'Real' foreign inflows are here - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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'Real' foreign inflows are here 

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In this issue:
» Credit card woes...for the lenders
» Unreal growth in real estate
» Not FIIs, but FDIs are coming in
» The billion-dollar taste of India
» ...and more!

00:00 Problems - not just for the credit card holder
If you were thinking that by raising interest rates, the RBI is only trying to get stricter with credit card holders, think again. Banks looking to get into the credit card business in association with non-banking companies are in for a struggle with the Indian banking regulator frowning on such alliances. This is particularly after the country's second largest credit card issuer SBI Cards - a joint venture of SBI and GE Money, accumulated huge non-performing assets (NPAs). According to the RBI, a bank partnering with non-banking companies for credit card ventures is not acceptable as it is important that the JV partner is regulated by a banking regulator. Earlier this year, the RBI rejected PNB's proposal to float a credit card JV with insurer American International Group (AIG) and Venture Infotek, a third-party processor for credit card companies.

In the previous fiscal, an aggressive customer acquisition drive had taken its toll on SBI Cards, with defaults rising to possibly the highest in the industry. The JV with GE Money, the Indian subsidiary of General Electric Co., a conglomerate that is also the world's leading consumer finance firm with more than US$ 200 bn in assets, ran into trouble with lack of consciousness of the unregulated partner. SBI Cards, which has so far issued about 3.5 m credit cards, posted a net loss in FY08, its first since 2003, wiping out a substantial portion of its net worth. Also, at the end of FY08, its NPAs stood at 16.3%, the highest among all credit card issuers in India. This justifies the regulator's apprehensions with regard to such JVs, particularly at a time when the high interest rates are making credit card dues a problem not just for the borrower, but also for the lender.

  • Also read - Is the RBI's justified in raising CRR and repo rate?

    00:05 Un'real' growth
    In June 2005, India's largest real estate company, DLF, bought a 17.5-acre mill land in suburban Lower Parel for Rs 7 bn and announced a futuristic retail-cum-entertainment centre. This project, which was earlier expected to be completed by the end of 2008, is unlikely to be over before 2010. Similar have been the fates of the projects initiated by the Kohinoor Group and the Piramal Group, both of which were acquirers of mill lands in 2005.

    These are just three examples of high-end luxury realty projects announced by the country's biggest property giants that are behind schedule. According to industry estimates, around Rs 80 bn of real estate projects covering over 40 m square feet are facing delays. With the cost of the projects having doubled in the last three years owing to the rise in input and construction costs, real estate developers are facing it difficult to execute their plans. Steel and cement prices, which are the main components in property projects apart from labour, have risen nearly 50% since December 2005.

    Further, the red tapism has also added to woes in the realty sector. In Mumbai alone, developers need to obtain 56 approvals from the environment and forest department, pollution control board and others, which often take over a year. Predominantly in the mill land's case, some of the earlier approvals were recently revoked with retrospective effect, causing further delays.

    As the execution risks come to the fore, they have already had a sobering impact on the real estate prices, which are expected to take a further hit once an additional estimated space of approximately 15.4 m square feet in the suburbs get added to the supplies by the next fiscal.

  • Also read - What's taxing real estate companies?

    01.43 The CEO babu's bonus
    The government is trying to address the twin factors of lack of accountability as well as performance of the chairmen and CEOs of public sector banks by offering them incentive packages. A public sector bank's chairman can now aspire to get as much as Rs 0.8 m in annual performance-linked bonus. Even if the CEO is not a hot performer, he can manage Rs 0.6 m, which is higher than his annual salary.

    For appraising their performance, each bank is setting up a compensation committee of the board, consisting of the nominees of the government and the RBI. Further, the government, in consultation with the Indian Banks' Association, has prepared a performance metrics. The performance metrics will judge a CEO on nine parameters, related to business-growth underlined in the statement of intent that each bank board signs with the finance ministry at the beginning of each financial year. While these metrics relate to growth, profitability and cost ratios, the maximum weightage (15%) is given to reduction of NPAs.

    02.30 Not FII, but the 'real' foreign money is here...
    In India, foreigners have sold net US$ 6.1 bn worth of equities so far this year. In 2007, they had invested net US$ 17.4 bn. Do you think, this should be disturbing to retail investors? We think otherwise.

    Last week, the World Bank published its report on Global Development Finance, 2008, which has a chapter on Financial Flows to Developing Countries: Recent Trends and Prospects. The trend of rapidly rising fund flows to emerging markets in the last four years is well known, but what's on every investor's mind is whether that trend is going to be reversed. The World Bank is sure that it will. The bank has projected that private fund flows to developing countries will decline from US$ 1.0 trillion in 2007 to US$ 850 bn in 2009. However, the flows in 2009 will continue to be much higher than in the mid-1990s, before the Asian crisis. Lower global growth and tighter financing conditions are expected to lower capital inflows.

    Having said that, the bank underlines its belief that emerging markets will continue to attract strong FDI inflows over the longer term. It gives the rationale that foreign investors' holdings of emerging-market assets are well below levels implied by their capitalization value and hence are expected to rise significantly over the medium term. The trend of stable FDI inflows is likely to benefit countries such as China, Russia and Brazil, which received FDI worth US$ 84 bn, US$ 52.5 bn and US$ 34.6 bn, respectively, in 2007. In contrast, India's share was US$ 21 bn. On the other hand, portfolio investment was much higher in India last year, at US$ 34 bn, only marginally less than top recipient China's US$ 35 bn. In short, India's dependence on volatile portfolio flows has led to lower overall (FDI and portfolio) net inflows compared to its peers.

    However, things are set to change with India allowing FDI up to 100% in many sectors. Power, petroleum and natural gas, services, construction and real estate have emerged as the preferred destinations for foreign investors, who have pumped in US$ 20.8 bn in these areas in the last four years (World Bank estimates). Between FY05 and FY08, FDI in services leapfrogged to US$ 6.6 billion from US$ 444 m. Infact, lower equity prices could lead to more FDI through stake acquisitions and takeovers of Indian companies, on the lines of Daiichi Sankyo's acquisition of Ranbaxy.

    04:18 Buffett goes shopping
    He has US$ 35.6 bn in cash to spend. He's looking for companies that he can buy at a reasonable price, that have experienced managers he trusts, products with strong market positions or other competitive advantages. Warren Buffet, also known as the Sage of Omaha, now owns 76 companies outright through his company Berkshire Hathaway. Berkshire also owns 8.6% of Coca-Cola, 13.1% of American Express and 8.8% of Wells Fargo Bank. These three investments alone amounted nearly US$ 25 bn in May 2008. Insurance firms dominate the list of Berkshire-owned companies and accounted for 31% of Berkshire's 2007 revenue.

  • Also read - What has the master taught his shareholders in his letters?

    Buffett's investment choices have yielded a conglomerate that's profitable in all kinds of weather. As per the Wall Street Journal, in May 2008, Berkshire's stock that traded for an average US$ 122,700 a share, had returned an average of 19.3% annualized in the past 20 years, nearly double the 11.2% return of the S&P 500 Index.

    04.40 In the meanwhile...
    ...the India markets outperformed most of its Asian peers today as the benchmark BSE Sensex registered gains of 1.4%, as against the Shanghai, Hang Seng and Nikkei which ended nearly 0.5% to 1% lower. Rating agency CRISIL has projected inflation rate to average 8.5% to 9.0% during FY09. It expects high oil prices, strong input costs and a depreciating rupee to continue to exacerbate inflationary and other pressures. Also, the agency believes that high interest rates along with a slowing global economy will trim India's GDP growth to 7.8% in FY09. This will lead the rupee, which is already under pressure from a rising oil import bill to depreciate further. Fiscal improvements in the past few years are likely to be reversed this year due to a surge in oil, fertilizer, and food subsidies.

    04.45 Billion-dollar 'taste of India'
    Gujarat Co-operative Milk Marketing Federation (GCMMF) popularly known by its brand name 'Amul' has become India's first billion-dollar co-operative unit after touching a turnover of Rs 53 bn in FY08. Registering a growth of 23% YoY in sales, the apex marketing body of 13 district milk unions of Gujarat having a membership of at 2.7 m milk producers, has reached another milestone by processing almost 10 m litres of milk in a single day. Amongst its products, sales of Amul milk pouches (up 48% YoY) and ultra-heat treated (UHT) milk (sales up 60%) were the biggest contributors to growth.

    The cooperative society has suggested that in order to maintain its profitability it should be offered a level playing field against the MNCs. That is, if the exporting country is subsidising their milk product exports, corresponding import duty should be imposed so that Indian farmers have level playing field.

    04.58 Today's investing mantra
    "For some reason people take their cues from price action rather than from values. Price is what you pay.
    Value is what you get"
    . - Warren Buffett
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