India is on a 40% sale...and more
(Jun 19, 2008)
|A A A
In this issue:
» Move over pharma...now its banking
» RBI leans against 'irrational wind'
» Even a civil war cannot stop China...but water can
» Emerging economies account for 50% of the world's infrastructure investment
» ...and more!
Equitymaster founder, Mr. Ajit Dayal, says India is on sale, and rightly so! The fact that in the current markets, investors have the opportunity to buy some of the best and globally competitive business at attractive valuations is as exhilarating as the annual sale at some of the biggest retail chains. What else can one reckon from the fact that when the Chinese Shanghai Composite and the US Nasdaq are trading at 22 times and 24 times one year forward valuations respectively, the Indian Nifty is available at 16 times?
||India is on a 40% sale
For retail investors, what is important at this point is to buy quality companies, be it from the small-cap, mid-cap or large-cap space, that trade at discount to intrinsic value, without worrying about timing the market or buying at the bottom. All they have to do is sit back, be patient and wait for the markets to award their stocks more reasonable valuations.
Also read - Hidden Treasure or Tragedy?
As the margins in the generic pharma business get wafer thin, the lure of the burgeoning <>financial sector seems to be irresistable to the promoters of one of the largest drug manufacturing companies in the country. The promoters of financial services group Religare Enterprises - Malvinder and Shivinder Mohan Singh - who recently sold ther 35% stake in Ranbaxy to Daiichi Sankyo of Japan for a consideration of Rs 100 bn, have proposed to seek a banking licence from the RBI.
||Move over pharma...now its banking
However, what needs to be kept in mind is that the banking regulator has not issued too many licences in the recent past. While Yes Bank was the only one to have received a greenfield banking license, Kotak Bank was the only NBFC to be converted into a bank in the past decade. In the banking sector itself, net interest margins have got squeezed with the entities having to park a larger sum in the form of CRR (cash reserve ratio). However, Religare has the advantage of already having a large customer base through its equity broking and financial services businesses that it can tap for cross-selling its banking products.
Also read - Identify a banking stock
In the early 90's the government issued special bonds to public sector banks, which, in turn, used the money to buy government bonds of the same value. The biggest advantage that came to the government out of this deal is that these bonds issued for a special purpose were not reckoned as part of the government's annual borrowing which is undertaken to bridge the annual fiscal deficit gap. The lesson learnt in the 90's is again helping them to keep their fiscal deficit targets under the FRBM Act (Fiscal Responsibility and Budgetary Management), and yet indulge in populist measures (subsidies and duty cuts).
||No worry, special securities are here!
As per government sources, the total value of outstanding bonds issued to oil companies, Food Corporation of India and fertiliser companies is to the tune of Rs 1,000 bn. However, what we fail to notice is that whether the bonds are accounted for in the budgetary books of the government or not they do have a fiscal cost attached to them. The governmet's claims of meeting the FRBM targets, have but to be taken with a pinch of salt!
World's leading commodity investment expert Jim Rogers strongly endorses the view that China's long-term prospects are so strong that even a civil war, an economic collapse or political assassinations would only temporarily delay its emergence as a worldwide economic powerhouse. According to Rogers, with an economy that is advancing at an average annual GDP growth of more than 11%, US$ 1.7 trillion in currency reserves, and an emerging middle class that will soon be the world's largest, China represents the future to globally focused investors and businesses alike.
||Even a civil war cannot stop China
But he points out that only one thing could cause this powerful expansion to wash out: A major water crisis. And his concerns are not unfounded. China, like India, is expected to face shortage of water, a commodity with no substitute, due to its burgeoning population in the next two decades. Consider these facts projected by The International Food Policy Research Institute (IFPRI).
In 1995, 63% of China's urban households had access to piped water. By 2025, this may decline to 40% due to the water crisis.
Between 1995 and 2025, China's water consumption for irrigation will decline by 6%
Source: IFPRI report on Global Water Outlook to 2025
||Total water consumption (km3)
||Irrigation water consumption (km3)
1km3 = 1,000 bn litres
Rice growers in Punjab, India's 'grainbowl state', couldn't have had it worse. Two days after the sowing season began, they are grappling with a shortage of manpower to plant the crop. A decline in Punjab's rice crop would hurt the entire nation, already battling soaring food prices that have pushed up the inflation rate to a near four-year high. Punjab is the largest contributor (37%) to the Central rice pool - the stock purchased by government agencies for distribution nationwide and contributes 11% of the total national production.
||Talk about manpower shortage
So far, farmers have managed to plant the crop in less than one-third of the state's target. The government has also proposed to avert the crisis by offering the farm labourers free travel during the sowing season. Sowing expenses have shot up because of the labour scarcity. The per hectare cost of planting rice has jumped to Rs 850 from Rs 600 last year. More job opportunities in industrial belts in northern India and the National Rural Employment Guarantee Scheme, which offers 100 days of employment a year to one member of poor rural families, have been held responsible for the decline in the arrivals of farm hands from other states.
Also read - Manpower problem in the IT industry
...so says HDFC Bank's MD and CEO Mr. Aditya Puri. With the global financial turmoil leading to examination of the roles and responsibilities of regulators, their resistance to "irrational exuberance" has been put to test. Traditionally the central bank's role has been to use the monetary tools to manage the terrible trio of inflation, exchange rate and growth. However, this is set to change with financial disasters becoming too large to handle and significant parts of the markets being outside the central bank's direct control.
||RBI leans against 'irrational wind'
RBI, nevertheless, has from the beginning been very proactive in its role of 'leaning against the irrational wind'. Whether it was aggressive consumer lending, retail asset delinquencies or borrowing against securities, each time the central bank has shown its diligence by dissuadng the borrower and the lender through measures such as tightened liquidity, higher provisioning and limiting exposures. This has lent the Indian financial sector better visibity in the midst of a turmoil.
Here's another sector that's being impacted by slowdown in the US economy - jewellery. As reported by Forbes, 'with jewelry sales slowing in a downshifting economy, many jewelers are placing more emphasis on lower-priced silver and have turned their focus overseas'. For instance, online jeweler Blue Nile has indicated that it sees international sales to form 50% of its total business over the long term, from 5% in 2007. This slowdown in jewellery sales has been a direct fallout of the Americans having less cash to spare for 'high-priced trinkets' as they are already suffering from the financial strain of higher prices for necessities like fuel and food.
Also read - What's ticking for Titan Industries?
||No 'jewel' in the crown for US consumers
Indian consumers' appetite for jewellery however continues unabated, or atleast it seems. And one of the beneficiaries of the same has been the gold market in Dubai, which saw its volume sales grow by 17% in May 2008 on strong demand from India. High prices were seen hurting gold demand in the domestic market during the 'Akshaya Tritiya' festival recently that is otherwise seen as an auspicious time to buy the yellow metal.
...after rising by almost US$ 4 per ounce yesterday, gold is trading flat in international markets today. The metal is currently trading at US$ 893 per ounce.
The Dow Jones index sunk to its three-month low on Wednesday as crude oil prices spurted by US$ 5 a barrel. The US President has been emphasizing on producing more oil indigenously and will push for lifting the ban on offshore drilling. The president's recent remarks have highlighted the growing political pressure to reduce dependence on foreign oil and deal with rising gas prices.
Until a couple of months back, infrastructure stocks looked like the darling of investors who wished to cash in on the long term 'India growth story' in a very short term. But what followed later was indeed a revelation for many. The prices of these stocks have dropped by as much as 40% in the latest market meltdown. We believe that these stocks, at the current levels, are very attractive for long-term investment purpose as, keeping aside the stock price volatility, there has been no real change in the fundamentals of the companies.
The World Bank estimates that a 1% increase in a country's infrastructure stock is associated with a 1% increase in the level of GDP. Also it is estimated that emerging economies are likely to spend US$ 1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs-twice the average infrastructure-investment ratio in developed economies. The visibility of the earnings potential of Indian infrastructure companies, is thus, very robust.
"Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it." - Peter Lynch
||Today's investing mantra
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...
| Get Access
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 infringementDisclosure & 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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407