Ratings agencies offer 'breaking news' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Ratings agencies offer 'breaking news' 

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In this issue:
» Audit firms face the flak for 'gross negligence'
» NRIs become non-remitting Indians
» Toxic assets make US' private investors rich
» Maruti succumbing to 'Nano' effect?
» ...and more!

At a time when even the layman on the street is well aware of the economic risks and can offer an opinion on whether this is another 'Great Depression', rating agencies are claiming their share of limelight in the downgrading business. In fact, while S&P and Moody's are doing their job aggressively in the global markets, their Indian arms - Crisil and ICRA respectively - seem to be following on close heels. A recent report released by India's largest rating agency Crisil suggested that it had downgraded as many as 84 companies in the first three months of 2009, most of them hailing from the debt ridden sectors like construction and real estate, textile and metals. Also, that its ratio of upgrades to downgrades had reached a 10-year low in FY09 at 0.86 times, against 0.97 times in FY08. The previous low, at 0.61 times, was in FY99. While the rating agency's precautionary signal is not uncalled for, we have the benefit of hindsight to say that there is little credibility in the same with such a lagged effect. This is certainly no 'breaking news' as the business papers have made it out to be.

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Just as the might of the top five investment banks was diminished by the subprime crisis, it seems that the top global audit firms are facing a similar fate. The Enron scandal led to the demise of Arthur Andersen, the Satyam fiasco has cast a shadow on PriceWaterhouse Coopers and the latest audit firm to receive flak is KPMG. As reported on CNN Money, this accounting giant was hit with a US$ 1 bn lawsuit over claims that its 'grossly negligent audits' propelled the collapse of New Century Financial Corp at the start of the US housing crisis. New Century is the largest independent provider of home loans to people with poor credit and had filed for bankruptcy two years ago when defaults just kept mounting. Its failure impacted the US mortgage industry and the rest they say is history. The lawsuit that has been filed against KPMG alleges the latter of helping cover up 'catastrophic' problems at New Century that led to its demise.

As if the flight of FII funds to foreign shores was not enough, even remittance of foreign money is likely to see a huge slump in the wake of the global financial crisis. As per a leading business daily, the Planning Commission has submitted a report to the Ministry of Finance citing a possibility of huge decline in NRI remittances. The report states that with the deepening crisis and loss of jobs for migrant workers, remittances from Non-Resident Indians (NRIs) could decline by as much as 20% in FY09. As per the report, total foreign inflows (including investments and private transfers) will be around US$ 65 bn as against US$ 81 bn in FY08, implying a fall of nearly 20% YoY. However, it also projected that foreign inflows could surge to US$ 90 bn dollars on account of one time increase in private transfers in the likelihood of Indian workers abroad deciding to bring home their accumulated savings on losing jobs.

As per a recent report released by the RBI, while the FDI inflows and NRI deposits in banks (due to the attractive interest rates) remained robust, fall in portfolio investments and banking capital were the prime reasons for the drop in the country's forex reserves in the nine month period until December 2008.

Sources of variation in India's forex reserves
    (US$ m) Apr - Dec 07 Apr - Dec 08
I   Current Account balance (15,508) 36,469)
II   Capital Account (net) (a to f) 82,682 16,089
  a Foreign Investment 40,197 4,032
    FDI 6,905 15,373
    Portfolio Investment 33,292 (11,341)
  b External Commercial Borrowings 17,410 7,114
  c Banking capital 5,931 (129)
    of which NRI deposits (931) 2,115
  d Short term credit 10,719 547
  e External assistance 1,274 1,861
  f Other items 7,151 2,664
III   Valuation change 8,963 (33,375)
    Total (I + II + III) 76,137 (53,755)
Source: RBI

Even as Tim Geithner's plan of buying 'toxic' assets from banks is waiting to take off, reports on the kind of returns that lie in store for private investors are flowing thick and fast. Some estimates have put the gains at a whopping 20%. In other words, private investors who will participate in the program could earn a compounded annual return of 20%. The major benefit is likely to come from the available leverage that allows private firms to raise US$ 6 for every dollar that they are investing and that too without any recourse. Thus, with government putting so much on the table, big bond managers like Bill Gross have already expressed their keen interest in participating in the program. However, this has also invited flak from economists of the stature of Paul Krugman and Joseph Stiglitz, who believe that such a program would make private investors rich at the expense of the US taxpayer. Furthermore, apprehensions are also being raised on the willingness of the banks to part with their bad assets as this would mean booking losses and causing further erosion in net worth. Clearly, America's problems are far from over.

In the battle between CDMA and GSM, GSM is surely coming up on top. As reported in a business daily, the minutes of use per subscriber per month for GSM companies has grown 6.9% YoY in December 2008. However, the minutes of use for CDMA during the same period have actually dropped by 1.3%. The same is the case in terms of average revenue per user (ARPU) per month. While that figure for GSM players has shown a decline of 15.7%, CDMA has shown a substantial decline of 36.9% in the same period.

Retailers are trying their best to alleviate the impact of low footfalls and lower conversion ratio on their profits. Apart from other cost control measures, the retailers are now focusing on private labels to boost their sagging margins. While it is difficult and time-consuming to position private brands, there seem to be few options left to boost profitability. In fact, the private label offerings are expected to contribute between 20% to 40% of their revenues going forward.

Retailers' depth of private labeling Share of pvt. labels (%)
Trent 90
Reliance 80
Pantaloon 75
Nilgiri's 38
Indiabulls/Piramyd 30
Foodworld 22
Shopper's Stop 20
Subhiksha 19
Spencers 10
Ebony 10
Source: Images Retail Report 20009 - KPMG, DNA Money

Rather than picking up the gauntlet, it seems to have thrown in the towel. We are referring to Maruti's response now that Tata Motors has finally upped the ante and has launched the Nano. Before the launch, there was a speculation doing the rounds that in order to counter the Nano, Maruti may bring down the prices of its oldest warhorse Maruti 800. But that speculation has been completely put to rest by the company as it has decided to phase out the Maruti 800, first from 11 major towns by 2010 and from the entire country by 2015-16. The reason? Well, the car will not be in a position to meet the new emission norms that are coming into play. Does this mean that the Nano will now have the entire entry level car market to itself? Unlikely. News are that there is already a new strategy that is being put into place to deal a counterpunch to the Nano. Maruti looks in no mood to give in. Not yet.

Besides a broad-based recovery, a strong upsurge in stocks from real estate, auto, commodity and energy sectors helped the Indian benchmark BSE-Sensex joined the pack of gainers in Asia and close the day with gains of 4.5%. The Sensex was the third biggest gainer in the Asian region following close on the heels of the Hang Seng and the Straits Times that gained 7.4% and 5.9% respectively today. The BSE Midcap and Smallcap indices gained 3.8% and 2.9% respectively. The European markets, meanwhile, have also opened on a positive note. The Indian markets will remain closed tomorrow on account of Ram Navami.

04:55  Today's investing mantra
"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger
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