Indian equities most attractive

May 20, 2010

In this issue:
» 3G pricing sensible, says TRAI chief
» Indian banks to face liquidity crunch
» Inflation in India is worrisome, says RBI governor
» Did Greenspan's arrogance cause the financial crisis?
» ...and more!

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We are all ears when Asia's number one equities strategist for the past seven years has to offer his views on the markets. And this time is no different. We are talking about CLSA's Christopher Wood, who now believes that "Indian equities have the most attractive outlook in Asia this year." His view is supported by a fast recovery of the Indian economy. Wood's prediction however hinges on the speed at which India develops her infrastructure. He says, "India will grow faster than China over the next five years if infrastructure development happens."

Well, we are no authority on analysing other Asian markets. But we also believe that Indian stock markets still present some great long term buying opportunities. Of course, the dark clouds of the European crisis are spoiling the sentiment currently. But it is times like these when long term investors can pick some great stocks that were earlier available for expensive valuations. Any further correction will only make such stocks even more attractive!

 Chart of the day
So you thought that Indian telecom companies have bid excessive sums of money for 3G spectrum? As this chart of the day suggests, the case isn't so. When compared to the government revenues from 3G auctions for various countries in the past, India operators have bid a very small amount per capita (just around Euro 12 per capita). However, if one were to assume that the target market for 3G in India is just around 20% of the population, the bid figure rises to Euro 60 per capita. Even this is less than 10% of the amount that operators in the UK and Germany had paid for 3G spectrum ten years ago.

Note: Data for countries excl. India are for the year 2000
Data Source: Oxford University document, Indian papers

Continuing with the 3G auction pricing, if one were to go by the words of the Chairman of the Telecom Regulatory Authority of India (TRAI), the pricing has not been irrational. According to him, companies have put in their bids based on their different strategies and approaches. This is quite visible by looking at the prices that some of the metros have garnered. But now all said and done, it is up to the telcos to make their 3G ventures profitable as early as possible.

Banks were until now complaining of too much liquidity floating in the system. Even their best efforts were insufficient to make productive use of the funds. But soon they see themselves facing an opposite situation - that of too much liquidity getting sucked out too quickly. With the payments of 3G auctions as well as advance taxes due in June, banks are fearing shortage of money supply. Add to that the government's ambitious borrowing programme!

As per a business daily, while the tax payments are expected to be around Rs 400 bn, the 3G payments could also range between Rs 400 to Rs 500 bn (60% of bid amount). Having said that, while banks could dip into some of their investments in liquid mutual funds, the chances of their going back to attracting expensive term deposits cannot be ruled out.

The government has raised the price of administered price mechanism (APM) gas to US$ 4.2 per m British thermal unit (mBtu). This is at par with the price of Reliance Industries' KG-D6 gas. The question arises, is this gas price hike sufficient for attracting more global participation in the oil & gas sector? In our view - no!

APM gas comes from the blocks nominated to public sector upstream energy companies like ONGC and OIL. So any revision in APM prices is limited to these companies. It does not provide any policy direction to the Indian natural gas sector as a whole. As far as oil & gas foreign investors are concerned, there are more important issues. For example, oil production in India gets a 7-year tax holiday. Gas production sometimes does, sometimes doesn't! There is no clarity on that front. The main contract between the government and operators - the production sharing contract - is also not settled. As we saw in the Ambani vs. Ambani case, it took the Supreme Court to settle matters.

So, in our view, with the next round of auctions of oil and gas blocks around the corner, it will take more from the government than revision in APM gas price to attract the interest of global energy majors into the sector.

The RBI governor has stated that inflation in India is worrisome with asset prices and demand pressures picking up. Plus with rural incomes also increasing, there could be a rise in structural inflation as well. The immediate challenge, however, is to ensure that food prices cool down. A good monsoon this year will certainly ease some pressure.

Humility is a trait that does not come easily to a person. And if this lack of humility comes bundled with immense clout, one can get pretty disastrous results. Roger Lowenstein, a bestselling financial author has argued that the financial crisis in the US was caused by this very potent mixture. And Alan Greenspan, the former US Fed Chairman seems to be the center of it all. Lowenstein believes that it is Mr. Greenspan's lack of humility or in other words, his arrogance that has cost the US the financial crisis.

It seems Greenspan had argued way back in 2004 that too much of the Fed's discussions be not made public. It was Greenspan's reasoning that doing so would mean losing control of the process that only the Fed understands so well. Well, we all know now what an understanding it turned out to be! Due to the Fed's policy of not being overly transparent, the crisis' buildup did not get to see the light of the day. And then, a disaster that could perhaps have been averted, followed. Perhaps, the world would do better with more transparency from the powers that be.

After yesterday's selloff, Indian stock market had a positive day today. The BSE-Sensex was trading with gains of around 110 points (0.7%) at the time of writing this. Oil & gas stocks were leading the rally in the Indian markets. In fact, India was the lone gainer amongst all Asian markets that closed in the red. The biggest losses were seen in China (down 1.2%) and Japan (down 1.5%).

 Today's investing mantra
"...a business or stock is not an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: 'Most men would rather die than think. Many do." - Warren Buffett

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4 Responses to "Indian equities most attractive"


May 20, 2010

The comparison of India with UK, Germany wrt 3G bidding amount seems unfounded as 3G subscription costs borne by end customer in India would be far less than their european counterparts.
As mentioned, accounting the 20% of India's population for 3G, the bid figure rises to Euro 60 per capita. Further if the call rates(in future the 3G rates) of India & Europe are compared & assumed to be 5 times, the above bidding figure can go to atleast Euro 300 per capita.



May 20, 2010




May 20, 2010

Is it right to compare 3G cost at Euro/capita across countries. I would think that it should be normalized atleast based on the cost-of-living index to get parity for comparision


Anupam Garg

May 20, 2010

Now analysts feel India has a great future, now? I always believed that such resilience shown when the whole world was in crisis means that India rox & will surpass China soon, as soon as som1 does something about its price dumping and currency pegging policies.

I predicted on ur very newsletter some time back when mkt was at 17.5k tht correction will happen...16.5k today...m saying it was obvious given the way 3G auctions on, the operators hav can u b fooled by per capita figures. u know the pop of india?

its about time banks come out with term deposit schemes..i hope they reach a figure of 15% at least

The govt always has dubious stands which leads to controversies, wht's new? in the end its decision making is to maximise its coffers...need i mention the name of our telecom king?

nice take on the transparency theory

Mr. Warren rocks

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