The government turns pharmacist - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The government turns pharmacist 

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In this issue:
» Shares of TARP funded companies decline 4 times decline in S&P
» India saves US$ 120 bn in 2009
» 'Bush' treatment to Chinese Premier
» Consolidation to intensify in cement industry
» ...and more!

In recent years developed countries have laid special emphasis on making healthcare and medicines available at reasonable prices. This trend gave birth to the 'pharma research outsourcing' and 'contract manufacturing' bandwagon, of which select Indian companies are the leaders today. In India, however, little has been done to this effect. For instance, the Indian government funds merely 25% of the nation's healthcare expenditure as against 86% in the UK, 46% in the US and 36% in China.

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The government is now planning to set up generic drug stores in all the districts across the country to provide quality generic medicines at affordable prices. As per a leading daily, the Department of Pharmaceuticals, under the aegis of Chemical and Fertilizer Ministry, has been entrusted with the task of setting up these outlets across the country that would sell medicines at a fraction of the prevailing market prices. While the same may also be seen as a pre-election welfare programme, the results may nonetheless be praiseworthy, if implemented diligently.

Recapitalisation of financial institutions, it is believed, is indeed a good thing. The process enables a bank to lend more and thus bring in more income. It is also good for the firm's shareholders as higher income means higher valuations. But how would you describe a situation where despite massive recapitalisation to the tune of billions of dollars, valuations fall by as much as 70%! No, this isn't a figment of our imagination. The event has actually played itself out in reality.

US financial giants like Citigroup and Bank of America have destroyed shareholder wealth to the tune of 70% ever since they started receiving the financial aid as part of the US$ 700 bn recapitalisation program. This can only mean one thing. The aid that these firms have already received could be peanuts to the potential losses they could potentially be sitting on. Otherwise, stock markets could not have reacted the way they have.

In fact, an index of 201 firms that have received the aid so far has fallen by a huge 45% since end October 2008, four times more than the decline in S&P 500 of 11%. As per Bloomberg, the six biggest lenders in the index make up 57% of the group's value and account for nearly half of the 45% fall in the index. However, all is not gloomy as 15 members of the index have witnessed a rise in market cap led by Morgan Stanley, which is up a good 26%.

Source: Bloomberg

The first reports of Warren Buffett's reaction to his biography 'The Snowball' are out. A report by the International Herald Tribune gives the impression that Buffett is quite displeased with some aspects of the book, which is written by author Alice Schroeder. In fact, as per reports, Buffett has actually gone ahead and cancelled a yearly dinner (which would have otherwise happened in May this year) hosted by the author. The annual event has been a longstanding tradition of the Berkshire Hathaway annual meetings for over ten years now. This cancellation is apparently due to his displeasure particularly over the portrayal of his late wife Susie in the book. How much of these reports reveal a true picture of the situation, and how much of it is mere conjecture remains to be seen.

US President Obama is not in favour of the 'buy American' concept in the economic stimulus package recently suggested by Democratic allies in the House of Representatives, which would ban the use of non-American steel in the US$ 800 bn of construction projects. This comes in wake of the European and Canadian diplomats privately threatening retaliation. While the Democrats are of the view that a shift from free trade towards economic populism will solve the current crisis, Mr. Obama considers it having the potential to spark retaliation from US allies and create a trade war.

A month back, an Iraqi reporter threw his shoes at the then US President George Bush during the latter's farewell trip to the country. This treatment came to be heavily condemned despite Bush's disgraceful exit from the US leadership. But what is shocking to note is that this treatment has not lost its favour amongst protestors and was recently meted out to the Chinese Premier Wen Jiabao as well.

Mr. Jiabao had a shoe hurled at him as he gave a speech at Britain's Cambridge University. Although the local Chinese media made no mention of the incident in reports on his visit, the opposition to the Chinese leader's communist policies is palpable. The Chinese media had recently also censored the inaugural address of US President Obama and published Chinese versions of the speech that removed reference to fighting communism and a paragraph about leaders who keep power by silencing dissent.

The Central Board of Direct Taxes (CBDT) has made a dire prediction that tax collections this fiscal are running short by a staggering sum of Rs 1,000 bn. The growth in direct tax revenue which has been merely 12% YoY this year, down from 20% YoY in FY08, has been primarily on account of lower corporate tax collections. While these figures may sound alarm bells for India's stretched fiscal situation, we do have some things to cheer about as well.

In a recent interview to a business magazine, Mr. Rakesh Jhunjhunwala has quantified the enormous amount of savings to the Indian exchequer due to the lower oil and fertiliser subsidies this year. The same not just make up for the revenue losses on lower tax collections but also spare additional liquidity of US$ 120 bn or Rs 5,227 per head this year.

To put things in perspective, last June, the government had estimated a loss of Rs 2,450 bn due to fuel subsidies. As against this, if the basket of Indian oil continues to be available at US$ 40 a barrel, the oil companies will be making a profit of Rs 500 bn. Together that makes a saving of Rs 2,950 bn. Further, with sulphur prices having come down from US$ 800 to US$ 90 per gallon, the estimated fertiliser subsidy of Rs 3,800 bn will not be required after all.

These subsidy savings (Rs 6,750 bn) net of lower tax revenues (Rs 1,000 bn) will leave additional liquidity of Rs 5,750 bn or US$ 120 bn.

As per report released by Fitch Ratings, the Indian cement industry that has witnessed consolidation over the last few years is expected to see more such activities in near future. The slower growth in volumes and pressurised realisations has depressed valuations of companies within the sector. These low valuations are expected to boost consolidation activity within the sector.

The report cautioned that smaller players with poor cost structures and ongoing debt-led capex would be more vulnerable during the cement down turn and could face issues like fund availability and working capital. However, for larger players, the report ruled out any such problems as they have strong balance sheets and have worked out capacity expansion plans mainly utilising internal accruals.

Key Asian indices remained in the positive today backed by strength in global markets. Indian benchmark BSE-Sensex ended the day with gains of around 50 points (0.6%). The US markets are expected to remain firm as President Obama is set to lay out rules limiting corporate compensation package to US$ 500,000 a year for companies getting taxpayer bailout funds in the future. Prices of precious metals like gold and silver declined for the third day today. The European markets have also opened in the positive.

04:54  Today's investing mantra
"You should not buy a stock because it's cheap but because you know a lot about it" - Peter Lynch
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