»5 Minute Wrap Up by Equitymaster

On This Day - 20 JUNE 2011
What has led the Tatas to surpass the Ambanis?

In this issue:
» Gold has outperformed other asset classes
» China's high-speed rail project biggest in human history
» The sad story of India's telecom industry
» Does India Inc. have pricing power?
» ...and more!

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Just one year back, the Tata group with its 30 listed companies was smaller than the Mukesh Ambani-led Reliance group alone. Today, the stock market wealth of the Tata group stands close to Rs 4.4 trillion. This is higher than the combined market wealth of the two Ambani groups put together, which is about Rs 3.67 trillion. Effectively, the Tata group has become the biggest corporate house in the country.

Well, what has caused such a drastic change in just one year? You very well know that the stock prices of both the Reliance group companies have had a severe beating on the Indian bourses. The market wealth of Anil Ambani-led Reliance group has dropped by more than Rs 600 bn. While it ranked as the third biggest group last year, now it is not even part of the Top 10. In fact, two of its group companies- Reliance Communication and Reliance Infrastructure- are going to be taken off the BSE Sensex from the 8th of August, 2011. The Mukesh Ambani-led Reliance group has also not been spared. Its market capitalisation has dipped by around Rs.730 bn. On the contrary, the Tata group's valuation has increased by more than Rs.1 trillion in the same period.

Should we just take this as a stock market phenomenon? Or should we read more into the matter? We choose the latter. We believe that during uncertain times riddled with scams and policy loopholes, investors value some degree of long term certainty and safety of capital. When it comes to the Tata Group, the fact that the likes of Tata Steel, TCS, Tata Motors and Tata Power have time and again proven themselves to be the stalwarts of corporate excellence, works in the group's favour.

The interesting part is that the stock markets have finally decided to value companies not just based on their growth prospects but also based on their long term commitment to stakeholders. It is time the companies realize that we are no more in an era where you can take the investor for granted. We hope this sets a solid precedent and compels corporates and entrepreneurs to review their acts.

What, according to you, is the real reason for Tatas having overtaken the Ambanis? Share your comments with us or post your views on our Facebook page.

 Chart of the day
Today's chart of the day shows that the return on gold has beaten other asset classes over the last one year. The 10 year Government of India bonds were the second best asset class with a yield of 8%. It is clear that the equity markets have been the worst performers. In fact, the returns on the benchmark BSE Sensex and equity funds have been lower than even the savings deposit rate.

Data source: Economic Times Wealth

The poor infrastructure and transportation network has been the bane of the average Indian for quite some time now. Especially, in major metros such as Mumbai, commuters have certainly realised that a high speed and comfortable commute will go a long way in bolstering overall productivity and output. However, this still seems like a distant fantasy for most Indians.

But China has once again upped its Asian rival in matters relating to infrastructure. As if the current stupendous growth rate was not enough, China's growth is all set to accelerate in the years ahead. This will be the result of the dragon nation's high-speed rail project which is touted to be the biggest transportation infrastructure plan in human history. And this project is set to significantly set to alter the Chinese economic landscape. This super high-speed train system will criss-cross the nation and will be able to ferry millions of passengers thereby slashing travel time by over 60%.

There's more to it. For instance, income inequality has for a long time been quite rampant in China. The coastal regions have seen wide scale economic development while the Chinese hinterland relatively has remained quite backward. This is all set to change as the rail system connects both the coast and the interiors of China and will narrow down income disparities. The mobility of the workforce will increase and new markets will open up. All of which is a sure fire recipe for more economic growth. India certainly has the ingredients to replicate China's success. But the will power and inclination to do the same is sorely lacking.

When it comes to per capita availability, India pales in comparison to most developing peers for most categories of consumables. The only consumable that India prides herself for penetration levels is mobile telephony. And the subscriber numbers as well as revenue per user has grown tremendously per year. However, if one takes it for granted that the telecom sector in India is making a lot of money there could be no bigger misconception. Even amongst the top 4 players, there is barely one that is able to fetch some return on investment above the risk rate. And if the market size is to be increased the cost of capital is expected to far outstrip the returns. In fact, as per The Economist, even with the launch of the much sought after 3G spectrum, the telecom companies may not be making enough money. Poor policy making, lack of transparency and corruption scandals combined with aggressive competition have managed to paint a bleak future for one of India's most promising sectors.

Pricing power (bargaining power of buyers) is one of the most critical elements of the Porter five-force model. Businesses which have 100% inflation flow-through rate are well guarded against any unexpected increase in raw material prices. However, most of the companies are unable to pass-on the entire increase in an inflationary scenario for the fear of losing their market share.

Nonetheless, recent comments by RBI over the pricing power of most Indian corporates have surprised many industry veterans. In its recent monetary policy review RBI stated that "In the face of sharp increases in input costs, the pricing power remained intact". While this may be true for the consumption sector capital intensive businesses are worst hit by raw material price inflation. In an environment of volatile commodity prices where cost of capital is rising, majority of the companies are struggling to pass on the price increases. Companies from auto, realty and mining are worst hit by the rising raw material prices. Monetary tightening on the other hand has resulted in a slowdown in industrial capex. This would mean further deceleration in earnings. Hence, in such an environment exposure to the FMCG sector offers better opportunities due to its relatively superior pricing power.

Rising interest rates, inflation, policy freeze and a new scandal hitting almost every month have raised the risk of investing in the Indian stock markets. However, foreign institutional investors (FIIs) continue to pump money into the country. So far this year, the FIIs have pumped in almost Rs 150 bn, but all of this has been allocated to the debt markets. On the other hand, they have pulled out Rs 8 bn from the equity markets. This we believe is a temporary phenomenon seen in a weak market.

If we look at the larger picture, we see that the Greek debt crisis is looming large. There does not seem to be any consensus among the EU countries whether to lend more to Greece or to let the country default. We believe that the default is inevitable as the debt level has climbed too high to be sustainable. When that happens, other nations with debt will also face additional pressure from the higher interest rates that will follow the default. Mind you, low interest rates in developed markets have been the driving force behind the weak economic recovery. Therefore, when the interest rates start to climb up we would see a further fall in equity and real estate markets; until investors find more value.

Meanwhile, Indian stock markets continue to trade in the negative territory, dragged down by weakness in the realty and power sectors. At the time of writing this, the benchmark BSE Sensex was trading lower by 256 points (down 1.4%). Asian stock markets have been trading mixed with Japan and Singapore trading in the green while rest the have been witnessing selling pressure. The European markets have opened on a mixed note.

 Todays' investing mantra
"The four most dangerous words in investing are 'This time it's different." - Sir John Templeton

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