India: Missing Where It Matters Most

Conclusion: Finance Minister Mukherjee’s budget failed to adequately address the #1 issue facing the Indian economy – inflation. As a result, our bearish stance on Indian equities continues unabated. Further, we don't see India meeting its FY12 deficit reduction target as a likely outcome.


Position: Short Emerging Market Equities via the etf EEM.


Though we tactically covered our short position in Indian equities on 2/24 (for a gain), we still remain quite bearish on them at current prices. India’s SENSEX has rallied +1.1% off its lows on 2/24, driven by a confluence of declining crude oil prices (India imports ~70% of its crude oil needs) and hopeful expectations surrounding the unveiling of the government’s FY12 budget, which took place today.


Regarding the budget specifically, it delivered where quite a few investors were hoping it would – on promoting investment in India’s woeful infrastructure. Highlights include: 

  • An additional +23% more spending on roads, ports, and power generation capacity;
  • The limit for foreign institutional investment in debt issued to finance infrastructure projects quintupled to $25B vs. $5B prior;
  • The limit for foreign investment for Indian corporate bonds doubled to $40B vs. $20B prior, with the entire delta reserved for bonds issued by infrastructure companies;
  • Domestic individual investors could purchase up to $450 worth of infrastructure bonds and receive tax-free status on the returns for an additional year;
  • $330M for investing in clusters of farmland with the intent on increasing lentil, palm oil, and vegetable production;
  • Keeping the excise tax at 10%, rather than returning it to its pre-crisis level of 12%;
  • $450M in rural infrastructure spending designed to created 4M tons of warehouse capacity used to store food grain (by March 31, 2012);
  • To further encourage investment in cold-storage capacity, the budget exempts air-conditioning units and refrigeration equipment from the excise duty; and
  • Mukherjee plans to incentivize commercial banks to increase lending to India’s farmers by +27%. 

For perma-bull BRIC-lovers, this bullish-on-infrastructure budget is full of long-term investment opportunities. For those of us that prefer to manage the risk associated with playing the game that’s in front of us, this budget is a flat-out failure, missing where it matters most – reigning in inflation. This budget does very little in combating India’s massive inflation problem, which now shifts the bulk of the onus of suppressing inflation back towards the central bank (think: policy “hot potato”).


To Mukherjee’s credit, his proposed budget “only” calls for a +3.4% YoY increase in spending, which is down substantially from the +20% YoY increases of India’s more recent budgets. On the flip side, however, these recent budgets reflect heavy countercyclical gov’t spending during and in the wake of the global financial crisis.


The fact that India is unable to retract from such elevated levels of gov’t spending shows that India’s ruling elite may be increasingly unconcerned about the strife of its impoverished populous. The reactions by India’s competing politicians (which certainly need to be taken with a grain of salt) underscore this assertion: 

  • “This is an anti-people budget. The budget is targeted at a section of the country who are considered to be the cream of the society. No relief measures have been unveiled to provide relief to the common man.” – Left Front Chairman and Communist Party of India-Marxist (CPI-M) politburo member Biman Bose
  • “The most important issue that is taking a toll on common man is price [increases]. No measures have been taken to tackle it. Rather they have given attention to indirect taxes. And another thing, no measures have been taken for the minority community of India.” – Forward Bloc leader Hafiz Alam Sairani
  •  “This budget is for the rich section of the society, not for the poor people.” – Communist Party of India (CPI) leader and state Water Resource Minister Nandogopal Bhattacharjee 

Less anecdotally, our analysis of the budget leads us to side with the gentlemen above. The budget is rife with tax hikes and income tax deductions that appear more symbolic than impactful in nature: 

  • A new service tax will be levied on air-conditioned restaurants that serve alcohol – in addition to the VAT, which is typically 12.5% for food and 20% for alcohol;
  • Hotels will levy an additional 5% service tax and all room rates will increase by a minimum of +1,000 ($22) rupees per night;
  • A +50 rupees ($1.10) service tax will be levied on domestic airfare and a +250 rupees ($5.50) service tax will be levied on international airfare, with an additional tax for flying business class;
  • A 5% tax will be levied against all services provided by air-conditioned hospitals with greater than 25 beds (essentially all major hospitals in every urban area);
  • The income tax exemption for individual male taxpayers increased +20,000 rupees ($445) to 180,000 rupees ($4,000). For women, the increase brings their exemption level to 190,000 rupees ($4,220). Calculations by consulting firm Deloitte Haskins & Sells suggests these increases amount to a tax saving of ~$45 per year, which is likely to be consumed by the increases in the effective tax rates on many services broadly; and
  • The retirement age drops to 60 from 65 previously and those individuals will maintain tax-exempt status on income less than 250,000 rupees ($5,555). Individuals older than 80 will maintain tax exempt status on incomes up to 500,000 rupees ($11,111). It remains to be seen how many individuals will benefit from this change in tax code. 

All told, taxes are going up, which directly equate to higher consumer prices. $112 Brent crude oil and a currency that is down (-1.3%) YTD indirectly contribute to accelerating inflation as well. As we have seen with the RBI’s decision to engage in Quantitative Easing throughout 4Q10 and early 2011, Indian monetary and fiscal policy continue to be managed in a way that disenfranchises the bulk of India’s population (the World Bank estimates that over 75% of Indians live on less than $2 per day).


Perhaps that is why thousands of protesters continue organizing rallies on the nation’s capital – a trend we expect to accelerate as growth decelerates over the next 6-9 months and inflation remains sticky due to corporate COGS increases being passed through to Indian consumers. Perhaps the worst part of the Finance Minister’s budget proposal is that it forecasts growth to accelerate to +9.25% YoY next year, which implies that corporations are likely to be increasingly comfortable passing through price increases to Indian consumers in an environment of robust growth expectations.


Decelerating global growth, heightened interest rates, and accelerating inflation – particularly elevated crude oil prices – all remain headwinds to Indian GDP growth over the intermediate-term TREND. Perhaps that’s why the SENSEX has diverged from both the government’s and sell-side consensus’ lofty growth projections (down -13.1% YTD).


Darius Dale



India: Missing Where It Matters Most - 1


Ho hum quarter and future




  • "We were able to increase our property EBITDA by about 17% (11% on a same store basis) on increased revenues of only 2.4% in part as a result of the benefits of lower gaming taxes in Florida and because we are providing an improved guest experience, our marketing programs are driving more profitable business, and our team remains focused on fiscal discipline.  The efficiency we have created in our business is demonstrated by the fact that in the markets where we experienced increased revenues the flow through on year-over-year revenue changes was significant, ranging from about 40% in Marquette to a high of 154% in Waterloo. In addition we were able to increase EBITDA in Lake Charles and Biloxi despite revenue declines year over year."
  • "While we have not experienced a wide spread increase in consumer spending, we are capitalizing on specific areas of opportunity in our business, and have therefore been successful in achieving improved financial results. During the quarter we experienced a slight decline in rated visits that was offset by an increase in rated spend."
  • "Capital expenditures during the quarter totaled $20 million, of which $8 million related to Cape Girardeau and $12 million related to maintenance capital expenditures."
  • "The Company expects capital expenditures for the remainder of the fiscal year to be approximately $15 million consisting of $10 million in maintenance capital expenditures and $5 million related to Cape Girardeau."
  • Development Update:
    • Casino Cape Girardeau:
      • "Completed purchase of all land and demolition of existing structures is underway... In the process of selecting a general contractor, we expect to break ground in the summer of calendar 2011. The $125 million project, which will feature approximately 1,000 slot machines, 28 table games, three restaurants, a lounge and terrace overlooking the Mississippi River and a 750-seat event center, remains on schedule to open in late calendar 2012."
    • PA:
      • "In January, the Pennsylvania Gaming Control Board indefinitely delayed its decision on granting the state's final Category 3 resort gaming license... Since that time, two new gaming board members have been appointed and the Company has received no guidance with respect to the timing of any announcement regarding the license."


  • Faced weather issues in Dec and Jan that have continued into February
  • Over 50% of their properties saw higher retail spend.
  • Beginning to look for new COO
  • 79MM on R/C; 357 MM sub notes; 5MM of other debt . Total debt: 1.25 BN
  • Leverage: 6.75x; interest coverage: 2.27x


  • Believes no gaming tax hike for Iowa - not popular with public
  • In November, signed with potential developer for Davenport casino. Quiet period right now.
  • Lake Charles
    • Continue to strengthen customer relationships
    • Niche with little competition
    • Consider Houston secondary/tertiary market - a little lift from high oil prices
  • Vicksburg EBITDA:
    • Pressured from high unemployment
    • Lula-20th cons. quarter of declining gaming revs
    • Natchez - highly promotional market
  • Term loan: All term B
  • Amending revolver? Yes, when they do new credit facility
  • Bridge opening in Thanksgiving benefited Bettendorf results
  • Missouri has been particularly strong. Iowa had a good Q. Pressure continues to be in the South.
  • Biloxi: market continues to be tough; decline in Pensacola market; canceled fishing tournament.
  • Corp exp run rate: lower than expected insurance claims benefited FQ3; for the year, run rate is mid-30s on a cash basis + stock comp (in-line with previous guidance).
  • Stock comp for F4Q: 1.4-1.8 is better range.
  • Cape Girardeau: still in process of selecting a contractor
  • Competitive market:
    • Increased promotional activity in Quad Cities; Jumer's in particular
    • Biloxi, Vicksburg, and Lake Charles - high promotional environment
  • Other accrued liabilities: some swaps, timing of payments
  • Interest expense run rate is in-line with guidance; wouldn't change until construction cycle at Cape Girardeau
  • A good chunk of the improvement in Florida is due to the change in tax rate
  • Increase in retail revenue at about half of their properties which is more a profitable customer for them
  • Iowa removal of smoke exemption for casinos?
    • Tough to read the tea leaves


Looking at recent short interest moves in the restaurant space, it is interesting to note the increase in casual dining short interest versus quick service.  Both have seen increases in this metric, but casual dining continues to be the primary target. 

  • BWLD and EAT saw significant gains in their short interest levels over the past two weeks. 
  • PFCB short interest had been ticking down but the last two readings have shown that investors are continuing to short the stock, even with the short interest at elevated levels.
  • CMG saw an uptick in short interest as inflation concerns impact sentiment around the name.
  • GMCR saw a downtick in short interest over the past two weeks in reported data terms (settlement date 2/15) but I would submit that the recent decline in the share price (-5.65% since 2/15) suggests that sentiment around the name may be changing.
  • PEET short interest was driven higher as the continuing gains in coffee costs got the attention of the investor community.

SHORT INTEREST UPDATE - rest short interest


Howard Penney

Managing Director

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Risk Monitor: European Bank Swaps Widen

Position: Long Germany (EWG); short Emerging Market (ESR)


Below we include a portion of a product offering from our Financials’ team, the Weekly Risk Monitor for Financials that tracks CDS across global banks. The table below covers major banks throughout Europe and the trend week-over-week was mostly wider, tightening for 15 of the 39 reference entities and widening for 24, particularly for Greek banks.


Risk Monitor: European Bank Swaps Widen - top1 

Risk Monitor: European Bank Swaps Widen - top2


The European credit markets continue to be an important indicator of risk for us. As the chart of 10YR government bond yields below presents (and in sharp contrast to the continued outperformance of the equity market of the PIIGS year-to-date) yields continue to trend higher, a reflection of the risk premium to own the debt and deficit imbalances of these nations.


Risk Monitor: European Bank Swaps Widen - top3


In the Hedgeye Virtual Portfolio we sold our long position in Sweden (EWD) today with the country immediate-term overbought. We’ll buy back the position on the next pullback. We continue to like the country’s growth profile; proactive rate adjustments to manage inflation (particularly housing related); and believe that the SEK will appreciate alongside rate hikes and as a safe haven versus the uncertainty with the EUR and USD.


We covered our EUR-USD position via the etf FXE on 2/25 with the ECB continuing to signal a more hawkish stance on inflation. We see the EUR-USD overbought for a TRADE (3 weeks or less) at $1.38 with support at $1.36.


We shorted more Emerging Market exposure today via the etf ESR as inflation crushes consumption's growth.


To keep on the calendar:

  • Wednesday (3/3) the EU announces methodology for its second round of bank stress tests
  • Thursday (3/4) the ECB announces its Refi rate decision

Matthew Hedrick

R3: JCP, GOOG, UA, Jimmy Choo


February 28, 2010






  • JCP noted that the company’s collaboration with MANGO is off to good start in locations where the brand is well known by international visitors.  However, they also noted that they are working with MANGO to tweak some of the offerings to help those customers who are not familiar with the offering/price points in an effort to boost familiarity with the brand.  In other words, better performance on the coasts and not so great everywhere else.
  • Keep an eye on the Cosmos, the New York Cosmos that is.  Efforts are underway to revive the legendary NY soccer club that was once the team of Pele.  Interestingly, the brand revitalization (in a very retro way) is in full swing with a collaboration between the team and Umbro recently releasing a 1977 inspired “kit”.  However, the team itself, let alone a stadium to play in, has yet to be determined for the proposed 2013 inaugural season.   This may be one of the more interesting branding experiments we’ve seen in a long time, especially since there’s actually a uniform for a team that does not exist.
  • According to the US Census, total US e-commerce sales were $165.4 billion in 2010, representing a robust increase of 14.8% over 2009.  As a percentage of total retail sales, 2010 put e-commerce at 4.2% up 30 bps from the prior year.  Interestingly, this data suggests an even stronger growth rate than reported by “online” outlets including comScore which suggest total sales increased by 10% for last year.
  • With substantial focus on Under Armour’s endorsement activity of late, it appears the company may have secured another rising talent with the signing of wide receiver Julio Jones last week. Surprising many with his performance at the NFL combine this past weekend, Jones is quickly becoming the talk of the draft and will provide UA with a new face for its fall marketing campaigns.



TowerBrook set for Jimmy Choo sale - The £400m-£500m sale of Jimmy Choo is poised to kick off next week, with information memoranda circulated to more than 10 potential bidders for the luxury shoemaker.  TowerBrook Capital, the private equity group that bought it for £180m four years ago, is exploring strategic options for the business. TowerBrook has not ruled out other options for Jimmy Choo – known for selling stilettos to the stars under the guidance of Tamara Mellon – such as an initial public offering. But a sale is looking increasingly likely. <FinancialTimes>

Hedgeye Retail’s Take:   With much of the press over the past several months centered on a potential IPO (as well as growth initiatives including the company’s men’s launch), a private equity transaction would certainly be a surprise. 


Judith Leiber’s New Line - Judith Leiber is extending its reach beyond Ladies Who Lunch to encompass girls who party, with the launch of Overture by Judith Leiber. The 15-piece line, produced with licensee Accessory Network Group, will be sold in luxury department stores and Judith Leiber boutiques beginning in the fall, and will be priced between $200 and $700. Overture handbags come in jewel tones like violet and blue, as well as a heavy dose of metallics and leopard print. Though manufactured in a different part of the world than Judith Leiber bags (China, as opposed to Italy) the accessibly priced collection displays an unmistakable Leiber thumbprint. Geometric minaudieres are plentiful and encrusted with crystals, studs and agate geometric designs, and come with cross-body straps, while larger suede day bags are accented with delicate studs. <WWD>

Hedgeye Retail’s Take:   In the luxury world of Judith Leiber, this launch represents a major move towards the “mainstream” with price points for the new line being positioned in the triple digits.  Leiber’s traditional price points hover in the thousands, not hundreds.


Chrome Hearts Acquires Eyewear Licensee - Chrome Hearts LLC has acquired Optical Shop International, its decade-long eyewear licensee.  Financial terms of the deal, which closes today, weren’t disclosed. During its 10 years as a licensee, OSI expanded Chrome Hearts’ distribution to nearly 60 countries. Chrome Hearts, which won a CFDA accessory designer of the year award in 1992, will “consolidate oversight in all of its key product categories,” allowing for “more cohesion from a design perspective,” said Chrome Hearts co-owner Laurie Stark.  <WWD>

Hedgeye Retail’s Take:  Expect to see the gothic, rock luxury brand step up its efforts in eyewear now that the brand is complete control over its distribution.


How Will Retailers fare with Google’s New Search Algorithm -  A change this week to Google’s formula for determining search rankings serves as a reminder to online retailers about the importance of including original content on their e-commerce sites. Google doesn’t normally announce tweaks to its search ranking algorithm, and though this change merited a Google blog posting Thursday evening, the details are typically vague. But Google says the changes will affect nearly 12% of searches, and will push sites that the search engine considers higher quality closer to the top of search results. “This update is designed to reduce rankings for low-quality sites—sites which are low value-add for users, copy content from other web sites or are just not very useful,” according to the blog posting from Amit Singhal, Google fellow, and Matt Cutts, a Google principal engineer.   <InternetRetailer>

Hedgeye Retail’s Take:  Sounds like the front page expose of JC Penney’s sketchy search engine optimization tactics have helped to push Google towards making it’s a search environment a more “fair” place.


Strong Demand at CurveNY - The mood was hopeful at the CurveNY trade show at the Jacob K. Javits Convention Center in New York despite worries over skyrocketing costs for raw materials and labor. A demand for fashion merchandise underscored a growing sense of optimism at the three-day fair which closed Wednesday and was bustling with retailers — even the last day when traffic is traditionally sparse. Retailers left orders for immediate deliveries as well as gift-giving items for Mother’s Day. At the same time, volatile market prices for raw materials as well as production and labor costs accelerated commitments for fall-winter 2011-2012 goods.  <WWD>

Hedgeye Retail’s Take: Accelerated commitments is the call out here – a trend we expect to be confirmed with greater frequency over the coming weeks/months. The offset here is the likelihood that some branded manufacturers are likely to maintain an optimistic bent to full-year guidance through the 1H with the 2H setting up for greater volatility if enhanced order activity proves unsustainable.


Sichuan, China Sets the 12th Five-year Program for Footwear Companies - The footwear sector in Sichuan, China has been discussing the content of the forthcoming 12th five-year programme, with an aim to create CNY10 billion of output value and job opportunities of one million people by 2015, reported the China Leather Industry Association.  The programme has been drafted by the Western Shoe Capital Industrial Park and Economics Institute in Sichuan Academy of Social Sciences and comments are being collected.  Before publication, the document will be submitted to the Provincial Economic Commission for verification.  <FashionNetAsia>

Hedgeye Retail’s Take: With the shift of footwear manufacturing towards other Southeast Asian countries underway, Chinese manufacturers will likely target increasing foreign brand interest in ramping sales in the country – particularly athletic brands with an eye on capturing share.


India Ducks the Retail Issue - In the run up to India’s budget, expectations were running high that New Delhi would finally bite the bullet on a crucial item of its unfinished reform agenda: opening the “multi-brand retail sector” – commonly known as grocery stores – to foreign participation. But New Delhi still lacks the spine to take such a decision, despite a growing consensus among policy-makers that strengthening organised retail could be an important tool in battling the persistent food price inflation now seen as one of India’s biggest economic challenges. <FinancialTimes>

Hedgeye Retail’s Take: Clearly not for lack of interest from domestic and other global retailers, it appears that New Delhi is simply delaying the inevitable. However, with food inflation taking hold on the country’s population, it may see increasing pressure from within to open up to multi-brand retailing.



February will finish at a new monthly record.



It looks like February Macau gaming revenues are going to exceed our recently raised estimate of HK$18.5-19.0 billion.  Last week, daily table revenues surprisingly stayed above the HK$600 million per day level.  Not much of a post CNY slowdown here.  Through the 27th, table revenues were HK$18.2 billion.  With a full month of slot revenue and 1 more day of table revenue added, total Macau gaming revenues should come in around HK$19.5 billion, a monthly record despite the shortened month. 


We think the market benefitted primarily from higher volumes, not luck.  Our sources indicate that Mass volumes were also very strong,  which is a huge positive for profitability.  February’s performance is outstanding, particularly considering the slow, pre-CNY start to the month.  The only risk we see now is if Beijing were to apply the brakes but no indication of that yet.


Market shares are shown in the table below.  The only items of note are LVS picking up some share from SJM and MPEL’s share staying elevated and likely above Street projections.



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