Lower taxes on the way... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Lower taxes on the way... 

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In this issue:
» Everything is possible, says Chidambaram
» Chinese burger problems
» IBM wants to offshore employees
» Buffett strikes again
» ...and more!

Former finance minister P Chidambaram has said that the interim budget later this month may include some changes in the tax structure and more stimulus measures. "Wait until Feb. 16. I suppose everything is possible," he said. Mr. Pranab Mukherjee, the acting finance minister, will present the interim budget, also known as a vote on account. However, with the RBI forecasting a fiscal deficit of close to 6% of GDP this fiscal, there is very little elbow room left for the government.

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IBM is offering a choice to the employees it recently laid off in North America - work in India, Russia and some other countries. It calls the program 'Project Match' and includes moving costs and visa assistance. Interestingly, the company says that the employees should be 'willing to work on local terms and conditions'. It is not clear if that is a euphemism for 'lower pay'. This initiative has not gone down well with Alliance@IBM, the unofficial union at the company. Its spokesman has said, "IBM not only is offshoring its work to low-cost countries, now IBM wants employees to offshore themselves."

We believe this initiative highlights the compelling logic that the outsourcing model is based on. Despite the heartburn that it causes in the developed countries, it is simply too hard to ignore the value of a low-cost talent workforce reachable by modern communications.

The appointment of A.S. Murty as the new CEO of Satyam has evoked a mixed response. There are those who believe he has been a steadying influence for the company for 15 years. He has previously served as the chief delivery officer, head of HR and other business verticals. Others believe that he should not have been appointed given his proximity with Ramalinga Raju. Moreover, Mr. Murty sold 40,000 shares of the company in the days preceding Satyam's announcement of the Maytas deal.

Just a day after it found itself at the center of a controversy concerning vendor payments, Tata Motors has issued a public statement stating that the media seems to be making a mountain out of a molehill and as much as 75% of its purchase from vendors have been paid immediately through an arrangement with banks. Elaborating further, the company's MD added that Tata Motors works under a tripartite agreement, whereby the bank pays the vendor for purchases by Tata Motors and then in due course of time, the company reimburses the money to banks. And as per the company's own admission, there could have been delays for the remaining 25%. But this indeed is not as big a problem as it is made out to be. The company may be having very little cash to spare as all avenues for raising the same, including sales of vehicles, have dried up, but given its size and bargaining power, it would be a little unwise to assume that it cannot sail through few months of difficult times without committing large scale defaults.

There are tell tale signs that economic slowdown has hit China. And there is perhaps no better indicator of disposable income than the price of McDonalds. The company has sharply cut the prices of its offerings in the land of the dragon in a bid to stimulate demand. Others like KFC have also begun promotions for attracting the bargain hunters. This development shows, if not anything else, how economic problems that began in the US have affected patterns in buying and selling all over the globe.

Amidst uncertainty surrounding the 26% stake sale in UTI AMC, the MD of the fund house has cleared the air. He has stated that the stake sale is on track and is taking place at the request of the shareholders and not against their will. It must be noted that SBI, PNB, Bank of Baroda and LIC hold 25% stake in the fund house. While there are talks flying about that UTI AMC would buy a fund house from the proceeds by roping in a strategic investor, the AMC has not yet lent any credence to the same. It may be noted that each of these banks have their own fund houses to manage as a result of which they were unable to participate on a day-to-day basis in the management of the company. These shareholders had attempted to exit earlier through the IPO route, but had to withdraw their plans as the stockmarkets plunged. Thus, it would be interesting to see to whom the stake would be sold to eventually especially in these times.

The importance that companies attach to social responsibility cannot really be measured. However, some companies do make statements that stand them in good stead when it comes to socially responsible behaviour. After a photo of Champion swimmer Michael Phelps purportedly taking drugs was published by a British newspaper, the world's largest cereal maker Kellogg has set such an example. A company spokeswoman has indicated, "Michael's most recent behavior is not consistent with the image of Kellogg. His contract expires at the end of February and we have made a decision not to extend his contract." Interestingly, a few years back, a leading Bollywood actor was caught in a similar state. The apparel company that used him as a brand ambassador remained silent and continued the endorsements.

Warren Buffett has become an oasis of capital that fund-starved companies all over the word are steadily marching to. After the American icon Harley Davidson, it is the turn of Swiss Re. As per the International Herald Tribune, the Zurich based reinsurer (it takes on insurance risk of other insurance companies) is all set to receive an infusion of US$ 2.6 bn from Berkshire Hathaway. Berkshire will buy 12% bonds convertible into shares at 25 francs after 3 years. While it is a tribute to Buffett's achievement as a capital allocator, the development also indicates that the credit crisis is far from being over. Deutsche Bank's December quarter loss of US$ 6.2 bn highlights the fact.

At a time when demand for financial products is at its weakest in a decade, the Tata Group's financial services arm Tata Capital seems to be the rare optimist. The company is raising capital to the tune of Rs 5 bn via non convertible debentures in order to foray into retail as well corporate lending, broking, wealth management, investment banking and private equity verticals. Although the company has the wide retail client network and business linkages of the Tata Group to fall back on, how far it will be able to realise its ambitions in a field dominated by established players and in a tough economic environment is left to be seen.

Now, primes are turning sub-primes in the US. The Economist has reported that even better-heeled Americans have started defaulting on their mortgages. And credit rating agencies that rated their people as 'above investment grade' or having good credit score, are again in the line of fire. As a matter of fact, of all the AAA-rated securities that Moody's has lowered over the past week, an astonishing 91% has gone straight to 'junk'!

The next season of the Indian Premier League (IPL) begins soon and every detail makes 'breaking news'. The latest is that English players, Kevin Pietersen and Andrew Flintoff have fetched US$ 1.6 m each at the IPL auctions today. That's more than what Dhoni received last year. While Bangalore Royal Challengers snapped up Pietersen, Flintoff was acquired by Chennai Super Kings. It is believed that the management of Royal Challengers was willing to shell out even more for Pietersen. Surely there are no signs of liquidity crunch on the T20 field!

The Indian benchmark index, the BSE-Sensex gained almost 2.5% today. That was in line with its Asian peers which also saw healthy gains. All the major European indices are also trading in the green currently, thus indicating optimism that government measures will help revive the global economy. The benchmark index in the US, the S&P 500, also rose yesterday following an analysis showing Goldman Sachs and Morgan Stanley as healthy enough to repay rescue funds.

Crude oil in the meanwhile fell as a report showed the number of newly jobless in the US climb to a 26 year high. US, the world's biggest energy consumer, is bound to witness a fall in demand for oil if things continue to worsen.

04:55  Today's investing mantra
"You need to fill your mind with various competing thoughts and decide which make sense...I remain big on reading everything in sight." - Warren Buffett
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