Are you earning more and saving less?

Jun 2, 2009

In this issue:
» India Inc.'s paying a price for its acquisitions
» CEO's paid well despite lower profits
» Monetary policy could be tightened
» Auto's decent sales in May
» ...and more!

One would think that a big thing that differentiates India from the US is its savings rate, which is significantly higher than the US. Indeed, India is a nation of savers, something we pride ourselves on. Compare this to the spendthrifts in US who have landed their country into its current position of a nation mired in debt. However, a Mint report throws light on a startling pattern within India that makes one stop and think.

----------- Equitymaster Research -----------
Small Caps Remain One Of The Surest Ways To Multiply Your Wealth...
Read On...

If India's top 112 cities were to be classified into metros, state capitals and other cities, it is seen that metros on an average have the lowest savings rate despite having the highest per capita income. Yes, living in a city might have some benefits, but it evidently takes a big bite out of your pocket. Among the various reasons for this, one surely has to be the greater lure to spend and consume in a big city. Better roads lure more people into buying automobiles, and better entertainment options and higher property rentals are getting big city denizens to lighten their wallets much more often than what is necessary. Looking at the examples of the US and Indian metros and their move towards consumerism and spending, it may very well be likely that India's savings rate decreases as we move towards greater development in the hinterlands of India. No wonder then that auto and FMCG companies want to leave their mark on smaller cities.

Saving Dynamics
Image Source: Mint

Tiger on the prowl
Image Source: The Economist
India Inc. has developed an ever increasing appetite for overseas acquisitions over the last eight years or so. Otherwise, what could explain the fact that between 2000 and 2008, Indian companies announced over 1,000 international mergers or acquisitions worth over US$ 72 bn (Source: Economist). But while the heady days of the past couple of years made the logic of all the acquisitions above board, the recent economic meltdown has seen many companies pay a heavy price. Noted examples would be Tata Motors' acquisition of Jaguar Land Rover,Tata Steel's acquisition of Corus among others. Saddled with huge debt post acquisition, many of these companies have a considerable challenge on their hand in ensuring that the acquired companies do well enough to justify the high price paid for them. The rationale for these acquisitions was really never in question as Indian companies did need to achieve scale as well as have access to technology. But pressure to outdo peers compelled them to pay lofty prices, the ill effects of which have been laid bare in the past one year. Having said that, those companies with strong managements and better finances should be able to weather the storm and emerge stronger in the future.

Looks like the green shoots of recovery are likely to rub off on Indian corporates in the form of share sales. As reported on Bloomberg, share sales by Indian companies may increase to US$ 13 bn this fiscal year as a revival in the nation's economic growth lures investors. Infact, it is expected that companies may raise US$ 4 bn to US$ 6 bn from initial public offerings during the year and another US$ 5 bn to US$ 7 bn through share placements over the next two to three months. While the Indian stockmarkets have been surging in the past few months, inflows have also been pouring into the country fuelled by expectations that a stable UPA government at the centre will push ahead with reforms without having to pander to the Left. We do not know whether this optimism is well founded but given how deep the crisis has been, chances are that any recovery will be slow and gradual.

Bernie Madoff may have gotten a big rap on his knuckles for running a Ponzi scheme but quite a lot of CEOs in India are doing the same and that too right under the nose of the authorities and are walking away scot free. We are referring to the healthy dose of increments in salaries that the corporate chiefs are helping themselves to even as their firms report lower profits or are mired in losses.

As per The Economic Times, a survey of companies that have come out with their annual reports has revealed that four out of every five CEOs covered by the survey have gotten a pay hike even as half the companies covered reported lower profits or made losses in the latest fiscal over the previous year. We wonder what kind of morale employees at these companies would be carrying, especially at a time when they themselves face huge salary cuts and see some of their peers being handed the pink slips.

India's inflation has come down drastically in the past year dragging down interest rates along with it. But do not be surprised if this scenario reverses in the near future. If that happens, RBI may resort to tightening its monetary policy, which also means that the government's deficits could swell further. The key here is inflation which could start to rise again. As reported on Wall Street Journal, one reason for the same would be that oil prices have gradually started to chart the upward path after its steep decline late last year. Secondly, there has been abundance of liquidity which has been fuelled by the RBI pumping in Rs 4.2 trillion into the financial system to facilitate access to credit. Not only that, foreign investors, amidst expectations of economic recovery have started pumping money once again into the country. Thus, as far as inflation is concerned, it is probably not so much a question of 'if' as it is of 'when'.

Even as China is worried about the safety of its investments in US Treasuries, the US Treasury Secretary Timothy Geithner is looking to calm the dragon nation by stressing that the US intends to shrink its budget gap as soon as an economic recovery takes hold.

As reported on Bloomberg, Geithner is aiming at bringing down the deficit to 3% of GDP from a projected 12.9% this year. While this target is an ambitious one indeed, it is not likely to happen for some time to come. And if printing more money to fund the bailouts will lead to higher inflation going forward, the US dollar is sure to lose sheen In that matter, probably the Chinese do have something to worry about.

A marvelous May it might not be but India's leading auto manufacturers like Maruti and Hero Honda are surely not complaining. They have managed to fork out decent sales numbers during the month. While Maruti saw its domestic sales grow a little over 10% on a YoY basis, two wheeler major, Hero Honda witnessed a strong 22% jump in sales over the same period last year. Incidentally, reasons behind the buoyancy for both the companies were about the same viz. aggressive launch of new models and greater push in the rural and the semi urban towns. Thus, while market leaders in two-wheelers and passenger vehicles posted good numbers, Tata Motors, the domestic market leader in CVs was not that lucky. Sales of heavy commercial vehicles continued to face rough weather, going down by a huge 27%. And it this decline, more than anything else that must be worrying the industry observers. It is being hoped that over the next few months, buoyancy returns in this segment as well.

The Indian markets closed marginally higher today led by gains in the BSE Metal (up 2%) and BSE Auto (up 1%) indices. On the global front, while the Asian indices closed mixed, the European indices are also witnessing a mixed trend currently.

 Today's investing mantra
"The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Are you earning more and saving less?". Click here!

4 Responses to "Are you earning more and saving less?"

N Kannan

Jun 2, 2009

Not only today's wrap up, but the 5 minutes wrap up that I get every day is highly educative, informative and well researched. At last, I have come across an organization that really really delivers the goods. Soon I will subscribe to your paid services.



Jun 2, 2009

This is from personal experience. As regards your comment on savings rates Metros and rural areas, I have lived for 36 yrs. in Bombay and now I stay at Jalgaon (419Kms from Mumbai) and travel to Mumbai every fortnight. The Saturday & sunday exps. at Mumbai is equivalent to my monthly exps. at Jalgaon. As there are not many entertainment places, w have not many places to visit. Max. one dinner outing on a sunday with friends.(at Rs120/- per head -No drinks) Not much shopping venues except day to day needs. Not very heavy fuel bill. Preferably move on your bike. only when with family move in your car, that too might be an avg.10/15 kms. per week.
so all inall great savings in rural area is bound to remain, depends upon how the MALL culture visits us. any how not for another five years, what with electricity cuts for 8 hrs per day (no power cuts during 8.00pm to 6.00am).
thanks to the Tv and comments from you all we keep abreast to the happenings around the world.
have a nice day!



Jun 2, 2009

CEO’s paid well despite lower profits

I think, the ministry of corporate affairs must initiate passing a law to ficx certain ceiling of executive salary for loss making companies.Both CII & Ficci are silent on this.They demand interest rate cuts, tax concessions from government and do not respond to such practices.As was done in US and UK government must impose tax at the rate of 50% on exectuive salaries above Rs.2 Crores and also must have a say and cap on companies where public sector financial institutions or mutual funds have invested more than 1%.It is the greed of the private sector ruined the financial sector in the west and government must not allow this to happen in our country.



Jun 2, 2009

hello very good to that msg , actually i am trying to get all the news about Indian stock market . so in this case u could make happy by sending the wrap up of the next days future so that can think in investing the amount ,

yours sincerly
bharath chauhan

Equitymaster requests your view! Post a comment on "Are you earning more and saving less?". Click here!