Indian rupee: choosing to remain the underperformer

 Foreign inflows picked up in a big way in the month of March when foreign portfolio investors bought over $4 billion in Indian equities, reversing outflows seen in the first two months of the calendar year

The monster rally in the US dollar, which started in mid-2014 and extended through most of 2015, has been steadily unwinding.

The Dollar Index, which measures the currency against a trade weighted basket, has dropped about 5.5% since December 2015. The drop in the dollar began after the US Federal Reserve indicated fewer interest rate hikes in 2016 than earlier expected. Since then, incoming data and the Fed’s concerns about the global economy have ensured that the dollar remains under pressure, although it traded higher in the US trading session on Wednesday.

The weakness in the dollar and the accompanying resurgence in risk-appetite have pushed up emerging market assets, including Asian currencies. Since the start of December, the Malaysian ringgit has gained 9%, the Indonesian rupiah has gained 5%, while the Thai baht and the Philippine peso have risen 2% each.

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In contrast, the India’s rupee’s flat performance over this period makes it seem like an underperformer. This underperformance, though, is largely by choice and it may stay that way for most of this year. The reason is that the Reserve Bank of India (RBI) has chosen to mop up most of the incremental dollar flows that have come in, partly to avoid volatility in the rupee but also as a way to tackle the domestic liquidity shortage.

Foreign inflows picked up in a big way in the month of March when foreign portfolio investors bought over $4 billion in Indian equities, reversing outflows seen in the first two months of the calendar year. As the direction of flows reversed, RBI was quick to step in and buy dollars. This prevented an unnecessary spike in the currency but, more importantly, helped infuse rupee liquidity into the domestic markets, where cash was in short supply. Some in the market even argue that it would be the latter that was guiding RBI’s interventions rather than the former.

While the precise data for how much the central bank bought in March is still to come, a $14-billion increase in forex reserves between the week ended 26 February and 1 April suggests that RBI absorbed a sizeable amount of the inflows. Forex reserves now stand at a record $360 billion.

Since then, RBI has altered its liquidity stance dramatically and said that it will move away from maintaining a liquidity deficit for ensuring that liquidity is neutral. It will do this through a mix of forex operations and bond buying.

In fact, RBI governor Raghuram Rajan explained that the amount the central bank infuses through bond buys will be the residual amount required after accounting for interventions in the forex markets. “Given our target growth rate for durable liquidity, the amount that we infuse or take out will be the residual amount after accounting for interventions in the foreign exchange market,” said Rajan in an interaction with the business journalists on 5 April, when RBI’s monetary policy was released.

Rajan, however, added that RBI won’t do forex interventions only to manage liquidity. “That would have its own logic,” he added.

Luckily for RBI, even the standalone logic of forex markets allows it considerable space to absorb flows, and in turn, add liquidity to the domestic markets. As this column has consistently argued, the rupee remains overvalued on a real effective exchange rate (REER) basis. As such, holding the currency near current levels or allowing it to depreciate slowly by absorbing any excess flows would be logical. Put differently, RBI’s new liquidity framework provides an implicit guidance to the forex markets, which suggests that the rupee may see little or no appreciation this year, even if the dollar continues to weaken and other emerging market currencies rally on the back of strong inflows.

Some currency strategists have started to adjust their forecasts following RBI’s changed liquidity stance. In a note on Tuesday, Nizam Idris, head of foreign exchange and fixed income strategy at Macquarie Bank, pegged down the 3-month forecast for the rupee to 67 against the dollar from 66 earlier. The six-month forecast has been adjusted to 68.50 to a dollar from 67.50 earlier.

What remains uncertain is how RBI would tackle a period of outflows. Given the unstable world we live in, the probability of an event that sparks off another bout of risk aversion remains high. If that happens and flows reverse, RBI may find itself in a spot.

The significant build up in reserves means that the central bank has sufficient firepower to intervene, but if it steps in to sell dollars aggressively, it will suck out rupee liquidity. The heavier the intervention through dollar sales, the greater will be the need to infuse liquidity through bond market operations.

This could mean that RBI will intervene by selling dollars only if absolutely necessary. In contrast, it will buy dollars far more willingly. The implication—the rupee may retain a neutral to depreciating bias this year.

While some (most notably, foreign investors and overseas borrowers) may complain about that, in the grand scheme of things, it’s a positive development.

Modi government to integrate 21 mandis in 8 states under online platform

NEW DELHI: The government will integrate 21 regulated wholesale markets, or mandis, in eight states under an online platform on Thursday as part of the proposed National Agriculture Market (NAM). "On April 14, on the 125 birth anniversary of BR Ambedkar, Prime Minister Narendra Modi will launch the e-trading platform — NAM — which proposes to integrate 585 regulated wholesale market or agriculture produce market committees (APMCs) under one electronic platform," said agriculture minister Radha Mohan Singh said on Wednesday.

This will ensure farmers get competitive returns and consumers get stable prices and steady availability, he said.

NAM is envisaged as a pan-India electronic trading portal that seeks to network the existing Agriculture Produce Marketing Committee (APMC) and other market yards to create a unified national market for farm commodities.

"The national e-market platform will allow transparent sale transaction and price discovery of commodities," Singh said.

Currently, there are more than 7,000 wholesale markets in the country. States selected for the pilot project include Gujarat, Telangana, Rajasthan, Madhya Pradesh, Uttar Pradesh, Haryana, Jharkhand and Himachal Pradesh.

"Initially 12 commodities, including chana (black gram), castor seed, paddy, wheat, maize, turmeric, onion, mustard, mahua flower, tamarind and shelling pea, will be traded on e-platform and not in the physical market," Singh said.

Government officials said while sale of agri produce shall continue through mandis, an online market would reduce transaction cost, provide single license valid across all markets, and maintain quality standard with provision of quality testing and single point levy of market fees.

The agriculture minister also said that food grain production in the country in 2016-17 will be better than the previous year. In 2015-16 (July-June), food grain production is expected to be 253.2 million tonnes from 252 million tonnes in the previous year, which was also a deficit monsoon year.

A bumper production will keep a check on inflation, ensure steady supplies of commodities and remunerative price to farmers.

Asked if he expected food grain production to touch the 2013 record of 263 million tonnes, Singh said, "that was a record food production the country had and we will make a comparison of production with the previous year."

PM Modi pitches for Rs 1 lakh crore investment for port development

MUMBAI: Pitching for making the country's 7,500-km long coastline an "engine of growth", Prime Minister Narendra Modi today said India wants to mobilise Rs 1 lakh crore investment to enable port development and invited global community to invest.



Inaugurating the first Maritime India Summit (MIS) here, Modi said it is the "right time" to come and better through the "sea route".

"Our vision is to increase port capacity from 1,400 million tonnes to 3,000 million tonnes by 2025. We want to mobilise an investment of Rs 1 lakh crore in the port sector to enable this growth," the Prime Minister said after opening the MIS 2016.

India, according to Modi, plans to add five new ports to meet increasing demand of Exim trade, which is expected to rise in line with the fast-growing Indian economy. New ports are also being developed by several coastal states of India.

Making out a strong case, the Prime Minister said Indian shipping sector is ready for "a long haul" and called upon investors not to miss out on "the pleasant journey and great destination".

Modi added: "It is even better time to come through the sea route... Once you are here, I assure you that I will personally hold your hands to see that your berthing is safe, secure and satisfactory."

Paying tribute to Baba Saheb Bhim Rao Amdedkar on his 125th birth anniversary, Modi said the architect of India's Constitution is also the architect of the country's water and river navigation policy.

Elaborating on the government's plans for the sector, Modi referred to the shipping ministry showcasing some 250 projects with investment opportunity in the maritime sector.

These projects include various infrastructure development opportunities in 12 major ports, projects in eight maritime states and other agencies, of which over 100 projects have been identified under the ambitious Sagarmala programme.

"With more than 14,000 kilometers of navigable inland waterways in the country, there is tremendous potential for development in this sector. My government is committed to integration in infrastructure. We are also committed to creating an enabling environment for investors and facilitating investments with an open mind," he added.

On the need for collaboration, the Prime Minister said it not just creates and facilitates economic activity, but connects countries and civilisations. He termed it as "the cleanest and cheapest carrier" of global trade.

"However, in this sector, no country can achieve the desired results in isolation. Nations have to collaborate to realise this potential and overcome challenges in this sector. The objective of this summit is to provide a platform and a forum for such cooperation," he stressed.

"India has had a glorious maritime history. We are on the path of shaping an even better maritime future."

The overriding theme in Modi's speech was to modernise India's ports and integrate them with special economic zones, port-based smart cities, industrial parks, warehouses, logistics parks and transport corridors. 

Seeking partnership, Modi made a specific reference to rating agency Moody's recent appreciation of the Make in India initiative. 

"We have done a lot of corrections on the front of ease of doing business. We have jumped 12 ranks in the World Bank's ranking," the Prime Minister said, adding India has liberalised the licensing regime, including that of defence and ship-building sectors. 

Backing up his assertions, he said FDI inflows have gone up by 44 per cent since his government took over. 

"In fact, 2015-16 has seen the highest ever FDI inflow into India," Modi noted. 

In 2015, India saw the highest-ever volume of cargo handled by its major ports. Port efficiency parameters have improved and India notched up fastest average turnaround time in ports in the same year, he added. 

"In the last two years, our major ports have added 165 million tonnes of capacity with record addition each year. 94 million tonne capacity was added by these ports in 2015-16 alone, which is the highest ever," he said. 

The Prime Minister said the shipping ministry is showcasing about 250 projects with investment opportunity in the maritime sector. These projects include infrastructure development opportunities in 12 major Ports, projects in eight maritime states and other agencies. 

The initiatives would create employment opportunities of approximately 10 million jobs over the next 10 years, which includes 4 million direct and 6 million indirect jobs, he added. 

Modi also touched upon more than 14,000 kilometers of navigable inland waterways in the country with tremendous potential. 

Speaking at the same event, Union Shipping and Ports Minister Nitin Gadkari said: We've launched Project Unnati for major ports and already, there has been a 30 per cent increase in efficiency... We plan to double the port capacity in the next 10 years, which will include building 6-8 major ports at an investment of Rs 50,000 crore." 

Plans are also afoot for developing 40 coastal SEZs which would create 1 lakh jobs. 

Kim Young Suk, Minister of Oceans and Fisheries, South Korea, called for tapping similarities of both India and South Korea. 

"India is well endowed with growth through oceans and South Korea is well positioned to offer its technology and expertise to support India," Kim added. 

Governor of Maharashtra K Vidyasagar Rao, Chief Minister Devendra Fadnavis, Gujarat Chief Minister Anandiben Patel and Secretary General of IMO, Kitack Lim, were present.

Sun Capital

Patanjali’s success may lead to a FMCG rejig

At a time when most companies were charging a premium for organic products, the fact that Patanjali’s products are cheaper than most other competing brands did the trick.

ET Intelligence Group: Patanjali has emerged as a serious threat for mainstream FMCG companies especially for the likes of Colgate Palmolive, Dabur and Emami. Brokerages such as Credit Suisse have downgraded Colgate Palmolive to neutral as Patanjali toothpaste eats into the market leader's share.

There is a strong likelihood of more earnings downgrades to follow as Patanjali products continue to garner market share in packaged foods and personal products. The fourth quarter performance of FMCG companies could well provide the fresh triggers.

At a time when most companies were charging a premium for organic products, the fact that Patanjali's products are cheaper than most other competing brands did the trick.

"Besides adopting a different marketing model of starting with its own stores, Patanjali also appeals to the 'spiritual' lot thanks to its brand ambassador," said an analyst tracking the FMCG industry.

So, what are FMCG companies doing and is it enough to stave off the threat? They have responded with strategies ranging from rejuvenating old herbal brands (HUL with its Ayush brand) and acquiring new ones (HUL buying Indulekha and Emami buying Kesh King) to investing in brand building. Yet, these measures are unlikely to provide relief in the short term. The benefit of advertising starts trickling in after a lag. Same is the case with brand acquisitions and revival of old brands. A more immediate impact could be realised through price cuts on the mass market products. The recent industry drive of premiumisation introducing high value premium products could give way to introduction of more mass market products.

The moot question is will Patanjali, as the proverbial new kid on the block, turn out to be a game changer for the industry or just a new fad that may fizzle out soon. With multitude of products and plans to aggressively expand in more categories, Patanjali is running the risk of spreading itself too thin, too fast resulting in unsustainable growth. Besides, a good monsoon (as forecast) could improve the overall consumer sentiment increasing the size of the pie for all marketers.

Sun Capital

Axis Bank cuts funds based lending rate by 15 bps

Axis Bank’s one-year MCLR will now be at 9.35%, down from 9.5%

Mumbai: Axis Bank Ltd on Tuesday reduced its marginal cost of funds based lending rate (MCLR) by 15 basis points (bps) across all tenors and its base rate by 5 bps, with effect from 18 April.

One basis point is one-hundredth of a percentage point.

In a statement, the lender said that its one-year MCLR will now be at 9.35%, down from 9.5% the bank had announced as on 1 April.

Two-year MCLR is set at 9.45%, while three-year rate is set at 9.5%, the bank said.

Axis Bank’s reduced base rate will be at 9.45%, for all its existing borrowers.

Even with the latest round of rate reduction, Axis Bank’s one-year MCLR is higher than that of State Bank of India (SBI), which had set it at 9.2% as on 1 April.

Axis Bank is the first lender to reduce its lending rates after the Reserve Bank of India (RBI) announced a 25 bps reduction in repo rates on 5 April and new liquidity measures making it easier for banks to access funds. The measures are expected to have reduced the cost of funds for banks.

RBI introduced MCLR on 17 December, and the guidelines mandated that banks must price incremental loans using MCLR.

Under MCLR, banks will need to consider their marginal cost of funds, or the cost incurred on incremental deposits across different maturities. To this, banks will add their operating costs, the negative carryover of their cash reserve ratio balances with the central bank and a tenure premium. MCLR is only applicable for new customers, while existing customers may choose to shift to it from the current base rate system.

Sun Capital

L&T Infotech’s valuation gets a reality check

L&T Infotech’s valuation estimates were far too high to begin with, necessitating the sharp cut in the issue size.

In an unusual turn of events, L&T Infotech Ltd on Monday withdrew the draft red herring prospectus (DRHP) it filed with the Securities and Exchange Board of India, and filed it afresh on Tuesday. According to investment bankers, this was necessary because the estimated size of the issue has been cut by more than 10%. As it turns out, the estimated size of the issue has been cut by almost 30% to around $200 million, according to news reports.

The Nifty IT index has corrected by around 5% since the time L&T Infotech filed its DRHP the first time in end-September.

Clearly, its valuation estimates were far too high to begin with, necessitating the sharp cut in the issue size.

Parent Larsen and Toubro Ltd (L&T), which currently owns all of the company’s shares, is offering a part of its stake in the issue. The number of shares to be issued will remain the same at 17.5 million. Based on the earlier rumoured issue size of up to Rs.2,000 crore, L&T was expecting a valuation of around 24 times fiscal year 2015 earnings. This has been toned down to around 16-17 times.

Large-sized IT services companies such as Tata Consultancy Services Ltd and Infosys Ltd trade well above 20 times FY15 earnings, and so is the case with some smaller-sized firms such as Mindtree Ltd and Hexaware Technologies Ltd. But these firms have grown at faster rates.

Mindtree has grown revenues at an annual average growth rate of 23% in the three years till FY15, while growth at Hexaware has stood at 21.2%. L&T Infotech’s growth was lower at 16.1% during the same period.

Operating profit margins are comparable with Mindtree at around 20%, although they are ahead of Hexaware. However, free cash flow generation is lower at L&T Infotech at around 9% of revenue. For the other two firms, free cash flow generation as a proportion of revenue was in double-digits.

Besides, like most other mid-sized firms, L&T Infotech carries greater risks such as high client concentration. Its two largest customers, Citibank and Chevron, account for 21% of revenue.

Against this backdrop, L&T was clearly aiming too high by demanding valuations of around 24 times trailing earnings earlier. The fact that it has toned down expectations sharply should help the issue sail through.

Sun Capital

Realty firms miss residential sales guidance for 2015-16

A few developers revise sales target for March quarter; weak demand, delay in approvals seen as reasons for slump

Bengaluru: Real estate developers struggled to meet their residential sales guidance for the year 2015-16 due to tepid consumer sentiment and delays in securing project approvals.

Unable to launch projects and sell in line with expectations, a few realty firms even revised or downsized their sales targets in the March quarter.

While real estate developers in Mumbai and Bengaluru selectively launched projects in the last fiscal year, most in India’s largest property market—the National Capital Region centred on Delhi—refrained from bringing more new supply into the market—causing sales to shrink.

Bengaluru-based Prestige Estates Projects Ltd, which generated about Rs.5,030 crore of sales in 2014-15, includingRs.1,000 crore of rental income, is expected to have clocked a little above Rs.3,000 crore in 2015-16.

Prestige Estates, which had set an annual sales target ofRs.5,500- 5,800 crore for 2015-16, revised it in the course of the year.

PrestigeGroup’s chairman and manaing director Irfan Razack said the approval delays and the inability to launch projects in Chennai and Hyderabad affect- ed the sales momentum.

“We are happy with the numbers in the current environment, and we would be the highest to generate such sales in the current environment,” Razack said.

In the April-December period, Prestige launched just 3.8 million sq.ft of the full year’s target of 12 million sq.ft and met just 33% of the Rs.5,800 crore sales target. However, with three residential launches in the March quarter and one commercial project seeing good response, the company is targeting more than Rs.1,000 crore of sales bookings in the last quarter and Rs.3,000 crore for FY16, according to an Elara Securities India (Pvt.) Ltd report.

Prestige did not give out exact numbers due to the impending results.

Another Bengaluru developer, Sobha Ltd, last week said it has registered new sales of 3.38 million sq.ft, valued atRs.2,012 crore, 3.2% higher than its 2014-15 performance, in a scenario where demand remained muted in almost all property markets in the country.

Sobha’s affordable housing brand Dream Acres emerged as its fastest selling product.

An Elara Securities report said that “FY16 is the third consecutive year where Sobha Ltd has missed its annual sales guidance with 3.4 million sq.ft of sales worth Rs.2,010 crore versus guidance for 4 million sq.ft of sales worthRs.2,600 crore. This was largely owing to continued delay in approvals for new launches (Kochi, Chennai and Gurgaon), slowdown in the Rs.1 crore-plus segment and sustained weakness in the Gurgaon market.”

“Most developers missed their sales guidance last year, but 2016-17 is expected to be much better. Developers in Bengaluru such as Sobha and Prestige have a strong pipeline of launches, and that will naturally boost sales numbers. We expect NCR to remain slow and Mumbai will be mixed bag where some developers will sell well,” said Adhidev Chattopadhyay, real estate analyst at Elara Capital.

On a pan-India basis, Mumbai-based Lodha Group again seems to have hit the highest sales numbers, crossingRs.8,000 crore in gross sales—far ahead of Prestige Estates and Godrej Properties Ltd (GPL). GPL generated sales of about 4,422 crore in the first three quarters of FY16. The company didn’t disclose full year numbers. Lodha Group, which beat India’s largest developer DLF Ltd and Prestige in 2014-15 to clock the highest new residential sales of Rs.7,800 crore, had set an ambitious target of Rs.9,000 crore for 2015-16.

Lodha Group’s 40-acre residential project Amara in suburban Thane was the largest contributor towards sales last year. In the past month or so, it has clocked 1,500 apartment bookings that would amount to Rs.1,300 crore. In total, in 2015-16, Amara contributed nearly Rs.3,000 crore, followed by Palava, a township near Mumbai which generated another Rs.1,200 crore.

“The product, brand and price are the three things that played important roles in generating this kind of sales. We have also been able to significantly improve the net to gross ratio without sustained consumer-centric approach,” said Prashant Bindal, chief sales officer, Lodha Group.

While the gross sales typically indicate customers who have paid the booking or the signing amount, net sales would mean when a customer actually makes the initial 20% payment.

Pune-based Kolte-Patil Developers Ltd, which had set a target of selling 3-3.5 million sq.ft of residential space, revised it to 2-2.5 million sq.ft in the last quarter, Elara Capital’s Chattopadhyay said.

In 2015-16, DLF is expected to match the level of 2014-15, when it clocked sales of about Rs.3,850 crore, said analysts.

DLF’s chief executive Rajeev Talwar said that there was a visible rise in customer enquiries. “Customers are gradually coming back. In the last 5-6 years, developers only launched residential projects leading to a lot of supply in the market and this will take time to be absorbed. But... the new financial year will definitely be better in terms of buyer sentiment,” Talwar said.

Sun Capital