Indian outsourcing - cloudy future?

Mar 23, 2009

In this issue:
» Bill Gross' investment outlook
» The next bull market has begun
» Lucrative government deals for Indian IT
» The much awaited launch of the Nano
» ...and more!

India's status as global outsourcing hub is in jeopardy. While clinical trials are the most important part of the drug development process, the safety of the same is being questioned in recent months; especially in developing countries like India. Supervisory shortcomings, rather than problems with a vaccine itself, led to the death of a baby girl in India a couple of months back during a Wyeth clinical trial, according to an official investigation by Drugs Controller General of India. The findings by India's top drug regulator are likely to add to concerns about how well Western pharmaceutical companies oversee human testing of potential new medicines in developing countries.

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As reported in the Wall Street Journal, many are of the opinion that patients in poorer countries are exploited and used as guinea pigs to test medicines, which they may never be able to afford. At present, drugs discovered outside the country can be tested in India after the first human trials are performed elsewhere. Thus, it is obvious that while conducting clinical trials is necessary, if India has to emerge as a major clinical trials destination, proper procedures and high safety standards with will have to be followed by drug companies, both domestic and international.

Another instance of showcasing India's outsourcing potential in poor light has been the revelation about illegal sale of credit card details of British citizens. The BBC has reported a sting operation, during which it illegally purchased the card details of British citizens from a person in New Delhi. The cost? US$ 10 per credit card holder. Apparently the data is leaked from call centres in India handling back office operations of the credit cards. Do we really want such things happening in India? Not only will our credibility continue to suffer, we will be seriously harming our own prospects of being a global outsourcing hub.

Bond Guru, Bill Gross' investment outlook for the month of March is out. Mr. Gross is of the opinion that credit is disappearing from the private system and unless government steps in to completely replace it, economies around the world will retreat. Infact, he even went to the extent of saying that if not enough is done, economic activity could go back to 2003 levels, causing severe job losses. Hmm, it is now becoming clear why the US Fed is intervening and buying debt left right and center. Maybe it is doing the same thing that Bill is referring to.

Bill also spoke on nationalisation of banks and mentioned that although he prefers recapitalisation of banks and diluting existing shareholders' interest, he was not in favour of hurting the interests of bondholders and preferred stock holders as that would cause further panic in the markets. He is also opposed to the idea of large scale 'nationalisation' of banks due to the sheer enormity of the task. Thus, to summarise, the bond guru feels that the current crisis is indeed of great magnitude and hence, wants the government to step in to replace the deleveraging of the private sector and also buy stakes in banks but should stop well short of 'nationalisation'.

With travel (both personal and business) dramatically down, occupancies and average room rates (ARRs) at hotels the world over are taking a big hit. As per a survey by a British corporate-travel firm, the ARRs in ten of the twelve most expensive cities across the globe has fallen. Situation in India is no different. The average occupancy rate for January 2009 (top 10 cities) had nosedived 58% YoY, while ARRs had fallen by about 14% YoY. With the economic scenario expected to worsen and added worries of terror attacks, rates are expected to further take a hit. The relocation of the IPL cricket tournaments will only add to the hoteliers' woes.

Image Source: Economist

As per Templeton Asset Management's CEO Mark Mobius, the next bull market has begun. A report on Bloomberg has quoted him saying, "You have to be careful not to miss the opportunity. With all the negative news, there is a tendency to hold back." Furthermore, he has indicated his preference for cash rich, low debt stocks from emerging markets. These companies should either have significant growth opportunities or pay substantial dividends. However, experts at the world's biggest mutual fund company, Fidelity, believe no one can call the bottom in the stock market. While we agree that nobody has a crystal ball, we believe investors should buy stocks now if they understand the businesses and are comfortable with the valuations.

Goodwill write-offs have recently taken a toll on the already wilting profits of US banks. As per the Federal Deposit Insurance Corp., the US banking industry posted a net loss of US$ 32.1 bn in the fourth quarter of 2008. These are the revised statistics after the FDIC had previously reported that the industry had posted a net loss of US$ 26 bn - its first quarterly loss since 1990. However, significant amendments showing substantially higher charges for goodwill impairment prompted the agency to update the figures. At times such as these, it is pertinent to question the viability of accounting standards that allow fictitious assets like goodwill to be retained in the books of companies when the value of the business (existing or acquired) has deteriorated.

Its 'home sweet home' for the big boys of Indian IT. While there is a slump in demand from cash-strapped global customers for new technology services, the domestic market is increasingly looking good for these IT players. Particularly, with several big deals from the government up for grabs, with contract sizes matching the ones available overseas.

The government departments, now taking the nascent steps to become technologically equipped, have plans to spend as much as US$ 6 bn on IT projects. This number is only set to increase with the central and several state governments planning to introduce e-governance and digitise everything from land records to tax filing. Companies such as TCS, HCL Tech and Wipro have already won significant government business in recent months, while Infosys has recently bid for a railway project related to creating a Locomotive Management System and ERP implementation.

But what may dampen the spirits of the IT companies looking for a share of the pie is the long time frame for government project approvals. As per Nasscom, three years is the typical time frame for such projects. Case in point being the Rs 10 bn project for digitising passport records, which took the ministry of external affairs almost three years to conclude and was finally awarded to TCS.

Yes, this is finally the day of the Nano's launch, the much awaited 'people's car' from Tata Motors. A Business Standard report pegs the initial demand of the car at 250,000 to 500,000, while supply is estimated to be about 40,000 to 50,000 cars. With such a big demand supply mismatch, comparisons with the Maruti 800's launch many years back have already begun doing the rounds. To the extent that one Tata Motors dealer has been quoted saying that those who are lucky enough to be allotted cars this year can resell it immediately at a premium of Rs 30,000 due to the anticipated shortage. As far as choosing the winners goes, it will be done though a random computer-generated sample.

Leading the pack of gainers in the Asian markets, the benchmark BSE-Sensex notched gains of as much as 5.1% today, with the benchmark indices of Hong Kong and Korea following on close heels. The BSE Midcap and Smallcap indices gained 2.6% and 2.0% respectively. European markets, meanwhile, have opened on a positive note. Gold prices continued to advance in Asia after gains of 3.2% in the past week, as a weaker dollar fueled demand for the precious metal as an alternative investment.

 Today's investing mantra
"Bargains are the holy grail of the true stockpicker. The fact the 10 to 30 percent of our net worth is lost in a market sell-off is of little consequence. We see the latest correction not as a disaster but as an opportunity to acquire more shares at low prices. This is how great fortunes are made over time." - Peter Lynch

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