I-banks absent from placements. Thank God! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

I-banks absent from placements. Thank God! 

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In this issue:
» How reliable are credit ratings?
» Ranbaxy's troubles deepen further
» Obama's stress test for US banks
» TRAI's recommendations
» ...and more!

The placement season in the top management institutes has already begun and most of the investment banks (i-banks) are conspicuous by their absence. And maybe, that is a good thing. After all, i-banks have been one of the chief architects of the current crisis and have shown that they are not really capable as such of creating anything of value.

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Take the case of India's best management institute, IIM-Ahmedabad where the placement season began on a subdued note yesterday. The number of recruiters on Day Zero stood at a mere 7 which is a far cry from the 25 companies that visited the campus last year. Not surprisingly, in the previous years, Day Zero largely belonged to i-banks (perceived to be highly lucrative) and consulting companies with most students opting for finance jobs.

What a difference a year has made! Everything has changed. Salaries too are nowhere near what they were in the past couple of years. In fact, it is after a long time that recruiters have more of a bargaining power this time around which was not the case in those heady days when many companies had to return empty handed either because the students were already placed or the salary expectations were too high. For students, this will be the time to give their careers a serious thought and position themselves better with companies.

Source: Equitymaster Research
Is gold an investment or a consumption item? We have no idea about other countries but at least as far as India is concerned, the role the yellow metal plays in our lives is perhaps dependent on the price at which it trades. Thus, when prices are low we seem to be buying more of it and hence, turn it into an item of consumption and when prices are high, we sell out and encash the profits, thereby treating it as an investment. And how did we arrive at this rather weird sounding conclusion? What else could explain the steep fall in gold imports in India at a time when gold prices are ruling at lifetime highs?

As per Business Standard, gold imports have fallen a staggering 67% YoY in the month of January 2009. And the imports are likely to dwindle further in February if the data so far for the month is any indication. Going back to our thesis, high prices are deterring consumption and at the same time are enticing more hoarders of gold to cash out with tidy profits, thus making up for whatever shortfall of import there is.

We certainly do not know when the breakeven will be reached i.e., the level at which people will become consumers of gold. Perhaps the imports reaching parity could be a good indication. But prices are unlikely to fall anytime soon. Governments the world over are printing endless amount of paper money, forcing people to take shelter in the relative safety of gold, thus driving up its prices to record levels.

"Sold our soul to the devil for revenue", moaned some employees of Moody's recently. They were crying foul about how the company issued fake ratings to junk securities just to make money on them. Moody's 28% associate in India, ICRA, seems to be doing the same things. Not showing penance for giving 4 out of 5 IPO rating to Reliance Power which had no business to show for its creditworthiness, the company is at it again.

It has assigned its highest rating to Reliance Communications (RCL), as the latter prepares to borrow money for expansion purposes. This rating is for a company that has a debt to equity of 0.9 times, which will increase to 1.2 times after the latest round of fund raising! RCL is already being questioned by the Enforcement Directorate for violating the foreign exchange rules. The company had reportedly parked the unutilised money (of around Rs 51 bn) from its foreign currency bond issue interest free with a wholly owned subsidiary! Further, the company has a large portion of forex loans (around 66% of total loans) in its book, which has the potential to severely hurt its profits.

The story of credit rating agencies worldwide and in India is a story of massive failure. And the result is that our entire financial system is now at risk. If the raters are not brought to task, we will always remain in a debt bubble trap.

Experts after experts have pounded the table over the fact that the corpus of US$ 700 bn would fall way short in injecting life back into the dysfunctional US credit markets and recapitalising its massively eroded banks. But to no avail! Recently though, there have been signs that the US administration is finally falling in line. It has asked the country's 19 major banks to undergo stress tests so that their financial health could be ascertained.

Under the stress test, banks will be asked to work out their financial solvency after taking into account a worsening macroeconomic as well as a declining asset price environment. Thus, if a bank is not coming out of the other side of the test with enough net worth, further capital will be injected into the bank by the government, the terms of which are believed to be quite harsh.

Although the plan seems far better than the previous one, quite a few experts are of the opinion that the assumptions used for the stress test are quite aggressive. They reckon that the government could have been better off taking a more conservative stance. But given the political hot potato the issue of funding has become, it looks unlikely that the Obama administration would jump the gun on this one.

The Telecom Regulatory Authority of India (TRAI) has recommended that broadcasters should not be allowed to control more than 20% equity stake in any distribution platform and vice versa. Platforms include cable, DTH (direct to home), Headend in the sky (HITS) and mobile TV. Companies which already have such cross-media control have been given three years to restructure their operations.

It may be noted that many large media players like Sun TV and the Zee would have to restructure their operations as they have presence in both the segments. While the recommendation is not yet binding, it will have a negative impact on cross-media broadcasters. In fact, the broadcasters have been trying to build economies of scale through their distribution presence in the face of fragmented viewership patterns.

Ranbaxy's troubles have only gotten deeper. The US FDA after completing the first phase of its investigation has determined that there has been a trend of the pharma company forging data. This falsifying of data applies to drugs which have already been granted approval and have been launched in the US market, drugs that are pending approval and drugs that are being manufactured in the US but for which the data is being referred to from the Paonta Sahib facility in Himachal Pradesh.

Already, the US FDA has shut this plant along with the one in Dewas (Madhya Pradesh) citing manufacturing lapses. Besides this, the regulatory authority had already issued an import alert of 30 drugs manufactured at both these plants. Obviously, a Pandora's Box has been opened as far as the scams of India Inc. are concerned which does not bode well especially in the current times when companies are already being bogged by the global meltdown.

'Office Space across the World 2009', a report by global property consultants Cushman & Wakefield, reckons Nariman Point in Mumbai as the sixth most expensive office location in the world. Incidentally this is down two ranks from its last year's position, when it occupied the 4th place, and overtaken by Moscow (4th) and Dubai (5th) this year.

The Indian markets closed higher by 1% today, aided by gains in the BSE-Auto and BSE-Oil & Gas (up 2% each) indices. While the Asian markets closed mixed, the European indices are trading in the positive currently. As reported on Bloomberg, crude oil rose 1% to US$ 43 a barrel after US gasoline supplies fell on increased fuel demand.

04:52  Today's investing mantra
"The speed at which a business success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage as it may give the chance to buy more of a good thing at a bargain price." - Warren Buffett
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