India's recession free sector - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India's recession free sector 

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In this issue:
» China's hoarding gold
» Indian banks' performance so far
» More banks fail in the US
» Coke gung ho about India
» ...and more!

Without any doubt, telecom is one sector that has so far bucked the trend in India while other industries face slowdown issues. Not only this, companies within the sector have been able to grow strongly over the past few months, at least when it comes to ramping up their subscriber bases. The month of March 2009, for instance, saw the sector add a record 15.6 m subscribers, the highest in any month in the sector's history so far.

Source: COA Source: COA

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While reduction in tariffs and cost of handsets has supplemented the growth of the Indian mobile telecommunication sector, growth in the recent past has been largely driven by mobile service providers' aggressive entry into the large and relatively untapped rural markets. In these markets for instance, carrying a Rs 2,000 mobile phone can be something of a status symbol. This is clearly indicative of the much-larger drama unfolding in the Indian telecom market, once considered a backwater and now the fastest growing in the world.

While the country still has a long way to go in establishing a nationwide network of landline telecom networks, let alone high-speed broadband service, we have already overtaken China in terms of mobile-phone subscription growth and US in terms of wireless base. The robust growth in the Chinese mobile phone industry in the past was due to an expanding rural market and the increasing number of people who have more than one mobile phone. These, we believe, will be the very factors that will aid a superior growth of the Indian telecom market in the future.

Recently, China has minced no words in making its discomfort clear with respect to the US dollar. That it was diversifying its huge cache of dollar denominated forex reserves into other asset classes was also being speculated. Recently though, it let the cat slip out of the bag. And quite a big one at that! China's forex managing agency revealed that it has nearly doubled its gold reserves to 1,054 tonnes, up from 600 tonnes in 2003, making it the fifth largest holder of the precious metal. The disclosure is likely to have quite a few implications. Foremost among them could be a renewed surge in the price of the yellow metal, which has already quadrupled during the last one decade. There is no reason why it cannot inch even higher and scale new peaks.

Secondly, it might force a flight from the dollar by other central banks as well, who could well be spooked by the fact that if the largest supporter of the US dollar is stealthily moving out of it, significant depreciation in the greenback could only be a matter of time. If it does indeed happen, no one is going to suffer more than China itself as it still has majority of its forex reserves invested in the US dollar. Thus, caught in a Catch-22 situation, slow and steady accumulation of non-dollar assets is the only way out for the dragon nation. Otherwise it risks getting swallowed by the same beast it helped create.

Bank here in India, rounding-off a difficult fiscal with reasonably appreciable numbers seems to have been easy for most Indian banks that have announced their full year FY09 results so far. Despite marginally slower growth in advances and deposits in the third and fourth quarters, the banks managed to atleast come off without eroding their net interest margins and degrading the quality of their assets. For this, most banks seem to have turned cautious on their incremental lending to the retail customer base, particularly mortgages and auto loans. While there were some slippages seen at the gross NPA level, at the net level most banks have provided adequately for the same.

The area that was the most affected during this fiscal was the generation of fee income with banks losing out on fees based on capital market transactions and third party sales. Although the public sector banks managed to lock in some gains in their treasury books, the same is unsustainable in future. Cost curtailment was a feature seen across banks from the private and public sector spaces. It is however, important to add that going forward the banks' ability to avoid slippage risks and conserve capital will be the key to their growth.

The G-7, which is comprised of finance ministers from the group of seven industrialised nations of Canada, France, Germany, Italy, Japan, the UK and the US, in a meeting yesterday predicted a weak economic recovery that will take shape in the next few months amongst mounting evidence that the worst of the recession is over. According to them, recent data suggest that the pace of decline in their economies has slowed, and some signs of stabilization are emerging. But at the same time they continue to remain circumspect about confidently declaring an end to this tumultuous recession as long as toxic assets continue to impede bank lending.

And even as the G-7 have started showing nascent signs of optimism, the First Bank of Idaho became the fourth US bank to fail on Friday, taking the total of bank failures to 29 for the current year. That figure is 4 more than the 25 banks that failed in all of 2008. The failure of the above mentioned bank, along with other banks based in Georgia, Michigan and California, are expected to cost the Federal Deposit Insurance Corporation's deposit insurance fund about US$ 698 m, another blow to a US government desperately trying to get its country out of the current conundrum.

With last couple of quarters not being good for the media companies due to economic slowdown and lower ad spends by the corporate sector, they are now banking on elections to boost their revenues. As per The Economic Times, election ad spends are expected to be around Rs 8 bn during this year's national polls. Print and TV are the favourite mediums for the political parties, with OOH (out-of-home) following next. While this would partially aid growth of their advertisement revenues, it wouldn't be enough to provide a major turnaround for media companies, as election advertising contributes to only about 3% to 4% to the total advertising market.

Investment thinkers like Bruce Greenwald agree with Warren Buffett's assessment of the sustainable competitive advantage that the Coca Cola Company enjoys. They also agree that its future lies outside the US markets. Now, their view seems to be bearing out in India. As per the Wall Street Journal, sales of Coke in India have not been impacted by the slowdown at all. In fact, they are up 31% YoY in 4QFY09, the highest volume growth in any of Coke's markets. Moreover, the Indian operations have witnessed 11 sequential quarters of growth. As a result, the company plans to deploy more than US$ 250 m over the next 3 years in India. That's 20% of the investment it has already made here. How some companies would love to have Coke's superior competitive advantages!

Although recording gains on a week on week basis, the Indian markets did see some volatility as results of industry heavyweights came in full flow. The BSE-Sensex ended higher by 2.8% over the closing levels of last week. However, India was the only market which recorded gains as compared to its Asian peers, Japan, Hong Kong, China (each down by 2.2%) and Singapore (down 2.3%). It is believed that Asian markets stumbled mainly due to concerns over companies' earnings. In addition, it may be noted that Asia's six week rally came to an end this week. As for other global markets, Germany (up 2.2%), France (up 1.5%) and UK (up 0.4%) ended the week on a firm note while US (down 0.1%) and Brazil (down 0.7%) ended in the red.

Source: Yahoo Finance Source: Yahoo Finance

How times change! As per an intriguing Financial Times report, public servants with steady employment are now suddenly becoming highly desired as ideal marriage partners, giving their IT sector and investment banking counterparts a run for their money. Indeed a 'flight to safety' as parents look to pair off their daughters with grooms who have more secure job prospects. As the HR head at Wipro puts it, "In the marriage stock market, IT workers and investment bankers are the toxic assets." Topsy-turvy is what the world seems to have become in the last 1 year!

04:57  Weekend investing mantra
""Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense" - Buddha
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1 Responses to "India's recession free sector"

mrityunjay kaushik

Apr 26, 2009

it is a good article

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