Daily India: RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine and more

In this briefing:

1. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine
2. Wanted: A 21st Century Monetary Theory
3. Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question
4. India Policy Rates – Case For A Cut Builds
5. HDFC Bank – Quarterly Credit Deterioration

1. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine

The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.

While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.

Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries.
Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel.
India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..

2. Wanted: A 21st Century Monetary Theory

The globe is facing more than an ordinary business cycle.

Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.

3. Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question

Polycab India (POLY IN) plans to raise around US$280m 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 has also recently entered the consumer electrical segments. 

Sales growth has been decent while margin expansion has helped the company to report much higher PATMI growth. Although, cash flow from operations has lagged earnings growth as working capital requirements have been volatile. In addition, receivables quality seems to be deteriorating. To add to that the rationale for the dealers and employees rationalization hasn’t been clearly explained.

In this insight, I’ve covered the above points, compared the company to its listed peers and commented on valuations. Should the deal be offered at multiples close to its wires and cables peers, it might still be interesting.

4. India Policy Rates – Case For A Cut Builds

A cut in interest rates is coming. The case is compelling. Headline inflation is easing and is now running well below the RBI’s forecasts. System non-performing loans have peaked while the trade deficit is narrowing meaning the central can afford some largess. Given where real lending rates are and the fragility of the corporate profit cycle, lower policy rates would welcome and a positive of the India growth story. We reiterate our overweight Indian equities call.

5. HDFC Bank – Quarterly Credit Deterioration

The beloved bank reported exceptionally high growth in non-performing assets (NPAs) rising from INR111bn to INR119, from 2Q19 to 3Q19. And this is flattered, as it is after write-offs.  Its doubtful 3 loans, rose by 33% in the quarter. The bank’s additions to NPAs during the period, also increased – a more objective figure, before write-offs. The figure was INR40bn in 1Q19: INR39bn in 2Q19; and rose to INR46bn in 3Q19. This is not data that we expect most analysts to focus on, as much lays hidden in the bank’s Pillar 3 disclosure. The result of deteriorating credit metrics: 21% higher growth in credit costs QoQ and 64% YoY in 3Q19.