Living with Inflation

Everyday we hear and experience rising prices or inflation. Inflation measures the rate at which prices rise. Due to inflation, we end up with lower bank balances at the end of each month. What you could buy for Rs 100, a few years ago, costs you nearly double now. In other words, it also means the worth of a rupee has reduced.

Let me familiarize you with the three broad degrees of inflation - Hyperinflation, inflation and deflation.

You can recollect, last year, beginning of June, the rates of onions had shot overnight to around 25 to 30 rupees. Of course they stayed there for few days and came back to normal. Imagine something like that happening on a continuous basis. i.e. prices shoot from 10 to 20, next day they touch 40, after another day 80 and so on. Now imagine this happening for not only onions, but for potatoes, other vegetables, sugar, fuel and just about everything that you need and just continues without any sign of reversal. You are experiencing Hyperinflation - inflation gone out of control.

Flashback.. 1923 .. Germany! Picture a lady, keeping herself warm by the fireplace. What do we use to keep the fire burning? This lady was using neat bundles of currency notes. Why? Because the notes would burn longer than the firewood she can purchase with the same notes. Currency really becomes worthless. The government prints larger denominations of currency.

Hyperinflation is not like dinosaurs that have disappeared from this earth. One can go to Zimbabwe today and live through it. In 1980, one Zimbabwe Dollar equaled 1.5 US Dollars. In January this year, the government issued new notes of 10 million Zimbabwe dollars. Each note valued at 4 US Dollars. Just after 3 months, in April the government issued new notes of 50 million Zimbabwe Dollars. Each valued at 1.2 USD i.e. about 50 rupees. The government figures quote the inflation rate at 165000%. In reality it could be double.

Well, no one likes rising prices. We are happy when prices are reduced, when we get good discounts. What if prices keep falling? You think you will love it? Say, you want to buy a car and you expect prices to keep falling. Will you buy the car or will you wait till the rates of the car drop further? You will wait. Just like you don’t want to buy a car, you don’t want to spend on other things as well. Everyone feels the same. No one buys.

If you are on the manufacturing or selling side and no one buys, what do you do? Cut the price. Cut costs. Sack employees. Now people’s incomes reduce and they become more reluctant to buy. Here we have a deflationary situation. You have prices falling and you wait for them to fall further, leading to a deflationary spiral. Prices go into a freefall. This is what has happened in Japan in the last decade. They just couldn’t figure out how to make people spend. They had zero interest rates till 2006.

We have seen the extremes of inflation, hyperinflation and deflation and obviously do not like both. Simple inflation is what we have been experiencing in India. Should we not have any inflation? Actually, we do not need high inflation. But, we actually need a little inflation. Low inflation keeps the economy active as the prices of goods keep changing. In the short term, it encourages spending and borrowing and also encourages long term investments.

At the moment the inflation in India at 7% makes us a bit uncomfortable. But, let us be optimistic and let the government take care of the inflation. There have been several initiatives taken by the government and the effect of these measures should be seen in the next few weeks. In the past we have seen higher levels of inflation.

Bull phase begins?

Last week was good for the markets. The markets seems to be in an uptrend. I seem to talk in terms of a techinical analyst, though I do not mean to. The majority opinion is that market will move a bit higher and then we will see profit booking. I also do not expect the current rally to last long. It is inevitable that there will be more falls before the bull market sets in. And start it will.

The biggest IPO in the form of NHPC is supposed to hit the market in August-September.

Macro outlook

Discussed yesterday with a friend about the outlook for the next few months. Recession has already showed its face in the US. Though the actual situation may not as bad, it is the perception caused by the subprime problem that everything is not ok with the finance firms, which will hit and cause further damage. India has to face major problem due to the inflation which is primarily due to the high international commodity prices. My friend thinks that commodity prices will correct by 20%, though I feel that oil prices would not yield so soon and we could still see higher levels.
The 4th quarter results being announced already show a slowing of the growth, except for the telecom sector which has shown good growth. The margins though seem threatened even in that sector. We can see couple of tough quarters, but I am still optimistic about India's performance in the long term.

The market ahead

Last week I had an interesting discussion on the way ahead for the Indian stock market with someone who (to his credit) had predicted that the market was set to go into a bear market just before it went. Now, my friend thinks that the market is going to slide further during the next couple of months and his advise is to sell and move to cash using the increases in the market.
Though I admit that my friend has been on the spot predicting the slide, using his technical skills, I am more of a believer in fundamentals. I believe we should buy and hold the stocks that we know are undervalued. It is not difficult to find undervalued stocks when the markets are down. And according to me it is difficult to predict when the bear phase has ended. One could be left stranded with cash and then having to pick at higher values than currently available. I agree that the current market does not look positive and it is bound to fall further, but in the long term there is only one way to go.. UP!

Rail Budget

The rail budget has been to my expectations. Reduction in fares accross the board, looking at the popularity desired for the elections next year. The reduction in rates are of course welcome. These will balance some cost pressures due to the increase in fuel costs.

What is amazing and creditable is that Laloo has been able to provide these rate cuts and post a big surplus as well. There is no doubt that he has turned around the performance of Indian railways. It is not without reason that major management institutes are eager to analyse this turn around in terms of a case study. Laloo has also been invited by these institutes to share his tips.

Tips.. really:
Catch the bull by the horn, not the tail
If you don't milk the cow it will fall sick

Such ideas have tremendous potential as he has demonstrated. The problems of the sick Indian railways have been met head on. He has increased capacity utilisation by innovative means. Hats off to Lalu.

HDFC and CBOP banks merger

HDFC Bank is set to merge CBOP (erstwhile troubled Centurion Bank, which merged with Bank of Punjab) with itself. Usually in a merger of unequals, the smaller bank (CBOP) benefits more. This is easily reflected in the stock markets reaction to the news. HDFC Bank share price fell from (1540 to about 1450) while CBOP share price increased (from 50 to 60). I feel that besides the synergies identified like size and reach, HDFC Bank is also set to gain quite a lot from the expertise of Rana Talwar of Sabre Capital who will join the Board of HDFC Bank. Rana Talwar has a lot of international experience by working with Citibank and heading Stanchart. The exchange rate of 1:29 values the share of CBOP at about 50 and that is where the stock trades currently.

India Outlook

Yesterday I attended a conference on wealth management at the Grand Hyatt in Mumbai. It was part of the event Extravaganza organised by Shorex Ltd. A lot of the talk at the conference was focussed on the India growth story. There is no doubt in the minds of these finance professionals that India is on a growth path for the next 30-40 years. Since we are just at the beginning of this growth cycle, it is a very good time to invest in the Indian stocks.

How can we say if it is the right time to invest now? Well, looking at the growth of the Indian economy for 30 - 40 years, we can expect the stock market to grow for atleast about 15 years.

How do we judge if the market is overvalued or not? What about the PE ratios? Currently the Indian market has a PE ratio of about 18. We know that the economy is growing at about 9 or 9.5%. The inflation is about 4-5%. In nominal terms we thus have a growth of about 14%. This applies to the entire Indian economy. Now, the corporate sector is at the forefront of this growth. Hence, the PE of 18 is entirely reasonable. We can definitely see a increase in the PE levels from here as the sentiment in the market improves, but that is another story. At the current PE, we can easily expect a 20% growth from the Indian stock market for the next 15 years. If the PE increases to above 30, it might be a good time to come out of the market and wait for it to come down again, as historically the PE has gone above these levels only during the scam times when markets were overvalued.

Overall the sentiment was in line with my feeling. We can see a flat market or it might go down (giving more buying opportunities), but the long term growth is simply positive. Keep investing, stay invested.

Markets ahead

The crash continues! Last week we saw hopes of market recovery being dashed. The market could stay flat in the next weeks. The budget could be a stimulus for the market. Everybody is expecting a populist budget because of the election year. I feel there could be some surprises for the market.

Meanwhile Reliance Power, the heavyweight IPO lists today. Everyone has made predictions on the listing price and from listing premiums, now we are speaking about discounts. Let us see what effect the listing has on the markets.

Credit cards

How many of you would be interested in high interest rate unsecured loans? You don’t want to associate with high interest rate loans.. right?

In my view a credit card is just a facility to avail very high interest rate unsecured loans. Hence, I would like to share with you my views on a few important aspects of credit card management.

Indeed! Credit cards are very convenient. They help you meet emergencies. They help you make online purchases. Banks also make the credit cards very attractive to you. Most of the credit cards are offered by Banks free of cost for life. You can avail 45 to 52 days interest free credit period. You just need to pay a minimum amount. Rest can be repaid later as you wish. Multiple credit cards allow you to even roll over credit from one card to another. Credit card purchases entitle you to special offers and discounts. You can earn and redeem points on your credit card spends. All this convenience leads you into a trap which is difficult to move out of.

For example, I read about a Software professional, who earns a decent salary. He pays 30% of his salary towards his home loan EMI, 15% on his car EMI and 25% towards his credit card bill. He earns a decent amount. But, he is still struggling with his finances. He is not able to save or invest. He is caught in the credit card trap.

Let us look at some of the important features of credit cards and discuss what they actually mean.

Consider the interest free period. It is like the free samples of products that we get. We can enjoy the samples free, but if we want to enjoy the whole product we need to purchase. When we like the sample, we are tempted to make a purchase. Similarly credit cards offer you interest free credit. If you want to extend the credit, you have to pay interest. Generally, a credit card would have a one month billing cycle and about 2 to 3 weeks period to make the monthly payment. If you pay your bills on time, no interest is applicable. But you need to keep in mind that all your purchases do not give you a 52 days interest free period. Only the purchases that are made on the first day of your billing cycle, would give you the maximum interest free credit. For purchases made on the last day of the billing cycle would give you only about 20 days interest free credit. Hence be familiar with your billing cycle to get the maximum benefits.

Next, how much of the bill should you pay? You have the option to pay only a minimum amount. But, resist the temptation to do that. You should clear the entire bill as soon as possible. If the credit is availed by paying a minimum amount, the interest charges apply not only from the date of bill payment, but from the date of purchase. You are in fact paying for the free samples as well. The interest free period is applicable only to payments cleared within the time limit. Further, there is no interest free period even on future purchases till your outstanding dues are cleared. Hence, do not opt for minimum payment option. Clear your outstanding dues as soon as possible.

Also, you can withdraw cash using your credit card in case of urgencies. Never do that. Cash withdrawals do not have a interest free period. Interest free period only applies to credit card purchases. Besides, the interest rate is also very high. It seems nice to hear figures like 2.5% or 3%, but these are monthly interest rate. If you want to know annual rates, multiply by 12.. yes 30% to 36%. That is not all. Every following month you would have to pay interest on accrued interest. This is called compounding effect. If we consider compounding, the interest rate works out to something like 35% to 43%. It is certainly better in such situations to take a personal loan that has lower interest rates and also spread out the repayment.

What I have tried to convey is that, having a credit card can be a boon or a bane depending on how you manage it. Try to cash on the advantages the card offers. Understand the billing cycles and capitalize on the interest free period. If you are disciplined, you can use them to your benefit. The decisive factor should be your budget and not the limit that the credit card offers. never withdraw cash with your credit cards and clear outstanding dues as soon as possible.

Economy

My view that a slowdown in the US would actually benefit the Indian outsourcing market has been endorsed by Mr. Narayanamurthy. A report by Standard & Poor also states that India & Korea will not be affected by the slowdown.

Yesterday, the RBI decided to leave a status quo on interest rates despite expectations of a 25 basis points cut. RBI expects the banks to lower the rates themselves rather than wait for RBI to do it.

Another of my view about ever increasing salaries seems to be coming true. TCS has decided to reduce its staff salaries. They have made an across the board reduction in variable pay linked to company performance of 1.5%. It is against economics to see everincreasing salaries in India. At some stage we are bound to lose the competitiveness.

The resurgence

After the mayhem came the resurgence of the market. The market covered a lot of the losses it had made, though overall the week closed in the negative. This week also we expect the market to be volatile. The RBI rate decision would be closely followed. The market is expected to be in a range over a few weeks. The budget could be the major cue to set the direction of the markets.

Mayhem II

If day before it was mayhem, yesterday was mayhem continued. The crash was due to a combination of FII pull out and the unwinding of leveraged positions. The crash has given a great opportunity for value pickers. Since it was not a few stocks that had crashed, but almost all the stocks were down, it was much easier to cash in if you had the cash.

The US Fed concerned by the signs of recession came up with a higher than expected and unscheduled rate cut of 75 basis points. This was definitely a tonic for the Indian markets which are up and going. Today the sensex ended higher about 900 points. The rally could continue tomorrow. But the question is till when?

Mayhem

Yesterday the stock markets crashed like there was no bottom. though there were many expecting a correction in the markets, the speed and extent of the crash has taken everyone by surprise. If you thought there was any chance of a bounce back today, the chance is minimal. The Asian stock markets are all in the red today as well and we can expect the same in India. I feel that this crash is providing a good opportunity to buy value stocks.

Bull phase is over?

Last week saw a big slide in the Indian market. Everybody now thinks the markets could slide till some positive news comes. In my view markets most of the times see a rise during the period November to January. It seems to me an end to this rally. Also a large amount has gone into the Reliance power IPO.

IPO

As we see the listing of the largest IPO till date, Reliance Power, we have the news of BSNL planning a larger IPO soon. BSNL plans a $10bn IPO. However, the large size IPOs should not be surprising considering the market capitalisations of the Indian stocks which are record highs. It is but natural for the IPOs to set new records.

I also read about the presence of many pension funds on the Indian market. Indian pension fund money is yet to enter the Indian stock market, however many public and private pension funds from the US (including Microsoft) have registered with SEBI. Pension fund money can be expected to be long term unless we have a crisis. Soon we should have the part of Indian pension funds managed by UTI and SBI entering the stock market. This should only help to improve valuations.

Interest rates

There have been indications from the US that large interest rate reduction is on the anvil to avoid (or reduce the effect of) recession due to the sub-prime crisis. In India, the bankers seem to suggest that if the macroeconomic policies are left intact, i.e.the CRR or lending rates are not raised, then there is a case of the banks to reduce the rates. A reduction in interest rates would be a boost for the markets. I think particularly, demand for housing loans will again see a rise, bringing along an increase in real estate.

Innovation

All the buzz around is about Nano, the revolutionary small car from Tata Motors. Indeed, I endorse that Nano will bring about a huge change in the car market. The number of cars on the road is set to rise sharply. I think the low end cars from Maruti Suzuki will take a hit. The luxury cars would not be affected, but the entry level car will be Nano. It will be a sign of the rich poor divide which is becoming increasingly evident.

Another, large evidence from the Nano launch is the capability of India in manufacturing innovation. The team has accomplished something which has been dismissed by almost everyone as impossible. They have shown that it is infact I M possible.

IPO

The year 2007 was very good for IPOs. Lot of companies came up with IPOs and had good success with the issues doing very well. Most of the IPOs belonged to the real estate and financial firms. DLF set the record for the largest IPO. There are a lot of IPOs lined up for 2008 as well. The major ones in the queue are Future Capital and Reliance Power. Reliance Power is set to break the record set by DLF. I am sure it will also be a very successful issue. The Reliance IPO would have a special discounted price for retail investors. Despite the size of the issue, it is to be seen how much the retail investors finally get. Retail investors usually end up with only 2 to 3% of the market cap.

I had thought I would publish something on a daily basis... however at the beginning itself I have had a gap of 5 days..

Never mind, I will try to improve. Improvement is something we need to do on every front.

Having worked throughout my career on the operations side, I have hardly been exposed to the outside world, except for colleagues. Now, when I am keen to develop the business for my company, I need to improve my communication skills. I am quite focussed on this aspect of improvement.

Happy New Year!

Happy New Year!

As we hope of a very bright future for India in the new year and beyond, we are being warned of some challenges ahead.

First and foremost the Subprime meltdown in the US which is dragging the US into a recession (mild or severe is what the debate is about). The bright side to this is that the US corporations would like to cut down on costs and this would mean higher outsourcing to India.

Second, the Rupee appreciation. I feel the Indian industry would learn to cope with the Indian Rupee appreciation. What came in 2007 was an unexpected large move. In future I think it will be more of a steady appreciation.

Third, the shortage of skilled people to fill up the jobs. This is a current problem, which has caused huge increases in compensation at all levels. This cannot go on forever. I think that major reforms to the Education system like allowing entry of foreign institutions to train the Indian population would take care of this issue. The compensation levels cannot go up forever and would flatten out or increase at reasonable pace as we lose the competitive edge.

All the best for a wonderful 2008!