A big risk India companies are staring at - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

A big risk India companies are staring at 

A  A  A
In this issue:
» Quality of life has improved in India
» India has once again missed power targets
» China is set to post a trade deficit
» For Greece, inflation could be best
» ...and more!


------------------ Listen to the sound of money...big money ------------------
If you missed out on The Equitymaster Investment Summit 2010, don't lose heart, or your sleep! We're bringing it to you in a special Limited Edition Investment Summit twin CD pack.

To listen to investment strategies and insights by Ajit Dayal and Bill Bonner on the world economy, India and the biggest risk it faces, the 'must-haves' in your portfolio, ' the 5 categories of investment to build your wealth'....and so much more, click here

--------------------------------------------------------------------------

00:00
 
The strong growth in the Indian economy before the global crisis unfolded and the buoyancy in Indian stockmarkets during that time had given rise to many phenomena. One such was India Inc's appetite for debt to fund expansion plans and acquisitions. And when it came to debt what caught the fancy of Indian corporates were foreign currency convertible bonds (FCCBs).

These allowed the bondholders to convert the bonds into equity shares once the conversion price was reached. What is more, many Indian corporates then became ambitious and issued these bonds at a hefty premium to the market price at that time. And since all was hunky dory, the possibility of redemption looked very remote then. Once the global financial crisis hit economies hard, Indian stockmarkets also plunged. As a result, with the market price being way below the conversion price, converting FCCBs into equity shares did not make sense. Consider this. As on March 15, 90 companies in the BSE-500 index had foreign currency convertible bond (FCCB) liabilities worth Rs 546 bn till 2017.

Even in the past one year, with the stockmarkets rising the way they have, the conversion price is still very high. And so, companies will now have to gear themselves for redeeming these bonds over the next few years. Those who have sufficient cash on their books will move on unscathed. But the others would not only have to take a hit on their P&L but also take additional loans to repay these FCCBs only worsening the situation further.

01:21  Chart of the day
India has done pretty well when it comes to the improvement in the quality of life of its citizens. As today's chart of the day shows, the quality of life of Indian citizens has undergone a healthy change since 1990. What is more, in comparison to its BRIC peers, India is way ahead of Brazil and Russia. And even though it has come second to China, the difference between the two is hardly much to choose from.

* Life expectancy, adult literacy, education enrollment & GDP per person Data Source: The Economist

02:11
 
It's hard to get over a habit. And if the habit has been developed over decades, it's even harder to get rid of it. We are talking about India's underperformance on the power generation front. What else do we term it than a habit given that we have faced such an underperformance year after year, for several years now! And the year gone by - FY10 - was no different!

India once again missed her power generation targets. And the reasons? Fuel shortages at thermal plants and low water levels in reservoirs of hydro plants. Now these issues are not new. However, what worries us is that, with Indian power producers targeting aggressive capacity addition over the next 10-15 years, these issues are only going to worsen. This is something we see as the biggest concern for India sustaining a strong economic growth in the future, as everyone around seems to believe.

02:36
 
Now this is something unusual. China is set to post a trade deficit i.e., importing more in a year than it exports. And this comes for the first time in the last six years. This was on the back of a surge in commodity imports into the country, as it stimulated its economy by spending huge sums in infrastructure building. What is also interesting is that this weakens the US' argument that China is benefiting on its exports front by keeping its currency artificially low!

02:52
 
The world's largest bond fund Pimco's co-CEO Mohammed El-Erian had some interesting views to offer recently. Of late there has been some amount of noise about a slow pick up in the US economy, and how that also bodes well for the global economy. But that may just be very temporary according to El-Erian. He opines that growth in the US economy will continue to appear healthy during the first half of 2010. More so because markets will bounce back amid the huge fiscal stimulus and inventory rebuilding. But the second half of 2010 is likely to be a different story.

Growth is likely to slow down significantly in the second half as the stimulus effect wears off and inventory restocking by companies is over. We must add here that some of this is also relevant for the economy back here in India. This is because companies had significantly run down their own inventories during the slowdown due to the bleak outlook. Thus during the past few quarters, many of our companies may have seen higher topline growth rates due to the fact that many companies were restocking their inventories back to normal levels. However, this will no longer be a factor that will buttress growth going forward.

03:39
 
For a country's citizens, rising prices may not be a very attractive prospect. But for their governments with large debt burdens (like Greece), inflation can be one of the best things that can happen. To understand this, a brief historical perspective is in order. As per a report by economist Paul Krugman, Greece's public debt at 113% of GDP is high enough for a crisis. But other countries have in the past dealt with similar levels of debt without crisis. In 1946, the United States having just emerged from World War II had federal debt equal to 122% of GDP. Yet over the next decade the ratio of US debt to GDP was cut nearly in half, finally hitting a low of 33% in 1981. How was this made possible?

Through a combination of GDP growth and inflation. The ratio of debt to GDP fell not because debt went down, but because GDP went up. Infact, it roughly doubled over the course of a decade as a result of economic growth and inflation in equal measures. But since Greece has the Euro as its currency, it does not have the luxury of inflating its way out of debt. So the only other alternative it has is GDP growth. Which seems anything but likely at this point of time. Indeed, the worst is far from over for Greece.

04:15
 
The past week was a mixed one for the Asian markets. While China and Japan ended the week in the red, the other markets ended higher. Other global markets continued their positive run on the back of the positive US economic reports that released last week. Japan saw some pressure this week on the back of yen appreciating against the dollar, making investors concerned about earnings of export dependent companies. With gains of about 1.4%, India's benchmark index, the BSE-Sensex was amongst the top gainers this week.

Data source: Yahoo Finance, Kitco

04:52  Weekend investing mantra
"The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions." - Benjamin Graham
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

Equitymaster requests your view! Post a comment on "A big risk India companies are staring at". Click here!

6 Responses to "A big risk India companies are staring at"

sarojdhtr

Apr 11, 2010

Hi! Thanks! Which are these 90 cos. pl? Plz. name them in the next issue.
Today's Mantrea: Yes it is true. At present also one can veruiy this statement.He will find it absolutely true.
Thanks!

Like 

Ramarao m s

Apr 10, 2010

5 min.wrap is an eye-opener,providing a quick round up.But it does more. It is its impartial and open comments on the state of economy..to wit,the power crisis and India's missing the bus year after year.
Whrere are tha planners?do they hear?
5 min wrap is welcome.

Like 

K.D.Viswanaathan

Apr 10, 2010

The quality of life of Indian citizens has definitely undergone a healthy change since the 1990s. However, the question that arises in everyone's mind is whether all the citizens of the country have become pucca beneficiaries under this change? The honest answer to this seemingly simple question would be an emphatic 'No'. There are millions still languishing in poverty.

In power generation, India continues to lag behind. Power-cuts have become a common feature these days. Everything points to the fact that truly worthwhile efforts, in this regard, are yet to be taken.

Like 

Anupam Garg

Apr 10, 2010

Superb chart and update on FCCB revives my faith in the website.
I think India misses targets cos it does not pay attention 2 the resources.
China posting trade deficit after hosting Olympics is obvious.
I believe JIT is the best way 2 tackle inv. problems but that is quite tough indeed.
Poor old? Greece
all the best 2 japan 4 the coming week

Like 

piyushkumarsharma

Apr 10, 2010

I am like to EQuitymaster

Like 

prakash

Apr 10, 2010

GOOD. can u tell me that investment in mutual fund is good for me.are there is a chance to getting income.

Like 
  
Equitymaster requests your view! Post a comment on "A big risk India companies are staring at". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407