Here's how your biggest investment is placed

Jul 30, 2010

In this issue:
» India Inc. has leveraged downwards
» Cheap labour in China may not remain cheap for long
» India's BPO industry could grow to US$ 225 bn by 2020
» US consumers may slow down further in their spending
» ...and more!!

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The benefit of investing in companies with strong balance sheets isn't a secret. A company with a strong balance sheet brings along with it umpteen benefits. Benefits that, above everything else, let its owners sleep well at night. That being the case, if there's one entity in which your entire networth were to be invested, it's quite understandable if you would be on the edge of your seat to know the state of its balance sheet. Allow us to help.

The investment we're talking about is India. Yes, what happens to India's balance sheet is each one of our business. That's because most or all of our networth is invested in India. And the smallest red flag on that front can have a cascading effect on every single asset you own in the country.

Let's have a look at how this aspect of India stacks up against the rest of the world.

A Californian investment firm, Research Affiliates, recently came up with a study that contrasts the debt levels of countries around the world with their ability to pay. This in turn is based on the size and quality of each of their economies. Going by their findings, the US looks like one of the most stretched countries. Though it accounts for 14% of the world economy, it holds a huge 25% of global debt. Japan is even more startling; it carries 29% of all borrowings, while accounting for a miniscule 4% of world economy. Further, virtually all the nations of Western Europe carry debt that's 2 to 3 times their economic size, including the UK, France and Belgium.

What about India? Measuring 8.6% of the world economy, it has less than 2% of its total debt. This makes it one of the best placed large economies in the world right now, next only to China. It is no wonder that investors from the world over sing only one song these days.

 Chart of the day
There's been a lot of hullabaloo recently about the 'hike' in petrol prices. In light of that, we thought it would be enlightening for you to know what your neighbours around the world are paying for this most desired of commodities. When looked at in comparison to other major cities, Mumbai is certainly nowhere near the top. No regrets there though. This is one chart that most surely wouldn't want India to top!

Data Source: Daily Finance. Prices as of 30th June, 2010

In a world where everyone is leveraging upwards, it is nice to hear that there is someone out there who has leveraged downwards. This 'someone' answers to the name of India Inc. As per Yahoo, corporate India's debt raising spree slowed down dramatically during FY10. A survey of around 700 companies (excluding banks and NBFCs) revealed that growth of loan funds came down to a mere 2.4% in FY10. It should be noted that the same stood at around 40% during FY09. However, this does not mean that India Inc has raised very little money. What it has instead done is resorted to equity financing. Quite smart we must say.

In FY09, when stock prices were at multi year lows, India Inc resorted to debt financing. This saved the companies the trouble of diluting too much as equity fund raising would have occurred at very low stock prices. In FY10 on the other hand, where prices started moving upwards in a big way, equity financing came back in vogue, resulting in lower dilution. The move has also helped in lowering the overall debt to equity ratio from 0.6 times in FY09 to 0.5 times in FY10. Looks like Indian companies have learnt their lessons from the financial crisis quite well.

In economics, labour is a resource just like land or capital. If the Middle East benefitted from their oil reserves, China benefitted from cheap labour. With one difference, labour conditions evolve. As The Economist points out, the recent spate of strikes in China point towards change. The supply of cheap labour is reaching its limits and workers' aspirations are rising. As a result, more agitation and higher wage rates are now following. Moreover, this time the Chinese government is also not bullying them back to work. For a change, it wants the workers to earn more. After all, it is only with their spending power that China can become more consumer driven than export led.

The West must not be too worried though. Firstly, a Chinese worker earns about 5% of what an American worker does. Surely that imbalance has to correct sometime. Secondly, the developed world now needs more willing consumers than cheap workers. So if China transforms into a market for the West instead of being its factory, that's welcome. In any case, with rising unemployment in the West, a few jobs could easily go back to their workers. It suits everybody.

It is an industry that has grown 9 times in the last 10 years. The BPO industry has grown from US$ 1.6 bn to US$ 14.7 bn over the last decade. NASSCOM now predicts that the BPO and ITeS industry could grow to US$ 225 bn by 2020. To do this it would need to increase its presence in tier II and tier III cities. The industry currently employs 58% of its workforce from these cities. With India becoming a hot destination for off-shoring, BPO and ITeS companies are moving to smaller cities to no major cities for their delivery centers. This would boost employment and infrastructure development in these areas.

It is said that when the US sneezes the world catches a cold. By what we have seen since the start of 2008, nothing can be closer to truth than this. Now as the emerging market economies start to recover, there is another headwind that they face. That of a slowing consumer demand in the US, the biggest market for their exports.

With economists expecting US consumers to slow down further in their spending, the implications for exporting economies of Asia can be big. This is given that internal demand in these economies cannot really fill the void created by the disappearance of US consumers. In high times, no one really bothered. Now when the impact of the crisis is being felt, everyone's running helter-skelter!

India's young population is the target market for a host of companies in India and abroad. Economists call it the demographic dividend. While developed economies as well as emerging ones like China are 'greying' fast, more Indians are ready to join work. The Canadian High Commissioner in India has reportedly applauded the same in an article in a Canadian daily. He believes that India's additional workforce could be a boon in disguise. A report from Goldman Sachs verifies this claim. It states that Indian demographics alone would contribute 4% of annual growth for the next 20 years.

However, these predictions are not without possible downsides. A younger population would need better educational facilities. Scarcity of jobs for the youth could create not just economic but also social problems. Thus India may not be 'greying' fast. But for it to grow fast, only a young population may not be enough.

The Indian indices languished in the red for the larger part of the trading session today. Any attempts to move into the positive were thwarted by renewed bouts of selling. At the time of writing, the BSE-Sensex was trading lower by 66 points. Gains were seen in banking stocks, while IT, auto and oil & gas stocks were at the receiving end. As far as the global markets are concerned, most Asian indices were trading in the red at the time of writing. European indices are trading mixed.

 Today's investing mantra
"If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you'd need. If you're driving a truck across a bridge that says it holds 10,000 pounds and you've got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it's over the Grand Canyon, you may feel you want a little larger margin of safety..." - Warren Buffett

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9 Responses to "Here's how your biggest investment is placed"


Aug 1, 2010

For ordinary lay equity investors, which

salient points need to be read in a
Balance Sheet /cash-flow ,ratio-analysis?


sumit kumar mitra

Jul 30, 2010

besides it sector two other sectors likely to out perform
the market i.e pharma & chemical sectors focus should be
given to those two sectors to get maximum advantage of the


Vijay Anand

Jul 30, 2010

1.All i am worried how India can address more self demand needs of(Infrastruture,eGovernment & Power) effectively with bunch of Stupid corrupted policy makers.
2.How can we Independent stock market not depending on of US FII's
3.I am not sure what needs to be done to India to have
a common man to think about investing(MF,Equities).If you see USA 70% of them would have invested in equities.Still this is a huge task that is achievable if more Young generation of workers are molded and properly guided to invest like the Equity research firm.


Tony Fernandes

Jul 30, 2010

Regarding the petrol prices chart, seeing that New York & Dubai have a higher living standard, and lower petrol prices, makes Mumbai which has lousy living standard, (by your own comments) makes your rant of removing the subsidy on petrol seem a bit out of line. [It has been published several times in your newsletter].

Instead why not transfer the subsidy cost to luxury car owners, or vehicles which have higher engine capacities.

How are the the US and Dubai able to hold on to lower fuel prices, is the question you should be asking yourself, instead of continuing with your rant.



Jul 30, 2010

The chart on petrol prices is very misleading - it should be on ppp (price purchasing power....) and not absolute - which gives a very distorted picture.
Petrol Price per liter in our neighbors and other countries

Pakistan = 26Rs

Bangladesh = 22Rs

Cuba = 19Rs

Nepal = 34Rs

Burma = 30Rs

Afghanistan = 36Rs

Qatar = 30Rs

Chine =23 Rs

USA=2$ a gallon =30Rs/liter approx

In all these countries, basic cost of petrol is 15-17 Rs and taxation
comes to another 15 Rs or so i.e. price doubles because of tax.


Basic cost of petrol =16.50 Rs

Central tax = 11.80

Central Excise duty 9.75

State tax=8

Vat 4

Total 50.50, now made 53

India is the only country which tripples the cost of petrol because of tax!


Sasi Raman

Jul 30, 2010


It was very interesting to read your chart of the day on Petrol prices in our neighbouring countries. YOu should have taken China too in the Chart, who import most of their crude oil. You also should have indicated how much oil our negibours imports and how much we import and our indigeneous production of oil. Moreover, if your consider earning of people and the cost of living, then our price of petrol should have been much much lower. Indian oil companies (mainly PSU) are loosing money because of the loft sided planning and implementation, instead of shattered investment in oil sector by the government, they should have a long range planning and should have gone for mega processing plants at the center of India. Moreover, a good percentage of money is wasted, eaten by politicians and corrupt officials. It these companies have been run on a professional manner, our petrol cost should have been much much lesser.




Jul 30, 2010

Your comment on the balance sheet of india seems to contain incorrect numbers. If the US is 14% of the world, then it is not possible for India to be 8.6%. Can you please share the report from Research Affiliates that provides these numbers. Are these PPP adjusted? And do they include domestic debt?


Girish Pahadiya

Jul 30, 2010

Its very surprising what your information mentions. India you mentioned is 8.6% of the world economy and US is 14%. If we understand that US is a $14 Tn. economy, means India is $8.6 Tn economy.......... its the dream which every one is watching in India..... pls. explain.....


Karthikeyan Manoharan

Jul 30, 2010

Regarding your chart on Petrol Prices:- London & Hongkong people earning power and "value" they spend on the petrol is not at all comparable to India. Pls do not mislead..........

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