A superhighway to growth?

Jul 11, 2009

In this issue:
» Rs 1,000 bn worth of new roads for India
» Infosys open to 'outsider' as Chairman
» 'Fear' may extend the recession further
» Another 315 hypermarkets likely to be set up by 2011
» ...and more!!

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If the government's 'plans' are to be relied on, India may add 12,000 kilometre of new roads worth Rs 1,000 bn by the end of this year. The Union minister for roads Mr. Kamal Nath has said these roads will be built mainly on the toll-based model, for which he is planning to rope in foreign investors from places like Asia, Europe and the US.

Also, as per Mr. Nath, road projects in the country require about Rs 2,000 bn over the next three years for which his ministry is considering innovative financing instruments that will fund road projects and attract domestic and foreign investors. If indeed these plans are executed as per stated, it could mean a big fillip to the fortunes of many companies in the country, especially the ones that make up sectors like engineering/capital goods, cement, and steel. Surely one development to watch out for!

 Chart of the day
For all the debates of how attractive an investment destination India really is, today's chart of the day presents one definitive and bold answer to silence all the critics. In a tumultuous year like 2008, where countries around the world felt the wrath of the credit crisis to the maximum, India was still at the top of the heap when it came to attracting foreign direct investment (foreign direct investment) into the country. It saw the biggest growth in FDI flows in the world in the year 2008. It's no surprise then that doing business in India is indeed an attractive proposition for most big businesses around the world, which we expect to continue to be the case going forward.
Source: United Nations Conference on Trade and Development

For Infosys, setting precedents in the industry is something that comes very easy. The recent one was the co-founder Mr. Nandan Nilekani leaving Infosys to join the government for spearheading the latter's Unique Identification programme. Lauded for its excellent management and healthy corporate governance practices, Infosys is now open to an 'outsider' to assume the next Chairman post after the illustrious N. R. Narayana Murthy. And what is more, these words have come from Mr. Murthy himself who is open to the next Chairman not being part of the promoters who founded the company.

Until now, the promoters of the company were the ones who bagged the top jobs and in expressing an interest in an outsider taking over the reins of the company in the future, Infosys is once again setting another precedent. In fact, given the company's ability to enhance the depth of its top management, we will not be surprised if this 'outsider' also makes a significant contribution to the company and the industry in the future.

Emotions, something that has long been an impediment to investing success for investors the world over, are now also being pointed out as the culprit for the current recession getting prolonged more than necessary. Renowned economists Nouriel Roubini and Robert Shiller are of the view that the fundamental problem right now, as in the depression of 1933, is fear.

"The Great Depression was deepened by a sense of lost confidence or animal spirits that was a self-fulfilling prophecy. The worry is that we will have the same kind of issue arising again," says Shiller. He also concurs with Warren Buffett by feeling that the US needs another stimulus package because President Barack Obama's initial US$ 787 bn plan hasn't been implemented fast enough.

Both Roubini and Shiller are of the view that lasting improvement in consumer sentiment is needed before growth can resume, and that the recession will probably continue for six months as companies struggle to pay their creditors, possibly leading to a massive wave of corporate defaults going forward. Assuming that a worst is already behind us might just turn out to be not so well-founded after all.

The economy may be slowing down but India's appetite for growth seems insatiable. What else would explain the healthy 22% growth in India Inc.'s capital expenditure (capex) in FY09 despite declining profits? However, the slowdown has had some impact and this can be seen in the pace of growth, which though robust by itself, is nevertheless lower than the 39% growth witnessed in FY08.

Obviously, several Indian companies are adopting a long term view and do not want to cut back on capex just because there is a slowdown. The sector which leads the pack is auto (66% growth) which has been propelled to the top largely due to the JLR acquisition by Tata Motors. Other sectors which witnessed increasing capex were oil & gas, telecom, power, capital goods and engineering. What is more, the capex incurred has not been only for the domestic market but also for expanding abroad by acquiring companies. However, while the capex growth in FY09 was robust, the same is likely to come down going forward as the problem of overcapacity sets in.

As per a study undertaken by KPMG and Assocham, nearly 315 hypermarkets are likely to be set up in tier I and tier II cities by 2011. It may be mentioned here that organized retail, which is growing by 20% annually, may be encouraging mall building activities. Eventually the same is expected to amount to the creation of a chain of hypermarkets, with tier III cities also provide scope for growth.

But as we have seen before, too much of optimism can be dangerous. Extreme optimism in 2008 led to ambitious plans in the retail sector, only to be later rescheduled in 2009 as many retailers faced host of financial issues. Considerable opportunities are available to grow and expand, but they are accompanied by unique set of challenges. How many of these planned 315 hypermarkets see the light of day remains to be seen.

The pre budget period saw the Indian markets run up significantly on hopes that the Union Budget 2009 will meet its expectations. Come 6th July and the markets were in for a surprise as the budget failed to live up to the hype. Falling by 9% during the week, the market participants did show that they were not so content with the budget this year. In fact, the Indian markets were the top losers amongst key global indices. Other global markets had a rough week as well with Japan (down 5%), France (down 4%), Brazil (3%) being the key losers. However, China and Singapore managed to buck the trend, recording gains of 0.8% and 0.4% respectively.

Source: Yahoo Finance

Coming to the performance of BSE's sectoral indices during the week, stocks from the FMCG and auto sectors emerged among the favourites. While the BSE-FMCG Index ended the week higher by 4%, the BSE-Auto Index fell by just around 1% over the previous week. On the other hand, stocks forming part of the BSE-Realty Index were in for a reality check as the index dropped by 17% over the previous week. It was followed by the BSE-Bankex and BSE-Capital Goods indices which dropped by 14% and 13% respectively.

 Weekend investing mantra
"It is absurd to think that the general public can ever make money out of market forecasts" - Benjamin Graham

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5 Responses to "A superhighway to growth?"


Jul 26, 2009


Appreciate your point. But, surely percentages have thier own value in analyses. Its a truism in investing that "you take care of percentages and percentages take care of your portfolios". The %ge growth taken here is a good measure in the analysis as the base is same, i.e.,previous year's data, for all under comparison. It clearly shows where there is a momentum.

I agree with your quoting Munger saying "People calculate too much and think too little". In fact absolute numbers tend to make us calculate more and %ages make us think more.

if a small company is giving good %ge growth QOQ and YOY, while Infy is not, surely its a ticker to be kept on our investment radar. After all, Infy has taken the fancy of the investors exactly in this way, if you remember.

Hope you appreciate my point.




Jul 13, 2009

good point abc.


Bharat Chauhan

Jul 11, 2009

FDI - the percentage growth is indeed impressive, gratifying and hopefully a portend of more investments to come. If the percentage growth numbers had been juxtaposed with absolute numbers, it would have helped us get a better idea as to where India stands in the pecking order of global investors.



Jul 11, 2009

More comments on 'Chart of the day'

To make my point clear. Consider, a small IT company announcing double digit growth in Revenues/Profits in coming days for Q2 2009-10. Would it be better than Infosys just because Infosys showed small negative growth in Revenues and Profits for Q2 FY 2009-10? Will it become more 'attractive' than Infy?

Clearly, this would be poor reasoning. While Infosys has billion dollar revenues, the small IT company might not be having even million dollars in revenue. Hence, difference in size of the two makes any such comparison meaningless on percentage basis.

The absolute values are the right parameter for comparison not the percentage change. The point is that you are applying standards/tests (% growth over similar period) of 'normal years' to 'depressing year (2008) period'. A small decline on huge base in comparison to growth of competitors/industry is a desirable feature and right standard/test for depressing years.

I have never liked analysis of your research team when it comes to numbers. Charlie Munger's one comment comes to mind which suitably applies to analysis of your research team:

"People calculate too much and think too little"



Jul 11, 2009

Good write up except the first chart in today's note.

What matters in FDI is not growth over a period but its absolute value. A higher percentage on a lower base is always a misleading figure. A small decline on a huge base is always preferable over a higher increase on a small base in difficult times like 2008. This is true both for FDI inflow as well as a company's performance as compared to its competitors/industry.

Plot this chart again using absolute values and you will find the real winner. Your conclusion that India was winner in 2008 is wrong simply because of wrong parameter you chose! Percentage increase does not tell the attractiveness of a nation but absolute quantity does.

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