|»5 Minute Wrap Up by Equitymaster|
On This Day - 16 MARCH 2011
This is one company which towers over all others
In this issue:
-------------------------------------------- Free Guide -------------------------------------------- The Definitive Guide To Financial Planning
Take the case of HDFC. This financial institution is the sole Indian company figuring in Ethisphere Institute's (a New York City think tank) fifth annual list of the World's Most Ethical Companies. Now, this think tank may not be that well known in India. Hence, its views do come under the scanner. But what is important is that out of several Indian companies that it studied, only one made it to the list!
Ethisphere's stamp of approval or not, the point is that Indian companies need to do a fair amount of work on the ethics and good practices front. Indian companies have already begun making a mark in the international arena because of the low cost advantage that they enjoy and good English speaking skills. Many have also moved up the value chain and have done overseas acquisitions all by themselves rather than looked upon as targets by international majors. Some of India's big names in the corporate world such as Infosys and the Tatas are also widely respected overseas. But overall for India Inc on the governance front, efforts seem largely wanting. The Satyam fiasco, the telecom scandal and the murky dealings in real estate are some examples that have tarnished India's image.
Now, we are not recommending the stock of HDFC here. But, it would be to India Inc.'s benefit if it takes a leaf out of HDFC's book and steps up initiatives on the governance front. This is not just to make an entry into annual lists but step up investor confidence and widen the gamut of good companies that they can invest in. Please be informed that more than the Government it is the private sector that ensures long term wealth creation in an economy. And it is good governance that makes this wealth creation more equitable and sustainable.
Thus, a disruption in supply in these items will no doubt affect the entire supply chain and hurt a vast array of businesses therein. And this is not an isolated example. There have been cases where entire production lines in complex manufacturing industries like auto and electronics have been forced to shut down. Quite a few them, it should be noted, on account of supply disruption at a small, not so critical component supplier. Thus, it is time companies start taking this risk seriously. Cost savings by way of economies of scale is no doubt important. But what may not be acceptable is the risk of disruption of the entire supply chain that comes along with it.
As per RBI deputy governor Dr Chakrabarty, raising long term funds is the key to managing this mismatch. The likes of SBI have already set the trend in this regard with their retail bond issuances. Dr Chakrabarty also believes that Indian banks need to tap overseas funding to meet their growing capital needs. We do agree with him. However, we believe that, if competent banks source long term funds from domestic markets at attractive rates, there would be no dearth of it. On the contrary, the domestic funds would be devoid of currency and global economy related risks.
We are not sure whether this is a real sensible strategy for these managers. Stocks in the western markets, including North America, are artificially supported by the quantitative easing from their central banks. While this seems to be the case with equities in emerging markets of Asia as well, the real fundamental long term growth story still lies in Asia.
Of course, history doesn't repeat itself exactly the same way. But there could surely be some essence of the past in the present turmoil. Let's look at the circumstances during both the catastrophes. The recent Tohoku earthquake may have a devastating effect on Japan's economy since the region contributes about 8% of the country's GDP. However, the impact on the global economy may be a bit muted compared to the Kobe earthquake of 1995. The reason is simple. In 1995, Japan contributed about 17.9% of the world GDP. That figure has halved to about 8.6% in 2010.
However, Japan may have a tough time ahead. In 1995, the country rebounded sharply on the back of robust public investment spending. However, the fiscal constraints may not allow Japanese policymakers to repeat the feat. The lengthy reconstruction will add further to the already high debt load of the economy. To give you a clear picture, the government debt to GDP ratio is already the highest in the world at 2:1. So the global economy may deteriorate only marginally. But the Asian patriarch will take a long time to recover.
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