Money is cheap
(Jan 6, 2009)
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In this issue:
» US auto sales continue to slide
» Corporate deposits are soaring
» M&A deals witness a fall
» Inflation eases, but food prices are rising
» ...and more!!
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The Reserve Bank of India's aggressive rate cut moves in the recent past has had a vicious impact on the long term bond yields. The benchmark 10-year bond yield has dropped to a 6-year low of 5.2%. The previous low had been 4.9% in 2003. Although profit booking by banks on their investment portfolio has dragged the yields marginally higher, bond dealers expect the yields to fall further to 4.5% in the coming months. In fact, as per the RBI, banks have deposited Rs 540 bn with itself under the reverse-repo window, where the return is just 4%. Going forward, with the government's emphasis on accelerating lending, the RBI may cut the rates further to ensure that the banks are dissuaded from parking funds in investments and rather lend them to productive sectors.
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The world has left 2008 behind but 2009 is not expected to get any easier. According to Bloomberg, corporate earnings will continue to slump in the first half of 2009 amid the first simultaneous recessions in the US, Japan and Europe since World War II. Besides the US, the adverse impact will be felt in Europe and Asia too, which are battling lower demand for exports and retail goods. Companies are also under tremendous pressure as demand is waning, cash balances are dwindling and bank lending has become tight.
Why buying some "about-to-go-bankrupt" companies
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While profits will rise 4.3% for the full year in the US, profits in Europe are expected to decline for all of 2009 and the situation in Asia could worsen as the recession has not fully hit there yet. In the US especially, retail, finance and auto companies may still report losses while software and healthcare companies will see growth in profits. Half of Asia is most likely to be in recession this year as a US$ 700 bn drop in export earnings causes economies in Japan, Hong Kong, Singapore, South Korea and Taiwan to shrink. Thus, companies will really see their mettle tested this year and the focus will be more on curtailing losses and spending.
Image Source: Wall Street Journal
In light of the economic turmoil, it was being strongly felt that US car sales would continue to go downhill. It only got officially confirmed yesterday. Sales of cars and light trucks in the US fell a steep 36% in the month of December, the fourth time in a row where monthly sales did not touch the one million mark. The tally for the full year does not look very enticing either, with sales coming down a jaw dropping 18%, one of the worst performances in decades. And unlike the previous few occasions, none of the segments have been spared, not even the luxury car market, which otherwise is supposed to be relatively immune to the slowdown on account of its ability to attract high per capita individuals. But credit is so tight that even wealthy individuals are finding it difficult to raise the required funds. Plus, there is the fear of the macroeconomic scenario worsening. Tough times indeed. Most car makers are anticipating pain for atleast two more quarters.
Ranbaxy's promoters may have made a killing by selling their stake to the Japanese drugmaker Daiichi Sankyo, but the same cannot probably be said of the latter. Ranbaxy's tryst with the US FDA has impacted its sales and profits and the same is expected to have an impact on Daiichi too. As reported in a leading business daily, Daiichi is expected to book more than US$ 3.3 bn (300 bn yen) in losses as a result of the fall in the stock price of Ranbaxy ever since its troubles began. This means that Daiichi will be forced to post its first ever loss at the net level and the same has been pegged at 200 bn yen.
Meanwhile, Ranbaxy's woes continue as the company is unable to launch the generic version of GSK Plc's drug 'Imitrex' for which it had reached a litigation settlement deal with the former as there seems to be no signs yet of the issues raised by the US FDA being resolved any time soon. But Ranbaxy's loss is Dr.Reddy's gain as the latter who had also entered into a similar agreement with GSK Plc will stand to gain in the form of higher revenues and profits from this drug.
At current international crude oil prices, a consumer in India is paying more per liter of petrol as well as diesel. And it is this anomaly that the government is trying to remove. Reducing prices is also likely to give them the much needed political mileage before the crucial national elections. However, a second round of price tinkering (prices have already been lowered once in recent months) is not likely to go down well with the head honchos of oil marketing companies who want to make good for the losses they have incurred when oil prices were ruling high. Is there a middle path? Of course there is. The deregulation of the sector. In other words, government stops meddling and consumers pay as per the prevailing international crude price. But oil prices aren't certainly a one way ride. They are as likely to double or triple as they are likely to fall further. What if it retests its recent highs within a few months? Not a very good proposition indeed. So, forget the deregulation. We believe regulation is here to stay for few more years to come.
The global economic slowdown has played spoilsport for the India's M&A scene in 2008. As reported in a leading business daily, companies signed M&A deals worth only US$ 52.6 bn during the year, down by a considerable 24%. Both outbound and inbound M&As declined by 32% and 37% respectively. This is not surprising given that globally too the value of M&A deals has fallen drastically due to the crippling effects of the financial crisis. 2009 is not expected to see any significant pick up as this will be the time when most companies would most likely consolidate, wean down costs and sell non-core assets.
Going forward, while the number of deals may not drop, the value of deals will most likely fall and big ticket size deals, which are dependent on funding, could face a crunch. The global financial crisis has not spared the IPO market either and this is evident from the fact that the domestic primary market declined by 46% to US$ 4.4 bn. Infact, several firms are holding back IPO plans to raise US$ 15 bn given the meltdown that the stockmarkets are witnessing. In this regard, ICICI Bank CEO and MD K.V. Kamath opines that the earlier signs of the market being ready to accept the IPOs would be the very late part of 2009.
Corporate deposit schemes that almost vanished after the interest rates started cooling off in the early years of this decade, have made a reappearance. And a solid one at that. To put things in perspective, in the last six months, the corporate public deposit market has almost doubled to Rs 8 bn a month and is expected to touch around Rs 15 bn by 4QFY09. There are close to 110 companies that are accessing the window to raise funds, offering up to 12% interest on the deposits for up to three years. Tata Motors, which has tapped this market managed to collect Rs 1.8 bn within a month. HDFC, which has raised Rs 80 bn by way of deposits in FY09 secured nearly 62% of its funding requirement from this source during the nine month period. While these are amongst the few companies that have the credibility to repay the investors' money with the promised returns, depositors must remain wary of the spurious ones that are using this opportunity to rake in some additional funds.
Inflation has eased and policymakers in India must be breathing a sigh of relief. But all may not be over! Even as inflation progressively fell to 6.38% as on December 20 from the peak of 12.91% in August, food prices are rising. As reported in a leading business daily, the annual inflation rate for cereals has risen sharply from 6.5% to 9.5% and that of pulses from 5.3% to 13.25%. This comes at a time when elections are around the corner and it is feared that in the scramble to get votes, various sops may be given, which will strain the fiscal outlook further.
While hoarding could be one reason why prices are rising, other reasons could be the increase in demand led by schemes such as the National Rural Employment Guarantee Act that has ensured a minimum 100 days of employment for each family and the farm loan waiver which has enabled farmers to have more money. Higher costs of agricultural inputs and a gradual increase in the minimum price guaranteed to farmers are some other factors that could explain the rise in food prices. Thus, while inflation is showing signs of cooling off, the government will have to keep an eye on food prices to make sure that they are within acceptable levels lest inflation heads north again!
Some Indian corporates are having trouble repaying their liabilities as a result of which the reputation of the promoters is being called into question. Take the case of Great Offshore. The promoters of the company have pledged another 2% of the company to a 100% subsidiary of Bharati Shipyard in place of the loan given by the latter. This takes the total number of shares of the promoters of Great Offshore pledged with Bharati to 14.87%, a hair's breadth away from the 15% mark where the company will have to make an open offer for another 20% stake. Wockhardt is another case in point. The company is desperately looking to raise funds to the tune of US$ 150 m to US$ 200 m for the redemption of its FCCBs in October 2009. As reported in a leading business daily, it appears that the company is in talks to issue around Rs 2.5 bn worth of non-convertible debentures to LIC. Wockhardt is already burdened with a high debt equity ratio of 2.3 and while its performance at the operating level has not really been poor, debt repayment has become a big challenge for the company.
The Indian markets closed higher by 1% today. BSE Metal and BSE Bankex (up 2% each) contributed to the rise. While the Asian markets closed mixed, the European indices are trading in the green currently. As reported on Bloomberg, crude oil fell by 2% to US$ 47.7 a barrel on speculation that the deepening recession in the US and the UK will restrict fuel demand.
"The speed at which a business success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price" - Warren Buffett
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