Be careful of this trillion dollar opportunity

Mar 24, 2010

In this issue:
» Peak oil theory gets closer to reality
» P-Note investment at an all-time low
» Indian realty back to boom days
» The dangers of supporting TBTF
» ...and more!!

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The companies in India's private sector are set to have a windfall gain. After all, the government is offering a third of a trillion dollar opportunity to them! Yes, you read that right. The government is expecting private sector participation to the tune of 30% in the US$ 1 trillion infrastructure outlay during the 12th Plan period. That offers immense scope to private companies looking to leverage the India growth story to fortify their business models. This includes not just infrastructure building and ancillary companies but also those that are into infrastructure financing. The government mandate will go to the extent of allowing private sector banks and NBFCs to compete with PSUs in raising long term money for infrastructure financing. Must say that the going is set to be great for companies that can effectively tap these opportunities. But does that mean investors must look to invest in any and every company that has the word "infrastructure" tagged to its name? We certainly do not think so!

Foraying and succeeding in infrastructure development related businesses require skilled manpower, technological support as well as a strong bargaining power with the government. But the most important of them all is execution abilities. For all infrastructure projects are time bound and project overruns come at a heavy cost. Thus, if you find cement, textile, realty or auto companies planning to foray into power generation or road building, you need to be cautious. The companies' plans to diversify into the lucrative infrastructure business may lead to 'diworsification'! Not to mention little known companies' ploy to seek investor money under the guise of infrastructure investment. Remember the dotcom bubble?

While we are no less enthused by the government's move to accelerate India's infrastructure development through the PPP (public private partnership) route, we would like to caution investors from getting carried away by this theme.

 Chart of the day
The US may be worried over its citizens and corporate having got into the habit of borrowing too much and saving too little. However, we in India have a completely different story to tell. As per the RBI, the per capita deposits in Indian banking system is nearly 1.4 times the per capita loans. While this certainly affirms the theory that Indians are good savers, it does raise some concerns. Prime amongst them being the tendency of India Inc to borrow abroad at cheaper rates. So while Indians may be having a healthy saving rate in banks, are we relying too much on non bank funding for loans?

Data source: RBI bulletin, CMIE

The availability of reliable and timely data is perhaps the most important requirement of decision making. Hence, everyone related to the oil and gas industry is keenly interested in the figures related to oil reserves. But what if the figures are doctored? As per researches from the Oxford university, OPEC countries over reported their reserves during the 1980s. Hence, official global oil reserve figures should be brought down from 1,350 bn barrels to 900 bn barrels. This would bring closer the peak oil theory timeline, when the demand for oil will exceed the supply of oil. Infact, as close as the calendar year 2015. A vast majority of the world's oil & gas reserves happen to be regions not exactly reputed for their transparency. While there are strong arguments for and against the peak oil theory, we do believe that it is difficult to increase supply when no major discoveries have been made in several years.

The days of the 'Great Indian real estate boom' seem to be slowly but steadily coming back. Take the Gujarat city of Ahmedabad for example. A business daily report pegs the value of land deals that have taken place in Ahmedabad in the last fortnight at a whopping Rs 9 bn. Indeed, sentiments, and along with that prices and deal values, seem to be picking up. The demand for property in the residential segment due to the rapid pace of industrialization is thought to be one of the key reasons for this unexpected surge in land deals. However, commercial and hospitality construction projects are also contributing their fair share. With realty deals all over the country building up in momentum, we wonder how long it will take for the pan India 2007-08 boom days to come back in full gusto once again.

By the way at the recent Equitymaster Investment Summit 2010, Ajit Dayal, our founder shared some very interesting perspectives on investment in Indian real estate sector. For those who missed out on this wonderful presentation, this would be perhaps your last chance to grab the opportunity.

Participatory notes or P-Notes as they are popularly known, are finding themselves out of favour with FIIs. At least that's what a recent data from SEBI indicates. As per the capital market watchdog, P-notes as a percentage of total assets under management of FIIs have dropped to an all-time low of 13%. Just to put things in perspective, at its peak in June 2007, the proportion was a huge 56%. So, what explains the sudden disinterest? Attribute it to stricter regulations. People in the know are of the opinion that the SEBI is keeping a close watch on investments through P-Notes and is not hesitating in taking strong action. A recent ban on two FIIs - Barclays Bank and Societe Generale - is a case in point. Also, with cost of entering through P-Notes becoming prohibitive, a lot of FIIs are now willing to take the direct route. With the kind of havoc P- Notes can wreak on the country's stock markets, we indeed see this as a welcome sign.

The Financial Times carries an interesting piece today. It talks about the dangers of policymakers continuing to support the 'too big to fail' institutions. As the report states - "The world is well aware that it needs an exit strategy from the massive monetary and fiscal stimulus that started in the final months of 2008. But we also need an exit strategy from too big to fail. It is simply too costly to continue."

It indeed has been very costly for the governments worldwide to support their biggest institutions from failing. The US$ 787 bn TARP funding is a case in point. A large sum of this money went towards recapitalizing the shrinking balance sheets of the biggest banks in the US. And what has been the outcome of such a huge spending? Nothing that investors and taxpayers will feel happy about! The banks are back to risk taking as they never committed any mistake in the first place. And bankers are once again seeing their bank balances swelling as the 'shameful' bonuses have made their way back to the global banks. So nothing has changed for them. But the common man is bearing all the brunt. And that's why the policy of supporting the 'too big to fail' institutions must stop!

The Indian government is finding itself in a tricky position. Given that the fiscal deficit this year has ballooned, the government will now have to marshal all its resources to bring this deficit down in accordance with the fiscal roadmap outlined in the recent Budget. But how should it do so? The one important way to do it is trimming subsidies for fuel, fertilizer and food. Infact, India has targeted US$ 22.2 bn for subsidies in the coming fiscal. In this regard, Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia has recommended that the prices of fuel, fertilizer and food be raised if the subsidies have to be capped. But therein lies the tricky part. Inflation in India is already near 10% largely due to a rise in food prices. Therefore, raising prices to limit subsidies may not go down well with the common man. Moreover, the government would not be comfortable tampering with its vote banks. While Ahluwalia is right in saying that subsidies will have to be brought down, whether his proposals see the light of day seems a tad unlikely.

Indian markets remained closed today on account of Ram Navmi. Other Asian markets closed largely in the positive, albeit with marginal gains. Japan led the pack of gainers in Asia. European markets have also opened on a positive note.

 Today's investing mantra
"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond." - Warren Buffett

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6 Responses to "Be careful of this trillion dollar opportunity"

agarwal mukesh

Mar 25, 2010

I think that the figure of official global oil reserves which you have quoted at 1350 bn barrels & which needs to be brought down to 900 bn barrels;is incorrect.I think the official global oil reserves figure of 1350 bn barrels or 900 bn barrels,is too low and can not be correct.Pl re-verify the same.


phani kumar lavu

Mar 25, 2010

It is advised to all investors to understand the underlying principles and economic development rather than searching for the names of the stocks which would bring wealth. It is a continuous process of making money, the opportunities are never lost. What it is written about the infrastructure sector is correct and one should go deep about he company's activities



Mar 24, 2010

Great informations! What are those infrastructure companies where I can start investing? By the way you have not still disclosed those "Hidden Treasured" companies yet, although I'm being a paid member!



Mar 24, 2010

It is really good.



Mar 24, 2010

What impressed me most when I went through the day's wrapup( March 24) was the earnest manner in which you have advised the investors not to throw caution to winds, even while conveying the much anticipated good news that the companies in India's private sector are well set to have a windfall gain.

As clearly pointed out, rapid pace of industrialization in Gujarat would have been the contributing factor for the recent sudden abnormal spurt in the value of land deals in Ahmedabad. As there are only a few more Indian States which can boast of such rapid growth, can the jump in the real estate business in Ahmedabad be taken as a common indicator for this industry's bright prospects in the near future?


A. K. Gupta

Mar 24, 2010

We seemed to be fooled by the Government propaganda about petroleum prices being subsidised by the Government. The fact is that first the Government levies heavy dose of taxes by way of import duty, excise duty, et al, cascading the price to an abnormally high level; and then it pretends to subsidise the retail price by issuing petroleum bonds or cash injection into the petroleum marketing companies. The fact is that despite all the visible subsidy, out of every rupee that a customer pays for buying petrol for his car, nearly 51 paise go to the Central and State governments as direct and indirect taxes.
It is like subsidising HAJ travel. These passengers are compelled to travel at highly inflated ticket prices, which are then subsidised by the Government to a given extent. If the travellers are permitted to charter flights by open tendering process, even without any subsidy, the travellers will have to pay much less than at present.

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