A wrong comeback again!

Feb 16, 2010

In this issue:
» The woes of daily commute intensify
» Is break-up of the Euro zone on the cards?
» LIC's investing appetite gets larger
» Companies can re-price FCCBs
» ...and more!!

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Companies in the US may still be wary of going on a shopping binge, but corporates in India are surely looking to loosen their purse strings. Otherwise what would explain the fact that Indian firms announced M&A deals worth a mindboggling US$ 14 bn in just 45 days in 2010. What's more, this has cast the whole of 2009 into a shadow as that year saw deals of only around US$ 12 bn taking place. This means that 2010 is all set to become a bumper year for India in terms of M&A deals.

Generally, it is very easy to get carried away by the brouhaha that surrounds big ticket deals. And now the temptation is stronger than what it was in 2009 because of the economic recovery that is unfolding in India. However, as is the case with stocks, valuations should also be given equal importance while purchasing companies. Infact, 2009 should have been the year to go in for M&A deals given that many companies were available at cheap prices. But just like on previous occasions, M&As tend to happen when markets run up a lot.

For any M&A activity, there is no doubt that the business model of the target company has to be strong with a good set of products and customers and foreseeable synergies going ahead. But throw in attractive valuations into that mix and you have a recipe for strong growth and returns for that company and its shareholders in the long term. But sadly, valuations more often than not end up playing second fiddle to management ambitions and greed.

 Chart of the day
The pain of commuting daily to work is certainly a hot topic of conversation at dinner tables in India. In the city of Mumbai itself, dense population, clogged roads and more vehicles mean that commuting everyday becomes a harrowing experience indeed. So much so that some have considered quitting jobs to avoid this pain. A recent survey done by a property company Regus and published in the Economist has thrown up interesting results. As depicted in today's chart of the day, around 25% of the respondents in India contemplated leaving their jobs because of the long time taken to reach offices. Certainly, a ramp up in infrastructure will go a long way in improving this scenario, if not completely eliminate it.

Data Source: The Economist

Retail investors looking to invest in solid companies for the long term have something to cheer about. An institutional investor in India is equally upbeat about investing in strong Indian businesses for the long term. Just that its investing appetite is much larger. We are referring to the largest insurance company in India - LIC. The company, considered a substitute of large pension funds in western nations, has been the biggest investor in government divestment in PSUs of late. LIC's equity investment has crossed Rs 500 bn so far in 9mFY10, surpassing the investment of Rs 450 bn in FY09. The insurer is looking for opportunities to invest in the forthcoming PSU IPOs and follow-on offers to pick up larger stakes in them. Given the long term nature of its investments, institutions like LIC can be instrumental in channeling domestic investments to Indian stockmarkets. We can then bid adieu to the P-notes.

Fiscal indiscipline has been India's nemesis for quite some time now. Its polity has always come up with some excuse or another to rake up continually large deficits. Infact, even the FRBM Act (Fiscal Responsibility and Budget Management) met with a colossal failure in trying to achieve its objective. Thus, there seems to be always another day for India's dilapidated finances to mend their ways. Sadly, Greece, one of the members of the Eurozone isn't that lucky. Maintaining fiscal discipline is one of the preconditions for it to continue enjoying the membership of the Euro. However, a strong balance sheet is certainly not one of Greece's strength right now. The country is expected to rake in a deficit of 12.5% in FY09, a far cry from the target of 3% set by the member countries.

And unlike India and a lot of other countries, which can keep on issuing debt to postpone the day of reckoning, Greece has no such luxuries. Help, if any, will have to come from member countries. But doing so would mean setting a bad example and shaking the very foundation on which Euro was built. Also, Greece is not the only Euro member in need of financial aid. The likes of Spain, Italy and Portugal would also try to get in line. Far from an easy situation indeed. Little wonder, one of France's largest banks has hinted at the eventual break-up of the Euro Zone. Other experts are also chiming in. Surely, how the events unfold in Euro over the next few days would be central to the movement of most asset classes across the world.

The 'maestro' seems to be at it again. Many have blamed Alan Greenspan, the former US central bank chief to be the chief architect of creating one of the biggest bubbles in the history of mankind. But Greenspan is not really amused. In fact, as he has told international media, "I did not cause the housing bubble." He adds that the housing bubble was global in nature and not just confined to the US. It's difficult to argue that the Fed's interest rate policy could set off housing bubbles around the world, he says. In fact, he attributes the housing boom to a glut of savings around the world that flowed into the US markets in search of safety. That surge of capital sent interest rates lower in the US, and thus the Fed's policy was of little consequence.

Well, we agree with Greenspan's theory that a surge of global capital flow into the US helped ignite the crisis. But we also believe that he has a lot of blame to take upon himself to not control the animal spirits of the commercial and investment banks that added much fuel to the crisis.

In their capital raising spree, Indian companies had issued some US$ 23 bn in foreign currency convertible bonds (FCCBs) from 1997 to 2008. Most of them were issued at a time when stock prices were high. Hence, the expectation was that the bondholder would find it attractive to convert the bond into shares when the time came. But as per a leading business daily, the current market price is a fraction of the conversion price for several issues. As a result, bondholders do not have incentive to convert. They would much rather redeem the bonds, which would strain the finances of the companies. In fact, in 2010 alone, some US$ 2.8 bn of FCCBs are due. Luckily, the government has now allowed companies to re-price the conversion price and negotiate with the bondholders. However, the companies have to take clearances from the board of directors, shareholders and the RBI. It is amazing how human ingenuity invents new problems for itself all the time. In the past several years, a bulk of them seems to be coming from the area of finance.

India Inc. has won the credential of being the most trusted corporate brand. Yes, if the recent survey conducted by global public relations firm, Edelman is anything to go by, Indian companies are believed to be the most trusted in terms of transparency and credibility. This survey which sampled around 4,800 informed people across 22 countries indicated that the Indian IT sector was the most trusted followed by banking and auto sectors. We believe that this honor definitely enhances the reputation of Indian corporates. However, we would remind the investors of the old Arabian proverb, "Trust in Allah, but tie your camel". It is always better to know in detail about the credibility of the management and the business model of a company before putting one's hard earned money into it.

After a volatile start in the morning, the Indian stock market moved steadily upwards and were trading well above the dotted line at the time of writing. The benchmark index, the BSE-Sensex was up by around 119 points (0.7%). Gains were largely seen in metals, energy, banking and auto stocks. By the way, we recently held a Web Summit with Mr. Ajit Dayal on the topic '2010: Where are the Indian stockmarkets headed?' exclusively for our subscribers. However, if you wish to get a glimpse of the excerpts from this Web Summit, please click here.

 Today's investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." - Benjamin Graham

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7 Responses to "A wrong comeback again!"

N.M.R Shreedhar

Feb 17, 2010

Hi , the comment on the Commuting woes is very apt --perhaps some agency can work out the manhours lost in the metros and big cities on daily commute and use that as a reference when planning new roads/roadwidening/overbridges/subways/metros. Besides the time loss, I am sure there wud be considerable fuel saving as well-- a typical example would be Bangkok where the metro has significantly reduced the airport-city commute time.
Also, on the issue of Greece's sovereign debt, since Greece is having 70% of its reserves in Gold, should they not be selling Gold to repay the debt? the same applies to the P,I,S in PIGS. regds


Chandra Shekar Reddy

Feb 17, 2010

Sir / Madam,
I received the CD yesterday evening.
I want password to open this files.


kersi Pirojshah Mahudawala

Feb 16, 2010

It is vry encouraging that LIC's equity investment has crossed Rs 500 bn so far in 9m FY10, surpassing the investment of Rs 450 bn in FY09.We should depend more and more on public financial institutions and mutual funds rather than FII to ruduce volatility in the market.



Feb 16, 2010

5 minute wrap up is very useful.
Unbiased opinion on Investing.... it's TRUE.



Feb 16, 2010

I wonder why 32% of the respondents in China (where the infrastructure is supposed to be very good as compared to India) want to change jobs due to commuting problems as compared to 25% of Indians?


Madhavan Kutty

Feb 16, 2010

Dear Sir,

I was watching the 10 minute capsule of your presentation "2010: Where are the Indian Stock Market headed?". Unfortunately, I missed both opportunities to view the Webnair. Is there a way that I could watch it in full or to get a hard copy of the presentation by email as I am located in Dubai and CDs may not reach me easily.
Warm regards
Madhavan Kutty


Jagadish Kolanu

Feb 16, 2010

Hi Equitymaster,

First thanks a lot. I like your mails, which are very much clear to people like me, who are naive in this financial market.

Jagadish Kolanu.

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