The mindset that can help India

Mar 13, 2010

In this issue:
» Middle class values can help the government
» What killed Lehman Brothers
» Attrition is back at IT companies
» Why Warren Buffett's salary is remarkable
» ...and more!

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When experts talk about the India growth story, they point at the Indian middle class and its increasing levels of consumption. Fair enough. But as most of us would know, this is a new association. If anything, the Indian middle class has traditionally been a conservative bunch of people. One that lives within its means, has a habit of savings and is very averse to debt.

In our view, all fine qualities. Qualities that the government would do well to imbibe. If the recent budget and the current discussion in the parliament are anything to go by, the policy makers seem to be going the middle class way. As the Finance Minsiter, Mr. Pranab Mukherjee has rightly pointed out, India cannot live on borrowed resources. The government must take steps towards fiscal consolidation. If that means rolling back a part of the stimulus, so be it.

We have been advocating a withdrawal of the incentives that were extended last year in the face of the global slowdown. If that means hiking the duties on petroleum products, so be it. Of course, we would prefer structural reforms in fuel pricing even more. But we cannot fault the government for wanting to live within its means, a quality that is the hallmark of the Indian middle class. In fact, investors would also do well to look for middle class values as they search for well-managed companies at reasonable valuations. In other words, look for companies that have abhorrence towards too much debt and that work hard towards achieving profits.

 Chart of the day

Note: GDP at current market prices
Source: Economic survey 2009-2010

There was a lot of agitation over the Finance Minister's decision to hike duties on petrol prices in the latest budget. The main concern was that direct tax slabs were being reduced, while indirect taxes were being increased. We broadly agree with the argument that direct taxes are more desirable than indirect taxes. After all, indirect taxes tend to be indiscriminate in their impact, affecting the rich and the poor alike. But it would be a mistake to think that the government is not aware of the fact. As the chart of the day shows, the proportion of direct taxes as a % of GDP has increased over the years, while that of indirect taxes has decreased. We hope the trend continues in the future.

The Indian economy is recovering nicely and one sector that is benefitting tremendously from the same appears to be real estate. It is a well documented fact that many Indians on an average are still looking for that dream home. And so, given the scenario of brighter job prospects and salary increases what with the economy recovering, it is hardly surprising that demand for housing is on the rise. And this is not the case only for premium properties. In fact, demand for housing is picking up at all price points and almost appears to be back to pre-slowdown levels. Companies such as Emaar MGF, DLF, Supertech, Logix Group, Omaxe among others are citing examples of projects being sold within days of their launch. However, investors should not forget that over optimism had led real estate prices to zoom to unprecedented levels before the global crisis hit hard. The crisis impacted real estate companies badly. So the companies will need to understand that they will have to keep prices within reasonable levels if they want demand for homes to sustain over a long period.

Warren Buffett takes home a paltry salary of US$ 100,000 reports a newspaper. Big deal you would say. After all, if one has a networth running into billions and billions of dollars, one does not even need a salary. So, please stop pretending as if the man has done some heroic deed. Well, what if we say that Buffett's salary has remained unchanged in the last 25 years, since the time his networth was a fraction of what it is right now. Certainly, there was every reason in the world for him to demand a higher salary and no would have said even a word given the kind of wealth he has created for his shareholders. Now, that speaks volumes about the man's characters, doesn't it? Not convinced? What if we say his salary appears peanuts in comparison to what the heads at some of the largest investment banks in the world have taken home in the past few years and that too after destroying billions and billions of dollars in shareholder wealth? Quite certainly, there is more to learn from Warren Buffett than just his investing acumen.

Indian stockmarkets were rocked last year by the Rs 40 bn fraud at Satyam Computers that was attributed to the financial engineering by its promoter. The auditors were also blamed for gross negligence and conniving in the fraudulent reporting of financials. But they are not alone. The committee probing into Lehman Brothers' collapse has similar stories to tell. The CEO of Lehman Richard Fuld held responsible for the bankruptcy is believed to have used complex derivatives to overshadow the risks at the entity. And the auditors Ernst and Young failed to notice the incorrect disclosures even nine months prior to the collapse. The collapse widely believed to be a starting point of financial crisis in the US was in fact in the making for a very long time.

The global corporate community has some very important lessons to learn from these. As firms grow bigger and more ambitious, it becomes all the more important to ensure that their core values are in place. Also, it needs to be ensured that the people entrusted with verifying the sanctity of the business are themselves ethical.

Economic recovery has brought good times for Indian companies. The same is true for IT companies as well. From uncertain times till about a year ago, these companies are now much clearer about their revenue visibility for the medium term. Clients are back on the discussion table. And they are loosening their purse strings to spend more on IT offshoring.

Now, while all this sounds hunky dory for the IT sector and its companies, there is one concern that seems to be raising its head. We are talking about employee attrition. Given the improved business scenario and the fact that IT companies across the board are back to hiring again, IT employees are suddenly finding themselves with a plethora of job options. And this has started giving sleepless nights to the HR managers at IT companies. Even a company like Infosys is not spared. There are reports that the company is seeing higher attrition as employees are looking out for other options. But this should not be a serious worry for the company given the good amount of bench strength it has. The problem really lies for the mid and small size IT companies that nether have the bench nor the financial strength to retain key employees. In fact, we see employee costs rising for the broader IT sector, and margins coming under some pressure as companies try to retain their assets - their people.


Source: Yahoo finance, Kitco, CNNfn

World markets once again ended positive this week. European markets were buoyant after a report that the European Union will offer Greece a US$ 75 bn bailout. Furthermore, European industrial output jumped the highest in more than two decades. This was on the back of increase in production of goods, which included steel and machinery. In Asia, stocks rose, on speculation that the Bank of Japan will add funds to the financial system while a lower-than-estimated US unemployment rate boosted investor confidence in the US' economic recovery. Furthermore, reports from the US showed that inventories rose by 0.1% in January on the back of companies' replenishing inventories and this helped the US markets extend gains from last week. In India too, the markets extended the Union Budget rally during the week and kept the benchmark BSE-Sensex safely above the 17,000 mark.

India ended the week higher by 1% over the previous week. The top gainer this week was Japan, up by 3.7%, followed by Singapore, Hong Kong and Germany, which gained 3.3%, 2% and 1.2% respectively. China was up by 0.9% while Brazil was up by 0.7%. US and UK closed the week with a gain of 0.6% and 0.5% respectively. France gained 0.4% over the week.

 Weekend investing mantra
"As an investor with small capital, one should prefer businesses that have high returns on capital and that require little incremental investment to grow." - Warren Buffett

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5 Responses to "The mindset that can help India"

Arun Gupta

Mar 14, 2010

Your article on contribution of Direct & Indirect tax to Indian GDP is a good insight into government financing. The upcoming Govts. Direct Tax Code shall enhance the Direct Tax contributions further.



Mar 14, 2010

Warren Buffett has also set up a Trust into which 90% of his wealth will decant after his death, all for the benefit of charity.


Navnit Lal Bhatia

Mar 14, 2010

The views about middle class values being followed by Govt in Union Budget is justified. The opposition for the sake of opposition by the political parties needs to be decried.
We would like to include a column on hedge funds and P notes inflow and outflow during the week in the 5 minutes wrap up and job creation in India as to how far 27,700 target is being met.



Mar 13, 2010

The weekend edition dated March 13 has given excellent coverage to many items of interest to the investors. In particular, your observation that, by openly declaring that India cannot afford to live on borrowed resources, the government is perhaps trying to imbibe the fine qualities of the people belonging to the Indian middle class, who always prefer to live within their means, avoid debts and save money to the extent possible, is superb.


Anupam Garg

Mar 13, 2010

Adoption of (middle class) values!!
The distinction between high/middle/poor still beats me...I mean i dunno if there is a guideline based on family income...i HOPE petrol prices remain in check...they influence everything!

sorry didnt read the rest....

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