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.

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