One more reason to be a well-informed investor - The 5 Minute WrapUp by Equitymaster
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One more reason to be a well-informed investor

Nov 10, 2009

In this issue:
» Obama's proposal a boost for Indian pharma
» Big banks once again ready to dole out big bonuses
» Indian IT looking for homegrown opportunities
» The next menace after subprime mortgage
» ...and more!

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The universe of listed companies in India is about to get bigger, infact much bigger. Capital market regulator SEBI has announced that it will allow small and medium sized companies (SMEs) to list on existing stock exchanges, eliminating the need to set up a separate platform for these firms as was envisaged a year back. However, only those companies that have a minimum paid up share capital of Rs 100 m will be allowed to list on the NSE and BSE.

As per estimates, there are around 3 crore micro, small and medium enterprises operating in the country and even if a small fraction of them plan to list; it could give a big boost to the total number of listed entities in India. However, even at current levels, the number of listed entities in India is not one of the worst in the world but what leaves a lot to be desired is the poor quality of disclosure. It really takes a truly well informed and well researched investor to unearth the few gems that lie hidden amidst thousands of worthless stones. While SEBI's directive that a merchant banker involved in the IPOs of SMEs underwrites 100% of the issue would indeed help in reducing the number of worthless companies wanting to list themselves, it has nevertheless given the retail investor one more reason to stay well informed.

 Chart of the day
Real estate prices are on the uptick once again. As banks armed with single digit lending rates try to woo new borrowers and cannibalise on their competitors' market share, real estate prices that showed marginal signs of cooling off last year are once again heating up. As per the country's largest dedicated mortgage financing institution HDFC, the home prices are once again becoming less affordable as was the case in FY07. This may affect the borrowers' loan servicing power and pose a risk to the banks' asset quality. As seen in today's chart, the affordability multiple (calculated by dividing the property price by the annual income) has once again gone up to 5 times in 1HFY10 as against 4.5 times in FY08. Although this is significantly lower than the multiple of 20 times seen a decade ago, mortgage lenders need to be cautious given the larger penetration of other high-risk retail loans.

Source: HDFC
Note: Property price estimates are for suburban Mumbai

The competition may have intensified in the global generics market and the price erosion may have been brutal, but generics have still not lost sheen. Infact, if Obama's proposed healthcare bill becomes law, Indian generic players will stand to benefit immensely as the consumption of generic drugs will grow by leaps and bounds. As reported in a leading business daily, the new bill will provide health insurance cover to 96% of the American population. It has also asked private health insurers not to exclude patients with pre-existing medical history. What is more, the new people who will be covered under insurance are the poor and the elderly which will make the case for low cost drugs all the more strong. Having said that, margins will be thin due to intense competition and lack of branding and hence, much of the growth will come from volumes. Indian pharma companies such as Ranbaxy, Dr.Reddy's, Sun Pharma and the like are well entrenched in the US generics market and will look to capitalise on this opportunity.

Infact, many blockbuster drugs are scheduled to go off patent over the next three years with the icing on the cake being 'Lipitor' whose patent will expire in 2010. While Ranbaxy has received the 180-day exclusivity for being the only player at the time to come out with a generic version, Dr.Reddy's has also entered the fray now.

Bankers are at it once again. Despite being chided for taking home large pay-packets on the basis of short term profitability of their institutions, they do not seem to have learnt any lessons. What else would justify the fact that bonuses at financial firms worldwide are expected to increase by an average of 40% this year, due to market buoyancy led profits. Among the financial firms that are expected to increase bonus pay this year are US banks such as Goldman Sachs, Morgan Stanley and Citigroup. You may recollect that each of them were recipients of taxpayer-funded bailouts in 2008. Although most of the same has been repaid, Goldman Sachs' and Morgan Stanley's decision to together spend US$ 35 bn this year on employee compensation comes in as a rude shock. Wall Street's compensation practices have been heavily criticized by lawmakers and the public for encouraging the risky behavior that helped cause last year's financial meltdown. However, the bankers seem to be in no mood to listen.

The Indian IT majors have recently signaled a fair amount of optimism about the bottoming out of global IT spending. However, a Hewlett Packard survey on companies in the US and Europe hints that the air of uncertainty is likely to prevail over IT spending at least for a couple of years. A large number of firms in the US and UK are still either stopping or deferring their expenditure on long-term enterprise solutions (ERPs). So, one might question the new-found confidence that Indian IT industry is oozing. Though acknowledging the uncertainty about a complete recovery in discretionary IT spending, our home-grown IT majors are not any less confident about the off-shoring success story. With customers planning their annual IT budgets by the year-end, IT biggies expect a demand revival to begin in a few quarters.

The recent surge in domestic IT demand is another fillip for the industry. For instance, the recent branchless banking initiatives by nationalised banks is expected to bring in revenues to the tune of Rs 20 bn for IT vendors chasing rural banking opportunities. These developments along with a plethora of other e-governance initiatives will go a long way in decreasing Indian IT's dependence on the West.

India may have skirted the subprime mortgage menace thanks to the abysmal rate of housing credit penetration in the country as compared to the levels in the developed world. However, bankers here are developing cold feet over another asset that has the potential to become a sticky one, unless handled with caution. Credit cards are a bane of contention for bankers in other parts of the world as well, more so where the economic recovery is superficial and unemployment rates are rising. The unsecured nature of the product makes the loan recovery for the bank time consuming and expensive. Add to that customers who willingly default on their payments or do fraudulent transactions.

Although Indian banks have less than 10% of their total advance book exposed to credit card liabilities, the high delinquency rate on credit cards in the recent past is prohibitive to its growth. A business daily has recently quoted a leading banker saying that nearly a 3rd of all credit-card loans in the system are bad. We believe that while a large chunk of the sticky loans are currently resting in a few banks' balance sheets, an aggressive growth attempt towards this product may soon transmit the malady to the other players as well.

Will we see India's per capita income overtake that of the US and UK? Hans Rosling of Sweden's Karolinska Institute believes so and is fairly confident that most of us will see this milestone breached in our life time, by 2048 to be precise. Despite our human resource capital available to drive this growth, India and China may face several obstacles in the achievement of the goal. Factors like non congenial weather for agriculture or even war may harm the region. We will also have to watch out for how the West reacts to our success. Having said that, we believe that if India's domestic growth prospects are effectively channelized, they may poise us strongly enough to cross this milestone in spite of any trade barriers which the West may place on us.

We were amused to read the following quote of Goldman Sachs CEO Lloyd Blankfein reported by The Times of London "Goldman Sachs is doing God's work. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose."

Tell us what do you think of Mr Blankfein's claim.

Meanwhile, Indian markets witnessed a volatile trading session today and the BSE-Sensex was down nearly 43 points at the time of writing. Stocks from the realty and metal sectors were amongst the major contributors towards the weakness. Amongst global indices, while most Asian stocks closed in the positive, Europe too opened higher.

 Today's investing mantra
"A mania is a mania, and the experts are caught in it just as the public is." - Marc Faber

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45 Responses to "One more reason to be a well-informed investor"


Nov 13, 2009

Sounds like a statement from a militant group leader. "We doing God's work"



Nov 11, 2009

That seriously expands the definition of God's work.... Hmmm ... I'm introspecting about my business !


Capt. Brian Fernandez

Nov 11, 2009

Mr. Blankfien is talking a lot of poppy-cock. He should have been a politician in India!


V. Ramdas

Nov 11, 2009

Mr. Blankfien should be taken to task for making this statement. He should be ashamed to give bonuses for cheating the public bringing the world economy to this level. The US Govt. should tax 150%, the individul who avail this binuses.


Michael Louis

Nov 11, 2009

Yes, Gentlemen, I find your articles very engrossing and the articles,lucid.It makes a lot of sense to be well informed through these articles and make an impression in society.Please do continue to come out with informative articles so that all of us can gain an insight into the economy and ways of being competetive.



Nov 11, 2009

He is a shameless sucker. Greed can take people to any extent and in the western countries Greed is worshiped. So why not claim to be God if it can earn some more credits.



Nov 11, 2009

This statement of the CEO is truly commenddable considering that the message he gives out is that his company and its business makes a huge positive impact to people and country.

During these times when much of the financial companies and their CEOs are getting into news for being extremely self-centred in their intention, and therefore their actions creating irreparable damages to people-nations, such committment and vision statement will always motivate employees to take decisions in times of conflicting agendas. My kudos to Mr. Blankfien for stating his company's agenda in simple but lofty terms. it sure is a challenging job to get his vision into action

To draw parleys to such statements: Government has a statement "Government work is God's work"'; Intel India has a 511 vision on broadband and internet devices penetration in India as a means to acheive growth and prosperity; TI has a vision statement on linking up all by optic fibre and DSP technology as a means to acheive growth and prosperity.

While we are aware that many a times actual practice/ conduct leaves a huge gap between actions and vision, it by no means implies or expects individuals and organizations to shrink/ dilute their vision.



Z. Shaikh

Nov 11, 2009

What a joke Mr. Blankfein, did your company made profits at the time of recession, and how many company went bust funded by your organisation? And your social purpose is not to help people, but to enable you to fly in a private jet.


Prem Singh Rawat

Nov 11, 2009

If you remove that L (lie) from Go(l)dman, they seem to be so, but alas that L is not silent.


raghuraman c n

Nov 10, 2009

It sounds like a statement from a politician and not from a business C E O

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