Monitoring the NaMo Bull Market in Stocks: Update as of end December 2014

Indian Stock Market Watch

Please refer to my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether market is cheap or expensive. 

Fifth, December 2 , 2014, Bi-Monthly Monetary Policy Statement by Governor Rajan: Is the RBI’s key interest rate high?

RBI Watch                                                                                    Monetary Policy 2014-15

Banks can reduce their lending rates without waiting for the RBI to reduce its repo rate 

Yesterday the Economic Times reported that the Finance Minister pinned the blame for the slump in manufacturing on high interest rates. The ET’s interpretation of this was that FM wanted the RBI to reduce its key rate, the repo rate. Today, the ET reports that FM criticised reports that he has differences with Governor Rajan on interest rates.

Whatever the full facts, there is clearly some truth in yesterday's report: the government would love to see bank lending rates lower, and if the RBI could accomplish this by reducing its key repo rate so much the better.

The fact is that banks have sufficient liquidity, and they do not need the RBI to lower its repo rate to reduce their lending rates. Note also banks have greater capacity to lend now – remember the reduction in Statutory Liquidity Ratio, the amount banks must compulsorily invest in government securities, by RBI in its earlier policy statements this fiscal year. One could expect banks then to lend more by reducing the lending rate. But this has not happened, perhaps because banks want to increase their profit margins after some years of stress on assets. Note, some banks have reduced deposit rates.

There is also another factor that could be playing on the mind of banks: the expected hike in interest rates by the Federal Reserve next year. The market’s expectation is that it will not happen before April next year. A rise in interest rates in the USA will certainly put pressure on India: a withdrawal of liquidity from India is possible but could be countered with macro reform measures -the government is acting on this front with energy through ordinances - and tactical micro market measures.

On the RBI’s part, as I have said earlier, it wants to send a strong signal that it wants to keep real interest rates positive at the 1.5 to 2% level on a sustained basis.  This is the new monetary policy paradigm under Governor Rajan and his team. High inflation in India was supported by negative real interest rates.

Inflation (CPI ) has trended down at a faster pace than the RBI expected – for three months now it  has been below the 6% target set by the RBI for Jan 2016. The fact of the matter is that weak demand in India has played a part in this. So has the exceptional deflationary situation in the developed world, and even in China, where for 33 months there has been PPI deflation, and the latest CPI came in at 1.4%. And to top it all, we have a deflationary oil price shock!

The RBI expects, after the base effects wear to off in another month or so, to see an uptick in inflation. Its estimate is that inflation will be around the 6% level by January 2016. So, a repo rate of 8% - a real rate of about 2% - is consistent with this scenario. My sense is that if the uptick is less than what the RBI expects – I won’t be surprised if this happens - then you will see a small reduction in the repo to 7.5%.

Just as in the case of banks, RBI is worried about the hike in interest rates in the USA next year. Ideally it would like to see through smoothly the first phase of the hike in fed funds by the Federal Reserve before reducing the repo rate.

The bottom line is that the RBI, left it itself, is in no hurry to reduce its repo rate. This makes good sense.

Finally, both the government and the RBI are by and large on the same page when it comes to growth of the economy. The Government is looking at the immediate picture - shall we say just as the CEO of a company is answerable for quarterly profits to shareholders - as well as the long run. The RBI seems more focused on the long run.

This is what Rajan said on growth in his press conference after the release of bimonthly monetary policy statement statement on December 2:

“On the first, I think there is a misconception in corporate India that the central bank is not concerned about growth. It is a misconception because the fundamental way to get sustainable growth in this country, and we are not talking about growth this quarter, in fact, monetary policy will not affect growth this quarter, it has long lags, it has been established in India, 3-4 quarters down the line we will see the consequence. What again and again we have seen is in India but outside India also the way to sustainable growth is to have moderate inflation.”

Amazon's financials

S&P 500 Watch

Reference my blog of October 30 on Amazon titled " Amazon’s performance critical for investors and the tech industry ". I suggest the following articles on Amazon's financials: 

Financial Times, December 1, 2014: Amazon falls on debt sale plan disclosure and
The Motley Fool, October 30, 2014 : What Investors Need to Know About Amazon.com Inc's Cash Flows.

Monitoring the NaMo Bull Market in Stocks: Update as of end November 2014

Indian Stock Market Watch

Please refer to my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether market is cheap or expensive. 

Kotak Mahindra’s Bank acquisition of ING Vysya Bank: the difficult part comes now

Timely and effective integration of ING Vysya staff and managers will be key to success

RBI Watch                                                                                                                    Banking Structure 

India’s regulations do not allow for a hostile takeover of one bank by another. Friendly takeovers are allowed, and this is done through the board approved merger route. For those interested in the regulatory detail (surprisingly easy to digest), please see this link.

In keeping with this, the boards of Kotak Mahindra Bank and ING Vysya Bank announced their decision to merge – ING Vysya Bank will amalgamate with Kotak Mahindra Bank in all stock deal. Here is an example of two strong parties coming together with the potential to become even stronger.

Uday Kotak was under considerable pressure to reduce his promoter stake in Kotak Bank by the RBI even as ING Group, especially after the financial crisis of 2008, was keen to give up its promoter status at ING Vysya. Kotak is considered a North and West based Bank, while ING Vysya is a South based bank; Kotak has a stronger presence in retail, whereas ING Vysya has a stronger presence in SME. So there is a congruence of promoter and business interests. And the deal has come cheaper for Kotak than some recent deals.

It looks likely that getting the necessary regulatory approvals will not be a major problem – either from the RBI or the Competition Commission of India. This will take about a year.

To my mind, the real difficult part for Kotak Mahindra Bank is after the acquisition: Kotak Mahindra Bank has a unique culture which accounts hugely for its success, and can it get the ING Vysya staff and managers to evolve into ‘’Kotakans’’. 

Kotak Mahindra Bank’s culture is less about form and almost totally about performance. It inculcates in its staff and managers to be fair, encourages open debate on tough issues, rewards merit generously, gives young staff greater responsibility than at other banks; yet expects it staff and managers to follow the rules and regulations.

Kotak Bank managers work very long hours – to finish work at 8-00 pm appears to be routine. I remember recently meeting by chance a young mother and her son on a train. When I asked her what her husband did she told me he was a Kotak Mahindra bank manager of one of the tier 2 city branches. She glowed with pride that her husband worked at Kotak Mahindra Bank, but she also made it clear that her husband spent long hours at work.

ING Vysya’s culture is different. Sure it has had a very experienced and progressive CEO during the last five years, who has built a good bank. Yet ING Vysya comes with some of the trappings of an old private sector bank. Its staff is more unionised, many come under the IBA wage structure, and are likely to be older than Kotak Bank staff.

Then there is the issue of finding work for those of the ING Vysya staff who in due course are found to be surplus. Kotak Mahindra Bank has announced that efforts will be made to find suitable roles for them in the rest of the Kotak Group.

Uday Kotak and his top team are aware of these challenges, and I am sure will start working on these issues right away. Newspapers have reported that Uday Sareen, the CEO designate at ING Vysya, will report directly to Uday Kotak after the acquisition. Surely, his role will be to tell Uday Kotak and his top team  not just the nuts and bolts of ING Vysya’s business, but of its culture – the formal, and more importantly, the informal rules of getting things done at his former bank –employees, and union. And when does his role start? I guess he needs to be also an Advisor to Kotak Mahindra Bank during the next year or so when the regulatory approvals will be in place.  There have been reports that Uday Sareen has already started meeting employees in town hall meetings.

Despite the challenges, I believe Kotak Mahindra Bank will succeed in getting the ING Vysya staff and managers to become ‘’Kotakans’’. Kotak Mahindra Bank will have its hands full over the next three years, and there will be some ‘’icebergs’’ along the way that will require deft handling.

Uday Kotak is considered by many a financial wizard. His real strength, to my mind, has been his soft skill: his ability to build a solid team and organisation. Perhaps the New Year will see him addressing some town hall meetings.

The future of Google

Indian Stock Market Watch
S&P 500 Watch

A day after I wrote a blog titled "Amazon’s performance critical for investors and the tech industry", on October 30, FT published an interview with Larry Page, Co-Founder of Google, which to my mind is compulsory reading to investors and those interested in the future of the tech industry. 

In my article, I had questioned Amazon's valuation, compared it with Google, and questioned the strategy of "visionaries at companies such as Google, Facebook (Amazon is an extreme example) pursuing long term profits but doing so through highly speculative, or shall I say forward looking, investments in fairly diverse industries". 

Now FT reports that Larry Page is considering changing Google's mission statement: to "organise the world’s information and make it universally accessible and useful" appears too restrictive for its ambitions and idealism.
FT  reports that Steve Jobs told Larry Page "He would always tell me, You are doing too much stuff".

It is clear that for all the things that Google wants to do it needs a different kind of corporate structure, appropriate for both its investors and the conversions of these explorations into successful businesses/industries. FT reports that Larry Page admits that there is no model for the kind of company Google wants to become.

These are fascinating times indeed!

Monitoring the NaMo Bull Market in Stocks: Update as of end October 2014

Indian Stock Market Watch

Please refer to my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge

whether market is cheap or expensive.