Hidden value in PSUs & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Hidden value in PSUs & more... 

A  A  A

In this issue:
» Cars 'steel'ing the show
» Hidden value in PSUs
» Orgainsed vs. independent grocery shops
» Railways go hi-tech
» ...and more

00:00 Cars 'steel'ing the show...
Steel prices have surged as India and China build more bridges and houses and their increasingly affluent populations buy more cars and appliances. Steel production has, however, failed to keep pace with the rising demand because of rising costs and a lack of investment in new plants in the past decade. The prices of flat steel, a key raw material for consumer durables, is ruling in the range of Rs 47,000 per tonne (up 29% YoY). The carmakers in India have had to pass on the rise in input costs to their customers in order to protect their margins. However, the industry, which is one of the largest consumers of steel, does not seem to show any adverse impact of rising prices on its sales volumes.

The sales of leading car makers like Maruti, Hyundai Motors, M&M, Tata Motors and Honda Siel have gone up by 8% YoY in the month of June 2008. These five carmakers together sold 160,000 vehicles during the month as compared to 148,000 units last year. Demand for passenger cars is a function of growth in per capita income in the hands of consumers. Thus, higher prices and increasing cost of funding only has a temporary impact on the demand. In India, while the per capita GDP (gross domestic product) grew at a CAGR of 7.1% between FY92-FY06, passenger car sales increased at a CAGR of 14.2% during the same period. The correlation seems to be strong, even if one considers the twenty and ten year trend. As economy grows and income levels increase, demand for passenger cars is also likely to improve over the very long term.

  • Also read - Our outlook on the Indian auto sector

    01:13 ...but trucks are off the road
    Indian truckers, who haul the majority of the nation's goods, have gone on strike to protest against taxes and rising fuel costs. More than 4 m heavy and light commercial vehicles are staying off the nation's roads after talks with the government to avert the strike failed. The strike is expected to cause shortages and hamper the transportation of food articles and manufactured products. That may thwart efforts by the RBI and the government to curb inflation running at the fastest pace in 13 years.

    The truckers are striking to protest against the multitude of taxes and increases in input costs due to the rise in retail fuel prices that has hurt their profit margins. Food retailers are having to store nearly a month's inventory rather than the usual 15-20 days' normally stored. A recent week-long strike by truckers in South Korea last month cost the economy about US$ 5.9 bn in lost trade, dealing a blow to the main driver of the economy's growth.

    01:35 Health of Indian PSUs - Never better!
    The last five years have seen a dream run for Indian state owned enterprises (also known as public sector undertakings or PSUs). Keeping aside the under-recoveries of the oil marketing companies, the government owned engineering, power, banking, shipping and logistics companies have given stiff competition to the best private players in their respective sectors.

    These institutions have not only cleaned up their books and got rid of high debt levels, but have also clocked high rates of growth with efficiency levels comparable to the finest in the sector. What else would explain the fact that NTPC's plant load factor (PLF), BHEL's order book growth, PNB's net interest margin (NIM) and net NPA and Concor's logistical infrastructure are amongst the best in the sector?

    The managements of these companies have now adopted better accounting practices, technological support and corporate governance, besides hiring some of the best talents available. Having a say in the government's policy initiatives only supports their cause. The better operating metrics have strengthened their balance sheet and enabled these companies to build cash war chests to defend as well as grow their market share, be it through organic or inorganic means.

    Further, the strong internal accruals have also strengthened the net worth of these companies. Our analysis of the stocks included in the BSE PSU index showed that the total cash levels held by them increased from Rs 977 bn in FY02 to Rs 2.4 trillion in FY07. Also, while their net worth increased at a compounded annual rate of 16.6%, the debt to equity ratio remained within a range of 0.7 to 0.8 times.

    Founder of Equitymaster, Mr. Ajit Dayal, suggests that the 80C limit of tax exemption should be increased 10 fold to encourage more domestic investors to invest in Indian equities. He further states, "The government has significant ownership of companies like State Bank of India, ONGC, and BHEL to name a few. The share prices of these companies have declined by 30% this year. The loss in market cap of these companies has cost the government a loss in value of its shareholding of around US$ 100 bn (Rs 4,000 bn). With the local Indian money coming into the market, share prices will recover - and the government will see a recovery of its US$ 100 bn loss, at the very minimum. The government could easily sell down its stake in many of these companies over the next few years to offset the loss of tax."

  • Also read - Building a local bull

    03:05 Organised vs. independent grocery shops
    Organised retail still accounts for just 4% of the country's US$ 350 bn market in India. Most Indian shopping still takes place in millions of independent grocery shops. India's small shopkeepers, often slow at the till, have been quick to man the barricades in defence of their turf. One of the larger protests drew some 20,000 traders, vendors and shopkeepers to central Mumbai in October last year.

    Stung by the protests, the government asked the Indian Council for Research on International Economic Relations (ICRIER), an independent think-tank, to measure the impact of organised retail on the unorganised sort. The findings of the study unveiled that when an organised retailer opens nearby, small retailers typically lose about 23% of their sales in the first year. But after five years they are more or less back to where they started. Only a tiny fraction of stores (1.7%) close down each year, and some even hire more people to improve their home-delivery service. The report projects that even five years from now, traditional retailers will control 85% of the market and retail dictatorship remains some years off.

  • Also read - The retailing story unfolds

    03:40 FM bets on high taxes
    The Finance Minister has predicted that India's tax to gross domestic product (GDP) ratio will rise to more than 13% in FY09, as against 12.5% in FY08. The same is expected to contain the fiscal deficit for the financial year below the budgeted estimate. The deficit during 1QFY09 stood at Rs 732 bn (US$ 17 bn) or 54.9% of the annual target. India aims to cut the fiscal deficit to 2.5% of GDP in the current fiscal year, from 2.8% in FY08.

    03:55 In the meanwhile...
    After a steady 700-point sprint yesterday, the India markets were the weakest amongst the Asian indices today, as the benchmark BSE-Sensex shaved off nearly 4% of the 6% gains notched yesterday. This was against a 2% gain in the Shanghai index and 2% drop in the Hang Seng. However, the steep crude prices have not spared other global markets as well as the Nikkei today set its longest losing streak since 1954. The extreme volatility witnessed on the bourses over the last few sessions has unnerved retail investors leading to a majority of them staying on the sidelines.

    The BSE-Sensex has dropped almost 40% since making its high in January 2008 while the Dow Jones Industrial Average (US' benchmark index) has already dropped 21.5% since the highs it had touched in October 2007. At such times, when the technical experts tell you of the possible 'resistance' levels and at what levels they can be broken, we suggest that you do some basic reading and "nothing' else!

    04.15 ...and our today's investing mantra also says so
    "Read Ben Graham and Phil Fisher, read annual reports, but don't do equations with Greek letters in them." - Warren Buffet

    04:25 What's stopping the steel sector?
    No we are not talking about the shortage of iron ore. In fact, what is really hindering the growth of the India steel sector is the shortage of quality engineers. Inspite of having 1,600 engineering colleges in India, there is growing shortage of engineers in the steel sector. As per the industry estimates, the paucity if not corrected, will make it difficult to meet the production target of 290 MTPA steel by 2020. With bright students choosing a career in the field of information technology (IT) over the manufacturing sector, the shortage of talented engineers in the steel sector is expected to increase in the coming years. The shortage of skilled engineers in the steel sector was a concern that came to light when captains of industry attending an international meet on iron and steel-making, expressed fears about the impending manpower crisis.

    04:45 Railways go hi-tech
    Indian Railways has short-listed six IT firms for commercial management of its web portal. The six firms are Wipro Infotech, Satyam, Infosys, Accenture, TCS and Hewlett Packard. The project will involve an integrated system for its freight management, warehouse planning, financial management and billing. The deal value is estimated to be Rs 2.5 to Rs 3.0 bn. The railways' IT outsourcing is estimated to be valued anywhere between Rs 10 to Rs 20 bn, which also includes technology upgradation. The decision to upgrade its IT systems not only augurs well for the one of the largest public sector entities in the country but has also opened up lucrative opportunities for the Indian IT sector.
  • 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...

    Latest EditionGet Access
    Recent Articles:
    You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
    August 19, 2017
    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
    Why NOW Is the WORST Time for Index Investing
    August 18, 2017
    Buying the index now will hardly help make money in stocks even in ten years.
    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
    August 17, 2017
    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
    This Company Beat the Business World's 'Three Killer Cs'
    August 16, 2017
    And what it has in common with beating the stock market too.

    Equitymaster requests your view! Post a comment on "Hidden value in PSUs & more...". Click here!



    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 infringement

    Disclosure & 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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407