»5 Minute Wrap Up by Equitymaster

On This Day - 27 AUGUST 2010
India shining but only foreigners buying

In this issue:
» Large caps emerge clear winners
» 'Silver Lining' becomes very expensive
» The windfalls from Direct Tax Code
» Smaller towns becoming hubs for hiring.
» ...and more!!

---------------------------- Exclusively for Serious Investors... ----------------------------
We are so certain you will find huge value in our latest long-term wealth creating opportunity that we're offering you something for the first time ever -A 365 Day 100% Money Back Guarantee. *
So, what is this service all about? Click here for full details...
* No terms and conditions apply.

 Chart of the day
Whenever one has talked of emerging markets in recent times, China has always found a mention ahead of India. However, today's chart of the day has thrown up a rather surprising result. India has performed way better than China as far as the year to date returns from stock markets are concerned. In fact, India has trumped not just China but all of its BRIC counterparts. It is the only country where stocks have given positive returns so far this year.

Blame it on the FIIs. As per a leading daily, overseas funds have poured in a record US$ 12.4 bn into Indian equities in the first eight months of 2010. And they seem to be in no mood to slow down. Total inflows could rise to as much as US$ 16 bn by the year-end. Surprisingly though, domestic institutions do not seem to be so gung-ho about Indian equities. Their investment during the same period has amounted to just 5% of the money put in by FIIs. What more, they have turned out be net sellers in the past three months.

This then presents the biggest dilemma for a retail investor. Should he listen to the FIIs or side with the domestic institutions? We believe that both the FIIs and domestic institutions have their own sets of reasons for doing whatever they are doing. And so should an individual investor. According to us, there is just one way in which long term wealth in equities can be created. And it is to invest in companies that have a long track record of generating far more cash than they can consume internally. Buy into such companies at reasonable valuations and you can forever ignore what FIIs or other institutional investors are doing.

Source: Yahoo Finance
Note: the countries are representative of their respective benchmark indices

In general, most investors look towards small and mid caps for growth, and large caps for stability and safety. It is only natural then that the former should grow their sales and operating profits at a rate faster than the latter. As per an Economic Times analysis though, while this was true for the five quarters ended December 2009, things have been different in the 2 quarters since then. As per ET, an aggregation of large caps surpassed the growth posted by the mid and small-caps in the March 2010 quarter.

They continued to do so in the June 2010 quarter as well. In fact, in the June quarter, large caps managed to grow their sales and operating profits by 20% and 35% respectively. This compares to a less than 20% growth for their smaller counterparts. For the moment at least, it seems like larger companies have been able to better manage their operating efficiencies and capitalize on their economies of scale.
A high savings rate is considered a big positive at a time when even the most affluent economies are reeling under high debt. For India and China, savings to GDP ratio in excess of 35% has been the key reason for investors flocking to these markets. And the Indian government can ill afford to dis-incentivise high savings at this point of time. Even if that means collecting lower taxes and looking for other means to curb fiscal deficit.

The revised Direct Tax Code suggests exactly this. Lower effective tax rates, exemptions on pension schemes and fiscal sops on housing loans are expected to help the tax payer retain higher income. This is turn is expected to drive higher consumption and savings rate. Both of these are necessary for India to sustain GDP growth rates close to the double digit mark. While this move is in the right direction, the government will need to ensure that it cuts down on subsidies and keeps its balance sheet healthy.

It would cost you nearly Rs 2 m to buy a kilo of pure gold. And, the yellow metal is not even at its all-time high. But, another shiny metal has quickly reached epic highs. Silver prices zoomed to reach a record of Rs 30,760 per kilo in the bullion market yesterday, reaching historic levels. Its recent rally actually beat the increase in price of gold in the same period. On an average, 73% of the overall demand for silver's is for industrial usages while the remaining comes from currency, investments or jewellery purposes. There was a huge demand for the white metal, this week both from stockists, as well as industrial users. Seems like all that glitters is not always gold!

One of the features of the Indian growth story is its rather unequal nature. The urban centers have boomed. The smaller centers are yet to catch up. But that is fast changing. And so is the mindset of companies selling consumer goods. Good monsoons, government sops, higher disposable incomes and media penetration has brought the Indian hinterland into sharp focus. FMCG companies are driving deep into India for hiring field staff to sell shampoos, edible oil and even pizzas. HUL is hiring 25,000 'shaktimaans,' or sales and field staff, to sell its products in nearly 150,000 villages. Dabur intends to hire 200 'feet on street' and indirect employees through its stockists in villages and small towns. The list includes a host of other FMCG giants. Clearly, the much maligned trickle down effect of economic growth is at work here. The smaller centers are where the big opportunity now lies.

The Government is trying to 'secure' the people of the country by putting restrictions on import of equipment from outside India. They imposed a restriction on import of telecom equipment last year. The result was that operators did not have the equipment to meet their network rollout targets. Now, the target is the power sector. The government has stated that only locally manufactured equipment would be used in the central government's high capacity power projects. This would mean that any foreign supplier would have to set up shop within the country or tie up with a local manufacturer. This would also mean that the local manufacturers of power equipment will have to increase capacity. Considering that these things take time, there could be serious delays to the government's target power capacity addition stated in the 11th 5 year plan.

After opening the day in the red, Indian indices continued their downward journey on profit booking in heavy weights in the IT and banking space. At the time of writing this, the BSE-Sensex was trading lower by 81 points. However, most of the Asian indices are trading in the positive territory led by Japan, Singapore, and China. On the other hand, Europe has opened the day in the red.

 Today's investing mantra
"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." - 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