Thursday, January 23, 2014

The electronics and gadget shop on Ritchie Street

"Ritchie Street" in Chennai is known to every serious electronics buyer. You name it, they have it. Whether it is a simple box of CDs or a flash drive to the latest gizmo from Apple or Google or Microsoft. They are launched here well before the official launch.

One of the shopkeepers, let me call him X, is a typical operator out there- A small cramped shop, with the shelves bursting with the latest gadgets and four young lads handling clients and X sitting at the counter.X makes it a point to talk to all the regulars and pushes more sales.

I was meeting X after a couple of years. He mentioned that in the last two years, he has opened sourcing centres in Singapore and Dubai. And he has got himself a new BMW 7 series and an Audi A8. He said that he cannot bring it to the shop due to the traffic problems so he typically takes an auto to the shop and in the evening his driver picks him up. He wanted to know from me if I could help him buy a few acres of land near where I stay. The going rate is around Rs.40 cr an acre.

Obviously, this entrepreneur has done very well, selling electronics.

I recall him today, as I read this piece in the newspapers:

X is a nice person. He knows the cops, the politicians and loves to eat at new places. And his shop is wonderful. He does not mind accepting payments in cash or credit card. Asked him about taxes etc. He mentioned that his cars were bought on loan- closed in three months- but when the tax man checks his source of money, no further questions asked. And yes, he does pay some taxes. He employs a CA firm to handle his books. And pays retainer to a couple of lawyers too.

Sunday, January 19, 2014

Our Moon Has Blood Clots- A book review -

“When I saw Nehru for the first time in Lal Chowk, I was a refugee in my own state. Sixty years later, I am a refugee in my own country.”

This sentence from the book “Our Moon Has Blood Clots” gives a brutal paraphrase of the Kashmiri Pandits’ plight. Rahul Pandita, a Kashmiri Pandit lived the first fourteen years of his life in Kashmir is now a journalist and an author, living in New Delhi. There is a dearth of writing and reporting on what happens in Kashmir and no one is sure about the veracity of news that comes out of there. This book deserves to be widely read to give us a perspective on what the conflict is all about.

This book narrates the plight of the author’s personal journey from a Kashmir whose tranquillity and peace has been broken permanently by fanatics who believe in Kashmir not being a part of India. The narrative is useful to piece together the gradual movement that started with terror on the dawn of independence and has accelerated in a way that it looks impossible to halt the cry for separation. There is enough anecdotal references in the book that date to as recent as 2012, which shows the total dominance of the faith driven populace who do not wish to be labelled as Indians. Unfortunately, this vision also includes the annihilation of people who do not share the faith.

Violence and brutality has been the weapon used by those who seem to think that Kashmir is Pakistan rather than India. Right at the dawn of independence, they started by targeting everyone who did not have allegiance to Islam. Whether it was Sikh, Hindu or Christian it made no difference to those who unleashed violence of the worst kind in the name of Islam. Killing, raping and looting commenced right in 1947. After the first few years, the only Hindus left were the Kashmiri Pandits. The ethnic cleansing by the fanatics continued through and the second and final wave commenced in 1990 which saw the Kashmiri Pandits departing en masse.

The story draws on the author’s life of growing up in an environment that was certainly not friendly, but one which was tinged by a hope that ‘things will revert to normal’. The story captures the people who after being friends and neighbours with you for so long, suddenly turn around and gang up on you. I shudder to think of what the author must have gone through when the first revelation strikes him at a cricket match where the entire audience whips up Pakistani flags and cheer an Indian loss. Perhaps, that is everyday life out there.

The story also tells us about the apathy and in some cases, the complicity of the political rulers as well as the local police and administration in shooing away the ‘infidels’. It surely sets us thinking about whether there is any hope in the future of a Kashmir that will be India. With the passage of time, each incident seems to imply that our enemies across the border are leaving no stone unturned to ensure strife and militancy in Kashmir. The fact that some part of India has to be under curfew for the hanging of someone like Afzal Guru, tells us what the situation in Kashmir now. The author also captures the slow and unhurried life in Kashmir before the rot set in. It is clear that the religious divide is an imported problem.

The loss of home and homestead and then the treatment of the Kashmiri Pandits in ‘refugee’ camps is mind numbing. Here are people who stayed in the lap of nature, in houses with ten, twenty, thirty rooms and are forced in to tin sheds with no running water or sanitation. The writer talks about how even in the rehabilitation efforts, the money has been skimmed off almost entirely by the politicians. After being deprived of a home (the fanatics simply occupied their homes and some of them had the decency to get some signed documents by throwing a pittance as sale price), the Pandits are struggling with absolutely no support from the state or from any of the political bodies that talk about oppression of the Pandits in Kashmir.

It is remarkable that all this suffering and oppression has still not made him bitter or spiteful. He still exudes hope that perhaps one day he could ‘return’ to his home. The section where he describes his visit to his own home as a visitor brings out the irony of the Kashmir that has become a home to the fanatics. In a way, the book is a telling commentary on our rulers and their lack of interest in resolving this problem. A must read for all Indians.

February 11th, 2013

Tuesday, January 14, 2014

Experts choose 10 stocks -

These are expert views -

Has 4 real estate stocks

And a few overhyped and overpriced stocks- Britannia, Cadilla, HDFC Bank-

If you ask the experts about how much money they have personally put in those stocks, one will know the truth

Yes, 50% may come back in 2014. Remaining 50%?? God help you.

You can make a small fortune this year- If you put a big one now in these stocks.

Indian Rupee and Company earnings


(This article published in latest Moneylife) The Indian rupee should normally depreciate at around six percent per annum against the big currencies like the US Dollar, Euro etc. I am simply using the difference between the inflation in India and the inflation in those nations. Just to give a backdrop, the US $ was worth Rs.7.50 in 1970. If I took an average inflation differential of 6% annual between India and the US (naturally, India with the higher inflation figure), the dollar should mathematically have been worth around Rs.92 by end of 2013.At a 5% differential, it should have been around Rs.61. In reality, the rupee has been cushioned to a large extent by the inflow of foreign currency through foreign remittances, FII and FDI inflows etc. If we look at our foreign exchange trade, we are consistently net importers. So we are always short of foreign exchange. We have survived due to these not trade flows that have propped up the rupee. Interestingly, if I take the 2002 average rupee to dollar rate of 48.23 and apply a 3% per annum depreciation, the rupee should have been worth around Rs.66 to the dollar by end 2013. I do not say that my method is the best or the only method, but I trust this. Purchasing power does not make sense to me, when our per capita is so poor and the day to day expenses are all globally price linked thanks to open economies. Subsidies if any come through only in petrol, diesel and kerosene. And the demand for and supply of foreign exchange is the other key determinant which can impact the rates. For the rupee to be stronger, we need to have an economy where more people want the rupee as opposed to foreign currency (exports plus remittances plus FDI/FII greater than imports & other outward flows).

This slide in the rupee can be used as an additional determinant in deciding an investment strategy.

The universe of listed in India can be broken down in to:

i) Operations in India, no imports and no exports- 100% domestic;

ii) Operations in India, net regular importer – Import intensive;

iii) Operations in India, net regular exporter- Export intensive; and

iv) Global operations- net foreign exchange earner- Global earners.

Given our expectations of foreign exchange flows, if we expect rupee to weaken over the near term, it makes sense to pick up those companies that are net earners of foreign exchange and vice versa. This is not to rule out fundamental analyses, but the foreign exchange factor would be useful in our stock picking.

At the present juncture, there is not much to move the rupee except some FII flows. FDI flows would be impacted by policy changes. The forthcoming general elections and its outcome will definitely have a bearing on this. Right now, the government is trying to restrain demand for dollars by putting curbs on dollars and providing greater incentives for exports. A falling rupee should logically help exports or earners of foreign exchange. If we were to get policy decisions that facilitate FDI in a big way, then it would be best to bet on those who are net users of foreign exchange.

As a strategy, in the near term, I would bet on foreign exchange earners- IT sector stands out as one clear winner. Yes, competition would perhaps lower the dollar pricing power to some extent, but not immediately. The momentum is clearly with the companies now. On the other hand, net users of foreign exchange- whether in capital goods or in petrochemical based commodities would see some squeeze in their margins. The ability to pass on cost increases is never unlimited.

Whilst looking at a company’s annual report, there is a table that shows the earnings and outgo of foreign exchange. Here it is best to focus on trade or business related outflows and inflows. A one off capital goods imports or dividend outflow to foreign shareholders should not be looked at. Similarly, those companies that have a high amount of foreign debt, will have higher rupee outflows. There may be some companies that have global earnings and they would be better placed if they have foreign currency debt. I ignore dividend outflows because dividends are fixed in rupee terms. It does not impact the margins or pricing power in any manner.

There are companies in commodity exports. Unfortunately, many of them could be in gem and jewellery or rice exports which are really trading on the margin rather than producers. Mining companies could gain if they are exporters. My expectation for the near term would be to bet on IT, Pharma companies with large exports, some engineering companies that have consistently growing exports. There would be some positive surprises from these sectors.

This is simply an additional input for constructing your portfolio. Fundamental analyses based on earnings and Return on Equity remains the key selection criteria as far as I am concerned.

Monday, January 6, 2014

Elections - Buy or Sell? And some thoughts on savings & investments

BUY TODAY, SELL TOMORROW- MAKE HASTE It is that time of the year when everyone will suggest revisiting your portfolio and investment themes. However, I do not believe in this ritual that is marked by a change in the calendar. Why should it matter so long as things are going as planned? And if things are not going right, why should I wait for the year to get over or another one to begin? Investment strategies should be not change unless there is something wrong with what one is doing. Investment strategies can get aggressive (buying riskier assets like equities) or get passive (keeping money safe against erosion of nominal principal) depending on circumstances and events. If someone tells me to ‘rebalance' simply because it is that time when one throws away an old calendar and gets a new one, it does not make sense to me.

When one starts off on the journey to ‘invest’, I am sure that there is some inkling of risk and return. And I also maintain that ‘investment’ is the second stage in financial accumulation. The first stage is ‘savings’. The ‘savings’ allocation is free of risk and does not warrant any change unless there are dramatic shifts in inflation or interest rates. In this we will have several things like our provident fund and or PPF, bonds, bank deposits etc. We are simply building our first line of defence. We have kept for ourselves a fixed goal of reaching a certain corpus by a date. So this does not get disturbed.

After having crossed that, I am looking at real estate, equities etc. These are tactical allocations and whilst it is great to keep buying these as much as possible till as long as possible, economic and political events dictate higher or lower level of buying of these assets. Typically, one would have some portion of money that is waiting to find the right asset.

Buying assets for keeps necessarily means having to wait for a ‘right’ price. There is no formula for this as far as real estate is concerned. However, for equities, one can define and work out prices at which we can buy and prices at which one should sell. Neither prices last forever nor do markets generally move in a narrow range. Thus, it would be ideal if I could buy more when prices are low and less when prices are high. Alas, none of us are expert enough to forecast the market trends accurately. I generally advocate people to buy a select bunch of stocks at consistent intervals and keep accumulating them for ten to twenty years.

There are those of us who keep dabbling in equities without any specific thought. It is more of a ‘herd’ mentality. Many of us got enamoured of equities in 2008 and then swore off it in 2009. And finally exited in 2013 when the index looked very similar, without bothering about value or price.

I am sure history repeats itself. Very soon, we will see another build up in our markets as the general elections come closer. One likely scenario that is being painted by everyone is that we could see a government headed by Modi. Markets will make him out to be the panacea for all ills and everything in the stock markets will seem to get better once he takes charge. So, logically once should be expecting a new surge in the markets till the elections are over.

By that time, a lot of expectations would have been built in to the market. Next, the results will come. Results may be as per expectations. Now the markets will not run up much more. Markets will have to wait some time to see expectations being met and nothing can positively surprise. The risk of disappointment is higher. Let us call this Scenario A. There other outcome is that UPA could cobble together a third term. In which case, all the positive build up would lose steam and the markets would correct sharply and then get driven by what the UPA will do. As of now, if UPA 3 happens, the markets would be greatly disappointed. Let us call this Scenario B.

Scenario C would be a third front- Ugly from the stock market perspective and cause a huge fall.

So, in short, whatever be the scenario, it makes sense to sell off stocks on the day votes are getting counted or just a day before the polls, to cater to exit poll opinions.

This is simply a ‘trading’ idea. Markets are not predictable, but what I have outlined is my take on the probabilities. January 1st , 2014