One ace India has up its sleeve

Apr 6, 2010

In this issue:
» India's trade balances leave a lot to be desired
» Rupee appreciation is hampering Indian IT
» 'Big Four' audit firms on ICAI's radar
» SEBI outlines new disclosure norms
» ...and more!!

India over the last couple of years has gained a big advantage over the developed world and even China. What gives India the edge over US and many European countries is that it has not suffered as much as the latter in the global financial crisis. True, Indian stockmarkets plunged. Further, some slowdown in overall performance was witnessed by India Inc. But the banking industry has remained sound. Not just that, the growth recorded by the overall economy is way above what the US and Europe are touted to achieve.

Unlike China, India has a robust demand from the domestic market and is not too reliant on exports as its Chinese counterpart. Infact, noted economist Nouriel Roubini is of the view that there is more risk in the case of China. This is because its real estate boom (both commercial and residential) is becoming excessive. Further, there is overinvestment capacity going on in China. India, Roubini believes is different, because there are supply constraints in terms of capacity infrastructure and demand is quite robust. So there is less possibility of a real financial bubble.

Bill Bonner, Founder Agora Inc.,
Speaking at the Investment Summit 2010
We too believe that there is no doubt about the long term growth prospects of India. But to sustain a 7-8% growth year after year, significant investments will have to be made in infrastructure and social sectors such as education and healthcare. More than that, the government will need to get its act together and improve its financial health.

Bill Bonner, founder of Agora is equally enthused about the long term potential of India. In the recently held Equitymaster Investment Summit 2010, Bill highlighted why he liked India better than China and why China is a bubble ready to burst. If you have missed out his wonderful presentation, don't fret! You still have another opportunity to gain insights from not just him but also from our founder Ajit Dayal.

 Chart of the day
India's economy may be growing nicely at present but when it comes to the state of its trade balances it leaves a lot to be desired. As today's chart of the day shows, India has a trade account deficit nearly close to that of Britain. In stark contrast, its BRIC peers are way ahead on this front as all three have maintained trade account surpluses.

* 12-months ended January 2010, Data Source: The Economist

India is suddenly facing a problem of plenty - of dollars that are flooding the Indian financial markets. This has led to a sharp appreciation of the rupee. An appreciating rupee is painful for Indian exporters. This is because they can now convert every dollar of earnings into fewer rupees. And this is when their rupee-based costs (like employee costs) are on a rise. So there's a double whammy!

It is thus not beyond doubt that Indian exporters' margins will be under pressure. Who else can vouch for this but our IT companies? With a large part of receivables in US dollar terms, and a majority of expenses in rupee terms, these companies are in for some tough time in the future. This is if the rupee continues to appreciate against the dollar.

The 'Big Four' audit firms in India are revered by industry and aspiring professionals alike. But the Satyam scam brought them under scrutiny like never before. Especially considering that one of these big four firms was the auditor to one of the biggest corporate frauds in the history of India. But now, a high powered committee of accounting and auditing regulator ICAI has revealed that these firms themselves may be on the fringes of Indian laws.

More specifically, these firms had entered India for rendering consultancy services. But now they are transgressing the permission granted to them for the same. They are doing this by rendering other services like taxation, auditing, accounting, book keeping and legal services. All of these fall beyond the gamut of the permission granted to them. This is because India does not allow foreign direct investment in these other services. But by using their ingenuity, they have managed to circumvent the law so far. What now remains to be seen is the final implications of these findings on the firms under question.

Information is critical to investing in stocks. Especially company specific information. In countries like the US, listed companies have to disclose both their Profit & Loss account as well as their Balance Sheet every quarter. India, companies disclose their Balance Sheets once a year. That is about to change!

As per a leading business daily, Indian listed companies will now have to disclose their balance sheets within 45 days from the end of the half-year. SEBI has amended the listing agreement that companies sign with stock exchanges. SEBI has also made it mandatory for listed companies to disclose their results within 45 days of the end of every quarter. Companies will also have to submit to stock exchanges an auditor's certificate for accounting treatment under schemes of arrangement like amalgamation or merger.

In our view, this move will help improve transparency. Investors will get a timely picture of company's financial health and solvency. With cash flow statements also coming out, it will be difficult for companies to tinker with profit numbers.

Once upon a time, the US pharma market was considered very lucrative and many Indian pharma companies made a beeline to grab the opportunity in this market. But then competition increased, drug prices crashed and suddenly the landscape of the US generics market underwent a drastic change.

There is no denying that there is still considerable opportunity in the US generics market. After all, billions of drugs are scheduled to lose their patents over the next couple of years. But the challenges have also increased. Firstly, innovator companies have now begun to dabble in generics. This is expected to intensify competition further. Secondly, the US FDA has become more stringent in terms of inspecting plants and granting approvals. This means that Indian pharma companies will have to gear up for higher costs to endure that their manufacturing plants meet the strict manufacturing standards laid down by the US FDA.

Indeed, the problems that Ranbaxy and Sun Pharma are facing with the US FDA are a case in point. Certainly, no other company would like to be caught on the wrong foot in the future.

Once the US Labour Department released its report for the month of March 2010, positive vibes were seen across global markets. As per the data, the US added nearly 162,000 non-farm jobs during the month. This recruitment figure is the country's highest in over three years. Alan Greenspan, the former Fed Chairman expressed his views on the same. He believes that the strong increase in jobs is on the back of a build up in the economy.

At the same time it must be noted that a little less than one-third of these jobs (during the month) were created by the government (on a temporary basis) to help with the 2010 census. In addition, this jump in recruitment has done little to budge the unemployment rate which stands at a high 9.7%. The only positive point is the jump in private sector recruitments. Having said that, the jobs data has obviously enthused Mr. Greenspan who therefore believes that the chances of a double dip recession are now lessening.

Indian stockmarkets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, the BSE-Sensex was trading higher by about 35 points (0.2%). While most Asian indices were trading mixed, the European indices had opened on a firm note. Gains were seen in metals and banking stocks, while healthcare and IT stocks were at the receiving end.

 Today's investing mantra
"The list of qualities (an investor ought to have) include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic." - Peter Lynch

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8 Responses to "One ace India has up its sleeve"


Apr 9, 2010

The year-end result announcements are to begin soon. The newspapers will carry detailed Accounts Statement of companies for public knowledge. Here lies the problem.
One would wish that these accounts statements follow a uniform pattern. In fact, it would be a good idea if SEBI or the concerned authority could step in and mandate a format for publication of these accounts/results. They would contain essential figures highlighting annual income under various heads, annual expenses, gross margin, provisions and net margins.
If these statements by companies are published in a uniform and standard format, the public (more especially the ordinary investor) would be able to understand individual company performances.
This form should preferably be carried to the Annual Reports as well.
May I request Equitymaster to examine this request and if convinced, to express through its much widely circulated columns.


thyagarajan v

Apr 8, 2010

peter lynch mantra of 12 qualities that investor shd hv is decorating our home bulletin board. every morning my boy go through your 5 inutes' wrap up and seem to hv become little more wiser when he goes to bed than what he was when he woke up!thanks for the excellent insight that it provides in a nutshell of market events/views of investor gurus.



Apr 7, 2010

Contrary to what obtains in China which relies a lot on its exports, strong demand from the domestic market is the predominant factor in the case of India. As such,it certainly has an edge over China.

Appreciation of India Rupee is detrimental to the interests of the Indian exporters. It is inevitable because, as the saying goes, one cannot have one's cake and eat it too.


N.M.R Shreedhar

Apr 6, 2010

Hi, last few reports of 5 min Wrap up--the agenda seems to have changed. Rather than giving a quick wrap up of the days' news and events, it is openly plugging readers to purchase the "Summit CD". Promoting an event CD is fine, but such aggressive adverts does more harm than good. Also, is the influence of the "big Four" so all-pervading that we dare not even mention their names?


M.Siva Kumar

Apr 6, 2010

Peter Lynch words are philosophical and practical



Apr 6, 2010

the evils of india are too much welfare ,acute labour shortage,abysmal power supply.uneducated folks,widespread corruption and so on.Still india is darling of the world.


kevin payne

Apr 6, 2010

Why, after so many months of reading your n'letter am I inclined to think that you are so eternally optimistic on Indian markets and do not have the underlying skills to see the whole picture? You never recommend that anyone invest in other than India Inc. I'm living here for past 6 yrs and see many problems which you present as small but surmountable speed bumps...however you are lying and hoping for change which is far in the future. This is how you sell it. Do you forget how or where you live or who you live with? Did we not all lose 30-50% a couple of years ago?..It's not so easy to get in and get out..given connectivity issues. Easy for you! Keep changing the rules about trading..stops, etc........................................You are selling a lie which is realized by make more in commission than you will ever make outright! Dare to publish this....You are just cheerleaders to a losing game! We want the real scoop! Like as if we don't do homework. godsakes



Apr 6, 2010

You are giving very good advice.

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