Shiv Kapoor

India Remains an Attractive Market

India's primary driver is expanding domestic consumption (56% of GDP). The external stimulus which was required to create income to consume has been delivered through export; now momentum caused by external demand has created a virtous cycle of need coupled with ability to pay in the domestic economy. Export remains important (it is about 22% of GDP); but not critical - revenue will be depressed and margins squeeze on strength of Rs, but this is limited mainly to export sector - and there too some pressure relief will come from productivity gains (India is very behind on productivity & those gains can drive margin growth to offet currency strength). BTW - I think sectors to focus on in India are materials/energy/infra... - anything driven by domestic demand - investing in export (IT/textile etc) driven sectors might be relatively weak. See my post on INFY.
India is a long term story; and the risks are high - risks will only start reducing once prosperity permeates through society - need per capital GDP to rise - see maxkapital.blogspot.co.... Until per capita GDP rises, expect volatility over economic cycle + also degree of external wealth through exports will be required. Import dependency is also high - particularly on machine/fert/chemicals... the latter 3 worry me most because these are supply contrained + food and energy security are very, very important for stability.

Get more info on GDP breakdown at www.mospi.nic.in/PRESS...


On Oct 09 11:37 AM TvC wrote:

> Shiv,
> What about the effect of the strengthening rupee in turn depressing
> revenue and earnings of the Export Driven portion of the Indian economy.
> This will in turn reduce the net returns to the Foreign investor.
> Could you elaborate on what portion of the Indian GDP is Export Driven
> and what portion is focused domestically.

India Remains an Attractive Market

EPI is good on quality with reasonable holdings in Bharti, Reliance Industries, Infosys.

PIN is great in quality, it has good holdings in Bharti, Reliance Industries, Infosys; all Dow Global Titans. Personally, I like quality, but short term I think its exposure to Infosys is too high. I am also not keen on their exposure to ONGC - that is a public sector entity and why it is a great holding, its profitability is very influenced by goverment policy.

IIF I do not like at all.

Overall I like IFN best. Their portfolio quality is excellent and while there is some exposure to public sector undertakings (I generally avoid PSU's), most are infrastructure plays which are positively influenced by policy. I am not keen on State Bank of India because its profits can be hurt by goverment dictates on how much to lend and to who, but that is only a small position.
1. Reliance Industries, Ltd.
2. Infosys Technologies, Ltd.
3. Bharti Airtel, Ltd.
4. Housing Development Finance Corp., Ltd.
5. Oil and Natural Gas Corp., Ltd.
6. Jindal Steel & Power, Ltd.
7. Bharat Heavy Electricals, Ltd.
8. HDFC Bank, Ltd.
9. ICICI Bank, Ltd.
10. State Bank of India
11. ITC, Ltd.
12. Reliance Infrastructure, Ltd.
13. Mahindra & Mahindra, Ltd.
14. Larsen & Toubro, Ltd.
15. Hindustan Unilever, Ltd.
16. Lupin, Ltd.
17. Tata Consultancy Services, Ltd.
18. Wipro, Ltd.
19. Hero Honda Motors, Ltd.
20. Sterlite Industries (India), Ltd.
21. Jaiprakash Associates, Ltd.
22. Power Finance Corp., Ltd.
23. Punjab National Bank, Ltd.
24. Axis Bank, Ltd.
25. NTPC, Ltd.


On Oct 07 10:48 AM jimp wrote:

> Shiv,
>
> Do you have a preferred ETF that you think
> is most able to take advantage of India's
> present & future investment potential?
> Thanks for the great article.

Indian Market Valuations: When's the Right Time to Buy?

Quite correct, near future events might impact valuations. See maxkapital.blogspot.co.... Keep in mind that the future is unpredicable; it is however very dependent on the past. Kind of like study hard, do well, become an engineer/doctor/MBA etc. = future expectation is relatively bright.


On Jul 15 04:18 PM askdala.com wrote:

> Remember that indian economy has local issues like monsoon . This
> year monsoon is not favorable and that can be disastrous. These earning
> calculations are based on what has happened in past . Not one what
> can happen in future. Stocks runs on future not past.

India: Trigger Happy on the Sensex

Just wanted to add a note on India's CGT rules.

For equity =< 1 yr is short term; > 1 yr = long term. For all other assets =< 3 yr is short term; > 3 yr = long term. .

For transactions on an exchange where the negligible securities transaction tax has been paid, LTCG is 0%; STCG is 15% plus surcharge and cess.

For off exchange transactions where no securities transaction tax is paid; STCG is 30% plus surcharge and cess while LTCG is 20% of the indexed gain (foreign investors can opt for 10% wihout indexation). I expect the new code to eliminate STT and have STCG/LTCG at these rates.
It gets more complex for trades in the futures and option market; or if a high churn leads to a re-classification of the nature of gains from capital gains to business income.

India: Trigger Happy on the Sensex

Seth

A couple of points.
1. If STCG and LTCG return, it is likely that STCG will be taxed as the top slice of income (mostly 30%) and LTCG at 20%.

2. As regards your comment "their company administrators, custodian banks and tax advisors do a proper job in maintaining the substance of these entities. Besides, the Certificate of Residency issued by the local authorities provides a prima facie protection.". For now it holds. However it is likely that the Mauritius/India treaty will be re-negotiated/amended to include a limitation of benefits clause (this is already in an advanced stage of discussion). You need to look at the Singapore treaty to understand what is likely to be necessary for treaty qualification subject to a limitation of benefit clause. I would also add that no tax advisor worth his salt would advise you to rely exclusively on "their company administrators, custodian banks and tax advisors do a proper job in maintaining the substance of these entities. Besides, the Certificate of Residency issued by the local authorities provides a prima facie protection." to maintain substance. Today in India this is a safe (not necessarily sensible though) position because of the Aazadi Bachao precedent; it is merely abusive not evasive so you should be fine. But tomorrow, a change in law or a treaty amendment could help. My view - you must have substance in Mauritius to be safe - direct employees and an office in Mauritius will help create it.

3. Some US taxpayers do pay taxes in US and in those situations, it is likely that any taxes paid in India will be creditable in US. But keep in mind several tax deferred vehicles invest in US via pension funds/401K accounts etc. These people do not pay tax in US. The Indian tax will end up being a cost for such investors.

On Jul 13 08:51 AM Seth Freeman wrote:

> There already is a 15+% short-term capital gains tax on Indian securities.
> There is no long-term gains tax at present.
>
> Shiv refers to the use of Mauritius or Singapore structures to enter
> the Indian market and take advantage of India's anti-double taxation
> treaties with those countries. We have two of them. Trading through
> these structures avoids double-tax (as the result of withholdings
> in India) for US tax-payers. as there is no such treaty between the
> US and India. However, US taxpayers do pay tax in the US on their
> Indian profits. I think most foreign investors with Mauritius structures,
> their company administrators, custodian banks and tax advisors do
> a proper job in maintaining the substance of these entities. Besides,
> the Certificate of Residency issued by the local authorities provides
> a prima facie protection. I don't think the new budget policies have
> any form over substance implications for these entities.
>
> Given the significant participation of foreign investors as a % of
> total investment in the Indian securities market, I do not believe
> the government will impose higher short-term gains taxes or any long-term
> capital gains tax on portfolio gains.
>
> One of the big risks as illustrated last week is the ill-timed and
> ill-conceived policy statements from Indian government officials
> that precipitate large declines in the market. SEBI did this over
> a year ago when they issued their policy P-Notes. Both times the
> market abruptly sank. Its this kind of volatility that dissuades
> foriegn investors and distracts them from the outstanding long-term
> investment opportunity. seth.freeman@emcapital...
>
> ----------------
> The impact on investors is less clear. My own view is that we shall
> see a removal of the Security Transaction Tax and a return of short
> and long term capital gains tax. This could be a negative trigger
> because the post tax return expectation will fall below where it
> stands today. It may lead to debt as an asset class gaining attractiveness
> relative to equity.
>
> For foreign portfolio investors operating with no treaty privilege,
> the attractiveness of the Indian market versus other emerging markets
> will reduce as a result of a change in long term post tax return
> expectations.
>
> For portfolio investors operating with treaty privilege, the introduction
> of capital gains tax will be neutral. However, anti avoidance rules
> will certainly result in elevated disputes. At a minimum, foreign
> portfolio investors will need to substantially increase the substance
> of their inbound investing vehicles in order to qualify for treaty
> privilege.
>
> Because the cost of substance will be well below the tax savings,
> I expect a massive shift in the structures used to deploy capital.
> To be honest, any portfolio investor operating with treaty privilege,
> who operates through an inbound investment vehicle lacking in substance
> is either foolish or ill advised!

India Outlook: Slowdown Ahead?

The Indian Analyst; normally when things turn nasty in an economy, in order to identify a slowdown ahead of the pack I adjust GDP to provide a picture which better highlights the immediate situation. I do not look at the GDP growth based on 99/00 $'s, because inflation since then has been slow except for now when it has escalated. I use the ministry of finance data on nominal GDP and look at quarter on quarter growth adjusted for inflation now prevaletnt. This gives a better feel for what is going on now.

India Outlook: Slowdown Ahead?

Look at India GDP for the last several quarters. Net of inflation, there has already been a significant slow down. Perhaps worst than what we saw in the prior 10 years; in a sense, real GDP has contracted. I expect this trend to continue for a further six months and believe that it is substantially priced in, with unlikely downside potential to 9500-10000 range.

I feel we are in a situation where interest rate cuts can begin to flow through after 6 months (max maybe 3 months); this together with several catalysts (Commonwealth Games, NSG etc.) should reignite growth. Foreign capital flows coming back (or at least not being withdrawn) will be another positive. Only factor to watch out for is politics; a single party in majority is unlikely, but a strong coalition is desirable. Both leading parties are capable of formulating good growth policy, so I have no preference. Only caution is that people should not expect the irrational fwd multiples we had while market traded at 21K. For next year a sensible expectation if growth returns is 16X 2010 fwd earnings - i.e. 17k-18k levels.

India's Approaching Age of Basic Materials

hownow - capital goods in India is domestic led. They are supplied first by domestic material suppliers and next by international material suppliers. The domestic suppliers are somewhat dis-advantaged at present because they cannot compete internationally. However, in the long run, the Indian demand from capital goods is of such significance that it can move the global material markets. In that sense, materials becomes a domestic story and in this situation, Indian material suppliers are in an advantaged positions. We do see India as being significantly influenced by global credit markets. If global financial services starts the healing process we will change our sector weightage.

At present, FMCG & Staples are over-weight positions; these will go to under-weight with an over-weight in financials as soon as the chances of success of the bail out package are estimable. We will shift into early cyclicals like technology and discretionary as once financial services outperforms. Once IT & discretionary commence out performance we will switch over weight to materials and capital goods. We are always 100% invested and we rotate sectors based on Sam Stovall's economic cycle.