Read more on this in Buffett's next letter...

Mar 28, 2011

In this issue:
» Higher oil prices: Boon or a bane?
» FM feels it is time for fiscal consolidation
» Will the new borrowing program help RBI?
» Good time to buy real estate sector?
» ...and more!

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Warren Buffett needs no introduction. The legendary investor has made billions through investments in the stock markets. And his entire wealth is made by simply adhering to his strict principles on value investing.

These principles are simple. Invest in a company that is fundamentally sound. It should have stable earnings over a considerable period of time. The company's earnings should be sufficient to take care of its debt repayments. The company should be earning decent returns on its equity as well as on its capital. It should reward its shareholders either by paying out a dividend or by utilizing its retained earnings in fuelling future growth for the company. And most importantly, the company should have a rock solid management.

In addition to these, the company has to have the pricing power or is the market leader in its field or sector. A natural question that comes into mind is- are there any companies in India that meet this criteria? As per Buffett, there definitely exists a huge opportunity even in the Indian markets. And in his own words, he is scouting for opportunities here. We agree with Buffett on the point that the Indian markets do present a huge opportunity for the intelligent investors. However, it is important to remember that these opportunities could be multi-baggers only for the patient investors. This means that one has to look at buying and then holding on to the good companies for a long term horizon. This would definitely help an investor in maximizing his gains.

So which opportunities in India would appeal to Buffett? We are as eager as you are to read his next annual letter to the shareholders to see whether any gem finally made it to his illustrious list of investments.

Which stock in your opinion meets all of Buffett's criteria? Share your comments with us or post your views on our facebook page.

 Chart of the day
India has witnessed a tremendous growth in broadband internet in recent times. So much so that it now ranks third in terms of the net additions to the broadband subscriber base. Today's chart of the day shows that India's total broadband additions in 2010 are third after China and United States. At this rate, India would soon be in the list of the top 10 broadband users in the world. Currently India ranks 13th on the list.

Data source: Point Topic
* Data for 2010

This one's for those who believe in doing a top down analysis. We all know how greatly we depend on imported crude oil to run our machines of all kinds. Thus, if crude oil keeps getting dearer, costs to run the machine spike up. This then leads to lower profits and ultimately to lesser capital for reinvesting and growing our country's GDP. In the end, it is the GDP of India that takes the flak. However, wouldn't it be better if were able to put a number to all this? We will save you the math. A leading daily has quoted UBS investment research and has come to the conclusion that a US$ 10 per barrel increase in crude prices from end 2010 levels over the course of this year can cause a 0.2% drag on India's growth. Thus, if crude prices were to rise by US$ 50 per barrel overall, it is quite possible that India's GDP could peg back by 1%. A nice little analytical tool for FIIs to contemplate on their India holdings. Should oil prices spike further, chances are that FIIs may prune their India specific portfolio. And everyone jolly well knows what to do when the selling gets a little too intense. Buy into the long term India story that is.

The Euro zone is going through a messy sovereign crisis. The US too is sitting on a mountain of debt. This is not the time for us to sit back and congratulate ourselves. What India needs to do is learn from the mistakes of these economies and prevent a similar thing happening here. The Indian Finance Minister seems to be of a similar view. He has said that the time is ripe to "further tighten the belt" through fiscal consolidation. And quite rightly so.

Rewind two decades back. Do you recall the 1991 economic crisis in India? Our government was pretty much close to default then. Our currency dived significantly and we were forced to open up our economy. Of course, it worked out well for us. And so far, India's deficits have been largely masked by the robust growth that the economy has witnessed over the years. But we need to take some proactive steps to avoid a repeat of the 1991 crisis.

The government's aim of achieving a fiscal deficit target of 4.6% of GDP for 2011-12 is a step in the right direction. It plans to take advantage of the buoyancy in revenue, both direct and indirect taxes. However, achieving this fiscal target could be difficult given the likelihood of higher subsidy bills, especially on fuel.

The higher demand for credit is evident from the steep rates being quoted by banks and NBFCs alike. But the appetite of the biggest borrower in the country would probably determine the rates in the coming months. The government has a colossal borrowing programme of Rs 4.2 trillion for FY12. This was expected to lead to crowding out of private sector players. But thankfully, with significant redemptions coming in the first half of the fiscal, things are expected to be better. What it means is that the government will try to complete more than half of its debt issuance in the first half of FY12 itself. The high redemptions will thus make the net borrowings lower. Also it will leave more headroom for private sector players who typically have a bigger appetite in the second half. Thus for those expecting interest rates on deposits to go up significantly from the current levels, there could be some disappointments.

Over the past one year, the real estate sector has been a gross underperformer when compared to the broader indices. And the reasons are manifold. Increasing interest rates have led to an increase in borrowing cost of the real estate companies impacting profits. Further unwillingness of the banks to lend to the real estate companies after the bribe for loan scam has led to a liquidity crunch in the sector. Thus, twin concerns of tight liquidity and increasing borrowing cost has lead to a huge correction in stock prices. However, after a long lull of underperformance the BSE Realty index finally posted a strong comeback by registering a gain of 9% in the past week. This has led to big question in the mind of the investors. Are all the concerns into the price right now and is the real estate sector ready to stage a smart comeback?

We believe it is too early to answer this question at the moment. Although the valuations are at historic lows the concerns pertaining to sector are exacerbating. Increasing inflation means the interest rates are likely to remain high in the near term. Even the liquidity issue is not likely to be resolved soon as apart from banks even PE investors are reluctant to provide money. Especially amidst the corporate governance issues that came on to the floor recently. Thus, getting lured by the attractive valuations could prove to be fatal as more pain can be on the cards from here on. Unless the interest rate cycle softens and the real estate prices come at more realistic levels we do not see a meaningful comeback at least in the near term.

In the meanwhile, Indian stock markets continued to trade above the dotted line. At the time of writing, the benchmark BSE Sensex was trading higher by around 107 points. Stocks from capital goods, banks and auto sectors are leading the pack of gainers. However healthcare and IT stocks are trading in the negative territory. The Asian stock markets closed on a mixed note with China and Korea ending in the green, while Japan, Indonesia and Malaysia ended in the red. The European stock indices have opened the day in the green.

 Today's investing mantra
"We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic." - Warren Buffett

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14 Responses to "Read more on this in Buffett's next letter..."


Mar 31, 2011

I am searching, hold on


R Srikanth

Mar 29, 2011

I think Symphony Ltd. will fit the criteria. It is going to be a future star in the bourses.



Mar 29, 2011

Asian Paints and Tata Investment Corporation.



Mar 29, 2011

Tata Steel and Ortin Laboratories


Muthuswamy Rajasekar

Mar 29, 2011

According to me Asian Paints and IDFC would meet the value investing ethics of Mr. Buffet


Suraj Nair

Mar 28, 2011

Pidilite, Titan, Bosch India



Mar 28, 2011

Tata Motors, Tata Steel, TCS, Infosys, Thermax, Axis Bank, L&T, are a few long time multibaggers



Mar 28, 2011

I am a strong believer of Growth Story.Our energy requirement ,Penetration of Communication to deeper India and the expansion of Financial Service will definitely give good wealth creation opportunity for the long term investor.
Money has to flow from Richer Domain to Needy Destination who are really interested in growing.Year 2012 is the start of New way of doing business in India.Best of luck for the optimistic folks.


Manoj Kumar

Mar 28, 2011

I think Infosys and Tata Steel fits the bill.



Mar 28, 2011

I dont agree with Ramji completely. Although there are companies in India like what Ramji said, US has lot more such companies than India has. One can just compare the Lehman and Satyam debacle, which is the prime difference between US and Indian markets. The role Indian govt. is playing in the markets is much more better than US. Last but not the least, whether its India or US or any country for that matter, what is important is to find the fundamentally strong stocks and adhere to long term investment, as Buffet said.

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