Fairval

Notes on Indian equities, sectors and economy

Archive for the ‘Trends’ Category

Indian handicraft exports are booming

Posted by fairval on May 17, 2017

Our research arm India Business Reports (IBR for short) recently did a note on handicrafts and handloom exports out of India. Good to see that this segment is booming.

Handicrafts exports touched USD 3.66B in 2016-17, a growth of 11% over FY16 in USD terms. In Re terms exports grew 13.8% to Rs245B in FY17, as compared to Rs216B in FY16. These figures does not include export of carpets, which is another sizeable market by itself.

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(Source: EPCH)

Over and above the handicraft exports, India exported around USD1.8B of carpets an floor coverings. A major portion of this is handmade.

Growth rates for both – handicrafts and carpets – are healthy. Over FY10-17, handicraft exports have grown at ~15% in USD terms. Over FY97-17, a 20 year period, handicraft exports have grown at 10.2% CAGR in Re terms. Growth rate of carpets is slower, but impressive nonetheless. Exports of carpets have grown at 5% in USD terms over the last 5 years, and 13% in INR terms.

In the last 1-2 years, growth rates have slowed down for all sectors, in both domestic markets and exports. In light of that, this growth in exports in handicrafts is commendable, and makes it a ‘growth sector’.

For the full report, you can write to reports@indiabusinessreports.com; also available on Slideshare at  https://www.slideshare.net/IndiaBusinessReports/handicrafts-market?qid=c91002da-202a-47a6-bce5-9592f319fa73&v=&b=&from_search=1

 

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India tops JBIC FDI survey for 2016

Posted by fairval on January 14, 2017

For the third year in a row, India has emerged as the most promising country for overseas business, in the annual survey ‘Outlook for Japanese Foreign Direct Investment’ by Japan Bank for International Cooperation (JBIC). 

India replaced Indonesia as the top investment destination in 2014; and has held the position ever since. The table belows shows the result of of the 2016 survey. The survey is published in December. The 2016 survey was the 28th survey.

This is very significant. China held the no 1 position for more than a decades before Indonesia emerged on top for 2 years, and was then displaced by India.

This should result in increased activity by Japanese companies in India. Out of the 230 companies citing India as a promising, 60% (142 companies) do not have a local production base. They survey asks another key question – do you have a real business plan to go to India? In 2016, 40% of the 230 companies which named India also said they are actively working on India entry. In 2015, this figure was 36% (of 168). So there is a clear increase in in active interest in entering India.

jbic-survey

More on India Business Reports (www.indiabusinessreports.com)

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Are Ruias India’s most selfless & misunderstood entrepreneurs?

Posted by fairval on October 22, 2016

A seminal deal happened this week: one of the largest ever acquisitions of an Indian company, and as the full page ads mentioned – India’s largest ever FDI. The Ruias sold Essar Oil to a consortium led by Russian oil major Rosneft, at an enterprise value of USD 10.9B (there was separate money involved for associated group companies like Vadinar Port).

With this deal, the group expects debt burden to reduce by 50%. Overall debt at group level could be as high as USD20B. This suggests most of the sale value would go towards debt servicing.

The impact of the deal was instantly felt on the banking system. ICICI Bank, India’s largest private sector bank, which had a large exposure to the Essar group, jumped 7% on the day this deal was announced, and has risen since. At the time of writing, the stock is up 13% from the pre-deal close. In market cap terms, this is a USD 2.8B gain.

All this is good for the banking system, the rupee and the Indian economy. It becomes even better when you consider that the promoters Ruias have pretty much made no money whatsoever in setting up and running Essar Oil.

You read it right. For a company spanning around 2 decades, it appears the Ruias may have made zilch for all their family effort, plus the risk they had taken in terms of corporate, and maybe personal guarantees against bank loans.

Since we don’t have full information, this is what we are assuming – almost entire proceeds will go towards reducing debt. This means the only money Ruias may have made would be from dividend income, and salaries for family personnel.

On this count, the situation appears to be like this: in terms of data since FY02, Essar Oil hadn’t paid any dividend (as per equity database Ace Analyzer). The database does not show data before this. As per FY15 annual report, the only family member directly involved with Essar Oil was Prashant Ruia, who was chairman of the company. His remuneration for FY15 was Rs 43 lakh (Rs 4.3million). This is negligible for a company with a revenue of almost USD15B.

In other words, since the last 15 years or so, Ruias may have earned nothing directly out of Essar Oil. Assuming other than the principal amount of their investment in Essar Oil, they use the rest of the deal money to pay bankers, that’s 15 years of no return for an incredible effort of setting up India’s 2nd largest refinery, and one which pretty complex configuration. It wasn’t just a refinery; Essar Oil has 2500 retail outlets, India’s largest oil retail network in the private sector.

Contrast this with what the other big private sector player in India in oil refining – Mukesh Ambani – makes from his company Reliance Industries. Mr Ambani earned dividend of Rs 1400+ crore in FY16. In the last 5 years, he has earned dividend income of almost USD1B. He also draws a salary, which he has capped at Rs 15 crore per year for the last 8 years. This is besides his wealth from shares of RIL, which is about USD24B.

That is more like it. Unless you are making huge amounts of money, why would you create such a large business?

Unless some of the data above is wrong, this leads to a natural question – just why did the Ruais do it? Take such a huge financial risk, and then make no money.

Group chairman Shashi Ruia said in the press release “It is a historic day for Essar. The transaction demonstrates our unique ability to build world-class assets”. Note the stress on creating history, and doing something world class. Prashant Ruia’s quote also emphasized the group’s ability to create benchmarks. He said “The deals we have done have led to an FDI infusion of more than $30 billion into India”

I guess all this is not easy for a simple mind like mine to understand. Can the urge to create national or global benchmarks be so strong, that one can labour for decades for no financial reward? I don’t have it, many of us middle class Indians, who can’t look beyond their next salary cheque may not have it either.

And on top of it, the paradox is: we, who want to work for money, are poor or middle class; and those who are working for no visible money are not. Maybe this is one of those god’s mysterious ways of dispensing justice and allocating wealth.

In sum, I think it is time the media and analysts revised their opinion about Essar group, and recognize their selfless deeds for what they are worth.

 

PS: I guess this transaction and the 2 decade history of Essar Oil deserves a case study by Harvard Business School – what say?

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IIP plumbs new depths

Posted by fairval on January 11, 2014

This blog has highlighted earlier how this is the worst slowdown in the last 2 decades. The following chart shows how this is far worse that the FY01 to FY03 slowdown. The chart uses 12 month rolling average IIP. This metric never even touched 2% in FY01-03. This time, its been below 2% for 18 MONTHS! With no recovery in site yet.

The UPA government has screwed this country with untamable inflation.

Rolling 12 month average IIP

Rolling 12 month average IIP

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FY14: 3rd sub-par year for passenger vehicle sales

Posted by fairval on January 10, 2014

FY14 is likely to see passenger vehicle sales end negative. Sale growth has been pretty anemic in the previous 3 years also, making it the third year in a row where volume growth will be less than the long term trend rate of 12%.

Since 1996, this has happened only once before, in the FY01-FY03 period; that time the bite was more vicious. Never have we seen 4 years of sub par sales. Will FY15 revert to > 12% volume growth?

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Midcap versus Largecap

Posted by fairval on January 9, 2014

Since 2008, while large caps have not lost much value, midcap indices are down 40-50%. The following 2 charts give some perspective on this. The gap between FII ownership of large caps and midcaps has widened in recent years, from around 2% 2008 to around 9% now. With good reason – midcaps (on an average) are in a debt trap as the other chart shows. Several debt free midcaps, smallcaps and microcaps do exist.

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Kanpur doesn’t figure in IIT rankings anymore

Posted by fairval on January 5, 2014

How times change! Saw this chart in an alumni egroup. Amongst top 100 JEE ranks, just about no one wants (or went, not sure which) to IIT Kanpur in the last 2 years. In my time, it was totally different. Atleast 5-10 out of top 20, came to Kanpur. The JEE No 1, always came to Kanpur. The directors used to go all out to woo the JEE no 1. Clearly those times are long gone.

The reason – clearly Kanpur as a city, and UP as a state, does not appeal to anyone – faculty or student; much the same reason Kharagpur got left behind. (As an aside, Narayanamurthy was from Kanpur; and there was a time when, if you did not get any other job, you went to Bangalore, and just walked into Infy office, and started working. Those who stayed are long enough all multi-crorepatis now).

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In top 1000, Kanpur is still 3rd, but probably Chennai should overtake it. I don’t know if Bangalore has an IIT now, but that would be a good candidate to come into top 3 or 4 rapidly.

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Impossibility of predicting earnings

Posted by fairval on January 2, 2014

The interesting thing to note in this chart below is how earnings estimate change over time. For FY14, for example, the EPS estimate (for msci india index) started at 435 and seems set to end at 395, down by almost 10%. FY13 was even worse, with estimates coming down by 16% over time.

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Actual earnings growth was 6-8% FY13 and likely to be less than 10% in FY14 again. While FY15 estimates seem to suggest 17% growth over FY14, these numbers should come down over time. As this blog has written earlier, earnings estimates a year ahead mean nothing, and tend to be in the 18-20% bracket by default. They may eventually turn out vastly different, going up in bull markets and coming down in bear markets. Seems to suggest estimating earnings is an almost impossible task.

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Corporate EBITDA’s at 2 decade lows, it seems!

Posted by fairval on October 13, 2013

A recent broker report throws up an interesting insight – the so called increase in ROE’s of Indian companies over the last decade was powered by easy money,  not by EBITDA improvement.

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The 3 lines above may confuse: they are different sample sizes. The black line, which is the oldest data, is ~650 companies. The blue line, is 10 year data and around 1100 companies, grey line has even more companies

If we just focus on the black line, EBITDA margins are the least since 1994! (tho ROE is still higher)

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Rupee down 28% against Renmimbi, and why inflation is No 1 issue in India

Posted by fairval on July 14, 2013

This is a chart this blog has periodically published. Check the latest u[date.

The Rupee is down 28% against China’s Renmimbi over 2 years. If we go back, to a 6 year period from 2007, it is down 45%!. Rupee is down against just about all other currencies as well – USD, Euro, JPY, even Indonesia Rupiah, or Ruble etc.

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Ideally, this would be great for Indian manufactured exports. India should be looking forward to becoming the ‘factory of the world’.

However, there is no evidence of this yet. India’s exports are still slowing. More importantly, we haven’t heard any big announcements, like a chip maker, mobile phone maker, saying – All further investments in India becos it is the cheapest in the world.

Why is this – probably because rampant inflation is killing a lot of the benefits from rupee devaluation (haven’t checked REER data, that shud give a picture on this). That is why inflation control is a huge priority, and RBI has rightly focussed on it. So far, tho, consumer inflation remains rampant.

In that light, the Food Security Bill could not have been more ill timed. Congress will hope to win the 2014 elections thru media hype around measures like FSB. But, like most govt measures, 50-70% of money allocated for FSB will end up lining pvt pockets. 2 years from now, we will have double digit inflation, and close to double digit fiscal deficit. and Rupee heading towards three digits

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