Why India need not fret over Fed’s rate hike move?

Bringing the curtains down on an era of near-zero interest rates, the US Federal Reserve finally raised its key benchmark rate by 25 basis points last week, ending a prolonged period of uncertainty in global markets. While the Fed’s decision was very much on expected lines, it may cause some repercussions on emerging markets which will become relatively less attractive in the wake of higher interest rates in the US. Further, the Fed’s verdict will provide a further fuel to the dollar rally which may cause more pain for dollar-denominated commodities, worsening a global commodity rout, threatening to hurt EM capital flows. But, India, blessed with superior macro-economic fundamentals, compared with EM peers is unlikely to be much affected by the start of the Fed’s policy tightening cycle. Let’s see why?

With a forex reserves kitty of over USD 350 billion, India has plenty of ammunition to deal with any potential volatility in global capital flows on account of higher US interest rates. Vast improvement on the current account front means that India’s external balances are strong, lending it less vulnerable to global shocks.

India, which doesn’t rely on commodity exports like its BRICS peers won’t be adversely affected by an ongoing commodity rout.

With a very small part of India’s sovereign debt held by foreigners or denominated in foreign currency, a strengthening dollar is unlikely to affect India much. Contrarily, a stronger dollar vis-à-vis rupee could boost the competitiveness of India’s exports which shrank for a twelfth month on the trot in November.

Moreover, India, being the world’s fastest growing major economy with growth clipping well above 7 per cent will continue to remain an attractive destination for foreign investors at a time when China is headed for the weakest growth in 25 years, and Brazil & Russia are in steep recession. At the same time, a progress on key reforms such as GST which faces the threat of delayed implementation amidst political roadblocks is critical for putting Asia’s third biggest economy on the path to attaining double-digit growth, and consolidating the country’s growing investment prowess.

Even as the Fed raised the target of its federal funds rate to 0.25 per cent to 0.5 per cent, from 0 to 0.25 per cent previously, it signaled a “gradual” pace of tightening, a sign that monetary policy in the world’s biggest economy will continue to remain fairly accommodative despite the first hike in interest rates in almost a decade. A measured pace of US policy tightening, coupled with record stimulus from Bank of Japan & the European Central Bank (ECB) and expectations of further monetary easing in China may prompt foreign funds to continue flocking to India amidst lack of any challenging alternatives elsewhere.

Back in the groove: IPO market sizzles in 2015

At a time when secondary markets are plying through choppy waters, traders are relying heavily on the primary market to safeguard their investments as both Initial Public Offering (IPO) and follow-on equity offerings attract strong investor interest.

Confidence is back in the IPO market as there is huge demand for diverse set of companies with completely new business models to hedge volatility and weak foreign fund flows prevailing in the equity market in the face of mounting domestic and global uncertainty.

The health care sector is looking very healthy in the department of initial public offerings, with the latest set of public offering by two entities, Alkem Laboratories and Dr Lal PathLabs, witnessing strong participation both from foreign and domestic investors, driven by investors’ increasing appetite to invest in unique companies that are fairly valued as secondary market valuations are not that cheap.

Alkem Laboratories received orders worth 44 times the number of available shares for its Rs 1,350 crore initial public offering, according to exchange data. Qualified institutional investors (QIBs) were the most active bidders, having placed orders worth about 57.2 times the number of shares slotted.

Meanwhile, Dr Lal PathLabs, a leading diagnostics chain operator, received bid for 2,14,51,060 shares against the total issue size of 81,20,000 shares for its Rs 630 crore IPO on the second day of the issue. The quota reserved for QIBs was over-subscribed 6.13 times, non-institutional investors received 57 per cent subscription, while retail category was subscribed 1.56 times, exchange data showed.

The IPO market will sign-off the year 2015, registering its best performance since 2010, driven by the success of marquee offerings of InterGlobe Aviation, Coffee Day Enterprises, Alkem Laboratories, Dr Lal PathLabs, Sadbhav Infra Projects, Prabhat Dairy and S H Kelkar.

With another power pack Narayana Hrudayalaya’s Rs 613-crore IPO lined up in the second week of December, the IPO companies are expected to raise Rs 14,000 crore this calendar year, the highest since 2010 when 64 companies raised about Rs 37,500 crore.

All in All, 2015 marked a reversal of trend when primary markets outshone secondary markets that have been plagued by bearish sentiments.

Where is Dalal Street headed as December looms?

After a stellar performance in 2014 when the Sensex emerged as the second-best performer among major markets, 2015 has brought little cheer for Dalal Street traders with the 30-share benchmark tumbling over 6 per cent so far this year, as slow pace of reform implementation, a sluggish economy and global headwinds fuelled an exodus of foreign capital.

Discontented by the progress on key reforms such as the Goods and Services Tax (GST) and the Land Bill which have been hit by political roadblocks, coupled with heightened speculation of an imminent interest rate hike by the US Federal Reserve, foreign institutional investors (FIIs), a key driver of Indian equity markets, have pressed the exit button, selling Indian stocks worth USD 672 million in November thus far, the most among emerging markets after South Korea.

A tepid bag of Q2 earnings numbers, a continued export slump, the slowest factory growth in four months in September and a pickup in the pace of consumer inflation to a four-month high in October, are indicative of the fact that Asia’s third biggest economy has lost momentum, adding to the gloom and doom at D-Street.

As we approach the end of the calendar year, the Sensex is likely to be driven by three major factors i.e., the outcome of the Winter Session of Parliament which is crucial to deciding the fate of key bills such as the GST & the Land Bill stuck due to policy stalemate, the RBI’s policy meet on December 1 and the Fed policy outcome on December 15-16.

The BJP’s disastrous showing in the recently held Bihar elections means that the ruling NDA government still lacks the numbers to push through key economic policies in the Upper House of Parliament. However, if Modi and his men are able to muster enough support from the opposition and get key legislations passed, the Sensex could be in for a major positive surprise. While the government has its hands full as far as getting opposition parties on the same page with regards to key bills, it has signaled some seriousness over re-starting the stalled reform process by giving nod to a 10 per cent stake stale in Coal India, approving the IPO of Cochin Shipyard and announcing a five-year interest subsidy scheme for exporters.

The RBI is unlikely to oblige with another rate cut next month & maintain status quo on policy rates amidst a resurgence of consumer inflation which accelerated for the third straight month in October 2015, to 5 per cent from 4.41 per cent in September 2015, and as the central bank awaits the Fed policy decision.

Even as markets have already priced in a rate lift-off by the Federal Reserve next month, the occurrence of the actual event could prompt a knee-jerk reaction in domestic equities. But, stronger fundamentals compared to EM peers are expected to ensure that Indian stocks may be less affected by a Fed borrowing cost hike. Fed members have signaled a strong case for a hike in short-term interest rates for the first time in almost a decade, next month.

In the absence of any positive surprise on the reform front, the Sensex is likely to see a range-bound and tepid December, with foreign investors unlikely to bet big on Indian stocks amidst delayed reform implementation.

Latin Manharlal Group

Is Indian economy losing steam?

It seems that Indian economy is still not out of the woods as disappointing set of economic data are signaling  weak  momentum for Asia’s third biggest economy.

A slowdown in industrial output growth to the lowest level in four months in September along with a pickup in the pace of consumer inflation to a four-month high in October has put India’s economic recovery in doubt, crimping room for a further interest rate cut in the ongoing fiscal.

India’s industrial production expanded 3.6 per cent, year on year in September 2015, compared to a revised 6.2 per cent annual rise in August 2015, whereas consumer inflation accelerated to 5 per cent in October 2015 from 4.41 per cent in September 2015.

While the 6 per cent retail inflation target for January 2016 will almost certainly be met, Raguram Rajan is likely to keep borrowing costs unchanged on December 1, 2015 amidst a quickening of inflationary pressures and a likely US interest rate hike in mid-December.

RBI in its September bi-monthly monetary policy review had cut interest rate by 0.5 per cent, much higher than the expectations for a rate cut of 25 basis points. The benchmark repo rate has subsequently come down from 7.25 per cent to 6.75 per cent, the lowest in four-and-a-half years.

Adding to the economy’s setback, India’s wholesale prices remained mired in deflationary territory for the twelfth month on the trot in October 2015 reflecting the effects of lower commodity prices owing to global factors and subdued demand conditions.

According to government data, Wholesale prices fell by 3.81 per cent in October 2015 from the same month a year ago.

The key macro indicators evidently point out that the economy still faces several tough challenges and an effective strategy is required to deal with the situation.

Latin Manharlal

Is India well placed among EMs amidst global financial crisis?

Even amidst heightened volatility in global financial markets and deepening economic crisis in China, India which has rightly claimed the honour of becoming the worlds’ fastest growing major economy remains the best bet for investors among emerging markets. Let’s see how?

Is India’s investment landscape more appealing than its BRICS peers?

Despite slightly succumbing to a global rout amidst fears over China’s economy, India seems to remain a stand-alone portfolio bet for emerging markets investors and fund managers. India’s sound economic fundamentals backed by strong reforms commitment by the investment-friendly Modi government, contrasts with that of China’s economy that grew at its slowest pace since the global financial crisis in the third quarter, while peers Brazil and Russia are on the edge of a catastrophic recession amid an oil price slump & political jitters.

Oil price slump: A boon for Indian economy

The downturn in oil prices has come as a blessing in disguise for Asia’s third biggest economy which imports nearly 70 per cent of its oil needs. However, the crude turmoil has pushed oil-driven Russia and Brazil on the cusp of a recession.

Given that oil is India’s largest import item, a reduced oil import bill has narrowed India’s fiscal and current account deficits while pushing inflation well below the targeted 6 per cent, allowing room for the Reserve bank of India for further rate cuts to revive the investment growth cycle.

From 8.8 per cent in January 2014 and 7.31 per cent in June 2014, India’s consumer inflation has plunged to 4.41 per cent in September 2015, luring the investors to park their funds in Indian markets.

India’s improving investment scenario has gained momentum in comparison with the gloomy outlook of its BRICS peers. At the time, when sanction-hit Russia is witnessing a capital flight, while FDI prospects in Brazil is also moving in opposite direction and China growth plummeting to the weakest rate since the global financial crisis of 2009, India’s investment climate remains apt amid the much campaigned ‘Make in India’ reform & hikes in FDI caps in sectors such as defence & insurance, coupled with investor friendly tax regimes.

Is India falling prey to a global slowdown?

Not withstanding strong fundamentals, Asia’s third biggest economy seems to have succumbed to a global rout amidst fears over China’s economy.  Growth has faded across both the manufacturing and service sectors, fully justifying the Reserve Bank of India’s aggressive 50 basis points interest rate cut last week, as softening inflation leaves ample leeway for monetary easing.

India’s services activity expanded at a weaker clip in the month of September as demand eased amidst tough economic conditions. Meanwhile, India’s manufacturing activity also expanded at the slowest pace in seven months in September as factories boosted output at weaker rates amidst waning demand, signaling a loss of momentum in the Indian economy.

India’s services activity gauge fell from 51.8 in August to 51.3 in September, whereas the gauge measuring manufacturing activity in India slid to 51.2 in September from 52.3 in August.

Adding to the economy’s setback, the Washington based lender, International Monetary Fund (IMF) has cut its growth forecast for India to 7.3 per cent from 7.5 per cent in FY 2015-16 predicted earlier.

Since the beginning of last month, forecasts on India’s economic growth by various agencies have been mostly negative, however, the overall picture does not look too gloomy as key reforms of Modi government along with RBI’s dovish stance may bolster economic growth and accelerate investment cycle.

Further, the Prime Minister Narendra Modi’s assurance that the stalled Goods and Services (GST) reform amidst Parliamentary logjam, will be rolled out in 2016, to improve the investment climate in the country will provide the much needed rest on the growth front. The governments’ big thrust area is to improve and expand manufacturing competitiveness of India and it has undertaken numerous initiatives to further enhance the ease of doing business in India.

Is the end of Rupee’s woes in sight?

Against the backdrop of turmoil in China and jitters over a looming US interest rate hike, the Indian rupee has been gripped by Bears in recent times as an uncertain global economic outlook triggered a capital flight from emerging markets. The Rupee has shed 4% of its value this year, while tanking over 2% since August 11 when China’s decision to devalue the yuan by the most in two decades sent shock waves to financial markets worldwide. However, the US Federal Reserve’s surprise decision to refrain from a hike in borrowing costs brought some relief to the domestic currency, which registered its biggest gain vs the greenback in two years, surging to a one-month high on Friday.

However, the rupee’s comeback may be short-lived with high uncertainty still prevailing on the global front, meaning that the currency will be prone to downward pressure that will be cushioned by expectation of further policy easing by the RBI and hopes of progress on key reforms. We explain below why.

Firstly, Even as it maintained status quo on interest rates last week, Fed meeting materials show that 13 out of the 17 policymakers warrant a rate hike this year, meaning that markets must brace for US policy tightening in the near-term. The Fed which has kept its key rate near Zero since 2008, next meets on October 27-28 and then on December 15-16. Higher interest rates in the US will increase the lure for US dollar denominated assets that may lead to further capital outflows from risky assets, causing the rupee to depreciate, taking severe toll on Indian companies having large overseas debt.  Foreign investors, who pulled out a record Rs 17,428 crore from Indian stocks in August 2015, have emerged as net sellers of Indian equities & bonds to the tune of Rs 4,600 crore in September, thus far.

Secondly, the ‘China’ factor will continue to dominate sentiment across global markets with uncertainty surrounding the full extent of the country’s slowdown. Recent factory, investment and export data have signaled that China’s woes seem to be deepening, defying efforts by policymakers to fix the country’s slowdown. Being the world’s second biggest economy and the largest commodity player in the world, a rout in China means diminished fortunes for the global economy, hence inviting risk aversion among foreign investors.

Thirdly, it is foolish to pin the entire blame of an FII exodus on global factors as slow progress on key reforms such as the GST which has been derailed by political headwinds, and a domestic economic slowdown have also contributed to the rupee’s slide in recent weeks. India’s economic growth slowed to 7% in the June quarter from 7.5% in Q4 FY 2014-15 while exports have been in contraction terrain for nine straight months.

However, its’ not entirely looking murky for the rupee as the Fed’s move to hold off an interest rate hike has almost guaranteed an RBI rate cut on September 29 which should support sentiment. The possibility of at least another rate cut beyond September, in the ongoing fiscal, looks high as a softening global commodity cycle amidst weakness in China keeps oil prices lower, narrowing the fiscal and current account deficits, taming inflation. At the same time, the RBI will keep a close watch on the effect of a deficient monsoon on food prices which may limit policy easing room.

On the growth front, much rests on the Modi government’s ability to fast track key reforms with hopes riding high on the passage of the GST bill in the Winter Session of the Parliament. Recent measures to boost public investment in roads and railways may bolster economic growth while a quick fix on the problems plaguing the banking sector which is sitting on a pile of stressed assets, is also the need of the hour, a move which may revive credit growth and accelerate the corporate investment cycle.

The Bottom-line- the Rupee may continue to depreciate against its US counterpart in the coming months amidst uncertainty over China and a US rate hike,  with hopes of a rebound in the domestic economy  likely to offer some relief.

What’s Ailing Dalal Street?

Gloom and Doom has descended on Dalal Street which has been hit by the triple whammy of deepening China woes, jitters over the timing of a maiden US interest rate hike since 2006 and a domestic growth slowdown, triggering an exodus of foreign capital from Asia’s third biggest economy.

Let’s have a glance at the dismal performance of Indian stocks, lately which have fallen prey to a global financial market rout amidst fears over a worsening slowdown in China coupled with a looming US interest rate hike. Marking four straight weeks in the red, the Sensex, the second best performer among top markets in 2014, has sank almost 12% since the start of August, crashing to a 15-month low of below 25K, while the rupee too, has bitten the dust, plummeting to a two-year low, falling past the 66 mark vs. the USD as foreign investors exit risky emerging market assets amidst signs of a fast faltering global economic recovery.

China’s decision to devalue the yuan by the most in two decades which fueled fears over a fresh global competitive currency war has sent global stocks in a tailspin with the so-called Black Monday (August 24, 2015) wiping out as much as USD 2.7 trillion from equities worldwide including Rs 7 lakh crore from the Sensex, which recorded its third worst day in history.

As if the China and the US factor wasn't enough, slowing economic growth has exacerbated the domestic market’s woes, prompting a record sell-off of Rs 17,428 crore from Indian stocks by overseas investors in August 2015.

India’s economic growth cooled to 7 per cent in the April-June 2015 quarter from 7.5 per cent in Q4 FY 2015-16 while manufacturing expansion eased in August and growth of the eight core infrastructure sectors hit a three-month low in July, dashing optimism over the India growth story.

Looking ahead, no major respite is in sight for Dalal Street in the near-term with caution set to prevail ahead of the two-day meet of the Fed on September 15-16 where the world’s top central bank may offer some cues over the timing for monetary tightening in the US. Domestically, the focus will be on the July IIP data due on Friday with a slowdown in industrial output growth likely to raise calls for an RBI rate cut on September 29. Investors will also seek progress on key reforms such as GST which has been hit by political roadblocks.

Is Indian economy poised to weather the global economic storm?

India, Asia’s third biggest economy is holding its head above water during a shaky time in the global economy. While India has also succumbed to a global markets rout, the country’s strong fundamentals will ensure that it will emerge strongly from this temporary setback.

Why the global economy rout isn’t a big worry for India?

The ongoing rout in the global stocks and deepening economic crisis in China has engulfed Indian benchmark indices, leaving Dalal Street shaken with the Sensex falling off the 26K cliff, shedding more than 5 per cent in August and the rupee  hitting a two-year low, falling to 66.74 per dollar amid China’s currency stunner.

A crash in global commodity prices amid China's move to devalue its currency, coupled with fears surrounding US policy tightening has created havoc in the global financial markets.

However, the impact of the ongoing global financial turbulence on India is expected to be only short-term & restricted to exchange rate volatility and stock market movement.

The country’s strong fundamentals, depicted by recent economic indicators, back up the strengthening growth story of Asia’s third biggest economy. India’s retail inflation cooled to a record low at 3.78 per cent in July, coupled with industrial output growth which quickened to 3.8 per cent in June 2015, year on year from 2.5 per cent in May 2015, along with a combined gauge of manufacturing & services rebounding into expansion terrain in July, while car sales soared 17 per cent in July.

In a nutshell, India is better placed to deal with the global shock-waves, amid the government’s strong reform commitment and prospects of further rate cuts with inflation under permissible limits, despite heightened global uncertainty.

China’s Yuan devaluation: Boon or Bane?

Given the recent turmoil in China’s stock markets amid gloomy economic outlook, investors were expecting bandwagoning from the central bank for quite some time. With volatility persisting in the markets, playing in the stock market has become a real worry for investors as it undermines the confidence of the Chinese people in the real economy and the government's ability to make policy.

In a seeming nod to such concerns, the central bank of China, in a surprise move, devalued Yuan by 2 per cent, the most in two decades, a move that could raise geopolitical tensions and cause a rout in emerging market currencies and metal commodities.

The People’s Bank of China cut its daily reference rate by a record 1.9 per cent, prompting the biggest slide in the Yuan since January 1994, signaling panic and desperation among policymakers to revive an economy that is set for its lowest growth since the 1990s.

The sudden currency devaluation announcement suggests that the situation in the Asia’s largest economy is far more serious than the policy makers and the authorities are letting out. Normally, authority institutes measures to prop up equity prices, but a radical shift toward a weaker currency indicates a worsening slowdown in the world’s second biggest economy which is set to miss its target of about 7 per cent growth in 2015.

Going forward, the depreciation of Yuan will improve the export competitiveness of China, but at the same time the effects of this downturn will be felt globally—it just may take some time. Given the fact that the global situation is not completely comfortable, China’s currency devaluation will create a headache for global economies as commodity prices including the bullion commodity would hit the other markets of the world.

Let’s peep into the immediate impact of Yuan devaluation on Indian economy:

China’s currency devaluation move sparked a rout in emerging market currencies, raising fears of an Asian currency war, with the rupee falling to two-year low of 64.78. The drop in the value of Yuan also gave a body blow to appetite for risky assets, with equities and commodities coming under selling pressure.

With the depreciation of Yuan, the Reserve Bank is set to come under pressure for further monetary easing and could be forced to take further rate cut action in coming months.

A weaker Yuan is not a simple but a complex issue that can also dent the competitiveness of Indian exports. With the drop in local currency, exports from China would become cheaper which may increase margin pressure on India's exports where we compete with China.

To sum it up, while the surprise devaluation move raises questions on the inherent strength of the Chinese economy, its sentimental impact on India and its currency amid not-so-favorable overall global economic environment cannot be ruled out.

Mahindra and Mahindra – Weekender Idea

Mahindra & Mahindra Ltd. manufactures automobiles, farm equipment and automotive components. The Company's automobile products include light, medium and heavy commercial vehicles, jeep type vehicles and passenger cars. Mahindra & Mahindra also manufactures agricultural tractors, agricultural implements, internal combustion engines, industrial petrol engines, spare parts and machine tools.

Although it appears to be an auto company, M&M is more of a conglomerate with stakes in various industries. Please see chart below. Almost half of the value of M&M comes from stakes in its subsidiaries such as Tech Mahindra, M&M Financial, Mah Life Spaces, Mahindra Holidays etc.

Company	M&M Stake %	INR Per Share of M&M
Tech Mahindra	36.7	350
M&M Financial	57.5	125
Mahindra Life-Spaces	51	20
Mahindra CIE	20	26
Mahindra Holidays	75	24
Ssangyong Korea	70	79
		624
M&M CMP		1419
Mkt Value of Core Business		795

Core Business

M&M’s core business is focused on utility vehicles and farm equipment. The M&M utility vehicle portfolio has lost a lot of market share in the last few years from 55% to currently 37%. They have lost market share due to lack of recent launches and competition from Ford Ecosport and Duster. Last quarter, the tractor volumes show the sharpest declines due to slowdown in rural consumption.

Future Prospects
Despite the slowdown in overall auto industry, M&M has maintained revenue growth of 16%. M&M has clearly highlighted that FY16E would be an aggressive launch year, which has already begun with the launch of new XUV500. The company is expected to launch a new platform, a major refresh and a new variant launch in the first three quarters of FY16. The new platform will include two compact SUVs, with one focused on the rural market and other towards urban consumers. The compact SUV segment is expected to grow faster as customers take to it as an alternative to premium hatchbacks. Secondly, peers like GM and Renault have a weaker distribution network compared to M&M. We expect M&M to regain market share as volumes improve.

As far as tractor volumes go, we expect some traction in the rural economy given the monsoon has panned out well and rural wage inflation has bottomed out.

The core business trades at 8-9x earnings and has the potential to surprise on the upside in the coming quarters. The company is run by one of the best management teams in India and this stock is a must for your long term portfolio. In the short term expect a 14-15% move. 

Disclaimer: This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein and may sell them to or buy them from customers on a principal basis.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Registered Office: 5^th Floor, 124 Viraj, S.V Road, Khar (W), Mumbai 400 052.

-----------------------------------------------------------------------------------------------------------

 Visit: www.latinmanharlal.com                       Call: 02240824082                     Mail: business@lmspl.com

'Castrol India – The MNC midcap stock for your portfolio'

Castrol India is a subsidiary of British Petroleum and one of the largest players in the automotive and industrial lubrications business. In India, the company derives more than 85% business from the automotive business and commands a market share of 25%. The company has three manufacturing plants along with 400 distributors servicing more than a lac retail outlet. The company imports its raw materials which are called base oils from imports and the rest from Indian oil companies. The size of the automotive and industrial lubricant market is estimated to be around 30,000 crores which amount to 2.5 billion liters of oils and lubricants. Castrol volumes and revenues were subdued due to slow industrial and automotive sales growth. However, India is now witnessing an improvement of automotive growth and this revival in auto sales will increase the top line for the company. See Chart below.

Recent sharp declines in oil prices (see chart below) will help in reviving the profitability of the company. Castrol’s strong brand positioning and superior distribution network allows it to command higher pricing power and premium for its products over its competitors in spite of decline in base oil prices. LM Securities believes that Castrol, which is the price maker in the Indian automotive lubricant market, will maintain stable realizations, going forward.

The stock price fell from 550 to a low of 415 and has recovered since then. The stock was also recently added in the Futures and Options segment, so the trader’s interest has also come into the stock. The stock has now formed a major bottom at 415 and is now poised for higher levels. One can keep longs with a Stop loss of 477 INR for targets of 550/600. CMP is 505. See Price Chart below.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Disclaimer: This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein and may sell them to or buy them from customers on a principal basis.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------

Registered Office: 124 Viraj, S.V Road, Khar (W), Mumbai 400 052.

MCX India – Long Term Idea

Commodity exchanges around the world exhibit the following characteristics: Oligopolistic in nature, high operating leverage, capital light, fatty EBITDA margins and above average ROE. MCX reflects all these characteristics as well.

How does it make money?

MCX charges 18 INR for every 1 million INR of transactions traded. Therefore for a round trip it would be INR 36. They have 2 main costs components to their business which are - Software cost and Employee cost. 

Before 2013

Back in 2012-2013, MCX clocked an average daily turnover of 503 Bln or 50,300 crores. At 32 INR  round trip transaction fees, the revenues per day was roughly 16 Mln INR or 1.6 cr a day which translates into around 5.45 bln INR or 545 Cr a year of topline. As mentioned above their main costs are Software cost and Employee cost. FTIL was and is the software provider to MCX. In 2012-2013 FTIL charged INR 20mln/month as a fixed fee and charged a 12.5% variable fee based on turnover. If you do the math, then software cost was around 785 Mln INR or 78.5Cr a year. Employee costs were about 290 Mln or 29 cr a year. After including other expenses, the EBITDA was roughly 3.152 Bln or 315 crores – 60% margins which translates into a PAT of 300 Crs a year. Depreciation and interest costs were miniscule.

Post 2013

The Company went through a rough patch in 2013. First the Commodity transaction tax (CTT) was imposed in July of 2013, then its promoter FTIL was deemed unfit and third commodity prices around the world began a downturn. As a result of all these events, the revenues and profits took a hard knock down by 50%. Average daily turnover currently which was 503 Bln in 2013 is now at approximately 220 Bln in 2015. PAT has shrunk to 125 Cr a year compared to 300 Cr in 2013.


Despite this triumvirate of bad luck, the company managed to stay above water. After the FTIL/NSEL scam, the company renegotiated its software contract with FTIL.  Now, FTIl is paid 15 Mln/month plus 10% of trading revenue. This is payable quarterly after services rendered as opposed to annual contract earlier which was paid in ADVANCE! The duration of contract is now 10 years vs 99 years earlier with a clause to exit software contract if they see necessary. This will reduce software charges to 400-450 Mln INR vs 785 Mln INR for the next 2 years. 

Now what from here? 

The company has no capex lined up in the foreseeable future and this business will be driven by operating leverage. Incremental increase in daily turnover will flow straight to the bottom line. The key question is how MCX can grow from 200 BLN INR of daily turnover to 500 Bln INR of daily turnover to perhaps 1 trillion INR. There are a few ways:

1. SEBI merger with FMC: Will have a long lasting impact on the revenues of MCX and many analysts are underestimating this. The implications of the merger are significant. Stock exchanges will be able to become universal exchanges wherein equities, debt instruments and currencies and commodities are traded under the same roof. SEBI cannot be biased towards any of these asset classes which means it will allow MCX to launch a Commodity Index and other derivative instruments such as Options which are currently unavailable. The launch of an Index and Options can have a disproportionate impact on volumes and here is the reason why. The top 4 commodities traded on the Exchanges are Crude, Gold, Silver and Copper. Of these 4 commodities 20-40% are Prop Trades, 50-60% is Client Trade and remaining 15-30% are HFT.

Now, with an Index being launched, most Index Arbitrageurs will seek to profit from mispricing and basis differentials between Index and individual commodities. Nifty ‘s Index Arb business was a big business from 2000-2007 and has built fortunes for individuals and prop desks in HK and Singapore. This could be a large revenue booster for MCX. Nifty Futures volume rose massively in the years to come despite competing with SGX in Singapore.

Second more lucrative aspect of the SEBI/FMC merger is the launch of derivative Options.
This could be that game changer as it has been for Nifty Index Options over the last 5 years.

The big player in the Options business could be the HFT traders. HFT Traders would definitely come in to trade the MCX options as Options are cheaper to trade. Currently HFT trading firms (I won’t name them) transact 30-40% of all Nifty’s Option turnover. Trading options also gives rise to increased trading in Futures and Index since these are usually delta neutral trades.

Third, if SEBI allows institutional participation in MCX traded instruments, then the volume growth will be far more than what we can imagine. Statistical Arbitrage Funds will trade MCX commodities against the ones listed on CME or LME or Dubai and other regional markets. These will be arbitrage trades. AIFs registered in India will be able to launch innovate products in this space as well. I don’t think Mutual Funds in India will do much in this space as it won’t fit the bill and they can’t leverage.

2. Commodity cycle: We are at the bottom of the commodity cycle space. Gold and Crude are at multi year lows and downsides from here are limited. If these commodities rise from here then the average traded value moves up without any effort.

MCX is now in a sweet spot. Margin of safety is there and this stock could deliver handsomely from here. My sense is that the Index can deliver 1 trillion of daily turnover by 2017. That would translate into a turnover of 850-900 crores with PAT of about 450 crores. At CMP that would translate into a fwd P/E of 11x. This stock could be one of those that you could hold for years to come. Expect handsome returns of 35-45% in this year.

------------------------------------------------------------------------------------------------------------

Disclaimer: This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and it’s affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein and may sell them to or buy them from customers on a principal basis.

Why has the yellow metal lost sheen?

Plagued by fears over a maiden US interest rate lift-off since 2006, coupled with a rampant greenback and ebbing fears over Europe’s debt troubles, investors have shunned the precious metal, pushing it to a five-year low.

Fears of an interest rate hike by the US Federal Reserve in the near-term have prompted investors to turn to the US Dollar, which has an inverse relationship with the yellow metal. A stronger dollar reduces the metal's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies, biting Gold.

Recent US inflation and jobs data have bolstered speculation that the world’s top central bank may pull down the curtains on its zero interest rate policy, putting the yellow metal out of favour, which will find it difficult to compete with high yielding assets when rates will be hiked. Moreover, a lift-off in US interest rates will curb the lure for Gold as a store of value, piling on the pain for the bullion which tends to flourish in easy money policies from central banks.

With a Grexit safely averted and fears over China’s stock market rout waning, investors have returned to risky assets such as equities, hurting Gold, considered a safe haven for investors in times of acute economic instability, ensuring that the precious metal remains firmly in Bear grip.

Gold - Will it glitter again?

D-Street’s Good Days on the way back!!

After a sluggish start to the year, Dalal Street has regained its mojo with the 30 –share benchmark Sensex notching up an eight-day winning streak in early June as fears of a below par monsoon seem to have abated, while optimism over Greece and delayed  US monetary tightening hopes have boosted the lure of emerging market equities.

The Indian markets are relieved that the monsoon is currently on the right track encouraging rural demand and improving hopes of another round of rate cut by the Reserve Bank of India amid softening inflation.

Further, a global stock rally coupled with new reform proposal by Greece has raised the market’s expectations that a long-awaited deal between debt-burdened Greece and its creditors is firmly taking shape, putting an end to the five-month long deadlock and averting a dreaded breakup of the 19-member Euro.

The Indian markets have another reason to cheer as Fed signaled a dovish stance at its June meet indicating that the pace of rate hikes would be gradual. Fed's new interest rate stance would reduce the outflow of funds from Indian markets and thus maintain liquidity in the Indian markets. This will also limit the US dollar's surge against the Indian rupee, thereby improving India's risk-reward ratio among emerging markets.

CNX Nifty - Is This The Bottom?

CNX Nifty has been heading lower since its peak in March 2015 at 9119 level. Its been nearly 66 days that the index has declined to its 2015 lows of 7958 level. The number 66 plays an important role in technical analysis as it is two third of 100%. In addition to this, the index has completed an Anti Shark bullish harmonic pattern. The PRZ of the pattern is 7933 - 7971 levels. In addition, we can also see a 'Last engulfing bottom' candlestick pattern, which indicates reversal in short term. The index is expected to bounce back to 8300 level until and unless it holds above 7850 on closing basis.

LM's Technical Insights!!

CNX Nifty after drifting lower from the peak of 9119 in early March'15 has corrected all the way near to 8000 level. At this juncture the index is near to its major support trend line constructed by joining the lows of 17th December'2014 and 07th May'2014. The index at this support has formed a morning star reversal candlestick pattern along with positive crossover in RSI momentum oscillator. Moreover, this is the third point on the trend line which is a Fibonacci number. Considering these technical evidences it is evident that a short term bottom is in place and the index may head higher towards 8450 levels.  

Esocrts - Are tractor sales getting better?

Escorts Anti Cypher (Bullish)

RBI Delivers But Sings A Hawkish Tune.

As expected, in its second bi-monthly policy review of the new fiscal, the Reserve Bank of India (RBI) obliged with a much needed rate cut, with the repo rate slashed by 25 bps, the third such reduction in 2015.

The repo rate was cut to 7.25 per cent from 7.50 per cent while CRR was kept intact at 4 per cent. The case for a rate cut this time around was quite strong given the pullback in inflationary pressures thanks to a softening commodity price cycle that pushed consumer inflation, the RBI’s most watched gauge to a four-month low of 4.87 per cent in April 2015.

Moreover, Raghuram Rajan, the RBI Governor doesn’t seem to be too convinced over the strength of the economic recovery as he warned over tepid investment and demand, a fact evident by the dismal March quarter report cards delivered by India Inc., vindicating the rate cut verdict.

Further, Rajan also stressed against reading too much into the March GDP numbers that showed the economy grew 7.5 per cent, outsmarting China’s 7 per cent. However, the headline GDP figure may be subject to distortions while tumbling exports, a dip in April core sector output, and a slowdown in Gross Value Added to 6.1 per cent in the March quarter from 6.8 per cent in December quarter, signaled that the economy was in need of further stimulus support.

The rate cut would act as a catalyst for growth as falling interest rates aid a credit pickup and bolster a capex rebound. Softening interest rates would be a boon for rate-sensitive sectors such as banks, auto, realty and capital goods, with housing and auto loans likely to get cheaper, bolstering consumer appetite while lower credit costs may help stalled infra projects to take off.

That is where the good news ends with the RBI signaling a long pause before another rate cut as it warned of upside risks to inflation including a below par monsoon (now downgraded to 88 per cent of the Long Period Average) that can prop up food inflation, a rise in oil prices and heightened external volatility.

Rajan’s outlook for further policy easing summed up by his words “conservative strategy would be to wait” clearly indicate that this was probably the last rate cut for quite some time. However, if the rain Gods are kind to us and the Monsoon tops forecast, while the government continues strongly with its fiscal consolidation progress, we won’t have to wait longer for another rate cut.

Image Courtesy: Google