The shortage that haunts India Inc. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The shortage that haunts India Inc. 

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In this issue:
» OPEC expects crude to touch US$ 75 a barrel
» FDI to shrink by 30% this year
» The crisis in automobile sector
» Bharti Airtel's December quarter results
» ...and more!

The euphoria experienced at the start of 2008 about the prospects of the Indian economy found its way into the drawing-boards of investment projects lined up by private investors. A record number of investment proposals were announced in the country during 2008; 11,904 new projects with a total investment of Rs 8,350 bn. However, as per a leading business daily, the global financial meltdown, which hit Indian shores in the second half and impacted the economy, more particularly in the last quarter of 2008, forced promoters to shelve around 420 projects entailing a total investment of Rs 2,096 bn (US$ 44 bn). Though the shelved projects account for 5.4% of the country's outstanding investment figure of Rs 38,607 bn (US$ 820 bn) as of December 2008, when compared to last year's numbers (275 projects worth Rs 236 bn shelved in 2007), the figure looks alarming!

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As per Reuters, the new president of the oil producers' cartel OPEC has projected crude oil prices to touch US$ 75 a barrel. This he believes will be possible if the OPEC strictly enforces the 2.2 m barrels per day supply cut, that was decided in its last meeting in December. In the past, many OPEC nations have not stuck to supply cuts because they depend on oil money for their domestic spending. Declining oil prices forces many countries to sell more and not less. Angola, of which the OPEC president happens to be the oil minister, is a perfect example.

However, the oil users are now making their best attempt to be less dependent on the OPEC. For example, China, the world's second-biggest energy user, boosted crude oil production by 2.3% in 2008 while natural-gas output gained 12% even as the economy expanded at the slowest pace in seven years.

With the financial crisis deepening in 2008, emerging markets which were believed to be decoupled from the developed world were in for a rude shock, as FIIs relentlessly dumped stocks in these countries causing the stock markets to plunge. But it appears that foreign direct investment (FDI) is also most likely to follow suit. As per Bloomberg, FDI in developing nations will drop by US$ 180 bn, or 31% this year as global recession compels multinationals to cut spending on factories and mines. FDI fell an estimated 10% in the developing world in 2008.

Companies such as Rio Tinto, Honda and Hitachi Construction have either shelved their expansion plans or delayed the same in markets such as Brazil, India, China, Argentina and Turkey. As reported on Bloomberg, according to World Bank estimates, FDI in developing countries is expected to shrink to US$ 400 bn this year from an estimated US$ 580 bn in 2008 and US$ 500 bn in 2007. Besides global trade contracting this year for the first time since 1982, pressure is also expected to mount on the currencies of these nations. Just like the developed world, emerging nations are in for some tough times indeed in 2009.

China's GDP (gross domestic product) growth slowed down to 6.8% during the October-December 2008 quarter, the slowest pace of growth for the country in a span of seven years, and is largely a result of sharp slowdown in exports to the US and Europe. Economists now predict the country's growth to weaken to 3% to 4% during the current quarter, before stimulus measures kick in and export demand starts to revive.

China is not the only major Asian nation to feel the pressure of a slowing global demand. It has Japan as company. Asia's largest economy has recorded a 35% YoY decline in exports during December 2008. This signals that Japanese companies will now be forced to cut back on production and downsize employees, thereby driving the economy deeper into recession. This decline in exports is the largest the country has faced since 1980.

Warren Buffett had once famously mentioned that his holding period was forever. Well, there are indeed very few businesses on the face of this earth that investors would love to hold forever. And Citigroup certainly is not one of them. Ask someone who answers to the name of Alwaleed Bin Talal. Yes, he is the famous Saudi Prince who became the blue eyed boy of his kingdom when he turned his US$ 590 m investment in the company in 1991 to a staggering US$ 11.3 bn, a huge 19 fold jump, when Citi's market cap peaked at the end of 2006. But that was before the credit bubble burst. Between then and now, investors have taken Citi's stock to the cleaners and such has been the magnitude of hammering that the Saudi Prince's investments is US$ 35 m out of the money currently. The losses are even bigger for some of his later purchases. His confidence in the company though does not seem to be shaken as he is willing to put even more money into the company. Who knows, he may once again turn profitable on his investments but the heady days of 2006 are not likely to return any time soon.

With increased job insecurity, people prefer to curtail expenses. This has reduced cash inflows for organised retailers in the past few months. Further, the lack of availability of short term funds and inability to generate revenues has forced retailers to delay payments. In a move to take the benefit of lower lease rentals, retailers are also opting to relocate few outlets. One such case in point is Subhiksha Trading Services. Of the 1,600 retail stores, the company is considering re-locating 5%+ stores on account of low sales volumes and high rentals.

Source: The Economist
While reams of documents have been published on the woes of the big three carmakers in Detroit, not many of us have the knowledge about the magnitude of losses in the automobile industry, the world over. As per Economist, no company or country has been immune from the collapse in the automobile sector. Last month sales of cars and light trucks in America fell by 35.5% compared with a year ago, while in France, despite government incentives designed to prop up the market, sales were down by 16%. Even amongst the BRIC nations, in Brazil and China years of double-digit growth turned into sharp declines in the last quarter of 2008. The reason for the same has been attributed to too much reliance on large vehicle sales at a time when fuel prices were at the peak. What also made the credit crunch so painful for carmakers was the total dependence on their captive financial-services subsidiaries for vehicle funding, which had become scarce and expensive. With both fuel prices and interest rates cooling off, we wonder if the worries of carmakers will soon be eliminated.

Bharti Airtel announced its third quarter results today. The company has continued on its path of strong and stable growth given that the telecom sector has been completely untouched by economic slowdown that India is facing currently. Another factor that continues to drive the sector's growth is 'affordability' given that India's telecom charges are amongst the lowest in the world. Interestingly, the management indicated that around 60% of Bharti's subscribers reside in semi-urban and rural areas and considering that these people did not really benefit from 'India Shining', they are not really seeing any pangs of slowdown either.

Bharti's management has termed Reliance's big bang entry into the major GSM markets as a 'self-destructive' mechanism given that the company stands to lose its customers after the honeymoon period (90 days of free trial) is over. We second this stand given that under-pricing alone will not stand Reliance on steady grounds. The company adopted and failed on this strategy when it had launched its CDMA services few years back. We believe history is about to repeat itself!

A recent report by the Earth Policy Institute makes some very interesting observations about how significantly population growth movements can affect the fortunes of a country. It throws light on the fact that for a country, the costs of providing family planning services are miniscule compared to the tremendous social and economic benefits that can be achieved by doing so, a quintessential example being Iran. From 1987 to 1994, Iran cut its population growth rate by half. Its population growth rate of 1.3% in 2006 was only slightly higher than that in the United States. In case of Bangladesh, for every US$ 62 spent by the government to prevent an unwanted birth, it saved US$ 615 in expenditures on other social services, thus leaving more fiscal resources per child for education and health care, accelerating the escape from poverty. As per the institute, here's the trick - if a country that needs to slow its population growth does so quickly, this brings with it what is called the 'demographic bonus'.

The price of gold declined by 0.2% (to US$ 852 an ounce) as the dollar appreciated against the euro for the third day in a row, diminishing interest in the metal as an alternative investment. The benchmark BSE-Sensex closed the day nearly 35 points higher (0.4%) lagging behind most other Asian indices. The Nikkei (2%) and the Seoul Composite (1%) led the pack of gainers in the region. The European markets have also opened on a strong note.

Indian pharma major, Dr. Reddy's seems to be finding it difficult to swallow its German pill. The company made headlines in 2006 when it acquired a German company Betapharm for US$ 570 m, which was touted as the largest acquisition made by an Indian pharma company. It was significant at that time, because Germany was a branded generics market. The revenue and profit growth expectations from this company were high as it was the fourth largest player in Germany with products at the higher end of the value chain. But then the tide turned since then.

Problems began with Germany opting to intensify efforts to make healthcare more affordable as a result of which the government made it mandatory that there be a certain differential between the price of the branded drug and the patented one. This led Betapharm to undertake price cuts across its product basket, consequently impacting its revenues and profits. To add fuel to the fire, Dr. Reddy's had to withdraw the drug 'Olanzapine' from the market as the German court ruled in favour of the innovator. The management of Dr. Reddy's remains hopeful that things will improve going forward. But the way things stand now, what began as a huge promise seems to have turned into a damp squib.

04:50 Today's investing mantra
"When returns on capital are ordinary, an earn-more-by-putting-up-more record is no great managerial achievement. You can get the same result personally while operating from your rocking chair. Just quadruple the capital you commit to a savings account and you will quadruple your earnings."- Warren Buffett
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