People's car Rs 1 lakh, cycle Rs 2 lakhs... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

People's car Rs 1 lakh, cycle Rs 2 lakhs... 

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In this issue:
» Do MNCs have the best intentions in mind?
» India Inc. gets forex relief
» Recession triggers reverse brain drain
» SBI's royalty issues
» ...and more!

We indeed live in a strange world. While Tata Motors has tried to put car ownership within the reach of millions of Indians, an altogether different company belonging to the Murugappa group is making an effort to wean away people from cars by offering them a bicycle. And this is no ordinary bicycle. As per a leading daily, each cycle is a good 3-5 kgs lighter than the ones available in the market and has been handcrafted and fitted with tubeless tyres and cutting edge technologies in shock absorbers and gears. Already surprised? Well, the most surprising part is yet to come. And it lies in the bicycle's price. The company has priced the most premium model, hold your breath, at a whopping Rs 2 lakh. Nearly twice the price of Tata Nano! And just as Tata Motors is confident that the Nano will sell like hot cakes, even this company is quite bullish on the prospects of its products. After all, it reckons that the market for such bicycles is growing at a rate of 25% annually. Indeed, when one is talking of a total market size of just 7,000 units, a growth of 25% does look like a small number.

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At a time when domestic investors are shying away from seeking attractive bargains, foreign investors seem to be making the most of the opportunity. No, we are not talking about the FIIs here. We are referring here to the multinational companies (MNCs) that are looking to increase their stake in the Indian subsidiaries at very attractive valuations. So much so, that they are even willing to make the open offer at a substantial premium to the current market price. The latest example being Swiss drug maker Novartis AG, which yesterday made an open offer to acquire an additional 39% stake in its Indian subsidiary at a price of Rs 351 per share. While the offer was at a premium of nearly 26% to the market price, it must also be noted that its successful completion would raise the stake of Novartis in its Indian subsidiary to nearly 90% from the current 51%. It therefore goes without saying that the company would then also have the option of delisting its Indian subsidiary.

This is not the first case of its kind as several MNCs in the past have chosen to delist their Indian subsidiaries. The same, however, is detrimental to the interests of Indian investors. Considering the growth potential of the Indian market and the company's extremely strong fundamentals, we believe the offer that values the company at about 10 times its trailing twelve month earnings is way too underpriced. We won't be surprised if there are very few takers for the offer. Furthermore, it also raises concerns over the intentions of the parent, which is looking to transfer wealth from minority shareholders to itself. If at all the company had best intentions in mind, a share buyback would have been a more prudent option.

In the web summit hosted by Equitymaster with Mr. Ramesh Damani, he had the following to say about MNC companies operating in India "I think a lot of them behave very badly in terms of corporate governance." With regard to their delisting, Mr. Damani said, "The rules for exit once you are listed should be far more stringent. I'm all in favour that we expand the list to the universe, for example if IBM wants to do business in India or someone else wants to do business in India, we should encourage them by way of incentives or tax laws to get themselves listed. That's how you create true investing database, a true investing population that is committed to investing and you create a national franchise for these businesses."

India Inc. might have something to cheer about on the forex front. The National Advisory Committee on Accounting Standards (NACAS), whose accounting policies are followed by the Indian industry, has favoured suspending for two years, the Accounting Standard 11 (AS-11) that requires firms to mark-to-market foreign exchange assets and liabilities. The last two years had seen very volatile movements in the foreign exchange rates which had severe repercussions on the profitability of companies. In the last year especially, the sharp depreciation of the rupee against the dollar compelled many companies to report losses in their profit and loss accounts, thereby denting net profits. The purpose of AS-11 was to account for forex gains or losses under normal business conditions, but because of the sharp fluctuations in currency movements and the unpredictability of the same, it has been contended to suspend this standard for the time being. Thus, corporates will be able to report higher profits, which also means that the government will be able to collect higher taxes. If this proposal does go through, those companies largely relying on exports and those with foreign loans on their books will stand to benefit immensely from the same.

'United States', 'Wall Street' and 'Silicon Valley', once hallowed and revered destinations for any ambitious student are now fast losing their sheen. Those once glamorous words now echo with a more negative connotation of 'recession', 'employment' and 'recession'. The reverse brain drain has begun. For many aspiring students, prestigious post graduate degrees in the US and Europe are now suddenly beginning to look less enticing. They are now discovering value back home here in India. A Mint report estimates that about 100,000 skilled Indian 'returnees' will come back home from the United States in the next five years. Indians are increasingly seeing greater opportunities in India, which now stacks up much better to the US in terms of job openings, the lower cost of living, and a more steady economy.

The country's largest commercial bank, SBI, has been looking at drawing synergies from its associate banks for some time now by consolidating them. However, after much resistance from the unions, it has been successful in merging only one of its associates last year. The bank has now decided to charge them a royalty for the use of its logo. The royalty being demanded is 1% of the net profits of the associate banks. This move is being seen as a measure to compel the remaining associate banks to go in for merger with the parent.

However, it must be noted that this is not the first such instance of a parent company charging a royalty for the use of its logo. After much controversy a decade back, the Tata group companies which use the Tata brand agreed to pay Tata Sons a royalty of 0.25% of turnover or 5% of profit before tax, whichever is lower. Further the ones which do not use the Tata brand name directly, such as Indian Hotels, pay 0.15% of turnover. Godrej Properties a subsidiary of Godrej Industries has agreed upon a payment of royalty of 0.5% of the former's gross turnover per annum for use of the parent's brand name.

Subsidized fuels have created a structural imbalance in the Indian oil and gas industry. This fact came to light sharply during the unprecedented bubble in crude oil markets that lasted till mid last year. As per a leading business daily, the public sector oil marketing companies (OMCs) have slowed down on the expansion of their retail fuel outlets. They added only 800 outlets this fiscal as compared to a proposed 1,680. In contrast, 2,079 were opened in the previous year. It is hardly surprising that the OMCs checked their capex plans in the face of record under recoveries. Just goes to show the pressing need for a genuine implementation of a market driven pricing mechanism in the oil and gas industry.

Following close on the heels of the benchmark indices in China, Hong Kong and Korea, the Indian benchmark BSE-Sensex joined the pack of gainers in Asia and closed the day with gains of 3.5%. The Sensex in fact breached the 10,000 mark after nearly three months. The European markets, meanwhile, have opened on a mixed note. Strong US housing and consumption data has fed the global equity rally that has persisted for nearly two weeks, on the assumption that the financial sector has gone past its worst days.

04:55  Today's investing mantra
"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." - Peter Lynch
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