Brief India: More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG and more

In this briefing:

1. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
2. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound
3. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
4. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks
5. Polycab India Limited IPO – Probably Near Peak Margins, Improvements Unexplained

1. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

2. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound

We expect the RBI’s MPC to cut the policy (repo) rate by 25bp on 4th April, thereby unwinding the policy error it made last year by raising the repo rate by 50bp — on the basis of an utterly erroneous inflation forecast. (Our view was: RBI Raises Rates, but Will Likely Look Foolish when Inflation Moderates). Between November 2018 and January 2019, India’s real policy rate was consequently well above +4%. Even after tomorrow’s rate cut, India’s real interest rate will be among the highest in the world — and so the appropriate cut on 4th April would have been 50bp. Real GDP has decelerated to 6.6% and is set to decelerate further in the Jan-Mar19 quarter, and the decline in imports over the past 3 months provides additional evidence for the slowdown. 

However, India’s external sector is likely to lead the recovery over the next few quarters. FDI inflows averaged US$33.63bn annually in the first 4 years of NDA2 (the Modi administration), up from US$18.19bn in the previous 4 years. In April-December 2018, FDI inflows have risen to US$44.7bn. Meanwhile, the current account deficit was 2.4% of GDP in 2018 (calendar year), the largest during the Modi years, but is likely to shrink to 1% of GDP in January-March 2019. (During UPA2, the current account deficit was consistently above 2.6% of GDP, peaking at above 5% of GDP in 2012). The improved basic balance will lay the basis for a modestly stronger rupee that allows the RBI to pursue more aggressive monetary easing over the next few meetings. 

India’s exports grew 12.7% in 2017, 10% in 2018 and are up 3.1% YoY in Jan-Feb 2019. The latter seems unremarkable, except for the fact that Indonesia, South Korea, Taiwan and Singapore are all seeing their exports decline at a double-digit YoY pace over the past 4 months (and China’s exports are down 5.3% YoY in the latest 3 months) amid a renewed slump in global trade. In fact, India’s goods exports have grown faster than China’s for the past 3 years. In the last 3 months, India’s electronics exports (albeit only 3.3% of total goods exports) were up more than 50% YoY (amid a cyclical decline in global electronics demand!). Something big is beginning to stir in India, and it is not just the momentum in the election rallies!  

3. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

4. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks

5. Polycab India Limited IPO – Probably Near Peak Margins, Improvements Unexplained

Polycab India (POLY IN) plans to raise around US$190m in its IPO through a mix of selling primary and secondary shares. It is the largest manufacturer of wires and cables in India with a 12% market share, as per CRISIL research. The company also recently entered the consumer electrical segments. 

I covered the company background and past financial performance in my previous insight, Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question.

In this insight, I’ll run the deal through our IPO framework, and comment on valuation and updates since the previous filing.