»5 Minute Wrap Up by Equitymaster

On This Day - 8 JULY 2011
Kudos to the RBI!

In this issue:
» Foreign banks charge up to 50% interest rates in India
» Would this quarter signal a slowdown?
» Oil regulations scare foreign investors
» World is headed for a crisis in 2013: Roubini
» ...and more!
----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more,click here to read on...


With global banks going bust left, right and centre, ever wondered why Indian banks have not featured on that list? Well for that we must thank the country's central bank, Reserve Bank of India (RBI). It is the prudent policies of the RBI that have prevented the banks from the state of bankruptcy.

So how has the RBI achieved this feat? Simple. It acted in the best interest of the country. Rather than bowing down to the money pressures. A classic example of this is RBI's instructions to the banks to not lend money to the real estate companies. Earlier this month, RBI had issued a directive to the banks cautioning them against lending to the real estate sector. The directive also urged the banks to carefully check the balance sheets of the realty companies as well as their valuations before sanctioning loans. This directive simply reinforced RBI's earlier guidelines of cautioning banks against the realty companies. The result, the banks do not have a large proportion of their loans tied up in the risky realty sector, which has a high probability of defaulting them.

Time and time again, RBI has come out with warnings and directives that have kept the risk exposure of Indian banks at bay. It may not have been very successful at containing inflation in the country. But it has definitely been successful in not letting our banking system go down like we have seen in some other countries. The same banking system that is pivotal to the economic growth and health of a country. Kudos to the RBI!

Do you think the RBI is right in its decision to restrict lending to real estate companies? Share your comments with us or post your views on our Facebook page.

 Chart of the day
Google.com is one of the most popular sites for internet users. Over the years, the search engine has become the most popular one in the world. So it is little wonder that it dominates the market share of search engines. In fact as shown in today's chart of the day, Google has a whopping 84% market share in the search engine category. The closest competitor, Yahoo, holds a meager 6% share. And this is despite the restrictions that the company faces in China, one of the largest users of internet in the world. In China, local search engine Baidu accounts for a majority share.

Data source: Netmarketshare.com

In a country where banking is one of the most well regulated sectors, it may be difficult to believe that there exist some gross anomalies. Charging interest rates as high as 50% on the loans to the poorest of poor is one of them. That's right! While the RBI has shown a lot of prudence in restricting loans to unregulated sectors like real estate and microfinance, the rate of lending has been an oversight. Few foreign banks that have high exposure to uncollateralized loans seem to be charging ridiculous rates of interest on the same. Despite the base lending rates being close to 10%, the actual loan rates to MFIs (Microfinance Institutions) are much higher than that. In such a scenario, if the microfinance organization's lending rates are capped, the entities will be ending up perennially in losses. We wonder how such an instance skipped the notice of a regulator as prudent as the RBI.

The first quarter of fiscal year 2012 has come to an end. With this the earnings season is about to kick start soon. However, will this quarter be different than the March quarter that passed by recently? Well, the prima facie evidence suggests status quo.

Profits of the Indian companies would continue to remain under pressure in this quarter as well due to rising interest rates and increasing commodity prices. Although the inflationary concerns have eased out a bit broader macro-economic challenges and global concerns remain an overhang. In such cases, quarterly earnings could prove to be an important trigger for the markets. And the broader picture on the earnings front is not that exciting. While revenue growth of India Inc is expected to remain strong, the bottomline is likely to be impacted by rising input prices and interest rates. We believe that in such a scenario one needs to look out for companies which have adequate pricing power (negates the input cost impact) with return ratios that exceed their cost of capital. Such companies would be in a better position to keep their margin profile intact and also generate wealth for the shareholders in the longer term.

Oil and gas sector has a long history in India. However, if regulations in the industry are anything to go by; we still lack a decent foundation. The sector is plagued with a maze of regulations open to multiple interpretations. This had deterred foreign investors keen on investing in the sector for a long time. The recent case of Cairn- Vedanta deal is a live testimony. The deal took almost a year over royalty and cess issue and what came out was a conditional approval. What Government wants in this respect nullifies its own production sharing contract under existing exploration policy. Its demands have questioned the sanctity of deals that involve Government, making foreign investors further wary. Even Reliance Industries Ltd- British Petroleum deal, the largest ever single foreign direct investment has not been spared.

But this is not all. The upstream and downstream regulatory bodies set up by the Government to attract foreign investments and offer a level playing field have been blamed for playing unfair. The upstream regulator has been charged for showing undue favors. The downstream regulator is mostly at loggerheads with oil ministry itself and its decisions face legal challenges.

There are no two ways about the fact that we need foreign investment and technology to realize full potential. With 80% dependence on crude and ongoing gas supply and oil crisis, the last area where we can afford to slip are the policies. Hence, it's time for Government to wake up and go for a regulatory overhaul.

The world may face economic crisis yet again in 2013. This statement comes from none other than the economist Mr Nouriel Roubini himself. It may be recollected that this gentleman had accurately predicted the timing and severity of the recession that the world recently faced. He feels that the economy will continue to grow but the growth may not meet the expectations of a lot of investors. These expectations seem to be overly optimistic especially with regards to the second half of the year. The reasons lie in the fact that corporations will not be able to pass on the rising input costs to the recession weary consumers. Thus, corporate profitability will be adversely affected. For the US, politicians are focusing too much on reducing spending to deal with the problem of widening deficits. The solution however lies not only in cutting spending but also raising taxes. The country is still facing a number of problems including high unemployment and housing crisis. The quantitative easing program has also been withdrawn. However, there are a few reasons to cheer as well. Rising energy and fuel prices that adversely impacted the economy in the first half have now stabilized.

After opening the day in the green, the Indian stock markets slipped into the red on profit booking and have been floundering since. At the time of writing, the benchmark BSE Sensex was down by 17 points. Among the sectoral indices, the metal stocks were the biggest losers. Asian stock markets were trading mixed with Indonesia and Hong Kong leading the gains. On the other hand, Malaysia and Taiwan were leading the losers. Europe has opened the day in the positive.

 Today's investing mantra
"Everyone has the brain power to follow the stock market. If you made it through fifth-grade math, you can do it." - Peter Lynch

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