%. It is hard to lose money in markets like that.  You could call 2010 the year of the monkey – You could throw a dart and make money.

2011 – Year of the Owl?

I doubt market may have this kind of breadth in 2011. This kind of breadth happens only in strong bull markets. For 2011, expect the number of companies gaining >15% to fall to 35% or less. So 2011 may well be the year of the wise owl – one will need to stock picking skills to make money in 2011.

Who’s the youngest?

Median Age across countries

The demographic dividend is a popular term in India these days. A good table from the Nomura report. Amazing how low the median age is counties like Pakistan, Nigeria etc.  No wonder Pakistan has these 17 year olds like Mohammed Amir who make it to the national cricket team!

How food consumption changes with income

Food Consumption change with Income

Interesting chart from a Nomura report.

Shows how consumption of meat, dairy and fruits goes up sharply with income change.  Should mean good times ahead for the poultry/meat and dairy companies. Nothing is cheap in this market though.Venky has run up dramatically and quotes at 20x trailing. Hind Industries is cheap, but the financials are stretched. And the management wants to enter the power business!

Hind In