India Vs England :2nd Test, Day 2 at Wankhede

For me it was the first day of watching a Test from the stands. Hopefully many more such days are there around the corner. Being a keen follower of Test Cricket, I was really looking forward to watch the Mumbai Test match between India and England. Mumbai Test pitches have been good sporting tracks (in my memory), which are predominantly spin friendly. Usually most of the pitches in India are run riots and these produce really boring cricket. For me Test Cricket represents a keen contest between bat and ball, aggressive or contemporary stratagems and loads of patience. 

The Session 1, Day 2 the Indian batting folded up at 327, with major contributions coming from Pujara (have huge expectations from him) and Ashwin. England started their 1st innings very cautiously with Dhoni using the spinners Ashwin and Ojha to open the bowling. The pitch was assisting the spinners and looking at the performance of the English spinners there were great expectations from the 3 Indian spinners. The English openers very reserved and cautious in their opening stance, they made sure that the team didn't lose early wickets. 

Over 30, Session 2, Day 2 provided the initial breakthrough for India. England lost 2 wickets within a span of a few overs and in walked in Kevin Pietersen (KP), who was expected to make a huge difference to the England batting line up. After failing in the 1st Test KP had a point to prove to his critics. KP too started cautiously but started capitalising on the weak line and length of the Indian spinners. It was a treat to watch KP and Cook bat, both have contrasting batting styles; Cook is an orthodox player who scores at a leisurely pace and KP who likes to stamp his authority on the opposition bowlers.

England did look vulnerable at the fall of the 2 quick wickets but after KP had settled down, the game was evenly balanced at the end of Day 2, with a slight advantage to England. The moment of the day was KP's back foot cover drive, it was simply awesome.  

PSU Banks - Rich Dividends

Public Sector Unit (PSU) Banks have recently undergone around 25% - 30% correction. Prior to this steep correction PSU Banks were already trading at cheap valuations compared to Private Sector Banks, the current prices have lead to further attractive valuations and dividend yields for several scripts in this sector. The below table provides ten year growth trajectory of 5 PSU Banks.  

Particulars	2003	2005	2007	2009	2012
Corporation Bank - Dividend Yield	2.78%	1.91%	3.01%	3.78%	5.06%
Dividend Declared	45%	65%	90%	125%	205%
Market Price	162	340	299	331	405
NPAT (Rs. In Crores)	416	402	536	893	1,506
Advances (Rs. In Crores)	12,029	18,546	29,950	48,512	1,00,469
Indian Overseas Bank - Dividend Yield	6.13%	3.11%	2.70%	5.23%	5.84%
Dividend Declared	16%	24%	30%	45%	45%
Market Price	26	77	111	86	77
NPAT (Rs. In Crores)	416	651	1,008	1,325	1,050
Advances (Rs. In Crores)	17,447	25,205	47,060	74,885	1,40,724
Oriental Bank of Commerce - Dividend Yield	3.60%	1.18%	2.00%	4.08%	2.79%
Dividend Declared	45%	30%	47%	73%	79%
Market Price	125	254	235	179	283
NPAT (Rs. In Crores)	458	727	581	905	1,142
Advances (Rs. In Crores)	15,677	25,299	44,138	68,500	1,11,977
IDBI Bank - Dividend Yield	3.13%	1.61%	2.28%	2.03%	5.58%
Dividend Declared	15%	8%	15%	25%	55%
Market Price	48	50	66	123	99
NPAT (Rs. In Crores)	474	415	630	858	2,031
Advances (Rs. In Crores)	46,385	45,413	62,470	1,03,428	1,81,158
Union Bank of India - Divid Yield	6.33%	3.21%	2.79%	2.30%	3.92%
Dividend Declared	21.00%	35.00%	35.00%	50.00%	80.00%
Market Price	33	109	125	217	204
NPAT (Rs. In Crores)	314	712	675	1,387	2,081
Advances (Rs. In Crores)	21,383	29,425	53,379	74,348	1,50,986

These scripts definitely come under my purchase radar for the reasons mentioned as under...
1) 3 of the above mentioned banks have a dividend yield of over 5%, this dividend is tax-free in the hands of the investor. And they have consistently provided above average dividend yield throughout the ten year period.  
2) NPAT or Advances have grown by atleast 2 times their 2002-2003 levels. And with their branch strength and growth of the Indian economy, these banks will continue to grow.

If these scripts make for such great cases then what is the reason for the sharp fall in their prices. The fall mainly be attributed to the markets expectation that Non Performing Advances will increase, which in turn will lead to higher NPA provisions and lower profits. I would recommend Corporation Bank, IOB and Union Bank of India as good long term bets as they are available at P/B of 0.70 and PE of 0.60. Such cheap valuations coupled with great dividend yields provide ample margin of safety for future asset slippages.
 

Diesel Prices : To Raise or not to Raise

The Indian government was planning to increase the prices of diesel several times in the last 6 months. And as the cookie crumbles in India, it has remained an illusion for all Indians. The question arises that why has the government thought about increasing diesel prices so often ? The answer 1) Fuel prices are dependent on  International Benchmarks and 2) Our currency has depreciated.

In India the prices of diesel are subsidised by the government and this subsidy bill comes to around Rs. 1 lakh crore. We can't increase the prices because we are a poor country and an increase would increase our already high inflation (currently at 10%, as per official estimates). The main reason that we need to raise the prices is because this subsidy burden is increasing the deficit i.e. the government's income is less than its expenditure, which leaves no surplus to invest in infrastructure and poverty reduction measures. And as we import more than 80% of our fuel our Balance of Payment also gets skewed, this further weakens the rupee.

As our deficit increases the government will have to borrow to pay not only for the subsidy but also for other expenditures, this in turn raises the cost of borrowing for the government. The high deficit rate also dissuades foreign investors from investing further money in a country which cannot balance its books. The low prices create high demand for diesel fuel, as petrol prices have been increased and anything which is not fairly priced will not be used efficiently ( economic basics ). Low diesel prices have also attracted people towards buying diesel cars, hence the government's rationale for subsidising the fuel for the poor doesn't stand.

Any measure such as differential pricing for disparate customers will lead to corrupt practices and also increasing tax on diesel cars will lead to lower demand which will further hurt the fragile economy. So if the government wants to subsidise diesel so that it doesn't create inflation as most of the goods in India are transported via road transport which primarily uses diesel. 

I propose we have dual pricing for diesel not between customers but for large cities and the rest of India. So that we can reduce the burden on the government and the affluent section of society pays the true price of fuel. This duality won't have a major impact on prices of essential commodities but it will curb indiscriminate use of diesel in cities. Those who want to use economical means of travelling in cities can opt for CNG cars or public transport (just hope it gets better).

Part III - The Solution

What's the use of discussing the problem if one doesn't provide the solution. So this it then, let us read my version of the solution to this issue.

As the boom began from 2003 and lasted till 2007, the fall will also last till 2013 or 2014. Most of the solutions require a long term approach to resolving our current conundrum. I feel we should stop the austerity measures as they aren't producing the desired results. On the contrary austerity has led to reduced consumption, lower tax collections, high unemployment and a feeling of helplessness among the masses. We need to complement the Monetary Stimulus i.e. the Quantitative Easing by USA and England and Long Term Refinance Operations (LTRO) i.e. lending by the European Commercial Bank at 0% for 3 years with Fiscal Stimulus as the money supply has not met with money demand which has led to inflation as the system if flush with liquidity and there are no other options but to speculate.

EU nations should revert to pay-cuts, pension and labour reforms to make their more productive and reduce taxes to fuel consumption. People will need to accept the fact that the days of superb social security web are over. In the USA banks should be made to realise that the funds that have been provided to them are for lending to the people and not for prop trading. The US government should come up with large scale infrastructure spending measures and alternate fiscal stimulus measures to create employment. We need to emancipate people from their current state of mind. 

EU will need to work together for a solution for the debt-ridden countries, they should be provided with more liquidity and a long term aid package should be finalised without penal austerity and fiscal goals. This will help to remove the insecurity and provide a definite road map for the revival of their Economy and re-entry into the Debt Markets. The current indecisiveness and disparate solutions by different countries needs to go, the stronger countries like Germany, Finland, the Netherlands and Norway need to sacrifice for the long term survival of the Euro. 

For India these measures will lead to higher prices and even higher inflation. If we exclude fuel price inflation from the indices we will see that the other components like agricultural and manufacturing prices can be tackled my taking prudential steps like de-bottlenecking the infrastructure and providing impetus to agricultural reforms. I feel the major beneficiaries of subsidies have been the rich farmers and the middle class, we need to provide them on a need basis and to the deserving. And we need to start making tough decisions pretty soon or the situation will be such that decisions will be made for us. I feel that the latter situation will prevail. It's human tendency to procrastinate and we are seeing this all over the globe.

Let us see what the future beholds.    

The Current State of the Global Economy - Part II

The bail-out funds came with many covenants, fiscal consolidation being the major one. Fiscal consolidation aims to reduce the fiscal deficit i.e. reduce government spending on social security measures like pensions, healthcare education and unemployment benefits. Hence these countries had to cut down on jobs in government departments, increase the retirement age from 55 years to somewhere near 60 years, wage cuts and tax increases to augment government finances. The caveat for receiving further funds was on reducing the fiscal deficit. Subsequently these measures led to large scale protests and resentment among the general public. 

e) USA - Post 2008 USA bailed out its ailing financial sector which included housing finance companies, banks, insurance companies and investment banks. Under Federal Reserve's (Fed) ( USA's Reserve Bank) blessings also several financial institutions were merged with their stronger counterparts. To spur up the economy the Fed came up with a monetary stimulus package called Quantitative Easing (QE) of about $600 billion and reduced the borrowing rate to Zero, this money was used to buy US Government Bonds which was used to bail out the financial companies and help the US Government to meet social security benefits , in layman terms the Fed printed $'s and gave them to the Government to splurge. This infusion of money didn't have the desired effect of increasing the growth rate or creating job opportunities. So in 2010-11 the Fed announced QE II of another $600 billion, this additional funds were used by banks to hoard or increase their cash reserves and speculate in commodity and forex markets, which led to increase in commodity prices without any tangible increase neither the growth rate nor the employment figures. This wasn't the last step which the Fed took, another measure called operation Twist i.e. replacing short term bonds with long term bonds in the Fed's Balance Sheet, this measure was introduced to reduce long term borrowing rates and propel infrastructure spending. But in 2012 the unemployment rate continues to remain above 8% and the number of people receiving unemployment benefits have remained the same. 

f) China - China's biggest trading partner is the US, hence it was thought that post the QE measures the consumer spending in the US would increase on the contrary it has remained at 2007-08 levels and is slowing moving lower and with very little employment growth the signs look bad. So to prop-up domestic consumption to sustain its manufacturing base, China also undertook a monetary stimulus which led to a property bubble and the inflation rate inched above 5%. Mid 2011 China's Reserve Bank increased the borrowing rate and put curbs on real estate lending, this tightening coupled with the slowdown in exports has also slowed down the Chinese growth rate to mid 8% level.

g) India - Recent economic surveys and reports haven't been kind to India. We all know the story by now, policy paralysis, high inflation, huge subsidies, fiscal deficit, current account deficit, crippling infrastructure etc. Last year inflation was the major issue in India which was caused to rise in agricultural commodities, dairy and poultry products and supply chain constraints in manufacturing products. Few of our problems can be because of international issues but the majority have been our doing.

My last part of this series will be about how we can tackle this mess.

The Current State of the Global Economy

June 13, 2012

This is my 1st post realting to Economic scenarios and hopefully many will follow. Currently we are encountering varied issues all over the globe, let me list them down...

1) Japan - Aging population and deflation

2) USA - High unemployment, low growth, low rates of interest

3) China - Propety bubble, falling exports, slowing growth

4) European Union (EU) - High unemployment, high debt to GDP ratios, low growth

5) Australia - High unemployment, low growth

6) India - Low growth, weakening currency, high inflation

The common feature among all is Low Growth and High Unemployment. Precursor to our current state was the Financial Meltdown of 2007-08 and we are still in its aftermath. Let's begin with the EU, which is the main reason for the current crisis. EU countries are currently facing high debt to GDP ratios ( in the range of 70% to 150%), i.e. their debt levels are not sustainable with their current GDP and neither will their economies grow at such a rate that they can repay the interest or the principal. Let us see what led to such a situation for a few of the countries...

a) Greece - Greece's entry into the EU was done in haste and without adequate due diligence by the initial member countries, to shore up member nations that have adopted the Euro, so it could convert into Euro at a highly favourable exchange rate. Greek citizens suddenly became rich as they possessed a stronger currency. The Greek government started borrowing at very low rates due to their EU association. These reasons coupled with an unproductive economy, high social security benefits and low retirement age made them profligate. To sustain such high levels of social security benefits, the government got into a debt spiral in which they had to borrow more money to pay the interest on the initial debt. This situation was sustainable till the world markets were flush with liquidity, but the 2007-08 crisis which led to a trust-deficit made borrowings by such profligate economies expensive as liquidity dried up and lenders became sceptical. Now the government could not mend its ways hence they started borrowing at higher interest rates compared to other EU nations. Earlier they were borrowing at 2% - 3% now the rates rose to 7% for a ten year note, a country which doesn't have the means to even pay the interest on such loans and has a GDP growth rate of 1%-2% can't sustain such a high cost of debt. If Greece had the power to print the Euro it could have easily repaid these loans, but the EU doesn't have a monetary union which allows its member countries to print notes and get out of jail. The EU treaty has a mandated the European Central Bank (ECB) to expand money supply i.e print notes at a certain fixed level. Eventually it had to approach the member countries for a bail-out.

b) Ireland - It also had similar story as Greece and it also had to approach the EU countries for bail-out.

c) Iceland - A non-EU state had a huge boom in real estate prices, being a country having a small population such price rise was unsustainable and had attained bubble proportions. The exposure of 2of the largest banks of Iceland in real estate loans was higher than the GDP of Iceland, when the 2007-08 financial crisis struck it was the first nation to seek help, the real estate bubble burst which lead to huge non-performing loans following which the banks faced huge losses. These banks were bailed-out with government i.e. tax-payer and IMF borrowed funds. Iceland was in a favourable position because it could print its own currency which was severely devalued during the real-estate crash and due to which it could restrain foreign capital from leaving its shores.

d) Spain - Spain also saw a real-estate bubble which was propped up by Cajas (Loca Savings Bank are known as cajas), the typical case of sub-prime lending. Even its real estate bubble burst post the financial meltdown and the Cajas are sitting on potential NPAs of billions of dollars. Just a few days back the EU sanctioned a $100 billion bail-out package to re-capitalise these banks.

Similar story resonates around other EU nations like Portugal and Italy. Till now Iceland, Greece, Ireland and Portugal have received bail-out funds from EU and they have stopped issuing fresh notes as there is no  market for their debt instruments. Greece's 10 year note has a yield of 27%. All the nations (except Iceland) approached the EU for assistance after the yield on their 10 year notes crossed 7%. As of today the yield on Spanish and Italian 10 year notes is 6.5% and 6% respectively and rising.

This the background of the current imbroglio and in the following post I shall provide further details with regards to the measures adopted by the EU, current state of the economy in the USA and China, and finally the impact of all this on India as well as our own follies.                        

Beautiful Dream Run (Part Two)

So having being put into bat, we sent in our openers CP and NA; with CS on the sidelines watching our every move and providing guidance.

Batting First

1st Over - Bowled by a woman

CP managed to take a single on the 1st ball and put our main batsman NA on strike, we collected around 15 runs from the 1st over, all thanks to CP's single and some power hitting by NA.

2nd till 5th Over

We can retire our woman player after the 1st over is bowled, so coming back to the pavilion accompanied a huge round of applause was CP. Next up was UE, he and NA has an amazing time in between and batted on till the 4th over. We lost UE in the 4th over and in came JT he took a few balls to settle down, CC was hoping that JT would perform well as he had put in a good word for him to CS. After a few hiccups we managed to reach a competitive score of 61 for the loss of 3 wickets in 5 overs. JT's performance was average and that's putting it very mildly.

Now Bowling

1st Over by CP

She had received a lot of inputs from CS on Saturday, and now was the time to follow-up on them. CP did a fine job at keeping the woman batsman on strike for 3 balls and conceding a couple of wide deliveries. For the remaining three balls Team Two could put up a score of 10 runs at the end of the 1st over.

2nd over by TT   

After going through a disastrous time in the previous edition of the cricket league, it was time to make things right. The 1st ball was lofted to long-on where RR was fielding, some sloppy fielding yielded 2 runs. This prompted UE to swap places with RR, 2nd ball was once again lofted to long-on, and UE made the catch look easy; his fielding change and TT's bowling were vindicated. 3rd ball was once again lofted to long-on and another catch by UE, this was turning into a dream spell for TT. The rest of the three went for 8 runs, a boundary included.

3rd and 4th over by NA and CC

These two overs went well for Team Two and they were in the game, thanks to our fielding to a very large extent. NA bowled well, the batsmen playing and missing most of the times. The only wicket to fall was by a run-out, which was a pretty eventful one; the batsmen edged a ball to the keeper and it spun after it landed, being sloppy as ever TT, the keeper, misjudged the spin and the ball went past him. They easily completed the single and went for a risky second. Now TT had a conundrum whether to go for a direct hit or throw at the bowlers end to get a run-out. As he wasn't sure about either he ran towards the stumps with more than 11 people screaming, " throw the god-damned ball", and when he was about 3 feet from the stumps he threw the ball and it hit, it bloody damn hit. God saved the day and his ass.

The Final Over - 14 Runs to win

Don't know whether CC had a plan in his mind about who was going to bowl the 5th over. Me thinks that he went with NA because he bowled a pretty good line. So NA with the ball, bowling the 5th over. The first ball a swing and a miss both by the batsman and the keeper (TT), so they get a bye. Second ball once again a swing and a miss by both, another bye. So they need 12 runs off 4 balls, match is still in the balance and everyone is pissed at the keeper. 3rd ball another swing, a nick and it lands just short of the keeper, but this time the keeper pockets it safely and no run given.

Final 3 balls and 12 runs to get, the pressure in on the batsmen to score and thankfully they couldn't. To everyone's bewilderment and ours included we won, we achieved our lofty goal. CS was ecstatic, however, he had to leave due to work commitments along with MIS. Congratulating the team for a very good performance and reminding us to improve our fielding for the next match which was against our old team-mate, the captain of 'Credit in a Mess' team.

PS : CC was given some more inputs for the next match, firstly that JT couldn't judge the bounce well, so to send him lower down the order and secondly to try out UE as a bowling option and if he bowls well not to give TT a bowl in the next match.