India not yet the preferred investment destination - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India not yet the preferred investment destination 

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In this issue:
» Credit growth continues to tumble
» No new stimulus package for now
» Tata Steel remains bullish on India
» Get ready to pay more for power
» ...and more!

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The Indian stock markets may have become the toast of the world after the clear mandate given to the UPA led alliance but one Jim Rogers thinks otherwise. One of the most successful and outspoken investors of our times believes that the promises made by the government are nothing new and he has been hearing the same thing for the past thirty years. "You've got the wind in your face doing business in India, you've got the wind in your back in China", is how the fiery Rogers chose to put it across. Rubbing more salt into India's wounds, Jim Rogers sees fantastic opportunities in Sri Lanka as the country limps back to normalcy after the end of the war. Even after being one of the fastest growing economies in recent times, Rogers has always remained a staunch critic of India, slamming the country for its poor infrastructure and bureaucratic shackles. However, this does not mean that he will never invest in India. The country will emerge as the next great investment if Dr. Singh sticks to this commitments is how he put forth his views. But other investors are surely lining up. As per Bloomberg, with gains of 42% year to date, Sensex, the Indian benchmark has risen in line with China's benchmark, which has managed to spurt by 43% since the start of the year.

After Jim Rogers, let us turn to another investment guru Marc Faber and if he is to be believed, agricultural commodities offer great opportunity and investing in agriculture today would be like investing in oil in 2001 & 2002 when oil prices fell to very low levels. He opines that while productivity is declining and stocks are depleting, demand is forever rising and this will force prices to go up. He recommends investing in listed agricultural and private companies. Given the kind of track record he has built over the years, it will be wise not to go against the man.

Source: Mint
The markets may have surged on discerning signs of revival in the economy, but has the Indian economy really picked up? The answer is no if the trends in bank lending are anything to go by. As per a leading business daily, credit growth on a YoY basis has been steadily deteriorating. In fact, while bank lending for the month to May 8 fell by Rs 199.4 bn, total loans had increased by Rs 148.2 bn over the same period last year. However, all is not bleak and there have been some improvements both at the micro and the macro level. But the fact remains that the economy is still far off from a significant recovery and the drop in the YoY credit growth is one factor that visibly underlines this point.

With crude prices flirting with the US$ 60 a barrel mark, concerns of energy security are broiling in certain parts of the world. We can't help but experience a sense of deja vu. Rewind to mid-2007 - rising crude prices and supply fears brought in the need to find an alternative and cheaper source of fuel. At present levels, it is believed that US$ 1 worth of coal can generate 475% more energy than US$ 1 worth of crude oil. Considering the global economic conditions, the chances of the world become more dependent on coal are strong. On the flipside, one major drawback is that coal is relatively less environmental friendly of the two fuels.

Coming to issues related with the domestic segment, lower profits, increased staff costs and unviable expansion plans are reasons that has made India's largest coal supplier, Coal India Limited (CIL) mull over increasing price of coal to improve realizations. Estimates of a leading business daily state that CIL may need to hike coal prices by at least 13% if it has to take up all its proposed expansion plans and retain its earlier profit trend for FY10.

While this piece of news may not impact power companies' margins as they have the ability to pass on prices to their customers, this does not augur well for the ultimate consumers of power - industrial, commercial and residential. Given that the cost of power has already seen a consistent rise over the past few years, this proposed hike in coal prices from CIL will further add to the consumers' burden.

Going by the view of Tata Steel's management, it does not foresee any problems related to demand in the company's domestic operations. "While Indian steel demand is expected to go up by 6%-7% this year, I expect Tata Steel's Indian operations to sell about 25% more than what we did last year" said Mr. Muthurama, the Managing Director of the company. In fact he added that India is the only 'shining star' in a world whose average demand for steel is down by 15% YoY in 2009 as compared to 2008. However, concerns over revenues do remain. Even though steel prices in India are relatively higher than the global average, realisations of steel products have dropped substantially over the past few months. For example - as per data sourced from CMIE, during March 2009 price of HRC in Mumbai was lower by 25% from its high in August 2008 and nearly 14% lower on a YoY basis.

A few weeks back, we had written about the rising clout of Indian operations of several multi-national companies. But this one surely takes the cake. As per a leading business daily, Maruti Suzuki, India's largest passenger car manufacturer now accounts for as much as 46% of its Japanese parent Suzuki's consolidated profits. Although the company has had a bad year in terms of profitability as its full year profits fell 30%, its performance was still way better than the parent's operations in developed markets of the West and even Japan.

A greater share in profits would translate into more leeway for the company in terms of taking its own decisions and greater autonomy. This is evident from the fact that although Maruti is exporting 30,000 units of its model A-Star as a part of an outsourcing deal with Nissan where the latter would sell them in Europe under a different name, it is less keen to do such deals in the future given the uncertainty involved. Suzuki on the other hand, will continue a Nissan like deal with Mazda whether Maruti does the same out of India or not. The parent has also not repatriated Maruti's profits to Japan as it feels that the Indian operations need to make sizeable investments in capacity expansion and research and development to continue to remain a force to reckon with in the Indian markets.

In an earlier issue, we spoke of PM Manmohan Singh's 100 day agenda. Some believed that the agenda might include a fresh fiscal stimulus package as indicated by the interim budget. It now appears that it will not. As per a leading business daily, the government is instead likely to focus on policy changes in key growth areas like infrastructure. A partial decontrol of oil prices and small disinvestment in PSUs is also definitely on the cards. However, only those PSUs in which the government has a stake well above 51% will be offered for disinvestment. The PM is likely to make these announcements in his address to the nation. We hope the government also reexamines critical areas like food and fertiliser subsidies and investment in urban transportation which will go a long way in making the long term India growth story sustainable.

The Indian markets ended the day on a firm note with the BSE-Sensexending higher by around 150 points. Stocks from the mid-cap and small-cap space ended the day on a firm note as well. While buying activity was witnessed in stocks from the capital goods and banking spaces, stocks from the auto and realty sectors ended the day on a weak note. As for global markets, most of the other Asian markets ended the day on a weak note, while the European indices were trading mixed at the time of writing.

04:54  Today's investing mantra
"You can wait for opportunities that fit your criteria and if you don't find them, patiently wait. Deciding not to panic is still a decision" - Seth Klarman
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3 Responses to "India not yet the preferred investment destination"


May 23, 2009

Mr. Roger is correct. We have been hearing these promises since many years nothing is new. Unless the attitude and the intentions of politics & polititians changes, india will remain same. We will be talking and building dreams but nothing will happen in real. A typical example of cheap politics is now seen with DMK. It is demanding portfolios that will fetch more money to their party(family) and that too just by having less than 5% of total MP''s in the parliment. Hope politics and polititians will change and ofcourse the people have no choice except to choose from the corrupt lot.


surajit som

May 22, 2009

it is elementry. bijli,sadak,pani,school,hospital for all. rest will fall in place . including the stock market. like castle,sensex cannot be built in air.


Anil Kumar NS

May 22, 2009

Very crisp and informative summary of the day

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