Is this India's most undervalued firm? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is this India's most undervalued firm? 

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In this issue:
» Infosys disappoints the street
» Which are world's and India's most transparent firms?
» Is China worse than Greece and Spain?
» Government all set to bite the bullet in diesel prices
» ....and more!

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Mention the word sovereign bonds and chances are that countries like Greece and Spain would shudder with fear. After all, it is these very instruments that played a pivotal role in their near-bankruptcy like experience. That sovereign bonds held by foreign investors are the ultimate weapons of destruction is not something that has been brought to light recently. For as Ajit Dayal, our founder, explained in his latest web summit, nearly every country that has gone bankrupt over the past few decades had its downfall engineered mostly by sovereign bonds that were held by foreign investors. Clearly then, the flotation of a sovereign bond overseas does carry a great deal of risks.

This is not all. As Ajit rightly highlighted, the rampant speculation in these bonds has the potential to dislocate the entire cost of capital structure of an economy. And lead to wild fluctuations in currency as well as GDP growth. Is it any wonder that despite intense lobbying by banks and Wall Street firms, India's central bank has chosen not to issue sovereign bonds to foreign investors?

This is not the first time though that the Reserve Bank of India (RBI) has come to the rescue of Indian economy. Time and again, it has played the role of a responsible monetary authority to perfection. But does it get all the accolades it so richly deserves? We do not think so. Infact, at times, it is the subject of unnecessary criticism. Take the recent case of the central bank receiving flak from corporate India for not lowering the interest rates. We liked immensely the attitude of the RBI of not bowing down to corporate pressure and instead, going strictly by rule book. Clearly, if there is one truly undervalued and underappreciated firm in India out there, it has to be the RBI we believe.

Do you think that the RBI does not get the appreciation it deserves or is it too conservative? Share your views with us or you can also comment on our Facebook page / Google+ page.

01:08  Chart of the day
Do the wealthy people in your country deserve their wealth? Or have they acquired it through ill-gotten means? This is a question that The Economist posed to a group of respondents in each country and their answers form the subject of today's chart of the day. As per the survey, nearly 60% of the US respondents feel that the rich in their country do deserve their wealth. So much for the intense debate around the rich poor divide in the country. In India too, with 50% people voting in favour of the rich, the percentage is not bad either and with China is the highest amongst the BRIC group of nations. Reports of there being Oligarchy in Russia gets further affirmation in the form of merely 16% respondents there believing that the rich there do indeed deserve their wealth.

Source: The Economist

When a stock of a company nosedives over 9% in one day, it creates panic amongst the investors. And if the stock is of a major bellwether, the panic is even more pronounced. Such is the case with the country's second largest IT Company, Infosys Ltd. We love it. We hate it. But we all cry when it loses so much in share value. The fall today was brought about by yet another quarter of poor results. The company reported a quarter-on-quarter (QoQ) decline of 1.2% in net profits. In dollar terms, the decline was even worse at 10% QoQ. Slowdown in the company's major markets, US and Europe, has been cited as one major reason for this decline. In addition to that, global uncertainty continues to haunt the future of the company. This has resulted in a weaker guidance for FY13 by the company's management. Though one should not really put too much faith in short term quarterly results. However, it does appear that the IT industry is going through a slowdown at least in the short term. In the long term the need for outsourcing and India's proven capabilities in the field would help boost the industry's growth.

The tag of being an 'under achiever' is not easy to carry. Especially if you are the Prime Minister of one of the largest emerging economies. But it seems there is something that is bothering PM Dr Singh more than this scathing mockery. The concern that a 'junk rating' from rating agency S&P will cause a flight of foreign investors from Indian shores. It has been a month since the rating agency downgraded our sovereign rating. And the government's failure to take any corrective action in the next 60 days will call for the junk status. That could be the last nail in the coffin. With lack of clarity on taxation issues and discouraging economic growth data, the junk rating is bound to scare investors. Hence, as always the government seems keen to opt for a quick fix solution.

A small rise in diesel prices may not allay India's ballooning deficit fears. But it will definitely give S&P enough reason to believe that India does not have a lame duck government. The diesel price hike could therefore be the only disaster remedy for restoring India's economic image. We believe that the government should not take a short sighted approach to tackling subsidies. A better rating from rating agencies will just be a temporary fee good factor. Unlike the US which is basking in the fake glory of its AAA rating, we would rather have a more fundamentally solid economy with mediocre rating.

For most people, Greece and Spain would be synonymous with a credit crisis. And quite rightly so! These economies have burdened themselves with so much debt, that it has put them on the brink of disaster.

China, on the other hand, gives the impression of a giant dragon growing at a gravity-defying pace. But if a certain Mr Jim Chanos is to be believed, China's credit is in a much worse state than Greece and Spain. In fact, in his view, the size of China's credit problem would make them look like pygmies. This is indeed shocking! How can this be? Let us explain his argument. Mr Chanos takes us to a micro level and points at the state of individual companies in China. As per him, the accounting is very bad. Most companies seem to have negative cash flows and non-collectible receivables. Even worse, they don't seem to be earning enough to cover their cost of capital . What happens when you have loads of bad debts and earnings lower than the cost of capital? You are on your way to bankruptcy. If this is really the case of a majority of companies in China, it is indeed a matter of worry.

High unemployment and slow economic growth don't mix really well. Unfortunately, America is stuck in this messy situation. And, if history serves as a lesson, America's current high rates of joblessness may be here to stay. The US unemployment rate has stayed over 8% for more than three years. Yet for seven decades after the Great Depression, the rate averaged 5.4%. Now, at the current slow pace of job additions, unemployment rates won't even dip to 7% until the end of the decade. Since Y2K the US has faced some crisis or the other. The dotcom bust, 9/11, the subprime crisis, Iraq war etc, to name a few.

This decade's jobless rate in the US is expected to be about 7.9% if things stay at the current pace. This would be the highest for a decade since the Great Depression. What's worse is that even people with jobs are feeling the pinch. A number of graduates are forced to become waiters or bartenders. Plus, pay rises haven't kept pace with inflation. For the fiscal year ended in March, wages and salaries increased an average of 1.7%, and during that same timeframe, consumer prices rose 2.7%. Plus, with the number of job seekers in the market, employers have the upper hand when it comes to determining wages. Thus, wage growth is expected to be low this year as well. The American dream does seem to be slowly turning into a nightmare.

Transparency International has come out with its report on 105 biggest publicly traded companies. This is based on their commitment to transparency. Some results have been surprising. Some not. For instance, the energy sector has scored significantly for being quite transparent. Now oil operations are mostly carried out in regions with high geopolitical tensions. Thus, one would have thought that there would be a veil of mist surrounding their businesses. But it is precisely because of this opaqueness that the pressure on oil companies mounted to focus more on transparency. And the efforts seem to have paid off.

The unsurprising part is that the financial sector was touted as the least transparent. The worst of this dubious honour was heaped upon Chinese banks. Interestingly, while Warren Buffett has been renowned for his sound value investing principles, his company Berkshire Hathaway seems to have fared poorly on the transparent front.

What about our Indian companies? Equitymaster is conducting a Corporate Trust Poll wherein we asked our readers to vote for the most trustworthy corporate group in India. And the results so far have been rather interesting. Tata Group has received overwhelming percentage of votes at 62%. HDFC Group is second but trailing far behind at 9%.

Meanwhile, indices in the equity market in india took a knock today on account of poor set of results from IT bellwether Infosys. The Sensex was trading lower by around 300 points at the time of writing. IT stocks were under the maximum pressure. Most Asian indices closed lower today with Europe too opening on a weak note.

04:57  Today's investing mantra
"Projections should be handled with care - particularly when they're being provided by someone who has an interest in misleading you." -Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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11 Responses to "Is this India's most undervalued firm?"


Jul 14, 2012

Time and again it is because of RBI our country has come out very comfortably from many crisis. Otherwise the scandals after scandals with multi trillion rupees would have brought our economy to one worse than greece and spain and such other countries. We are with you


Vinod Sahni

Jul 13, 2012

Unfortunately there is a flip side to RBI's unrelenting attitude to keep interest rates high:When our companies are made to pay high interest cost the business becomes unviable; even the value of GoI's holding in PSUs came plummeting down! In any case food inflation has not been dented by RBI's policy since the traders in Mandis do their business in cash & not through banks.

Like (1)

Ramasubramanian C

Jul 13, 2012

I join you in saying that RBI is the most undervalued entity in India and across the world. The Central Bank is doing a GREAT job in the midst of calamity in the financial world across the globe. Time and again, the RBI has withstood the storm like a chinese wall. Trust it remains so in future to save us from the impending calamity.

Like (1)

Anupam Garg

Jul 12, 2012

any prizes for guessing how rich were the respondents of people who read economist?

Like (1)


Jul 12, 2012

RBI - you saved us.. All the political buggers and beggers mend any rules for thier slightest advantage, but u stood tall and against the business/corporate pressures/political pressures and keep the safeguard.. good

Like (1)

PR Gadigi

Jul 12, 2012

Of course, RBI has been doing its job in a perfect manner. RBI, I believe, is the most upright autonomous regulatory body in India. Though judiciary gets some credit, but not to the same level as RBI. Had Judiciary also worked in similar manner, parliament and politicians could have been made to work with the right spirit of the constitution, and India could have been in much much better state than what it is today.

Like (1)


Jul 12, 2012

RBI is doing great service to the common man by not succumbing to the pressures from money hungry business magnets and unscrupulous politicians. In the days of high inflation, lowering of interest rates will certainly lead to higher inflation rather than spurring growth.Due to very nature of its duties, RBI will not receive accolades from the business and political community for the good work it is doing.

Like (1)


Jul 12, 2012

India's main conerns,
1.Lack of leadership
2.Work only for minority votes.
3. Most corrupted judiciary system and investigative systems 9 how can Raja gets bail and how come Chidambaram not behind te bars?
4.Lack good primiary enducation system ( no desciplane in schooling system.)

Like (1)


Jul 12, 2012

Only two institutes in Bharat ie India are working properly. One
RBI n other Judiciary. The politicians/netas from Galli to Delhi
are interested in grabbing and holding the power seat so that
they can amas money and Babus help them. Industrialist trying to
extract their pound of flesh by using media which they control.
Therefore a hysteria against RBI. RBI kept its cool in the last
two decades so that Aam Aadami can survive. I have not
forgotten the Naokhali Famine of last century. RBI KEEP IT UP
so that we can be alive no matter whether in skeleton form but
we will be alive.-

Like (1)


Jul 12, 2012

I dont think so.RBI remains in spotlight all the time.The TV appearance shows it is a great brand of India.

Like (1)
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