May 2016: Early signs of a pickup in the economy?

The Nifty continued its recent up move and was up 3.9% for the month – our portfolios continue to do well. In our last newsletter, we had said that “growth seems to be coming back, though grudgingly”. Soon after we sent that newsletter, the monthly automobile sales for April were released which is among the most reliable, current data that one gets about the Indian economy, because it is published by a private body consisting of all the automobile manufacturers in India. We are happy to remove the “grudgingly” from the previous sentence. We will of course look at May and June numbers to conclude whether this is sustainable, but one can certainly see from the data that perhaps the consumer is beginning to open his wallet and spend more.

What has also helped, has been the RBI governor’s sustained battle against inflation, and followed up by some good measures from the government. Because when we reduce inflation, we put more purchasing power in the hands of the consumer, which s/he can then choose to spend on multiple products and services. Also, certainty in the mind of the consumer can help him/her to take decisions which require larger outlays.

The other good positive we see is the RBI’s sustained fight against the scourge of NPAs which has rocked some parts of the Indian banking system. The RBI was quick in telling bankers that they could not restructure any more, through policy decisions taken by the RBI, as early as April of 2015. This was followed up by virtually forcing many big banks to take large hits in terms of provisions in Q3 and Q4 of the year ending 31-Mar-16. A problem can not, in our opinion, be solved unless we first know the dimension of the problem. We give full credit to the RBI establishment in trying to confront the problem of NPAs, rather than kick the can down the road. It makes sense to do the clean-up before we move to the process of government or private re-capitalisation of banks – because then the equity dilution in the banks will happen at sensible prices, making the system more stable.

One is also seeing the first signs of improvement in government spending, particularly on infrastructure. This may encourage private entrepreneurs and investors to also re-start the long moribund capex cycle. The sales growth of commercial vehicles is one lead indicator of the capital expenditure related part of the economy – medium and heavy commercial vehicles sales grew at 30% in the last financial year and the momentum looks like sustaining in April. One of our colleagues was sent on a mission to Andaman and Nicobar islands, to determine the veracity of the rumours that the monsoon was on schedule – he reports Aye! (Just kidding! He happened to be there on a break with his family).

All in all, the signs on the economic front are good – while challenges remain on the global front, and on the effective addressal of the NPA problem, we see signs of optimism, particularly for companies that continue to stick to their knitting and go on with the tough, boring job of increasing the width of their moat vis-a-vis their competitors. While many clients continue to point out to several beaten down stocks that we should invest in, we believe that we don’t understand those opportunities well enough and would rather stick to our knitting – which is finding wonderful businesses, which continuously generate free cash flows, and we hope to buy them at prices that are sensible.