Tata doing a Buffett & more... - The 5 Minute WrapUp by Equitymaster
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Tata doing a Buffett & more...

Aug 26, 2008

In this issue:
» Infosys acquires Axon
» Branded generics catching on
» Mr. Tata doing a Buffett
» China's post-Olympics endeavours
» ...and more!

  The end of economic 'decoupling'?
Well. There is no more confusion or ambiguity about this. The economic slowdown and financial crisis is not just the problem of the West. While it has been quite some time since Europe started feeling the tremors, Asian economies too despite their 'relative immunity' have started bearing the brunt. While the loss of business and investment from the West - that have become increasingly vital to Asian companies - is hurting their performance, rising input costs are threatening their sustenance.

Only a few months ago, some economists offered hope that robust growth could continue in other parts of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks that are still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Demand for US goods from large consuming nations in Asia (like China and India) was supposed to continue compensating for waning demand in the West. However, the US dollar's gain of strength against global currencies has thwarted the possibility of rise in imports from the US.

The International Herald Tribune quotes that while the US dollar's recent strengthening may be perceived as a correction after six years of declines, there is a worry that the dollar may continue to fall due to the US' lopsided cumulative balance of trade, with imports outstripping exports by nearly US$ 800 bn in 2007. Regardless of the dollar's value, sales of American goods may be eroded due to lesser demand for US goods from a slowing global economy. Even China and India that have at time been spoken of as a new global order have shown signs of slower growth and waning import demand in recent months. The view on economic decoupling thus now stands inconclusive!

  Infosys acquires Axon
It's finally happened! After ducking to investor queries on the usage of its large cash balance (US$ 1.7 bn at the end of March 2008) other than paying out decent amount of dividends year after year, Infosys yesterday announced the acquisition of UK based Axon Group Plc in an all-cash deal of US$ 750 m. This is the largest ever acquisition by an Indian software company and the second by Infosys after its US$ 23 m acquisition of the Australia based Expert Information Services way back in 2003.

The rationale Infosys' management has assigned for this deal is to get a stronghold in the IT consulting business as also increase its share of business from the European markets. Axon is a leading SAP (package software) consulting company servicing clients in 30 countries, with around 55% of revenues coming from Europe alone. Considering that Axon earned revenues of US$ 375 m in 2007, the acquisition has been valued at 2x sales. Axon's 2007 operating and net margins stood at 15% and 10% respectively, meaning that post consolidation, it would lead to some margin dilution for Infosys.

  • Also read - Consolidation in IT

      China's post-Olympics endeavours
    The end of Olympics marks the beginning of new struggle for policymakers in China to keep their economy from slowing down in the wake of a weak global economic performance. Although the Chinese claim that the end of the Olympic constriction boom is not expected to induce the sort of post-Games growth hangover that has afflicted other host countries in the past. In fact, the country's infrastructure spending might as well pick up pace and get more distributed across its provinces.

    In this context, the International Herald Tribune reports - "Although Beijing's new stadiums dazzled Olympic visitors, China's vast interior is crying out for modern housing and clean drinking water. Fast-growing cities, meanwhile, need much better public transport and less-polluted air. And the national rail network is overburdened and its power grid is inadequate." In fact, a consultant at Dragonomics, a Beijing based consultancy says, "We're going down from stupidly fast last year to really fast this year and just plain ordinary fast next year, which would be in the 8 to 9 percent range." You can take the Olympics away from China, but not the fact that even if it slows down, it'll still be growing faster than any other major economy in the world.

  • Also read - Illusions about China

      Branded generics catching on
    With many blockbuster drugs going off patent, generic companies the world over are making a beeline for launching generic versions of these patented drugs and reap in profits. However, given that many players are vying for a slice of the pie, the competition has become intense and price erosion brutal. What makes it all the more tough is that the generic drugs in the regulated markets of the US and Europe are not typically branded as a result of which margins enjoyed by generic companies are wafer thin. As a measure to counter this, Indian generic companies such as Ranbaxy, Dr. Reddy's, Glenmark and the like are focusing on 'branded generics', which enjoy higher revenues and margins. It must be noted that these companies were already selling branded generics in the semi and less regulated markets in Asia, Russia, CIS and Africa and garnering substantial profits. The focus is now shifting towards launching such branded generics in the regulated markets, especially the US.

    Another trend catching pace is the emphasis on niche products which are difficult to make and thereby attract fewer players, thereby magnifying the revenue potential. Since plain vanilla generic products have now become highly commoditised, having a balanced product portfolio with a mix of both plain vanilla generics and niche generics has become crucial to drive growth in revenues. Dermatology, biosimilars, injectables and sterile products and ophthalmology are some of the niche therapeutic areas, which have evinced considerable interest.

  • Also read - Focusing on Rest of the World

      The rupee weakens further
    The Indian rupee fell below the Rs 44 per dollar mark reaching its lowest level in almost one and a half years. As per Bloomberg, the reasons for the fall are demand for the US dollar by oil importers who settle their imports at the end of the month, concerns over import costs after the recent rebound in crude prices, and sustained selling by foreign institutional investors (FIIs). It may be noted that India's average monthly oil import costs have increased 45% from 2007 to reach US$8 bn this year and the FIIs have sold a net US$ 7 bn this year as against a net purchase of US$ 17 in 2007.

    It may be noted that a weak rupee aids the Indian IT industry, which has been under pressure from the global economic slowdown. However, with about 70% of India's oil needs coming from imports, a weakening rupee spells more headaches for policy makers and oil marketing companies alike.

  • Also read - Where is the rupee headed?

      In the meanwhile...
    Asian indices were at the receiving end today as concerns with respect to the economic slowdown and the credit market turmoil once again took its toll on stocks. Against a bleak landscape of escalating inflation and credit losses of US$ 500 bn, imminent erosion in profits led investors to go on a selling spree. While the Asian indices reported losses of 1% to 2% today, the BSE-Sensex closed marginally lower. As per Bloomberg, oil remained little changed at US$ 115 a barrel after tropical storm Gustav strengthened to become a hurricane in the Caribbean Sea, raising concerns that it may disrupt oil production in the Gulf of Mexico. Gold fell to US$ 818 an ounce as a relentlessly strengthening US dollar diminished appetite for the yellow metal as an alternate investment. Gold has now fallen 10% this month.

      Mr. Tata doing a Buffett
    With crude prices touching record levels and fears of recession enveloping the developed markets, the going has indeed become tougher for makers of big, powerful cars. So much so that analysts in the US have already started a countdown to how long will the 'Big 3' of Detroit able to keep their heads above water. Hence, amidst this gloom if the headquarters of a certain automaker look rather upbeat, one cannot really be faulted for finding defects in mental wiring with executives out there. However, these people are perfectly sane and are in fact, reveling in the greater autonomy that has been given to them by their employer's new owner. The company in question is JLR (Jaguar Land Rover) the two iconic brands that Tata Motors, India's largest CV (commercial vehicle) maker acquired recently by forking out in excess of US$ 2 bn.

    As per the Economist, while these executives were not really unhappy under their previous owner Ford, the company's poor financial health sometimes rubbed off on JLR as well, forcing them to take what few executives call a 'low' rather than a 'high' road. But not any more. Although the new owners would like the company to be a self funding entity, they are committed to JLR business plans until 2011, thus giving the latter's management ample space to maneuver and pursue an aggressive product launch strategy. Furthermore, the decision making has also been streamlined a lot with the JLR's board consisting of only three people, Mr. Smith, the new boss at JLR and Mr. Tata and Mr. Ravi Kant. This would allow the company greater nimbleness. This step looks straight out of Berkshire Hathaway's owner manual where management is given complete autonomy in decision making. Way to go Mr. Tata!

  • Also read - JLR in Tata Motors' kitty

      Leaning towards infrastructure...
    Property developers of late are seriously rethinking their strategies. Given the soaring inflation in the country, higher interest rates and tightening of credit by banks, building residential homes has suddenly become an unviable option. Therefore, to prevent the revenue streams from drying up, real estate majors such as Unitech, DLF and Omaxe are bidding for the right to build and operate national highway stretches that are currently being offered by the National Highways Authority of India (NHAI), the regulator for inter-state highways. These projects are a part of the national highway development programme, which aims to upgrade more than 33,000 km of highways.

    Real estate prices, which had reached unprecedented heights especially in areas such as Noida and Gurgaon, are now witnessing a meltdown. Given that revenues from residential properties account for nearly 50% to 70% of the revenues of real estate companies, focusing on infrastructure development is likely to ensure a steady cash flow for them till such time that property prices pick up.

      Today's investing mantra
    "Diversification may preserve wealth, but concentration builds wealth" - Warren Buffett

  • Also read - More lessons from Buffett

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