India, ape Gujarat... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India, ape Gujarat... 

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In this issue:
» The sector that could lead the next bull run
» Liquidity problems in real estate companies
» Infosys' December quarter results
» India adds 8 m to its GSM subscriber base
» ...and more!

Source: RBI
True to its theme, the Vibrant Gujarat Global Investors Summit-2009 which began in Ahmedabad yesterday has generated pretty good response. This can be seen from the huge Rs 7,500 bn investment that has been committed by global and domestic corporate giants in the state over the next few years. As reported by Business Standard, companies from the Reliance, Birla and Tata groups, along with others like Essar, M&M and Suzlon have announced their investment plans at the summit. The investments are expected to come into sectors like oil and gas, power, infrastructure, ports, shipbuilding and technology.

Just yesterday, in the same space, we had talked about the progress of Maharashtra's investment plans for the infrastructure space given that the government here has not yet finalised its Eleventh Five-Year Plan despite a two year delay. We hope they take lessons in marketing the state the way Gujarat has done for so many years now. Or the economic growth gap between the two will widen further (see graph).

We hosted the second Equitymaster WebSummit yesterday, with leading stock market expert Mr. Ramesh Damani as our guest. Mr. Damani offered some interesting answers for uncertain times such as these. The most sought after one indeed being with regard to the sector that could lead the next bull-run. Citing that every bull-run in the past had seen a different sector leading the chart, Mr. Damani opined that the leaders of the past will not be leaders of the future.

The 1992 bull-run was led by cement companies, the one in 1994 was led by FMCG stocks, in 2000 technology was the king, while the most recent bull run from 2004 had infrastructure and real estate companies foraying into unprecedented territories. None of these, are, however, expected to repeat history.

It will be a different sector that will lead the next bull run and Mr. Damani believes that the sector to watch out for is - hold your breath - Media! If the recent Golden Globe awards are anything to go by and such instances are repeated more often, there is no reason why Indian content cannot see higher demand, both domestically and overseas and command much higher valuations.

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Since we referred to real estate, most of the larger players in the sector follow accounting practice that makes earnings growth appear awesome. But one look at the cash flows and it becomes evident that they are indeed going through significant liquidity problems. The accrual method of accounting enables them to book revenues just as fast as the costs are being incurred, without actually receiving the cash for the properties sold. Thus, what the investor believes to be a cash inflow is actually an account receivable. Furthermore, the concept of land bank valuation has also started coming under the scanner with a lot of experts questioning its real worth. One wonders if only the regulators as well as the analysts had been more circumspect at the time the surge in the market cap of these companies was taking place. Billions of dollars worth of shareholder wealth could have been saved from getting eroded.

Infosys today announced its results for the quarter ended December 2008. While the performance has been fair considering the overall concerns within the global technology industry, the management has indicated of tough times ahead. Pricing is expected to remain under pressure if macro situation remains bad. While the company has not seen any project cancellations, it has indicated that flow of new projects has slowed down as clients are looking at freezing budgets. On Satyam's scam, the management has stressed on the need to manage trust of clients. They have also stated that while the company would not approach Satyam's clients, it may consider the same if approached by clients themselves.

Given the intense competition in the Indian pharma sector where products are branded, players are increasingly looking to vie for the attention of doctors in a bid to promote their drugs. This includes giving freebies, gifts and sponsoring trips of doctors. The government is now having problems with this practice and is stepping in to find ways to curb what it terms as 'unethical trade practices'. In this regard it is having a tete-a-tete with pharma companies with the purpose of devising ways and means of curbing promotional expenses on drugs. The government's continuous effort to reduce the prices of drugs is a well documented fact. Since these promotional costs form a huge component in the price of a drug, it is no wonder the government is looking to reduce the same.

As per the latest data compiled by the Cellular Operators Association of India, India's GSM players have added more than 8 m mobile customers in December 2008, registering a growth rate of 3.3% over the previous month. The total GSM subscriber base has touched 258 m. The growth was lead by Bharti Airtel, followed by Vodafone Essar. Category C circle witnessed the highest rate of growth at 3.8%, followed by category B circle at 3.6% and metros recording the lowest growth rate of 2.3%. Clearly, the telecom revolution in India continues!

Be it inflation or economic recession - Indians don't stop talking!
Increase in December Total Subscriber base (m) Market share
Total (Excluding Reliance) 3.4% 258 NA
Bharti Airtel 3.3% 86 33%
Vodafone-Essar 3.7% 61 24%
BSNL 2.2% 41 16%
Idea-Spice 4.1% 38 15%
Source: Business standard

Looks like the animosity between the US and Iran has reached new heights. As per reports, Iran has decided to pay India in euros instead of US dollars for the tea it imports from the latter according to the Tea Board of India (TBI). India exports 11 m to 12 m kg of tea to Iran every year at an average price of Rs 107 (US$ 2.2 or 1.6 euro) per kg. The reason for the switch was attributed to payment related problems being faced by Iran. Other important issues discussed during the TBI chief's three day visit to Iran were the registration charges of US$ 7,000 imposed by the government of Iran on exporters and speeding up of the process of trading even after paying that charge. But the question to be asked is whether the dollar is losing its value in the eyes of the world or only Iran?

Citigroup, after posting US$ 10.4 bn worth of net losses in the first nine months of 2008, is set to book a gain of as much as US$ 10 bn by selling the controlling stake of its brokerage arm to Morgan Stanley. It may be noted that the gains would be a huge cushion to the bank's provisions that it had to make to get US$ 45 bn of bailout funds from the US government last year. Morgan Stanley is expected pay US$ 3 bn to Citigroup to obtain 51% of Smith Barney and would combine both firms' retail brokerage arms. The sale of the brokerage arm, one of the most lucrative businesses of Citi, that not just helped it derive fees but also savings accounts, however, signals caution on future revenues. This was clear from the 17% decline in the stock's price yesterday. CNN's financial website calls it - "The incredibly sinking Citigroup."

'Go slow on towns and tap the rural markets'. This is the message that NCAER (National Council of Applied Economic Research) seems to be sending across to automobile and white goods manufacturers. As per the council's latest projections, demand for autos and white goods is likely to remain strong in the current as well as the next fiscal in the rural areas while it will slowdown drastically in the urban areas. It should be noted that the organisation made the revised projections in the month of December in order to assess the impact of economic slowdown and credit crunch on the sales of the above mentioned manufactured goods.

Crude oil prices fell for the sixth consecutive day (to US$ 36 per barrel) on speculation that the slump in demand would cause US crude inventories to accumulate. At the same time, gold prices advanced in Asia (US$ 825 an ounce) as a drop in global equities prompted investors to seek the precious metal as a safe haven investment. While the benchmark BSE-Sensex closed the day nearly 40 points lower (0.4%), other Asian indices ended mixed. European markets have opened on a somber note.

On one hand we have Satyam and Mr. Raju who has put the Indian IT industry in the spotlight, undeniably with a negative connotation. On the other hand we have the critically acclaimed 'Slumdog Millionaire' which is a British drama film written by Indian author and has had some roaring success at the Golden Globe awards. The film won all the four nominations including best director, picture, screenplay and music score (provided by A. R. Rahman).

04:50 Today's investing mantra
"Attractive opportunities come from observing human behavior. In 1998, people behaved like frightened cavemen. People make their own opportunities. They will be frozen by fear, excited by greed and it doesn't matter what their IQ, degrees etc is" - Warren Buffett
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