King of 'not-so-good' times - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

King of 'not-so-good' times 

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In this issue:
» 2009 is set to be an eventful year for oil and gas sector
» A valuable crash course in derivatives in 2009
» After Nano, Rs 100 bn investment coming to Gujarat
» The Tatas remain undeterred
» ...and more!!


FMCG companies, akin to other sectors, enjoy good times during economic buoyancy due to easy acceptance of new product launches and higher pricing power. However, they seem to be enjoying even better times during the economic slump. With decline in key commodity prices and the slowing pace of inflation, the companies are expected to earn higher operating margins.

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Prices of commodities such as palm oil and petroleum-linked inputs fell by up to 70% from their peaks. Input costs have dropped by between 25% and 50% from their 2007 average prices. The FMCG companies, however, despite the decline in input prices have not reduced the final product prices.

P&G, Hindustan Unilever (HUL), Dabur India and Tata Tea have increased some product prices in the range of 3% to 13% recently. While there is a lag effect before consumer-product prices decline, with demand not witnessing any slowdown inspite of hike in prices, the FMCG companies are making hay even when the sun is not shining!

In a bid to boost investments in the infrastructure sector, financing major IDFC has made a presentation made to top government officials to allow IIFC (India Infrastructure Finance Company) become an instrument for government support to infrastructure finance. The government hopes to attract investments of nearly Rs 20 trillion over the next four years (until 2012), of which at least 30% is to be contributed by the private sector.

It had earlier this month announced Rs 100 bn refinance window through which IIFC would raise money by issuing tax-free bonds. The new initiative would enable IIFC develop a balance sheet that will take care of 20% of total outstanding loans to the infrastructure sector. The suggestions by IDFC have been well timed as infrastructure companies and industry bodies are already lobbying for a stimulus package that would make it easier for them to access project finance that has become difficult due to the economic slowdown.

Ambitious infrastructure investment targets
Year FY07 FY08E FY09E FY10E FY11E FY12E
(At 2006-07 prices) Eleventh Plan Period
GDP at market prices (Rs bn) 41,257 44,970 49,017 53,429 58,238 63,479
GDP growth (% YoY) 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
GCF in infrastructure (% of GDP) 5.0% 5.8% 6.5% 7.3% 8.0% 9.0%
GCF in infrastructure (Rs bn) 2,063 2,586 3,186 3,874 4,659 5,713
GCF in infrastructure (US$ bn) 50 63 78 94 114 139
Total GCF in 11th Plan period Rs 20,018 bn or US$ 488 bn
Source: Planning Commission report
Dollar conversion rate has been assumed at Rs 41 per dollar for all fiscals
GCF - Gross Capital Formation

2009 is set to be an eventful year for the oil and gas industry. In the upstream segment, OPEC's spare capacity now stands at 4.4 m barrels of oil per day (bopd). As per a leading business daily, new oil supplies to the tune of about 750,000 bopd will come on stream in Canada, Russia, Saudi Arabia and Nigeria in early 2009. In India, Cairn will begin its supply of 180,000 bopd during the year. Gas will start flowing from Reliance's K-G basin blocks. In the downstream segment, Reliance Petroleum's 29 m tonnes per annum refinery is up and running. Some capacity addition has recently been announced in the Middle East.

It's clear that energy supplies are not a concern right now. Instead, everyone will be watching the demand figures. Since GDP growth translates to oil demand, the fate of oil prices this year will be determined by how the economy performs.

The subprime crisis has finally done some good! It has brought down the divorce rate in the US. The reason for that may interest you. Couples that were contemplating divorce are deciding to stay together simply because they do not have the money for getting a divorce! With house prices tumbling and asset values falling getting a divorce is becoming that much more expensive.

Divorce proceedings typically involve division of assets between the two concerned parties. But in some cases determining the value of the asset is becoming tricky, further compounding problems. Meanwhile, the lawyer fees are only mounting. Americans are really having a tough time with their patience being tested to the hilt!

And while we are talking of subprime, one of the worst casualties of the crisis - Citigroup - has finally tightened its belt. The company's CEO Vikram Pandit and Chairman Win Bischoff will have to completely forgo 2008 bonuses after the bank lost three-quarters of its market value and got a US$ 45 bn bailout. It was, of course, in addition to the government guarantee on US$ 306 bn of troubled assets. The bonus cuts, however. seem to be the end of the company's unrestrained excesses after it awarded Mr. Pandit 1 m shares of Citigroup as part of a 'sign-on' bonus in January and topped that with a US$ 2.5 m 'retention equity award' in March 2008. Meanwhile, Mr. Pandit himself has cut 52,000 jobs worldwide after taking over as CEO citing four consecutive quarters of losses tied to bad loans and failed investments.

No one is above the market. No, not even Warren Buffett. Thus when the S&P 500 slumped 38% in 2008, losses also came at the doors of the Oracle of Omaha's investment vehicle Berkshire Hathaway. The company, widely known as the gold standard in corporate governance, has seen its market value erode by 32% in 2008. That the loss is still less than the benchmark and the magnitude of the same is only once in a 30-year event, is little solace.

Yet the man at the helm, Buffett himself is hardly worried. He believes that it has happened to him before and is even hoping that he lives long enough to see a few more years of precipitous decline in market value of Berkshire Hathaway. A lot of the decline, we believe has to do with the company's exposure to derivatives. And the losses will turn out to be notional by the time the derivative contracts expire.

But investors, especially of the trading types are in no mood to listen. Even Buffett's statement that he will indeed provide more clarity on the valuation of his derivatives contract in his 2008 annual report has not sufficed. We are however not complaining. In fact, we are already rubbing our hands in anticipation of the fact that in 2009 one of the clearest minds in investing will provide a valuable crash course in derivatives.

2009 may bring in opportunities galore. No we are just talking about equities but also real estate, gold and government bonds. As per global real estate consultants, Cushman & Wakefield, India may benefit from the increased fund allocation to Asian real estate sector by global investors in 2009. As per the firm, even as the total amount raised by private equity real estate funds between January and November 2008 fell by a third to US$ 57 bn from a year ago, the allocation towards Asian markets increased to 28% from 19% in 2008. As a result, funds available for investment in Asia have increased from US$ 15.9 bn last year to US$ 16.2 bn in 2008.

Gold prices rose 4% in 2008 as nearly US$30 trillion of funds invested in equities were wiped off. The fall in interest rates also spurted the demand for the yellow metal after the Federal Reserve cut its benchmark interest rate to near zero percent. As per Bloomberg, the metal has been the second-best performer in the index of 26 commodities this year, behind cocoa. Going forward, economists expect uncertainty over performance of other asset classes to continue to attract money to gold from investors seeking to diversify their portfolios.

Indian long term bonds are expected to have their best year in 2009 since 2001 as cooling inflation will allow the central bank to further cut interest rates. The benchmark 10-year yields slid to the lowest since May 2004 (currently 5.3% as against 7.8% at the end of 2007) while bond traders continue to bet on lower borrowing costs as India counters an economic slowdown following recessions in the US, Japan and Europe.

The third party logistics business is set to grow strongly in the future. The industry body ASSOCHAM expects this industry to grow by 55% and reach the US$ 90 m mark by 2012. Given that many Indian firms are expanding overseas, having an efficient logistics and supply chain management system has assumed paramount importance. What makes outsourcing logistics services an attractive proposition is that it cuts conventional logistics costs and helps deal with complicated tasks.

This is amply demonstrated by the fact that 55% of the firms have opted to outsource as against 10% to 15% a decade ago. Given that the economy is slowing down, having a lean organisation will be one of the objectives that will be uppermost in the minds of the companies' think tank and opting to outsource logistics might just be the solution.

"Follow the talent" is what the Indian offshoring industry has practiced all these years by opening up development centres near to clients. The Chinese financial services industry is practicing this now and is hiring recruits outside their country. The New York Times has reported that several Chinese financial institutions recently attended a recruiting event in New York. The report says - "The recruiters are picking from the ranks of financial sector employees who fear what the future might bring." With jobs quickly disappearing in the US financial sector, these Chinese offers might seem like breath of fresh air for the Americans.

For long, the western state of Gujarat has been the harbinger of industrial development in India. And the state is in no intention to lose the race, whatever be the industry. A leading business daily has reported that the state government is inviting investments to the tune of Rs 100 bn for the shipyard industry. Companies like Dolphin Offshore, Bharati Shipyard, Jindal Shipyard and Pipavav Shipyard, have already shown their intentions. The state government is in fact citing the shipyard cluster models adopted by countries like Korea, Japan and China.

That there is a huge pent up demand for fund raising amongst Indian corporates is well known. And no other group would be as desperate to take a bite out of it as the Tata Group. As per reports, as many as five businesses of the group, viz. steel, automobile, hotels, beverage, and chemicals will make a beeline for fundraising on the first possible signs of thawing of the capital markets.

The fundraising would be to either to replace existing debt or to fund longer term growth plans. Despite facing a rather challenging 2008, one of the executive director of Tata Sons, the holding company of the group, sounded upbeat on the future growth prospects and opined that "the group will remain clearly on track on its growth pattern." However, he also cautioned that there will be a greater dose of prudence in making decisions vis-a-vis organic as well as inorganic growth. After taking into account what some of the group companies have gone through by biting a little more than they could chew in the near term, we too whole heartedly agree with the prudence part of the decision making.

A lower inflation number and strong cues from its Asian peers helped the Indian markets begin 2009 on a positive note today. The benchmark BSE-Sensex closed higher by around 260 points. The inflation number (measured in terms of WPI) fell to a 10-month low of 6.4% in the third week of December (6.6% in the previous week), helped by lower prices of minerals and aviation fuel, besides the impact of monetary policies. All other key world markets were close today on account of New Year.

The rupee, which completed its worst year in 2008 since 1991, gained (0.8%) today for the first time in three days on speculation that global funds will resume equity purchases as the government steps up efforts to stave off an economic slump. As per Bloomberg, FIIs have sold US$ 13.3 bn worth of Indian equities in 2008.

04:58 Today's investing mantra
"In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy" - Warren Buffett
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