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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'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.

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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.

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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?