Is this an opportunity for buying good quality stocks?

Oct 10, 2011

In this issue:
» Tata's 'Nano' failure
» Higher Govt. borrowing will not hurt India Inc: FM
» Co-operative banking in India is in trouble?
» Impact of Euro crisis on India could be severe
» ...and more!
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It is time for the quarterly results yet again. Unfortunately the clouds of higher inflation and interest rates have dampened the sentiment. As a result, most investors are worried as to what the results would hold this time.

A glance at the recent trends in interest rates and inflation makes one thing clear. The companies would definitely see their bottom lines coming under pressure. Increased costs of servicing debt as well as higher raw material prices would dampen margins. At the same time, companies will most likely hold back on future investments as the loans are more expensive. Companies that focus on exports to drive their gains would probably take a hit as the global crisis continues to grip international markets. Even those companies that focus on domestic consumption like the autos and consumer durables sectors may be hurt due to the rising interest rates on loans.

As a result the picture painted by the upcoming quarter results may be gloomy. But investors should keep in mind that these are just near term trends. Yes inflation would keep raw material prices high. True that higher interest rates would hurt net margins. But these are just short term blips that should scare the short term investors. Focusing on quarter on quarter performances and short term results can lead the short term investors into a state of panic.

However, things are still good for those who take a long term call on stocks. Such blips and consequent market panic give the perfect opportunity to such investors. For this gives them an opportunity to buy the stocks of fundamentally good companies at cheaper valuations. And holding such a stock is the best way to maximize long term returns.

Do you think that focusing on quarterly performance is the right approach to equity investing? Share your comments with us or post your views on our Facebook page

 Chart of the day
Gold has seen a dream run in recent times. The price of the yellow metal has been trending upwards due to its status as a safe haven. This has become more pronounced in recent times with the uncertainty clouding global markets. Though several investors have doubts that the metal might be in a state of a bubble, this has not deterred India from increasing its gold imports. As shown in today's chart of the day, India's import of gold has gone up on a year-on-year (YoY) basis. Despite the September quarter being a slow one in terms of off take for the metal, gold imports during the quarter ended September 2011 is still up by almost 68% YoY.

Data source: World Gold Council

A few years ago, Tata Motor's decision to launch Nano, the world's lowest priced car and to acquire the iconic brands Jaguar and Land Rover (JLR) raised many eyebrows. The perception was that the JLR acquisition would prove to be a much bigger challenge than ramping up sales of the Nano. After all, the company had taken massive debt on its books to buy those luxury brands, plus JLR at the time was also loss making. Nano, being the world's cheapest car, would surely find a lot of takers after all the hype. But come 2011 and the reverse seems to have happened. In less than three years, JLR has become the biggest cash-generating unit of Tata Motors, accounting for a significant chunk of the carmaker's US$ 2.1 bn net profit in FY11.

The Nano, on the contrary, has seen consistently subdued sales. More than two years after its introduction, the Nano only recently crossed the 100,000 mark; before the launch the carmaker hoped to sell about 500,000 cars a year. Indeed, it could be possible that the management was so caught up in turning JLR around; it was not able to focus on pushing the sales of Nano. Initial troubles with respect to the Singur plant aside, Nano has had to contend with a lot of competition. Plus, Tata Motors has also not done much to improve the distribution network for this car in the rural areas. As it is, the car is hardly a significant profit making enterprise for the company if it wants to stick to the tag of the world's cheapest car against a backdrop of rising input prices. This means that if sales of this car have to surge going forward, the management will have to come out with some novel ideas soon.

The Government has decided to go in for much larger borrowings for the second half of the year and consequently, there are concerns doing the rounds that there won't be enough money left to fulfill the needs of all the private sector borrowers. The real estate sector in particular is likely to be hit the hardest. However, some economists do not see this as too much of a problem. They argue that interest rates are anyways high and hence, private sector borrowings have slowed. This will thus give the Government enough headroom to go ahead with their revised borrowings without putting a lot of pressure on interest rates.

One could certainly argue that it doesn't matter if either of the two parties borrows. After all, what is important is the fact that credit off take is happening. This may not be entirely true though. The higher borrowing by the Government is towards higher spending and much less towards capacity building. Hence, there is a strong possibility that the Government ends up stoking inflation even more down the road rather than take steps to control the same.

Banks going belly up is not uncommon in the US. Ever since the collapse of Lehman Brothers, scores of them have been declared bankrupt each month. Lack of regulation and indiscriminate lending by the smaller and regional players led to the collapse of banking sector in the US. Comparatively, the Indian banking scenario seems far more robust. The scheduled commercial banks here are far better regulated by the RBI. The private sector and foreign players too play by the book. Stricter provision norms and capital controls have ensured almost negligible cases of bankruptcy even during times of crisis. However, dig a little deeper and the scenario does not seem as rosy.

Currently, India has 27 public sector banks, 7 new private sector banks, 15 old private sector banks and 31 foreign entities. In addition, there are 90 regional rural banks, 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks. The list seems pretty distorted in terms of regulatory control and supervision. While the PSU, private and foreign entities are well regulated, control over the large number of rural and cooperative entities leave a lot to be desired. What else can explain the fact that 26 cooperative banks closed operations in FY11 and another 8 are set to follow suit in FY12? While consolidation is a must for better regulation in Indian banking, the government needs to ease up regulations for the same.

Lehman Brothers was a surprise test for the Indian financial system. Surprisingly, India did exceedingly well, even though it was caught unawares. But, will it be able to perform as well in light of the current European banking crisis?

The Euro was created to unify the geographically close yet diverse European nations. But now it may self destruct, taking a few countries along with it. So, how does this affect India? Well, if the European banks go bust, the supply of credit to emerging markets like India will shrink. A sharp pull back of credit from India may cause the already weak rupee to depreciate even further. Plus, Europe is one of the biggest trading blocks for India, thus exports may take a hit. All in all, a weak Europe and a stagnant world economy may hit India even harder than the 2008 financial crisis. However if India is able to boost domestic demand, and attract newer markets for its exports it may still be able to survive the crisis. Plus, long pending reforms in retail, banking, insurance, etc need to be pushed for India to retain its spot as a top investment destination.

A new policy initiative by the Department of Industrial Policy and Promotion (DIPP) is set to hurt private equity (PE) deals in India where the investor is a foreign entity. As per the new policy, investment instruments with built-in options of any type would not qualify as eligible instruments of foreign direct investment (FDI). Any equity instrument issued by an Indian company to a foreign entity which allows the foreign firm to exit the arrangement through a buyback or through put and call option, will be treated as external commercial borrowing (ECB). Hence, this arrangement would curb all foreign companies from exiting ventures. Moreover, ECBs are subject to caps and limits. All this will act as a major deterrent to foreign investors.

What is the reason behind such a change in policy, you may ask? Well, it is important to note that the Reserve Bank of India (RBI) had raised concerns about foreign investors exiting through the put option route. The DIPP move has been initiated to curtail transactions in real estate that came under the guise of FDI-compliant investment, but were actually ECBs.

In the meanwhile, the Indian stock markets have been rallying upwards today. At the time of writing, the benchmark BSE Sensex was trading up by 208 points (1.3%). All the sectors were trading in the green with maximum gains witnessed in realty and energy sectors. Other Asian markets closed on a mixed note with Taiwan and Japan closing in the green while Hong Kong and China closed in the red. European stocks have opened on a positive note.

 Today's investing mantra
"Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful." - Warren Buffett

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2 Responses to "Is this an opportunity for buying good quality stocks?"

A Chopra

Oct 11, 2011

Tatas have already recovered much more than the money spent on the development of NANO in the form of the international advertising mileage. Not many people knew or cared to know about Tatas, and then suddenly everyone knows about NANO and the company that accepted the challenge.



Oct 10, 2011

Nano was,is and will be a failure.Being small it is very unsafe.A two wheeler may be better than Nano in many ways.

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