Who ends up buying when no one else is?

Mar 12, 2010

In this issue:
» India's investor of the last resort
» India among the most vibrant job markets
» The game changer in India's credit card industry
» Indians figure in the list of world's richest
» ...and more!!

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We have all heard of the 'banker of last resort'. Central banks, like India's Reserve Bank of India, can lend to those whom no else will. As we found out from the bailout program, central banks can and will rescue firms who simply cannot be allowed to fail.

What if we told you that in India, we also have an 'investor of last resort'? LIC. Let us explain. Recently the government came out with the NMDC FPO. It is part of the government's disinvestment program. By selling some of its stake in valuable companies, the government can raise funds quickly. Given the buoyancy in the share markets, it hopes to realise a good price for these companies. But as we highlighted in our view on the issue, the prices were rather high. As a result, the issue received a poor response.

So, it turned to the giant among domestic institutional investors - LIC. And being a government enterprise, it is sensitive to the government's needs. As reported by a leading business daily, LIC has emerged as the largest bidder in the NMDC FPO. Participation by FIIs, high net worth individuals and retail investors has been negligible. So there. LIC may end up virtually underwriting the issue. Just like it bailed out the NTPC issue. We have nothing against government issues or LIC's investment capabilities. But the question to be asked is - Just because it is a state owned insurer, is it right to nudge LIC to bail out issues that others find unattractive? Luckily, as individual investors you can act on your own sweet will. Our advice to you is to invest in promising, well-managed companies at reasonable valuations.

 Chart of the day

Source: The Economist

The state of the job market often acts as an accurate indicator of a country's economy. Hence, it should not come as a surprise that employment outlook is the most robust in countries where economic activity has rebounded the strongest from the financial meltdown. Manpower, an employment-services firm which conducted a survey, found that employment outlook is the strongest in Asia and the weakest in Europe. As today's chart of the day shows, India is among the top countries where employers who plan to hire outnumber those who plan to fire in the coming quarter. Little wonder then that news about pay hikes and attrition are grabbing headlines everyday of late.

Speaking of attrition, how flexible are Indians when it comes to changing jobs? Very, if a survey conducted by Ma Foi Randstad, the country's largest HR (human resources) services company is to be believed. This survey has thrown up some interesting results. Indians apparently are more open about shifting their jobs in the next six months. India's mobility index is the highest at 140 in the world, followed by Mexico, China and Turkey. However, in India, the study has found that highly qualified people exhibit lesser inclination to move. Not just that, those enjoying higher salaries are also content to stay put. Not surprisingly, economic slowdown in India of late meant that mobility across ranks considerably reduced. But we wonder whether increased mobility in India means that the people here are just not finding their jobs challenging enough to stick around.

India's industrial output eased marginally in January from the December 2009 levels. It recorded a growth of 16.7% on a YoY basis as against 17.6% YoY growth recorded in the month of December. Thus, for the current financial year, the growth now stands at 9.6% YoY. The industrial sector, we should say, has filled in quite well for the subpar agricultural output of the country and has played a stellar role in ensuring that India's GDP manages to grow at a decent pace. Of course, the Government's stimulus measures also played their part in propping up the industrial sector. Going forward though, some amount of slowdown is likely to take place as higher prices on account of the recent budget measures could dent demand for goods. Furthermore, the threat of RBI hiking interest rates in order to tackle the rising inflation also looms large. All in all, looks like the 16%-17% growth that we have seen in recent few months could well be a thing of the past.

It's nothing less than amazing how quickly India and Indians have begun making their mark in almost every area of any significance. Take those hallowed 'World's Top Ten' lists for example. Forbes latest 'world's top ten richest people' list is out. While the top spots are occupied by the usual suspects, Indians have now come uncannily close to the top. The fourth richest person in the world is now our very own Mukesh Ambani, right after the likes of Warren Buffett, who occupies the third spot. It doesn't end there. Right after Mr. Ambani comes steel baron Lakshmi Mittal sitting pretty at the fifth spot. Interestingly China's denizens stand conspicuous by their absence amongst the top. The dragon nation has only one in Asia's top 25 billionaires.

After home loans, if there is any financial product that was the worst affected by the subprime crisis it was credit cards. Not just in the US, but even in India where credit card penetration is abysmally low, banks saw a meteoric rise in credit card delinquencies. This was particularly thanks to a trend of distributing free credit cards started by the country's largest private sector lender ICICI Bank. After two fiscals of very poor performance on the asset quality front, the bank is set to undo its mistake. ICICI Bank's latest act of restarting to charge annual fee on credit cards is expected to be such a game changer in the industry that other players are expected to follow suit. We believe that given the rise in NPAs on credit cards from 8% in FY08 to 20% in FY09, it certainly makes sense for banks to filter their customers for such products.

The common man has been affected by high food prices for almost a year now. However, we are finally seeing a change. The food inflation for the week ending 27th February has come in a tad lower at 17.81% compared to 17.87% register in the previous week. While the prices of essential commodities are still high, the rate of increase has declined. However, a new problem is rearing its ugly head. The budgetary increase in excise and customs duty has led to a 6% increase in petrol prices on a weekly basis. The fear of fuel inflation resulting in a broad based increase in inflation is coming true. RBI expects overall inflation to be in double digits by the end of March. While this would make all commodities more expensive for the common man, it also makes a case for tightening of monetary policy for the government. This would make capital more expensive for companies. We believe that this would put pressure on economic growth going forward.

Meanwhile, after starting the day's trade on a positive note, Indian stock markets could not sustain the gains and plunged into the red during the day. At the time of writing, the benchmark index, the BSE-Sensex was down by around 39 points. The BSE-Smallcap and the BSE-Midcap indices were also down by around 0.2% and 0.1% respectively. Stocks from the energy, metal and auto sectors were amongst the top gainers today, while those from the realty, capital goods and power sectors were amongst the top losers. Other Asian markets closed the day on a mixed note. While the Japanese markets traded in the green, their Chinese counterparts closed below the dotted line.

 Today's investing mantra
"It does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character." - Benjamin Graham

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9 Responses to "Who ends up buying when no one else is?"


Mar 14, 2010

Recently the government came out with the NMDC FPO.

It is part of the government's disinvestment program.

LIC, being a government enterprise, bought chunk of NMDC shares.

This is NEWS....
But.... Is this DIVESTMENT ??????


Sundar Rangan

Mar 13, 2010

Very often, there is conspiracy by market players (big brokers) to hammer PSU stocks and force Govt.'s hands on pricing. It was seen in NTPC and now in NMDC. There is definitely intrinsic value in these companies and if LIC invests in them there is nothing wrong. It is an effective way of thwarting broker conspiracy. If LIC had not bid, the price would have been hammered down further. Now, you will see this stock moving up and LIC will make a nice packet. To hell with the brokers and market operators, who are dictating the IPO market now. I am sure you know better and there is no need to name those operators.


Ranjeet Jaiswal

Mar 13, 2010

5 Minute Wrapup has become 15 Minutes Wrapup. Pls reduce the description under each head.


Jayaraman Theyarath

Mar 12, 2010

Dear sir,
This refers to your point regarding marginal impact on India's industrial out put in Jan. It is agreed that the high industral out put has manged to sustain the GDP growth, not wtihstanding the fact that agricultural growth was sub par.
It is most unfortunate that India is not able to plan its agricultural growth to any where near the demand. Infact those in the middle and lower income groups are finding it extremely difficult to lead even a reasonably decent life in view of the sky rocketing inflation in consumable goods.
Clearly, our planners have failed miserably in ensuring production and availability of agricultural goods, most basic necessity for sustanance of every human being in this planet, at a resonable cost. Adhocism of the type, decreasing the income tax burden announced in the latest budget etc will serve to give only marginal and temporary relief. There is an urgent need for the county's great brains to put their heads together for a long lasting solution so that the supply of essential articles of mass consumption is at least at par with the demand if not slightly more!
Personalities like Dr. MS Swaminathan, the achitect of Green revolution, should be made resposible for finding and implementing ways and means of meeting the the country's food consumption needs. A parallel planning commision only for agri related areas is the need of the hour and of the future.
All our indusrial growth will be redundant and useless if we are not self sufficient in essential agri goods. We can not afford to depend on other countries for our food!



Mar 12, 2010

LIC as the state protected monopoly since independence, over the first 50 years has built-up a cash corpus, that will be the envy of many emerging economies' central bank! Thanks to our Glorious Govt's 'gift' of tax-ecemption to the vast salaried class, one did not have much choice but to 'invest' in LIC, if you wanted to 'avoid' tax legally (well the Lakhs of timid law-abiding Chintha Monies, take this course, to save their thousands, by subscribing to the largely useless policy for the majority - think of this - when you are healthy and able bodied keep contributing annually for the 'insurance cover' provided by LIC, earn a pittance 4% cumulative return by way of annual BONUS, special 5 year term end BONUS and a parting gift of further bonus at the end of 25-30 years of working life, all of it together returned a pittance 4% cumulative. Whereas the few thousand of the largely corrupt politicians and top bureaucrats aiding award of 'contracts' to Politicians' kith and kin, after taking their cut - all of that money is stashed away, ofcourse without paying tax, thanks to the immunity they have built into the system, to insulate themselves. Immunity? Consider this: To charge such privileged class permission is needed from the Chief Minister, who in the majority is himself the architect, thus providing absolute immunity for this privileged class that need not worry about imprisonment, for perpetuating this organised looting, never mind paying tax!). Back to LIC; But then, did Chintha Money not get upfront 20-30% return by way of avoided tax? Indeed; but then LIC did not have to work for that!! Even if LIC made an absolutely passive investment of depositing all annual premiums in bank deposits (giving 8 to 16 percent, thru this period), they would be singing their way to the bank, even accounting for typical Left-assisted PSU employment policy of employing 5 people to do one person's job shabbily and the odd mid term 'Life' compensation that needs to be paid out!!

Back to current topic: So only LIC (to salvage the Govt's mis-guided Dis-investment program) and gullible investors guided by 'agents' having an eye on 'commission' will subscribe to IPOs stocks that are available for less than IPO price band, just a few days after IPO closure and ironically even a few days before IPO!!

But then, is it not ultimately an erosion of corpus of what is lay investors' money? How on earth, LIC can be allowed to make such blatantly stupid 'investments' without a vote from ultimate stake holders - the lakhs of LIC policy holders? Hello, SEBI, Company Affairs Ministries and Depts - are you not supposed to be working to protect the best interest of 'investors'?!?!

Jai Hindustan!!

Tail piece: The IPO proceeds are supposed to bridge the gap in budgets & close the gaping fiscal deficits. But then, is it not broad daylight hoodwinking, to sell family silver, to pay for current & non plan expenditures like Umpteen duplicating Departments & Ministries (Once one of those Yojanas is named after great leaders like Bofors Famed Rajiv Gandhi et al, how on earth one can close those departments, Ministers, growing class of do-noting-enjoy-red-beaconed-ambassadors class of Coalition Parties' Minister of States, created to implement those Yojanas, even though the Yojanas themselves have become irrelevant or ten other Yojanas are trying to do the same thing since, but sporting different other leaders names - a self fulfilling prophecy - on the brass plates along the stinking corridors of GOI Inc?!?). Yet again, Jai Hindustan!



Mar 12, 2010




Mar 12, 2010

Taking into consideration the vital rescue role played by the Central Bank of a country ( RBI in the case of India) in times of dire need, it is generally referred to as the 'banker of last resort'. It was quite amusing that, on the same analogy, you have chosen to refer to the LIC as the 'investor of last resort' considering the fact that it has,time and again, come to the rescue of the government whenever it ventured to sell part of its stake in some of the well-performing PSUs for raising quickly needed funds. While there is logic in the government nudging the LIC to enter the fray in a large way when public response is poor,it needs a full-scale debate to decide whether such act on the part of the government is justified or not. The very fact that both net worth individuals and retail investors did not evince much interest in the FPOs of NTPC and NMDC reveals that our investors are not so naive.
While the recent revelation that India's Mukesh Ambani and Lakshmi Mittal are occupying the fourth and fifth places among the top ten richest persons of the world makes every Indian happy, it should not be forgotten that, quite unfortunately, astonishing affluence and abject poverty co-exist in India. This gives a clear indication that alleviation of poverty should be accorded top priority by the government.

Today's wrapup has given good coverage to many interesting economy-related topics.


Anish Poojara

Mar 12, 2010

We Indians have got used to charity. Everyone wants issues to come at discount to the market so that easy money is made by applicants. The scamsters move in make multiple and bogus applications and corner a large part of this charity.

LIC is smart to pick up large stakes in excellent companies like REC and NMDC at the current juncture. When the price of REC goes to 350 and NMDC 1,000 they will slowly and surely distribute them to the same samll and HNI investors who will then lap then lap them up.

All issues should be sold at market rates or at a small premium. If an FII tries to buy 500,000 NMDC shares the price runs up by 100 rupees. Today the idiots won't buy when they are getting the shares in bulk without any hassle.

Anish Poojara


Prem Singh Dhankar

Mar 12, 2010

Excellent reading.

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