»5 Minute Wrap Up by Equitymaster

On This Day - 22 JULY 2011
Can India challenge Google in innovation?

In this issue:
» Greece gets a Euro 109 bn lifeline
» Is land acquisition the biggest dampener to Indian prosperity?
» Can the agricultural sector live up to its potential?
» Indian banks can compete with China's only after a decade
» ...and more!
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In today's digital world one believes that corporate innovation skills can only be seen via the internet. Or in electronic products like smart phones and tablets. They have the all important 'wow factor' that draws a loyal customer and fan base. Almost everyone wants a piece of the company. Facebook is now valued at US$ 100 bn. Various tech IPOs in the US this year have commanded stratospheric valuations. Investors pay a high premium for innovation. They believe it would help propel the company's growth story forward in the future. But, is this premium justified?

Now, one would not traditionally believe that companies in India would be at the forefront of innovation. Especially not companies in the run-off the mill consumer products or industrial goods space. Well, you may just be wrong. Hindustan Unilever Ltd. (HUL), the Indian outfit of Unilever makes dull items like soaps, shampoo and detergent. However, HUL ranks at number 6 in the Forbes list of the most innovative companies in the world. And what takes the icing on the cake, it that this company ranks just below Apple, and one rank above Google! Power equipment maker BHEL also makes it to number 9 on the list.

So what makes this company so innovative? It has become one of the most trusted brands in India by developing an innovative network-marketing approach. This helps the company sell its goods via thousands of underprivileged rural women in over 100,000 villages. Its 'Project Shakti' helps reach consumers in remote areas and helps empower women across the country. The company has grown its sales and profits by 10% and 4% respectively each year over the past five years. Profits have seen some erosion due to increased input costs and discounts given to fuel volume growth. But no one can doubt the capital efficiency with which the company works. Its return on net worth and capital employed could be the envy of the likes of Apple and Google themselves. This, coupled with its ability to do wonders with the rural market does help it command a premium in the market despite not so decent profit growth in the recent past. But, are there more companies in the country that make the cut?

Do you believe in paying a premium for the innovation factor in companies you invest in? If so, which companies do you believe make the cut? Share your views with us or post your views on our Facebook page.

 Chart of the day
When we speak of urbanization in India, the cities that come on the top of the mind are the metropolitans like Mumbai and New Delhi. Therefore, it may come as a surprise to read that the states that have witnessed the maximum surge in urban population are not Maharashtra and Delhi. As per the Census of India, the state that has witnessed the maximum increase in urban population from 2001 to 2011 is actually Kerala. As shown in today's chart of the day, the top 5 states that have witnessed a surge in urban population include states like Nagaland and Tripura. But if one wonders the reason behind this, then the answer is a little disturbing. It is probably more on account of insurgents in the rural areas rather than seeking economic growth.

Data source: Census of India

For a vast country like India it is a pity that land acquisition has turned out to be the biggest dampener to prosperity. Especially when there are nations that are a fraction of India's size being able to overcome the hurdle. It seems that poor planning and even worse governance is creating ripples in a procedure as dreary as land acquisition. Illegal and forceful acquisition of land from farmers has stalled some of the most landmark industrial projects in the country. The Singur issue in West Bengal still remains unresolved while the Posco steel project is on the verge of being shelved. The Lavasa project became the highpoint of the environment ministry compromising for the sake of corporate benefit. But it seems that these entities are not the only ones affected. Innocent small ticket home buyers in Noida Extension have become the victims of the whimsical cancellation of land rights by authorities. In the process banks and finance companies that have lent almost Rs 12 bn to them see the funds turning into potential NPAs! Thus the impact of this crisis seems to have become far reaching. And if the government still does not take the issue seriously we could have an irremediable problem on our hands.

So the latest on the Eurozone crisis is that Greece has been given another lifeline. In a meeting of all the Eurozone leaders, Greece was given a bailout fund of Euro 109 bn. The fund comes as a relief to Greece which has been on tenterhooks thanks to the huge mountain of debt that it has piled up. The debt had threatened the very existence of the unified currency-Euro. However, the bigger problem is that despite the huge bailout, Greece still continues to have a staggering load of debt on its head. The ultimate solution would be for Greece to adopt strict austerity measures and get the private sector to help out. On this it could take some lessons from Italy, which plans to privatize a large number of its public sector undertakings. But Greek politicians and public have hitherto not reacted well to the mention of austerity measures. Therefore, it looks like this bailout is just another in the line of many to come. And considering the fact that the Euro zone has given a commitment to continue financing country bailouts if and when they occur. Looks like they will continue to receive more bailouts each time they start howling their heads off and threatening the precious Euro.

Without a shadow of doubt, the 1991 reforms have been the biggest boon to India since independence. And when we talk of the same, we usually talk about how India's manufacturing and services sectors have improved by leaps and bounds since then. What is pushed to the backburner is the agriculture sector. But you would be mistaken to assume that this sector has missed the reforms bus. What else could explain the fact that despite having the worst droughts in almost four decades in 2009, our agriculture growth rate stayed positive (0.4%)? Furthermore, in FY11, we are likely to have a record harvest of 241 m tonnes and public sector stocks of 65 m tonnes. Clearly, the doubling of investments in the sector between 2002 and 2010 appears to have helped us. However, we are from resting on our laurels yet. As a leading daily points out, the biggest challenge before us could be the enrichment of the farming community. And this is where the Government and the private sector will have a role to play. Clearly, the latter has quite a few strengths. But the Government will also have to act as a fair referee and needs to have a clear vision. It needs to utilise the private sector's strengths in such a way that it also benefits the farmers. Only then perhaps we can hope for a sustainable growth of 5-6% in agriculture for at least a decade.

A growth of ten times in 10 years is commendable by all standards! But as per McKinsey that is exactly the kind of growth that Indian banks are set to achieve in their balance sheet size. Providing financial services in the second fastest growing economy is lucrative enough. But that the facts that credit is under-penetrated and savings rates are high make the opportunity all the more lucrative. Hence the consulting firm estimates that the total size of Indian banks' balance sheets will go up from US$ 1 trillion in 2010 to US$ 10 trillion by 2020. Only then will some of these largest entities here be in the league of the top ones in neighbouring China. Unlike India, the Chinese banking system has few government owned players who have large market shares. Hence some of them already feature in the league of top 20 banks globally. But it will not be before 2020 that 4 of India's top banks find themselves in that list. We believe that the Indian entities should be in no hurry to make it to the list of the big 20. As long as their growth, profitability and quality are well managed, there is no need to compete with the Chinese counterparts. The latter in fact fail to qualify on most of these counts despite their size.

Perhaps no other precious metal has witnessed as much volatility as silver has this year. Indeed, debt concerns in the developed world of US and Europe led investors across the world to pump in money by the truckloads in both gold and silver. It was the latter, however, which really witnessed a meteoric rise to around Rs 75,000 a kilo mark before crashing by around 31% over the past three months. And now there are expectations that silver will outperform again. One major reason for this optimism is that the economic situation in both the US and Europe has only deteriorated further. Of course, a rise in silver once again will be a boon for investors who had bought the metal just before the plunge occurred. Having said that, silver is certainly a more volatile metal gold for the simple reason that the former is also used for industrial purposes. Therefore, any slowdown in industrial activity is bound to have a negative impact on silver prices.

The Indian stock markets are trading in the green on strong global cues. At the time of writing, the benchmark BSE Sensex was up by 274 points (1.5%). Barring consumer durables stocks, all sectoral indices were trading in the green. Asian stock markets were trading positive with Hong Kong and Japan leading the gains.

 Today's investing mantra
"You can't be a good value investor without being an independent thinker." - Joel Greenblatt

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