Is India Inc creditworthy? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is India Inc creditworthy? 

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In this issue:
» Is this the end of interest rate hikes in India?
» 12th plan to target subsidies
» Debt default by US would be catastrophic: PIMCO
» Euro disintegration is inevitable: Soros
» ...and more!

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00:00
 
In recent times, India Inc has been out rightly cribbing about the rising interest rates. They have claimed that rising interest rates have led them to defer their borrowing plans which in turn have led to postponing their expansion plans. But an interesting question to ask here is even if the interest rates were not an issue; would India Inc be able to raise funds anyways? Are they creditworthy for loans? Well at the moment it does not look like it.

As reported by a leading daily, around 500 of the top companies in India have Rs 160 bn of foreign currency convertible bonds (FCCBs) coming up for redemption in March 2012. If the share prices of these companies had gone up, the lenders would have converted these bonds to equity shares in the company. Unfortunately, many of these companies have lost share value due to market volatility. As a result, they would be forced to redeem these bonds on the due date. And that's where their troubles begin. Many of these companies have balance sheets that are stretched to the brink. Therefore, paying back the bonds becomes an uphill task.

Hence some of these companies are now trying to get rid of their commitments. This has raised concerns regarding the creditworthiness of India Inc with the overseas bond holders. These holders are now turning their eyes towards the Indian companies as well as the Indian judicial system. They are concerned whether the Indian courts would help them out in case the Indian companies default on their bond repayment.

Whether the situation of default arises or not, is something we will all have to wait and see. But one thing is for sure. India Inc will definitely look to restructure or raise more debt to take care of their FCCB obligations. They do not wish to be blacklisted in the foreign markets. But solving the problem of debt with more debt is actually as ridiculous as it sounds. And whether they will get more debt or not is another problem as it appears for now that they have lost their creditworthiness.

Do you think the problem of FCCB repayment highlights that India Inc has lost its credit worthiness? Share your comments with us or post your views our Facebook page.

01:15  Chart of the day
 
We all remember the days when computer meant the bulky screen, keyboard and the CPU (Central Processing Unit) tower. This transitioned into the streamlined laptops that one could carry along with them. These have now given way to the ultra-thin lightweight tablets that like the iPad and Samsung Galaxy Tab. As per a study carried out by CISCO the growth of tablet PCs is set outpace that of the desktop PCs. (This study takes into account the growth from 2010 to 2015.) Today's chart of the day shows the 2010-2015 growth rates for some of the popular devices being sold in the market today. E-readers and tablet PCs are all set to see phenomenal growth rates in the coming years.

Data source: CISCO

01:45
 
Interest rates may have finally peaked in the country, according to RBI's ex Governor, YV Reddy. This comes as a relief for the economy, which has been bearing the brunt of RBI's monetary tightening. Since January 2010, the central bank increased the portion of deposits to be kept with the RBI by 1%. It also increased key policy rates by 4.25% through 10 rate hikes. The transmission of the central bank's monetary policy usually takes some time. Thus, the RBI (Reserve Bank of India) will most likely take a wait-and-watch approach, before taking any decision on further tightening.

02:05
 
Fiscal deficit has been a problem for India for quite some time now especially since it does not give much headroom to the government to spend on developmental activities. Realising the importance of this, the Indian government in its Union Budget had outlined a fiscal roadmap for bringing the deficit down. But this may not be as easy as it seems. The major problem has been subsidies and the government will have to seriously get this down if there has to be any meaningful improvement in its finances. In this regard, the Planning Commission is in the process of preparing an approach paper to the 12th five year plan. This paper will be addressing the issue of a trade-off between outgo on subsidies and developmental activities. The idea is to bring down subsidies so that more revenues can be channeled towards development. That will be a big challenge. Subsidies are projected to rise by 23.5% in 2010-11 in the budget estimates of last year. About 94% of all subsidies comprise food, fertiliser and petroleum subsidy. A significant chunk of this subsidy has been provided for oil marketing companies (OMCs). However, despite raising petroleum product prices and reducing duties, OMCs are estimated to face under- recoveries of Rs 1.2 lakh crore this year. Hence, it will be interesting to see how the paper chooses to address this issue and whether it is able to come up with some meaningful suggestions to implement the same.

03:00
 
Currently, the US lawmakers are negotiating to raise the US$14.3 trillion debt ceiling so as not to incur a short term default. Simply put, a 'debt ceiling' refers to the limit set by the US Congress beyond which the national debt cannot rise. If the negotiations fail and the lawmakers are unable to raise the debt limit, the default will have far-reaching effects across the globe. PIMCO, the world's biggest manager of bond funds, has expressed some serious concerns about the occurrence of such an event. The firm opines that such an event could have "catastrophic" legal consequences. PIMCO has also asserted that as the US central bank prepares to end US$ 600 bn bond-repurchase program this month, non-US government bonds will begin to seem more valuable than the US Treasuries. There is a very simple logic to investing. An investor buys a security only when he sees someone else interested in acquiring that as well. With the QE-2 (quantitative easing program) coming to an end, there is no major buyer of US Treasury in sight. Now what kind of trouble is that going to spell? Well, there are broadly only two things that can happen. Either interest rates will have to be raised to attract investors or the US Fed would have to come up with a QE-3. Both the options are going to be disastrous for the US economy.

03:35
 
Billionaire investor George Soros has been a rather vocal critic of the Euro Union for quite some time now. He was at it again at a recent panel discussion in Vienna. Soros argued that the fact that weaker economies in the Euro region will have to exit the single currency is probably inevitable now. "The authorities are actually engaged in buying time. And yet time is working against them", he is believed to have added further. Soros' comments have come in the backdrop of crisis in Greece failing to recede. Investors are also concerned that Greece's failure could trigger a contagion that could well engulf other Euro nations as well. It should be noted that Soros had earlier spoken about how a monetary union without any political union led to the current crisis in the region. As per Soros, although credit risk of different countries within the Euro was different, they could borrow at the same interest rate as some of the stronger countries like Germany. The countries took advantage of this and borrowed indiscriminately. The borrowing binge then led to asset bubbles and a huge build up of debt. With their economies entering recession, the weaker nations are now finding it hard to repay. Consequently, they are also threatening the entire existence of the European Union. Therefore, unless they quickly find a way out, the breakup of the Union does look like a strong possibility.

04:05
 
We had written earlier about the perils of cheap money. But this time our views have been confirmed by none other than the Bank for International Settlements (BIS). That cheap money in the developed economies has been primarily responsible for fuelling inflation and giving rise to asset bubbles has been confirmed by it. The BIS has in fact placed the blame for economic problems in emerging economies squarely on the developed ones. Central banks in the US and Europe have been accused of misusing cheap money for getting rid of the financial crisis. And in the process, fuelling rise in prices of essential commodities. The BIS believes that this has hurt the growth rate in the emerging markets. While we are in no doubt of this predicament, the warning on property prices is indeed worrying. That spiraling property prices and rising private sector indebtedness could leave 'long-lasting wreckage' on the global economy is indeed something that policymakers need to keep in mind.

04:40
 
Meanwhile, Indian stock markets are treading in the positive territory boosted by the gains in the energy stocks. At the time of writing this, the benchmark BSE Sensex was trading higher by 232 points (down 1.3%). With the exception of China, nearly all the major Asian stock markets were trading in the red as well with Japan and Korea being the top losers.

04:55  Today's investing mantra
"Investing without research is like playing stud poker without looking at the cards." - Peter Lynch
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7 Responses to "Is India Inc creditworthy?"

shome suvra

Jun 28, 2011

For redemption India Inc should go for total return swap.

Like 

Veeresh

Jun 27, 2011

COULD YOU PUT UP A LIST OF THESE COMPANIES WHICH HAVE FCCB WITH REPAYMENT DUE ON MARCH 2012 SINCE IT WILL BE INEVITABLE TO EXIT THESE STOCKS FOR THERE WOULD BE A CRASH LIKELY COMING FOR THEM

Like 

SUJIT BANERJEE

Jun 27, 2011

Equity Master: you are in a most informative position and has given an well informed views about India Inc and their reputation abroad as well in India . We common man understand simple question and simple answer. You do business to make profit . Do ethical business and make reasonable profit . But India Inc views are too short sighted. They are always in a mood to Grab all at a time and how people feel about it they are least bothered .They are never happy. Is it not a contrast of Shining India : Ambani Palace next to Dharavi ( worlds Largest SLUM ) ? Do we will have to feel very proud of India Inc when they try keep on expanding their wealth in most unethical way with the help of politicians ( as we see Land Grabbing case base on the law of 1894 enacted by British that favoured them suits these Desi Kings & Corporates).What else to talk about them .
Thanks

Like 

Sthithapragnja

Jun 27, 2011

Eq.Master Team,

At the very outset let me honestly admit my utter ignorance of the subject of economics !!

Probably our Large companies must have resorted to the FCCBs when their going was good with high value both for their Shares as also for the Dollar then(some 4-5 years ago ??)

Their share prices also must have been at their peak then !!

Now that both the value of the dollar and the share prices have declined, as indicated in your article
it is very difficult for the concerned companies to make the repayment when the Overseas bond holders demand their (invested) money back ??

I have heard of "Kite Flying"( a parlance used in banking to denote those people who give a cheque in order to borrow time for making a repayment of one debt and getting into another debt(slightly higher amount than the original to take care of the interest etc. obligations ??)

The scenario may not be very far off from the one depicted above for the Indian Companies in the regard ??

I hasten to conclude !!

Like 

AMARISH SHAH

Jun 27, 2011

SIR,
WHICH 500 COMPANIES WHO HAS FOREIGN CURRENCY BONDS-
AMARISH

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R RAMAKRISHNAN

Jun 27, 2011

wrt your 5 minutes wrap up 27 06 2011 briefs on
1 Debt default by US would be catastrophic PIMCO
2 Euro disintegration is inevitable Soros

the world public have not still understood the real meaning of the OECD AND EURO

OECD stands for Organisation for economic crisis including chaos AND catastrophies and disaster

and EURO stands for European Umbrella of Rehabilitation Organisation.

The results in the past three years goes beyond any iota of doubt to prove again and again The Leman Brothers, AIG Black Rock
bail out, quantitative easing, jobless recovery
sovereign debt crisis

Privatise Profits Socialise Losses That is the dictum of capitalism. the hybridised capitalism China has understood the above gayatri mantra of capitalism

While STD AND P00R Moody etc make sovereign ratings of other countries China creates the sovereign ratings of USA and European countries based on the debtor creditor bonded relationships

When God created transactions he saw to it that the giver has the upper hand and the taker has the lower hand The sovereign bond of relationships of course

R.RAMAKRISHNAN
27TH JULY

Like 

R RAMAKRISHNAN

Jun 27, 2011

wrt 12th plan target subsidies, let the government of india allow the rupee to appreciate upto rs.40 (rupees forty) which will bring down our import bill, and where industries use imported raw materials, bring down their cost of imports in rupee terms (as importers will pay less rupees for dollar value of imports). The most beneficial effect of appreciation of the rupee will benefit the petroleum sector as crude oil will be less costly in rupee terms (as we need to import 70% of our crude oil imports) because of the appreciation of the rupee and the oil marketing companies will make a price equalisation reserve fund to meet the future oil shock rather than depend on government subsidies.

As far as the export sector is concerned, let them improve their technology and efficienty to bring down
teir export price competitive to earn more forieign exchange.

R.RAMAKRISHNAN
BANGALORE
27 06 2011

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