Marc Faber's favourite Indian stocks

Jan 28, 2009

In this issue:
» Dr Doom lifts the lid on his favorite Indian stocks
» 'Perfect hedge' may go still higher
» Look who's stealthily increasing its India count
» US mulling to set up a 'Bad Bank'
» ...and more!

Looks like Marc Faber, widely known as Dr. Doom is finally bullish on India. It is the huge correction perhaps that has led to the new found bullishness. Infact, he has even gone ahead and recommended a couple of Indian stocks at a recent roundtable conference. The two Indian companies that he particularly likes are ICICI Bank and Infosys Technologies. No doubt, both the companies are big names in their respective sectors, but we kind of found a discrepancy between one of his choices and the qualifying statement that he made. "Asians might go to casinos and gamble, but in their businesses they are ultraconservative". Thus, if his proclivity is towards ultraconservative managements, we are not sure if ICICI Bank fits the bill. India's largest private sector lender has been amongst the worst performer in the banking space with its stock down as much as 70% from its 52 week highs, a performance that ranks worse than the benchmark index. The company's aggressive lending practices will have to take a lot of flak for the same as when the credit cycle contracted, NPAs piled up, creating doubts of massive erosion in its net worth. Although some of the pessimism was founded to be unwanted, the bank does need to get more conservative in its lending if it wants to avoid meeting a similar fate in the future.

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So, Pfizer has decided to fork out US$ 68 bn for the acquisition of Wyeth. Despite Pfizer's robust cash flows, deal of such a magnitude will obviously have to be funded by banks. Hence, a consortium of banks have come together to lend US$ 22.5 bn to Pfizer for the deal. Even in normal times, US$ 22.5 bn is a big amount and hence, Pfizer's ability to raise funds in these troubled times without even few eyebrows being raised is indeed laudable. Furthermore, the consortium of banks that have agreed to lend are some of the largest beneficiaries of the government's TARP funding. And if this is not enough, Pfizer intends to make the deal value accretive by laying off thousands of employees once the merger is in place. You might wonder what is the point we are trying to make? Well, we are trying to connect the various dots with lines and in the end, we realize that it makes for a very complex picture. First, you have the US government bailing out banks so that credit starts flowing and job creations take place and then, the bailed out banks go ahead and fund deals that will result in huge job losses. From the banks' and Pfizers' perspective though, the deal is in their best interests as both the entities are likely to emerge profitable in the long run. While we may not know what else to call such a scenario, according to us it certainly is 'Capitalism at its best'.

And now, some more misdoings of the Raju family while in charge of Satyam have been unearthed. As per a leading business daily, IT officials at Hyderabad, the city where Satyam has its headquarters, encountered a complex web of transactions way back in 2002, which involved transfer of money by Satyam promoters to various relatives and that too not directly, but through a surprisingly long list of intermediaries. Using this method, as much as Rs 19.5 crores was transferred from Satyam promoters to the accounts of their relatives as well as firms belonging to their relatives between 1998 and 2001. The IT officials undertaking the investigation had also prepared a report, which never managed to see the light of the day. What more, it is believed that the key person in charge of the report was transferred just after the report was submitted. But now, days after the lid has come off the biggest corporate scam in India's history, agencies undertaking the investigation have shown interest in taking into account the findings of the 2002 report. Yet another instance of locking the door after the horse has bolted.

Voices, for substantially raising the size of both the monetary as well as fiscal stimulus programs are getting louder by the day. Latest to reiterate the facts are two of the most prominent economists in the US, Robert Shiller and Paul Krugman. Robert Shiller through an article in a leading business daily argued that the blame of the current crisis, to a large extent, should be put on the so called 'animal spirits' of the participants. The term, according to Shiller, refers to a sense of trust that one participant bestows upon another. While this trust was at its peak just before the bubble burst, it is now at its bottom and is badly shaken. Although some steps have been taken to restore the trust, the results are proving to be ineffective and hence, argues Shiller, substantially more needs to be done.

Nobel laureate Paul Krugman, while endorsing a large fiscal stimulus package has also lambasted critics of the package. He has come down heavily on people who are arguing that the cost of the package to the taxpayer is huge by pointing out that the analysis is indeed flawed and the actual cost is indeed likely to be a lot less. Furthermore, he has also opined that in less severe times, interest rate cuts is the best option but with rates now ruling at zero, more income needs to be put in the pockets of people by undertaking fiscal programs such as the one outlined by the Obama administration. Taking into account the view of the experts, it looks likely that the size of the package could well be increased down the road.

Gold, billed by many as the perfect hedge against inflation saw its prices rise to a five month high recently in the New York market. The yellow metal, perhaps the only commodity to have risen in 2008 and to have entered 2009 on the back of a seven year winning streak, witnessed a huge surge in demand on the back of speculation that President Obama will act quickly and hence, flood the dollar with markets. Infact, the US is not the only one to embark upon massive currency printing, economies across the world are likely to take a similar step in order to save job losses and get the credit markets to function again. This will lead to scenario where the ratio of available gold to available currency will shrink further, thus leading to a rise in the price of the yellow metal. Furthermore, with dollar, the current reserve currency of the world, very likely to lose its purchasing power, investors are likely to turn towards the relative safety of gold. Hence, considering these scenarios, betting against rise in gold prices for the eighth year in succession looks like a risky thing to do.

The thick air of uncertainty that has gripped the world has shaken up the confidence of investors and managements alike. In the recent times, it has become commonplace for managements of some of the biggest companies around the world to either change their earnings guidance, or to stop giving any guidance at all. Thus, amongst such a dearth of confidence, it comes as a breath of fresh air to see our very own Infosys saying that it is fully confident that it can meet its fourth-quarter revenue target. The company had said early this month that it expects revenues of US$ 1.13 bn to US$ 1.17 bn for the March quarter. At the World Economic Forum in Davos yesterday, COO of Infosys S.D. Shibulal has been quoted by Reuters as saying - "Given where we are today, we are confident that we can meet Q4 guidance." Go Infosys!

No one in the corporate world likes to announce layoffs. Now, US based IBM is taking that one step further and has refused to give out any official figures for the same. Estimates peg the company's job cuts in the thousands over the past week, which include positions in its sales, software and hardware divisions. IBM has chosen to call the cuts simply part of ongoing efforts to watch costs. But nonetheless, reports of firings have been consistently pouring out from IBM facilities across the US. But India surely has nothing to complain about. IBM has been quietly adding employees in cheaper and higher growth regions like India. As per a report from a leading business daily, staffing in India has jumped from just 9,000 workers in 2003 to 74,000 workers in 2007. Not bad.

The Indian hospitality industry has been hit by a double whammy - the global financial turmoil and the Mumbai terror attacks. However, in an interview with a leading business daily, Mr. Vivek Nair, the MD of Hotel Leelaventure says that the impact of slowdown in India has been blown out of proportion. However, Mr. Nair's statement must be seen in the light of the fact that the company's Bangalore property generates the bulk of the revenue. This is driven by top end clients from the IT sector. As for clients from other segments and tariff classes, he believes the long term outlook remains strong.

India continues to be short of rooms, and with the RBI recently permitting hotels to access external commercial borrowings up to US$ 100 m per annum, the industry will continue to witness capacity expansion.

Promoters in the last year were in the news for selling stakes in their respective companies to overseas buyers. Now they are making the headlines for increasing their stakes especially when the stock prices have crashed making the valuations very attractive. For instance, leading business houses such as the Tatas, Ambanis, Birlas and Bajaj have raised their shareholding in group companies over the last three months. Infact, one out of every four BSE 500 scrips has witnessed creeping acquisition by promoters. The reasons for the same are manifold. One is that it sends signals of the confidence that the promoters have in the future growth prospects of their companies. Secondly, such a move also wards off predatory promoters; the chances of which happening are pretty high given the low valuations. SEBI has also made some changes on the regulatory front as a result of which it has allowed promoters to increase their stake upto 75% by buying 5% of the company's equity every year from the open market. Thus, in the current economic scenario, all this has led to increased activity on the part of promoters. To put things into perspective, as per a leading business daily, out of 412 companies that have filed their latest shareholding with the BSE, around 113 companies have shown an increase in promoter stake.

The Obama-led US government that is under increasing pressure to perform 'miracles' and keeping the sinking US economy afloat, has now chosen to drastically revamp the US$ 700 bn Troubled Asset Relief Program. The government will set up a so-called 'bad bank' that would be managed by the FDIC and would buy the toxic assets clogging the US banks' balance sheets. The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin US banks' bad debts, in the hopes of stemming a crisis that has stripped more than 1.3 m Americans of their homes. As far as the issue of nationalising the banks is concerned, the US Treasury is likely to continue to require banks to hand over ownership stakes to the government as a condition of receiving the aid. The government will use its ownership of toxic assets to rework soured mortgages and prevent foreclosures. We might therefore witness a reverse-bailout wherein a 'bad bank' will bailout several bad banks to turn them into good banks.

In the meanwhile, with the surprise exception of the Chinese and Hong Kong markets, major Asian indices ended in the positive territory today. BSE-Sensex, the Indian benchmark also ended higher by 3%, led by significant buying interest in natural resource producers and real estate players. Strength is also being witnessed among European indices, with virtually all of them ruling higher currently. The US markets rose for the third straight session yesterday as better than expected numbers from some corporates and the sense that the US fiscal stimulus package could get passed lifted investor sentiment.

Today's investing mantra
"Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can't predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack." - Peter Lynch

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