Big News for the week ending 15th September 2017

Reliance New High

Stock touches a life-time high after nearly 10 years…

Nearly 10 years after the stock of RIL touched an all-time high in January 2008, the stock once again reclaimed a life-time high during the week. The last rally in RIL had happened between 2005 and 2008 when the stock had actually been a multi-bagger. Interestingly, in the last one year the stock is up by over 80% and its market cap has touched Rs.5.30 trillion and it is the most valuable company in India today. Both TCS and HDFC Bank have some major catching up to do. In fact, RIL looks poised to be the first Indian company to scale $100 billion market valuation. But, what exactly were the triggers?

 

Healthy GRMs…

 

This is the bread and butter of RIL. The last few years has seen a massive surge in value of Reliance Industries. This has been largely led by the gross refining margins (GRM) of RIL consistently quoting at a premium of $4-5 over the Singapore benchmark. RIL GRMs at nearly $11-12/bbl are literally unmatched in the entire refining business. It is this healthy GRM that has enabled RIL to sustain its profits even at a time when oil prices were weak. This outperformance by the refining division has been one of the key factors that have helped RIL create a cash stash to fund its subsequent business investments. In addition, petchem margins at RIL are also among the best in the industry. This has resulted in a long term re-rating of RIL.

The Bullet Train

The Japanese funding model is not all that simple!

It was, in many ways, called the deal of the century. The Japanese prime minister traveled down to India to lay the foundation stone for the project. Of course, the tougher job of acquiring the land, getting the clearances and actually executing the job is still pending. But that should happen, sooner rather than later. Also there are add-on benefits in the form of billions of dollars that has come in from companies like Suzuki, Denso and Toshiba. But the big question is on the funding part. Japan has to fund a large chunk of the $17 billion project with a 0.1% loan. Here are 3 key points we need to be aware of…

 

Not an economical solution…

 

The first question is whether India really requires a bullet train at all. High speed trains make a lot of sense in smaller nations like Germany, Japan, France, Italy and Spain. In a country like India, it is not too clear whether it will add value. But the bigger concern is over the cost of the project. The Japanese costing is at least 60-70% higher than the cost at which China has implemented similar projects in its country. On a mega project of this size and magnitude, it does not really make sense to overpay to this extent. India, most likely, did not use Chinese technology due to the security issues involved, but that could have been handled and could have saved billions of dollars. It will be interesting to see the payback period for the bullet train!

GDP Worries

A host of downgrades are raising hackles over the GDP number…

From the time the MOSPI announced the first quarter GDP on August 31st, there have been consistent worries about the level of GDP for the full year. While the RBI continues to maintain the full year GDP at around the 7% mark, analysts and rating agencies are getting jittery. Firstly, UNCTAD downgraded India’s full year GDP for 2017-18 to 6.7% at an optimistic level. Then other banks like Nomura and DBS have also expressed concerns over whether GDP can be sustained at 7%. Here are 3 key parameters to watch out for…

 

Note ban and GST…

 

Try as we may, the ghosts of GST and the demonetization cannot be wished away. The pressure on manufacturing is still visible in the aftermath of the note ban. The cash crunch had forced most corporate to go slow on inventory purchase and investments. That is showing up in the form of lower growth. The worst hit has been the SME segment which forms the bulk of the contribution to the manufacturing sector. This segment has been squeezed by a cash crunch on the one hand and weaker payment cycles from their clients. GST is another challenge where the lag effect is being felt. Firstly, the companies focused on inventory depletion at the cost of production. Then the confusion over GST is adding up and there is still a lot of work to be done on the technology front. GST will continue to be an overhang.

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