Greed will come back - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Greed will come back 

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In this issue:
» Fuel prices hiked, not freed
» Pharma, the next big thing
» India outsources to itself
» Introduction of law to improve disclosures
» ...and more!!

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Bill Gross, the guru of fixed income investments had earlier mentioned that the US economy should get used to the new trend of significantly lower GDP growth for years to come. And the man is at it again. His most recent letter has even more pessimistic connotations to it. Borrowing from an article in NY Times, he begs a very important question, "How do you put together a consumer economy that works when the consumers are out of work?" We couldn't have put it better. Indeed, this is the fundamental problem staring the US economy in the face and sadly, there aren't any quick fixes around.

Gross goes on to mention that corporate profits, which have already halved from the peak levels of 2007, may keep declining, in sync with the decline in real economic growth. Add to this the fact that the share of corporate profits in the GDP is also under threat as Government looks to raise taxes and employees ask for more concessions. It does not take a super IQ guy to figure out that the outlook for equity investors in the US and significant parts of global economy, does not look very good and sadly, it may continue for quite some time. "Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum" is how the erudite Gross chose to put it across.

There are no signs of the much anticipated deregulation of fuel prices. The government has instead hiked the prices of transport fuels - petrol by Rs 4 per litre and diesel by Rs 2 per litre. However, the prices of domestic LPG and Kerosene have been left unchanged. With global crude prices climbing again, this move comes as no surprise. The public sector oil marketing companies (OMCs) - Indian Oil, BPCL and HPCL - are unable to recover their input costs. In fact, they were likely to run up an under recovery bill of Rs 700 bn per year. This hike will save them around Rs 130 bn.

It may be noted that this is a partial measure. The OMCs will still incur under recoveries of Rs 2 per litre on petrol and Rs 1.62 per litre on diesel. We believe the ideal solution is for the government to genuinely deregulate fuel prices and let market forces determine the price levels. Simultaneously, it should provide targeted subsidies to the genuinely needy. However, India's top oil & gas producer ONGC, in its analyst meet, said that it is unrealistic to expect complete deregulation. They should know, after all they foot a part of under recovery bill.

If you believe IT will emerge as the next big thing in India think again. This is because Baron Ajit Shetty, the MD of Janssen Pharmaceutica believes that distinction could very well belong to pharma. And there are many reasons for this. For starters is the product patent law that has been introduced in the country. While there are many anomalies in the same which have been a bane for MNC pharma, Shetty believes that the Indian pharma companies cannot rely on the generics model forever and will have to focus on R&D and developing patents if they want to become a force to reckon with in the global pharmaceutical industry. Once the industry intensifies its focus on developing drugs and patents, then the pharma landscape in India will undergo a sea of change. Not just that, India will emerge as a key player in clinical trials and Indian companies are expected to step up the gas on tie-ups both in research and generics. While there is not much to choose from between India and China, China clearly has the edge in terms of infrastructure, an area which India seriously needs to develop by leaps and bounds.

The cliche of US companies outsourcing their call centre jobs to India is so widespread that there are several Hollywood movies made on this theme. With the US in recession though, it may all be changing. As per the Wall Street Journal, India's call centers are increasingly signing up Indian clients. Although India outsources business to the tune of US$ 12 bn, a merely 2.4% of the worldwide figure of US$ 500 bn, it is expected to contribute almost 15% of the pie by 2020.

It may be noted that US outsourcing to India was powered mainly by the relatively lower wages here. Interestingly, the outsourcing originating from within India is based on the difference in wages between urban and rural India. We believe this is a classic case of 'comparative advantage' - the ability of a person to produce a good or service at a lower marginal cost and opportunity cost than another person. Given the cost of living in the Indian metros, this trend is likely to continue.

The World Bank Group recently stated that it committed nearly US$ 59 bn to struggling economies during FY09 (ending June 2009). A chunk of this was put towards infrastructure financing creation, which according to the bank is the critical sector for rapid recovery from the crisis and job creation. The balance was shared between poverty alleviation, support for safety net and other social protection programs, amongst others. Considering that the economic scenario is yet far from recovery, the group feels that its assistance will strongly be required in the current fiscal as well. To put thing in perspective, the committed amount saw an increase of 54% over the previous year and also was a record high for the institution.

The Satyam scandal may have been a very unfortunate event for the company's shareholders and lenders, for whom the incident may have been nothing short of a nightmare. But it might just turn out to be a positive thing for equity investors in India going forward. This because it has served as a loud wake up call for the authorities, more so because of the magnitude and the boldness of the fraud.

As per a Wall Street Journal report, the Indian government plans to enact a law designed to improve companies' disclosure of information, tighten accounting standards and bring in more stringent requirements for the independent directors of a company, all before the end of this year. If a detailed review of the Satyam fraud is taken into account while designing such a law, it will surely add to the corporate governance standards practiced by companies in India. It is indeed the need of the hour to ensure that malevolent promoters and management do not get the upper hand over the other shareholders of the company. Cheers to safe and secure investing climate!

In the meanwhile, Indian markets ended the day on a flat note with the BSE-Sensex closing higher by 13 points. Other major Asian indices ended the day on a mixed note today while the European indices were trading in the red at the time of writing.

04:55  Today's investing mantra
"One of the first questions we ask about a possible investment is 'Why is it mispriced?' If you don't have a reason, there's a good chance it isn't really mispriced" - Jeffrey Tannenbaum
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5 Responses to "Greed will come back"

Ram Kumar Gupta

Jul 3, 2009

I am reader of this page since last one year. I find "Greed will come back" thought provoking and make a person updated in respect of financial effects not on the system but the people as well.

Keep it up and May God bless you.

ram kumar gupta


S A Rao

Jul 3, 2009

I have been reading this for about 3 months now.
Excellent 'wrapup'. You don't miss anything major.
Because "Today's Investing Mantra" is at bottom, I start reading from below upwards!!
Can you move it at 00:00.



Jul 2, 2009

its getting gloomy day by one say what will happen until it happens.

but this edition is tells you what may happen next..the policies of Indian govt. is likely to be scrutinized deep.

so keep working ...



Jul 2, 2009

3860/3800/3740/3680........what's your openion??


dipankar deb barman

Jul 2, 2009

i would like to thank you for sending me valuable input about the zigzag indian share market.heartly speaking to you sir earlier i was not too much interested to your mails now i am feeling being blessed by sir keep informing me about the ongoing world market situation

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