David Fuller and Eoin Treacy's Comment of the Day
Category - India

    The Real Winners From Trump's Tariffs Are China's Neighbors

    This article by Nathaniel Taplin for the Wall Street Journal may be of interest to subscribers. Here is a section:

    There is some evidence of that happening, even with the previous, smaller tariffs. Since the third round of U.S. tariffs on China went into effect in late September, U.S. imports from China have faltered. An 8% growth rate in October turned to an 18% decline on the year in March. Yet import growth from Taiwan has risen from 12% to 21% over the same period. Imports from Vietnam grew 34% in March, up from a 15% rate in October. And imports from South Korea also surged in the first quarter: They were up 18% on the year, against just 9% in the fourth quarter of 2018.

    Some of those shifts might represent manufacturers in China rerouting goods through neighboring countries. Chinese export growth to Southeast Asia and Taiwan accelerated in the first quarter of 2019, even as its overall export growth slowed. Regardless, the result is probably more expensive goods in the U.S. and lower employment in China, as Chinese companies shift elements of supply chains across borders or lose market share to pricier but tariff-free Asian competitors.

    Many U.S. policy makers would argue that some pain for U.S. households is worthwhile if it achieves broader strategic goals. In the meantime, however, the big winners from the Sino-U.S. trade conflict are still across the Pacific.

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    Email of the day on Yes Bank

    The cloud over Yes Bank is the result of the Reserve Bank of India (RBI) announcing last Fall that the bank’s co-founder and former CEO, Rana Kapoor, had not provided adequate reserves for bad loans in 2017. The RBI asked Kapoor to step down and find a replacement, which is a fairly radical move.

    When Gill took over this spring, he immediately took large write offs to clear the decks, but has since changed his tone and become much more optimistic (I am referring to his interview on 5/17/19 on CNBC India). He is adamant that there are no more skeletons in the closet.

    I am inclined to take him at his word, since the RBI has been closely scrutinizing Yes Bank for the past 6 months and knows the full extent of any problems. Also, the RBI found no issues in its most recent review of Yes Bank’s reserves, released just after Gill took the helm (but before his first earnings announcement in which he wrote off everything). The RBI also just appointed a representative to the board, so Gill is being held accountable in real time.

    Local investors remain nervous that there is more bad news coming in the next quarters, but I hold the view that the bank has adequate collateral for its important exposures (ADAG and Essel group), will get through this phase, and that perceptions will change – I think the shares will return to their historic valuation range in the next two to three years, providing excellent returns from the current price.

    The capital raise in the next 6 weeks could also be a catalyst in this process. That could be when the bank announces a capital raise, possibly with the participation of a Private Equity firm or other marquee investor. Tier 1 capital is now 8.3%, and the bank needs the capital to continue to grow.

    Long term shareholder returns from private sector banks in India have been excellent (HDFC Bank, Axis Bank, or Kotak Bank compare very well to the S&P 500 over 5, 10, or 15+ yrs. In USD). Yes Bank is trading at a severely distressed level compared to its historic valuation range, and I believe there is a strong possibility of making a 2x return in 3 years, and more over a 5-7 year time horizon.

    I am set up to invest in India (which is no small feat, 4-6 months of paperwork)

    The market capitalization in USD is $4.7bn, book value is $3.88bn, price/book is 1.21x. This is the lowest p/b ratio since the financial crisis (See chart below). In Aug 2013 the p/b ratio got down to 1.5x and recovered to 4.37x book by Jan of 2015. The mean p/b during the bank’s history appears to be around 2.7x, which is normal for private sector banks in India due to their continuing high growth and high ROE.

    Here is a chart of Yes Bank’s p/b range since 2009. It is important to note that when the shares reached 1.5x book in 2013 they were INR 49/share, compared to today’s price of 137/share, owing to the bank’s very fast rate of growth in book value.

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    Jai hind: This is the new India

    This report from Wellington Management may be of interest to subscribers. Here is a section:

    On our latest grassroots research trip to India, we visited three lower-tier cities — Ahmedabad, Pune, and Lucknow — to meet with middle-class consumers between the ages of 20 and 30. We also conducted an online survey of 1,200 millennials across the country. This paper outlines our observations and offers potential investment implications driven by a rapidly changing “Young India.”

    High-level observations
    • India is home to more millennials than any country in the world, with nearly 473 million people born between 1985 and 2000.1
    • Digital democratization is driving lifestyle convergence between metro and lower-tier cities.
    • Expanding internet access and a wave of national pride have begun to shift consumption trends.
    • The desires to bridge tradition with modernity and gain independence without losing family ties have boosted markets for inventive products and aspirational experiences.

    Trend: Digital democratization is reshaping consumption patterns Internet and mobile penetration in smaller cities like Pune and Lucknow are beginning to match that of large, metro cities like Delhi and Mumbai. Data prices in India have plummeted 95% to approximately 18 rupees (US$0.26) per Gigabyte (GB) since 2016 (Figure 1), contributing to an eightfold increase in usage with the average user consuming nine GB of data per month as of the end of 2018 (Figure 2).

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    Email of the day - on winners form the trade war:

    As you say, the US has many alternative sources of cheap goods but there are limited sources of US technology. China also has no alternative buyers of its products. Round One of the international confrontation will be won by the US.

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    Match Group Beats Estimates as Tinder Popularity Grows Abroad

    This article by Olivia Carville for Bloomberg may be of interest to subscribers. Here is a section:

    Match, which is owned by billionaire Barry Diller’s IAC/InterActiveCorp, runs dozens of dating sites like Tinder, OKCupid, Plenty of Fish and Hinge. But the bulk of the company’s earnings gains were fueled by Tinder, which lured in more than 384,000 new subscribers in the quarter, boosting direct revenue 38 percent from the year earlier period.

    The online dating app, where users swipe right to indicate interest in a potential date, now boasts 4.7 million global subscribers. Overall, Match’s average subscribers increased 16 percent with most of the new users flowing in from outside North America.

    “The world is changing," said Mandy Ginsberg, chief executive officer of Match. “I’ve been here a long time and 100 percent of the revenue used to be in the U.S. and now the growth and more revenue is outside of the U.S."

    With arranged marriages on the decline in India and the stigma towards online dating eroding in Japan, Ginsberg is concentrating on international expansion. There are more than 400 million single people living outside North America and Europe, two-thirds of whom have not yet tried a dating product, according to Match. Ginsberg recently revamped the company’s leadership team in Asia -- appointing general managers in Tokyo, Seoul and Delhi -- to try and grow Match’s footprint across the continent.

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    World's Cheapest Hospital Needs to Get Even Cheaper for Modicare

    This article by Ari Altstedter for Bloomberg may be of interest to subscribers. Here is a section: 

    Narayana has made Shetty one of India’s best-known doctors and the proprietor of a lucrative business, with about $8 million in profit in 2017. But he now faces a problem that might be even more complex than heart surgery: how to make his hospitals cheaper still. The reason is Modicare, the national health insurance program that’s one of Prime Minister Narendra Modi’s signature initiatives. Under way since September, it’s perhaps the most ambitious public-health effort in history, intended to give basic coverage for the first time to 500 million of India’s poorest. At first it seemed no one was in a better position to gain from this flood of new patients than Shetty. But his enthusiasm gave way to anxiety last year after the government published its list of reimbursement rates, which are lower even than Narayana’s prices. Those rock-bottom payments mean that to thrive under Modicare, Narayana needs to find ways to cut costs further—and then keep cutting.

    Shetty thinks he can do it and, in the process, create a model for ultralow-cost health care that can be applied anywhere. “We are trying to produce a pilot for the rest of the world to follow,” he said over a lunch of curries and fried fish after scrubbing out from the heart operation. He was still
    wearing his surgical cap. “In 10 years, India will become the first country in the world to dissociate health from affluence. India will prove that the wealth of the nation has nothing to do with the quality of health care its citizens can enjoy.” It’s a noble vision, and Narayana is as well-positioned as any provider to help make it a reality. But it’s hard to overstate the scale of the challenge Shetty faces. For a surgery like the one he’d just performed, Modicare would provide only $1,300.

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    Made-in-India iPhone X from July 2019

    This article by Bharani Vaitheesvaran for ETtech may be of interest to subscribers. Here is a section:

    Sustained increase in manufacturing will depend on, among other factors, the continuation of a favourable incentive regime into the next government, the official said. Mails sent to Foxconn and Apple seeking comment remained unanswered.

    The company began its India manufacturing journey through another Taiwanese company Wistron, which had started with the iPhone SE from its factory near Bengaluru two years ago and later advanced to iPhone 6S model. Wistron now makes iPhone 7, a sign analysts foresee as a bump-up in local manufacture of multinational technology companies keen on the Indian market. Around 290 million smartphones were assembled in India in 2018 up from 58 million in 2014, according to data from the Indian Cellular and Electronics Association.

    "In the short-term, the Differential Duty and the Phased Manufacturing Programme worked as far as import substitution is concerned. Now the challenge is to move from 290 million to 500 million phones and then to one billion by 2025," Pankaj Mohindroo, National president for ICEA, said.

    "The National Policy on Electronics, 2019, gives a broad framework, but we will have to put a robust action plan behind it, which will enable exports..."

    The ICEA has as its members brands such as Apple, Xiaomi, Vivo, Oppo, and manufacturers such as Flex and Foxconn.

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    Africa's emerging economies to take the lead in consumer market growth

    This article by Landry Signé for the Brookings Institute may be of interest to subscribers. Here is a section:

    One in five of the world’s consumers will live in Africa by the end of the next decade, and more and more of these people will fall under the category of affluent or middle-class. Growing discretionary incomes will lead to higher demand for high-quality, niche, and foreign-produced goods. Urbanization, such as in Nigeria where eight cities already host populations over 1 million people, promises to increase competition for formal retail centers and the development of efficient production and distribution chains. Rebounding oil prices in Algeria, Angola, Nigeria, and Egypt may contribute to an increased market share for luxury goods. Though, ultra-high net worth individuals(whose net assets exceed $30 million) reside throughout the continent—in South Africa, Egypt, Nigeria, Kenya, Tanzania, Ethiopia, and Morocco. Growth in GDP per capita will lead to greater purchasing power among these classes of the population, and luxury goods retailers should look to the continent for entry points.

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    BJP promises a collateral-free credit & Rs 20k cr seed startup fund in its 2019 manifesto

    This article from ETtech may be of interest to subscribers. Here is a section:

    BJP has promised a new scheme to provide collateral-free credit of up to Rs 50 lakh for entrepreneurs in its manifesto for 2019 elections. It said that 50% of the loan amount will be guaranteed towards female entrepreneurs, while 25% will be for male entrepreneurs. 

    BJP has also promised to create a seed startup fund of Rs 20,000 crore to back early-stage companies. It's worth noting that Prime Minister Narendra Modi had earlier announced a credit guarantee fund with a corpus of Rs 2,000 crore to provide funding facilities to startups in the country, as part of the Startup India action plan in January 2016. 

    The BJP-led government had also announced a Rs 10,000-crore fund of funds managed by the Small Industries Development Bank of India (SIDBI) in 2016. However, according to the Startup India status report, less than 20% of the corpus has been allocated to alternative investment funds as of November 2018, with the total commitment standing at Rs 1,611 crore. The report also noted that around 170 startups have received funding from these investments funds. 

    In its manifesto, BJP has envisioned facilitating setting up of at least 50,000 new startups and 500 new incubators and accelerators by 2024. It has also promised to create 100 innovation zones in urban local bodies. 

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    Indian anti-satellite missile test meets with success

    This article by NewAtlas may be of interest to subscribers. Here is a section:

    Anti-satellite weapons aren't new. Systems capable of destroying orbital spacecraft have been around since the 1960s and include everything from specialized anti-satellite satellites packed with explosives, to repurposed shipborne anti-missile missile systems that can take out space targets without any special modifications.

    However, for various technological and diplomatic reasons, very few spacefaring nations have actually developed anti-satellite weapons. Today's test makes India the fourth to do so after the United States, Russia, and China.

    The Indian government says that the test was conducted by India's Defence Research and Development Organisation (DRDO) and was fully successful, demonstrating the country's ability to knock out a satellite with a high degree of precision using indigenous technology. The missile was a DRDO Ballistic Missile Defence interceptor developed as part of India's general missile defence program. It operated as expected, but carried no explosive warhead. Instead, it was what is known as a "kinetic kill," where the hypersonic velocity of the interceptor is enough to destroy the target.

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