On the horizon - The Great Indian Reforms II

May 16, 2009

In this issue:
» Indian IT to benefit from crisis
» Bharti crosses 100 m mark, upbeat on future
» Commonwealth games booster shot for tourism sector
» Global economy 'not to recover anytime soon'
» ...and more!

The verdict is out and India has decided! Going a step better than most media projections, the Congress led UPA alliance looks all set to return to power and form the next government at the center. At the time of writing, the ruling party had either won or was leading in 251 of the 543 seats for whom the trends were available. Although still some seats short of the magical 272 figure mark, it now appears certain that the Left parties will have no role to play in the government formation this time around.

Manmohan Singh, the reformer par excellence has given enough proof of what he and his team can achieve if given a free hand. And the people of India seemed to have done exactly just that. Now it is up to him to deliver. The road ahead though is anything but smooth. The country's finances are staring down the barrel and economic growth has taken a big hit. However, looked differently, this could just be the time to unleash another wave of reforms and push the economy onto an even higher growth trajectory. Perhaps,it's time for 'The Great Indian Reforms II'. If at all they happen, the Indian people will have no one else but themselves to thank for it.

More than anything else this is likely to buoy sentiments in the stock markets. Not to say that the stock markets will rally in the short term, but this development could just lay the foundation for a long term rally in stock prices. Be sure to pick the right stocks for your portfolio.

If one was ever in doubt that the outsourcing story was over due to the global financial crisis, all those doubts would now be put to rest. This is because companies in the developed countries have been compelled to prune costs and they have realized that one way of doing so is to outsource their technology requirements to low cost destinations like India. Thus, while the outsourcing phenomenon was firing on all cylinders during the boom time, the financial crisis has all the more highlighted the need to outsource. This is leaving aside the fact that Barack Obama has serious reservations on this issue. A handful of small companies located in the US and continental Europe are now shifting their IT needs to Indian players like Wipro, Cognizant, Mindtree and WNS among others. Indian companies definitely have the advantage as they have the ability to offer a larger services portfolio at an affordable cost. Therefore, from these developments, it is apparent that the outsourcing story is definitely here to stay for some time atleast.

In the freshly out Infosys' FY09 annual report, the management of the company has given its views on some important things. As a result of the credit crisis, the management sees a probable decline of 3.1% to 6.7% in revenue in the current year. The company believes that new engagement models like solution-based offerings, platform-based BPO, Software as a Service (SaaS) platform mostly based on value-based pricing like billing the customer for the number of transactions will ensure maximum returns and increased productivity to stay firm in these turbulent times. Based on excellent past performance, strong ties with existing diversified clientele, opportunities in new market segments and a focus on new engagement models, Infosys is confident of sailing through the economic mess and emerging still stronger.

With Commonwealth Games inching closer, the Delhi government has geared up its operations to meet the deadlines in October next year. An amount of US$ 13.3 bn is being spent for the up gradation of facilities in Delhi. Currently 40% of the project work is completed, while the remaining would be completed in the next one and half year. The event holds great importance for the country, especially the tourism sector, which is banking on the mega event for recovery after the recent slowdown and terror attacks.

This week will be a cherished one for Indian telecom major, Bharti Airtel as its subscriber base crossed the 100 m mark. In fact, with this milestone, it has now become the world's third-largest single-country mobile operator and sixth-largest integrated telecom operator. As for the top spot, China Mobile and China Unicom are the world's largest and second-largest in-country mobile operators with 414 m and 170 mm subscribers respectively. Expecting India's teledensity to double within the next three years from the current level of 37%, Mr. Sunil Mittal, the company's chairman has given very optimistic views about the future. He believes that the company will be able to double its subscriber base within that period. Given the fact that the telecom players in India are adding mobile subscribers at a very robust pace and also that Bharti Airtel is the market leader (marketshare of about 25%), the task does not look very daunting. However, keeping in mind the intense competition within the industry and that it is bound to get more intense in the future, one may want to refrain from blindly going by the management's views.

India may soon be the proud owner of a national gas highway network, one that will ensure supply of natural gas across the country. As per an Economic Times report, the oil ministry is contemplating developing this national gas highway as infrastructure firms are refraining from venturing into non-profitable segments. That is the reason why even though there is a nationwide demand for natural gas, gas pipelines are concentrated mainly in the eastern and western regions while the southern, central and north eastern regions lack infrastructure. As such, a balanced distribution of gas will help India achieve a more distributed growth as industries have been known to develop along natural gas pipelines. Besides, with such a massive investment, companies catering to this industry will be direct beneficiaries.

Last week, the Indian indices were amongst the lowest gainers in Asia. However, this week the indices emerged as the top gainers as their Asian counterparts ended on a weak note. According to Bloomberg, Asian stocks fell this week as investors were concerned about the economy and corporate profits taking longer than expected to recover. The BSE-Sensex recorded a weekly gain of about 2.5%, while other Asian markets such as Singapore (down 4%), Hong Kong (down 3%) and Japan (down 2%) recorded losses during the week. However, China did manage a weekly gain of 0.5%. As for other global markets, Brazil (down 5%), France, Germany, US (each down by 4%) and UK (down 3%) all ended the week on a negative note.

Source: Yahoo FinanceSource: Yahoo Finance

Recently, the US government conducted a 'stress test' of its banking industry. It then quickly announced that the worst is over. However, not everyone is convinced. As per Barry Ritholtz, author of a forthcoming book titled, 'Bailout Nation', "You can't drink yourself sober and you can't leverage your way out of excess leverage". He suggests that it will take a while for the wounds to heal. The US banking system will not deleverage before 3 to 5 years.

As for the stock market, Mr. Ritholtz believes the rally is not the start of a bull market. As quoted in CNNMoney, he says "The beginning of every bull market comes from valuations cheaper than where we are here". For example, the US benchmark index, S&P 500 traded at a trailing price-to-earnings ratio of 12 in the early 1970s. A long bear market followed. In the early 1980s, the trailing price-to-earnings ratio was in the single digits. A bull market followed. Right now, the ratio is 13. So, the optimism might be overdone.

In a recent interview, investment guru Marc Faber gave his perspective on the economic recovery. He affirmed "I personally don't think that the global economy will recover anytime soon." He sees 2006, and early 2007 as the peak of prosperity and doesn't think that the world is going to get back there anytime soon. Further, Bob Parker, vice chairman of Credit Suisse Asset Management too holds a circumspect view. He feels that we will see less bad, not better, but less bad data over the coming months.

 Weekend investing mantra
"It is natural to assume that industries which have fared worse than the average are "unfavorably situated" and therefore to be avoided. The converse would be assumed, of course, for those with superior records. But this conclusion may often prove quite erroneous. Abnormally good or abnormally bad conditions do not last forever. This is true not only of general business but of particular industries as well. Corrective forces are often set in motion which tend to restore profits where they have disappeared, or to reduce them where they are excessive in relation to capital" - Benjamin Graham

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1 Responses to "On the horizon - The Great Indian Reforms II"


May 16, 2009

it is true that the country has saved it self from a disaster by electing congress , but the road to recovery will be difficult for the simple fact after this quantitative easing comes inflation , please note the fact that crude had touched 150$ per barrel , if all the economies start recovering then what would be the price of crude a minimum 80 $ per barrel , at that price of crude will it be possible to maintain low interest rates.
will oil producing countries allow themselves to let crude prices stay low , that will be the time whe n i feel everyone will be hurt as growth would have j ust startedwould not go at a faster speed as anticipat

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