Handling drought by the government

I have never been close to agriculture. So, the news of bad monsoon was slow to seep in. There were multiple voices. Some say that the effect is going to be severe as 60% of population depends on agricultural earning and kharif crop constitutes 52% of the total crop. Others say that the rural income has become less dependent on agriculture with the sucess of programs like National Rural Employment Gurantee Act (NREGA), Rashtriya Krishi Vikas Yojana (RKVY), National Food Security Mission (NFSM), National Horticulture Mission (NHM), Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), Member of Parliament Local Area Development (MPLAD), Backward Regions Grant Fund (BRGF) & other. However, what impressed me was the 73 page draft prepared by National Rainfed Area Authority (http://agricoop.nic.in/NRAA_DMS.pdf)
Some of the wow facts are mentioned below:
- The soutwest or summer monsoon accounts for 70-80% of rainfall while the rest comes northeast or winter monsoon
- In 44 years from 1965-2009, Orissa witnessed 19 years of drought, 17 years of floods and 7 years of cyclones
- Over hundred years from 1871 to 1988, 11 of the 21 dorught years were El Nino years
- Care for food, water and fodder are three most important thing
- Non participation of local communities was a major issue to alleviate pain they underwent during past droughts. This year this should be less because of focus of government on inclusive growth
- Four regions - North, East, West and Central have reservoirs lesser than 10 year average. Only South has greater than 10 year average primarily because Karnataka has higher levels due to higher rainfalls
- MP reservoirs have 160% and Tamil Nadu has 120% of the 10 year average
- Drinking water should be the first priority and then irrigation
- Canal irrigation generally based on reservoirs like Tehri dam has many possibilities and
flexibilities to adjust or adapt with the rainfall pattern and deficiency
- Some of the irrigation schemes especially of UP, Bihar, etc. are based on run-off of the
rivers or barrage based systems and have limited scope of adaptations to drought
- Rain water is the best source for crops. In some areas, there are increased concentration of salts in ground water which is bad for crops
- There is a central planning for the fodder to be made available across the country
- The non-kharif, Boro rice will be grown in winter as it can grow with less water
- Incase of delayed monsoon, pulses can be planted upto first week of september
- Advice on planting sesame oil seed as it can provide more output per hectare
- Sowing of castor can be in rain deficeit regions
- Alternative irrigation methods may be used to grow highly water dependent cotton crop

Understanding Power

11th five year plan (FYP) target : 78,000 MW
11th five year plan target : 60,000 MW (Revised)
12th five year plan target : 100,000 MW

Power added in 2008-09 : 12,500 MW
Power targeted to be added in 2010-2012 : 47,500 MW
Power to be added per year in rest of FYP is 15,833 MW

Private Players:
Rosa – Rel Power – 600 MW – End of 2009
Sasan – Rel Power – 1320 MW – End of 2012
Butiburi – Rel Power - 300 MW – End of 2011
Tata Power – 5800 MW – End of 2012
Tata Power / Damodar Valley – 4000 MW – End of 2012
JSW Energy – 1200 MW – Mar 2010
JSW Energy – 2000 MW – ??
Lanco Infratech – 1000 MW – Mar 2010
GVK Power – 1200 MW – End of 2012
Mundra I - Adani Power – 330MW – Jun 2009
Mundra II - Adani Power – 660MW – Feb 2010
Mundra III - Adani Power – 1320MW – Jun 2011
Mundra IV - Adani Power – 1980MW – Apr 2012
Tiroda II - Adani Power – 1980MW – Apr 2012
Indiabulls Power - ?? – End of 2012

Public Players:
NTPC – 30,000MW – End of 2012

Any indication from 20DMA and 50DMA of VIX?

One of the sell side analyst pointed out that the 20 DMA Vix has recently crossed 50 DMA Vix from the bottom which means it is a bearish sign. If you look at the historical data, there have been three instances in last one year that have seen markets come off by 6-36% in a matter of 20-40 days after the 20DMA vix crossed 50DMA vix from the bottom. A similar trend can be seen from 2004 to 2007 when markets lost 7-11% in 8-40 days. Hence, the analyst has a point.

Will this time be the same or any different? There are two instances (Jul'05 & Dec'06) when the above trend has not happened. There are other factors which become important. Consider today's scenario. The flows from FIIs and DIIs are pretty strong. The results declared by companies for first quarter are not all that bad. The markets have closed above 200 DMA for the first time. The global markets are also on the uptrend. Considering these factors, we could see markets sustain current levels. However, we have the mother of all events in mid May - the process of government formation. If the exit polls are to be believed and the voices of various political parties taken seriously, there is no clear sense as to who will form the government. This could just spook the markets. As usual, there are no clear answers for fund managers but May could provide a good entry point for long term investors.

Can I take advantage of Midcap Bonanza!

Last one month has seen a bonanza of kinds in the Indian equity markets. There are 185 midcap stocks that have beaten the CNX Midcap performance for 2 weeks. There are 166 midcap stocks that have beaten the CNX Midcap performance for 1 month. There are 145 that have done well.

Though the rally seems to secular in nature, there are only a handful of midcap oriented funds that have beaten the CNX Midcap (as shown in the exihibit). For me, there are no midcap funds to convincingly invest in. However, I like IDFC Premier which has risen in line with CNX Midcap in the last month and has fallen least since the correction in equity markets starting Jan 2008.

FIIs DO invest in midcap stocks

I have come believe that FIIs love liquidity. They love liquid stocks and it is the large cap names that provide it. I always took it on face value and never checked it up with data. There is one question that always lingered. Since FIIs are know to be aggressive, how can they not generate alpha through midcap investments. Infact some of the broking businesses are run on this business model. I dug up some data and found that FIIs do invest and they do invest big time.

Point 1: FIIs invested Rs 156k crores in midcap stocks (both BSE & CNX Midcap stocks totaling to 264 stocks) as of Sep 2007 during the bull market. At the same time, they were invested Rs 513k crores in large cap stocks (Nifty 50 stocks). This means about 23% of the total is invested in midcap stocks. The story is no different as of Dec 2008. FIIs are invested Rs 66k crores in midcap stocks while they are invested Rs 265k crores in large cap stocks which means they are invested 20% in midcap stocks.

Point 2: I have looked at the holding of FIIs in the overall midcap landscape. As of Sep’07, the midcap stocks has a market cap of Rs 989k crores out of which the FIIs owned 16%. Guess how much did they own of the large cap stocks. It is 17.3%. In Dec’08, they own 13% of midcap stocks while they own 14.4% of large cap stocks.

Point 3: Have they concentrated their investments in individual stocks? The answer is negative. 80% of their midcap exposure is in 42% of midcap stocks as of Dec’08 compared to that of 34% in Sep’07. Is it very different when compared to the large cap stocks? The answer is ‘No’ again. 80% of large cap exposure is present in about 36% of the Nifty stocks.

Point 4: Who are these FIIs who hold midcap stocks? These are pretty well known names. HSBC Global appears in a number of them. The hold 8% of Ibull Real Estate, 7% of IVRCL Infra, 5% of Max India and 2.3% of Sesa Goa. Fid Funds Mauritius holds 9% of Financial Technologies. Merrill Lynch Espana holds 3% in Amtek Auto, Quantum M holds about 2% each of GVK Power, Ibulls Financials & Ibulls Real Estate and the list goes on.

The message is it is unsafe to assume that the midcap rally happens because of domestic players. FIIs do participate in it and in a big way. The issue is that the differenciation of domestic and foriegn participation in mid caps is hard to figure out and can be done only after companies publish their holdings data every quarter.

There are some who dicount this as a political money or black money coming into the individual stocks. I take the point. However, the magnitude and the expanse of investments is huge to discount genuine FII investment in midcap stocks through this theory.