»5 Minute Wrap Up by Equitymaster

On This Day - 23 JULY 2009
This will drive stock prices in 2009-10

In this issue:
» Bloomberg poll says money pouring into China, India
» Leading fund manager terms India a 'seductive' story
» Bharti Airtel's next stage of growth
» Buffett's take on rating agencies
» ...and more!!
------------------ Don't Miss! ----------------------
You now have two very good reasons to subscribe to Equitymaster's StockSelect RIGHT AWAY:
1. It's the LAST OPPORTUNITY to save 60%
2. You become eligible to win a TATA NANO (Yes, you read that right!)
Why delay? Click here for more details...

Animal spirits, a term popularized by one of the top contemporary economists Robert Shiller seem to be on a comeback trail. No, not in US and Europe but in China and India. At least that is what a Bloomberg poll of investors and analysts seem to be telling us. And when animal spirits are back, it's the risky asset classes like equities and commodities that one heads for. No wonder, these investors and analysts see stocks and commodities offering the best returns over the next year.

Just to put the numbers in context, a whopping 70% percent of those who participated in the poll seem to be bullish on China. Europe and the US are however still continued to be perceived risky with 44% identifying the former as the biggest risk and 20% the latter. Although there are no statistics mentioned for India, we believe it to be a significant number. Otherwise, what would explain the huge jump in our benchmark indices over the past few months?

Source: SEBI

And mind you, equity rallies have their own ways of stimulating an economy (like by way of enabling companies to raise growth capital). So, if the rally does hold up, economic growth could very well exceed the 5%-6% rate that we have come to expect of India in the medium term. If it doesn't, not much damage would be done because we will anyways grow at the original rate.

All in all, equity investing at the current juncture seems to be a low risk proposition from a long-term perspective. Have you made sure that you are in the right stocks?

Although Indian equities had reached very attractive valuations earlier this year, no one really expected the recovery to be this strong and this quick. However, there are some who prepared for this rally and have reaped rich dividends. One of them is Sanjiv Duggal, who manages about US$ 6 bn in Indian stocks at HSBC Holdings Plc's Halbis Capital Management in London.

As per Bloomberg, Duggal's US$ 4.6 bn Indian Equity Fund, which targets overseas investors, rose a whopping 78% this year, the best-performing Indian equity fund with assets of more than US$ 500 m.

He continues to believe that the Indian economy's inherent growth potential remains intact. He expects FY10 results for India Inc. to grow by less than 10% but FY11 to witness a growth of 15% to 20%. These earnings are now made more attractive due to stability the new government will provide. As a result, as he says, "One could argue that India's trading multiple could be higher." In fact, valuations are in line with 10 year averages and lower than 5 year ones.

Mr. Ajit Dayal, Director at Quantum Advisors Pvt. Ltd. would have added this to what Mr. Duggal says - "India is neither a US (a big borrower and consumer) nor is it a China (a big producer of goods for export that created jobs and boosted China's economic growth). So, while I remain nervous about where the world is, I continue to believe that India has a good chance of being less impacted than most other countries in the world. And while the market has reacted very negatively to the budget (silly, in my opinion) and is nervous about the monsoon (we should be), the trend of India's GDP remains upward."

But despite all these positive vibes that emanate for India, it is pertinent that you do not lose sight of the fact that the world is still a very uncertain place to invest in. And given that, as Ajit says, "India is still hostage to flows of short term money from hedge funds," it is important that you do not give in to the greed that might lead the markets to high levels in the short term.

In such a scenario, what should you do? Invest in companies with strong business models and visionary managements, but only after you have kept aside enough cash for emergencies and to live comfortably.

India's largest and fastest growing telecom company, Bharti Airtel announced its June quarter results today. While the company remains on a fast track to subscriber addition, it saw some extraordinary pressure on its average revenue per user this quarter, with the same declining by around 20% YoY. In the post result conference call, which is underway as we write, the management has indicated that the Indian telecom industry has now reached the second stage of growth and is now targeting the hinterland.

Even for Bharti, around 60% of net addition to its mobile subscriber base has come from outside the 30-40 main cities of India. Focus on value added services and e-commerce services for large corporate and SMEs will also be the key focus areas for the company and the sector going forward.

 Chart of the day
In continuing with the telecom sector, today's chart of the day shows a country-wise comparison of average revenue per user (ARPU) from mobile services. The rate in India currently stands at just around US$ 5.7 per subscriber per month (Source: Bharti Airtel). This is almost 1/10th of the ARPUs that the Japanese and US mobile companies earn in their respective countries. How 'cheap' can we go further?

Source: Singtel (Singapore & Australia), Bharti Airtel (India), Vodafone (Rest of the countries)

We read today how India's leading infrastructure finance company,IDFC, has shown enough annoyance to its downgraded credit rating by Crisil. This does not come as a surprise to us given our disbelief in the ratings that these agencies churn out for their clients. In fact, reputation of rating agencies worldwide is on life support, after they invited widespread criticism for their role in the financial crisis. Expert after expert has hauled the rating agencies for not being able to assess default risks properly.

Now, Warren Buffett has also indirectly sounded his view on the sectors. Buffett, whose Berkshire Hathaway has held a 20% stake in one of the bigger rating agencies Moody's, has now sold around 4% stake in the latter. While Buffett has long defended investing in Moody's, he has also always maintained that he does not rely on credit ratings to make his own investment decisions.

Stocks in India were trading strong at the time of writing, led by the metal and realty sectors. The BSE-Sensex was trading with gains of around 320 points (2.2%). Other Asian markets were also trading with significant gains. Benchmark indices of Hong Kong (up 2.9%) and China (up 1%) were among the leading gainers. Stocks in Europe have opened mixed.

The government not meeting many of its ambitious targets especially in the infrastructure space is nothing new. So when Kamal Nath announced that the annual target of constructing 7,000 km of roads will not be achieved this year, we are not surprised at all!

Readers would do well to recall that immediately after taking over the Transport Ministry, Mr. Nath had set a target of completing 20 km of road construction per day taking the annual figure to about 7,000 km per annum. Yes, he has reiterated that getting investments for developing roads will not be a hindrance going forward. But what is the point if the execution remains poor. After the kind of delays and execution issues that are present in the power sector in a country where millions are deprived of electricity, this statement by Mr. Nath is just another example of the government taking two steps forward and then one backward.

 Today's investing mantra
"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential." - Warren Buffett

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407