India's oily politics - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India's oily politics 

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In this issue:
» Windfall tax is not the answer
» Strange bedfellows in Indian politics
» India to be downgraded
» Gold still has steam left
» ...and more!

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 00:00    Windfall tax is not the answer
Every oil PSU company, whether it is the exploration major ONGC or the refining & marketing major Indian Oil, is resting its hopes on the rationalisation of the industry on the newly constituted Chaturvedi Committee. The management of Indian Oil feels that it is similar to the Rangarajan committee, which has recommended targeted subsidies and making petrol and diesel prices market-driven. Unfortunately, those recommendations have not been implemented.

Indian Oil is facing a severe cash crunch in the face of mounting losses. In fact, it is struggling to meet capex plans of Rs 400 to 450 bn. However, the company feels the bigger problem is the erosion of its credit worthiness, market valuation and employee morale. Interestingly, it feels taxing the windfall gains of private upstream companies such as RIL will not be of any use as they wont amount to much when compared to the mammoth under recovery bill of Rs 2.4 trillion.

  • Also read - Different fates within the oil & gas industry

    Gross underrecoveries incurred
    Rs bn FY05 FY06 FY07 FY08 FY09E
    Petrol 2 27 20 73 NA
    Diesel 22 126 188 352 NA
    PDS Kerosene 95 144 179 191 NA
    Domestic LPG 84 102 107 155 NA
    Total 201 400 494 771 2,453
    Source: PPAC, Press information bureau, GOI

     00:42    Strange bedfellows in Indian politics
    There are two truisms in Indian politics- there are no permanent friends or foes and an enemy's enemy is a friend. With the Samajwadi Party (SP) supporting the government, the CPI(M) general secretary has gone all out to woo Bahujan Samaj Party (BSP) and the Bhartiya Janata Party (BJP) for the no confidence vote on July 22. And what does Mr. Karat offer in return? Support against "cooked up" CBI charges against Mayawati.

    Meanwhile, the SP continues to refer to former president Kalam in its support to the Congress led UPA government. It has also started laying down the conditions with regard to RIL's export oriented undertaking status, windfall tax and gas utilisation quotas.

    In order to counteract SP's proximity to Anil Ambani, Mukesh Ambani has lined up a series of meetings today with Prime Minister Manmohan Singh, Sonia Gandhi, Prime Minsiter's principal secretary and Petroleum Minister Mulri Deora. If this chaos is making you nervous and worried, it should be noted that such events are indeed commonplace in Indian politics and our economy has over the years learnt to take them in its stride.

     01:19    Anil Ambani's dream run...
    ADAG's Reliance Big Entertainment (RBE) is reportedly close to finalizing a deal with Steven Spielberg's DreamWorks. The agreement is expected to be around US$1.5 billion and is likely to be announced next month. The package is likely to involve producing 30 movies in a four-year span and will consist of Mr. Spielberg quitting Viacom and RBE becoming a major shareholder in DreamWorks. RBE is likely to invest between US$500 m and US$600 m by way of equity. DreamWorks would raise a debt of US$500 m. The reason Mr. Spielberg is interested is to regain his independence after having sold DreamWorks to Paramount Pictures in 2006. The reason Mr. Ambani is interested is to enhance the content for the value-added services of his telecom business as well as the direct-to-home (DTH) venture.

    It may be noted that this is not the only big deal this year for ADAG's entertainment venture. It has signed deals with Amitabh Bachchan, as well as Tom Hanks, Brad Pitt, Jim Carrey and George Clooney, investing more than US$1 bn. Moreover, RBE's subsidiary Adlabs has entered the US movie theatre space under the brand name 'BIG' and has acquired more than 200 theatres across 28 locations. Interestingly, billionaire investor George Soros invested US$100 m in RBE for a 3% stake in February, valuing the company at $3 billion. Since then, RBE has been negotiating with private equity giants such as Kohlberg Kravis Roberts (KKR), billionaire investor Carl Icahn, Japan's SoftBank and Abu Dhabi Investment Authority for offloading a 10% stake for a valuation of US$5 bn.

     02:10    India to be downgraded
    Within 18 months of India being lifted to the 'investment grade' category by global rating agency Standard & Poor's (S&P), failure to respond adequately to negative macroeconomic developments and political instability has led the agency to propose a downgrading of the economy's debt rating.

    India's long-term local currency debt is rated BBB- the lowest investment grade, by S&P. The rating may be reduced to 'speculative grade' if steep inflation and higher government spending ahead of next year's election impair the budgetary deficit. A one-notch drop in its ranking would place Asia's third-largest economy on par with Indonesia, El Salvador and Guatemala.

    Although India's ratings were lifted to the investment grade last year for the first time since 2002, the same has been instrumental in allowing Indian corporates seek cheaper funds overseas for their expansion plans and funding inorganic growth. A lower rating may deter foreign investors and make it more expensive for Indian companies to raise money, slowing growth in the US$ 912 bn economy.

  • Also read - Political hypocrisy on display

     02:44    Not all is bad about subprime!
    According to Bloomberg, legal process outsourcing is rapidly growing and is expected to become a US$ 4 bn industry globally by 2015 with India occupying a significant chunk of it. The current value of legal outsourcing is estimated at US$ 80 m, with more than three-fourths of it based in India. Legal process outsourcing is an industry in which in-house legal departments or organisations outsource legal work from areas where it is costly to carry out. The main areas of growth are discovery and litigation support, contract and document review services, legal analytics and due diligence.

    What's more, the subprime crisis in the US has added fervor to legal process outsourcing (LPO) boom. After the subprime, the subsequent defaults have given rise to a lot of litigations in the US. Further, the economic slowdown in the US and other developed economies has motivated legal departments and law firms to take a hard look at their own processes and physical functions carried out by their employees in their domestic markets. They are reviewing organisational costs and efficiencies and are expected to offer cost savings of 30% to 70% by offshoring a bulk of their requirements to India.

    India sees an annual output of 80,000 law graduates. The top 3,000-4,000 graduates either go overseas or join top-notch law firms, leaving the rest of the field clear for alternative careers such as outsourcing firms. Some of the top law firms in the US plan to invest close to US$ 50 m in India over the next 5-8 years. Currently, few top tier IT companies in India like Infosys are active in this space.

  • Also read - Subprime pain may prolong

     03.39    Indian airlines to takeoff by 2011
    According to a recently published KPMG report, Indian airlines are expected to become profitable once again by FY11. This however, would be after posting aggregate losses of around US$ 2 bn (Rs 87 bn) in FY09, and assuming that oil prices would continue to stay at the current levels.

    The KPMG report comes at a time when most airlines are ridden with significant losses, and spiraling ATF (aviation turbine fuel) prices are only adding to their woes. ATF constituted 45% of the operating cost of airlines in FY08, against 25% in FY06. KPMG believes that though ATF will continue to be a critical factor, airlines can post break-even by adopting strict cost-cutting measures.

    India's largest private airline Jet Airways recently said that the industry is losing at least US$ 20 per passenger, signifying close to a 20% oversupply or imbalance, which has led to route and capacity rationalisation. The estimated fuel cost per passenger carried (for Jet) is US$ 85. As against this, the average yield per passenger is only US$ 150. Jet estimates the industry seat capacity to grow at 18% and passenger growth rate to be 11% in FY09.

     04.17    Gold still has steam left
    After touching the US$1,000 mark, gold has since kept a low profile. However, a few crucial factors are likely to favour gold's upward run. First, the choppy equities market push investors towards asset classes with perceptions of lesser risk. Second, the boom in the prices of commodities has triggered inflation fear. Third, gold production in South Africa is declining, causing a supply-demand imbalance.

     04.30    ArcelorMittal to start India operations by 2012
    According to the CFO of the World's largest steelmaker ArcelorMittal, the group's India plants are scheduled to start operations by 2012. It has 2 greenfield steel projects of 12 million tonne capacity each in Orissa and Jharkhand. Besides, the group has recently bagged a mining lease for 500 acres in Karampada mines in Jharkhand to meet its iron ore requirement. The management intends to spend US$ 50 bn over the next 5 to 7 years in growing its steel business. They are also aware and willing to tackle the roadblocks given the size of opportunities.

  • Also read - Key growth drivers of the steel industry.

     04.52    Today's investing Mantra
    "Long-term shareholders benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices. So when the market plummets - as it will from time to time - neither panic nor mourn" - Warren Buffett
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