Worry about crude, coal and... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Worry about crude, coal and... 

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In this issue:
» The Detroit of South Asia
» Is the recent rally suggesting a trend?
» Are Indians qualified enough to be professionals?
» Is supply chain stopping Walmart?
»  ...and more

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00:00 Chennai - The Detroit of South Asia
As per the report of the 11th Five Year Plan (2008-2012) prepared by the Tamil Nadu government, the investment in auto sector in Chennai and its suburbs is expected to touch US$ 15-20 bn by 2015, jumping four-fold from the present US$ 4.5 bn. With top auto makers such as Hyundai, Ford, Renault-Nissan, BMW and Ashok Leyland expanding their units, Chennai may be overtaking other auto hubs in India like Pune and Gurgaon where DaimlerChrysler AG and Volkswagen AG and Maruti Suzuki India have their units respectively.

Tamil Nadu contributes to 21% of all passenger cars, 33% of commercial vehicles and 35% of auto components produced in the country. More than 100 companies are involved in the business, providing 2.2 lakh direct employment opportunities, playing a 'crucial role' in the state's economy and contributing 8% of its GDP. The state has two automotive clusters, one at Sriperumbudur and Maraimalainagar each and together these have attracted investment of US$ 4.5 bn. Tax sops, proximity to the sea port (for exports) and a good work culture are some of the factors that encourage manufacturers to set up shop in the state. With examples like these, it is time that other states pick up cues and develop their unique proposition for attracting investments and industries.

  • Also read - Identifying auto stocks

    01:00 Does a two-day rally suggest a trend?
    Some of the financial sector stocks listed on the US bourses that have been battered over the past so many sessions, have been bringing cheer to investors of late. Infact, a couple of them have registered gains in excess of 10% as the concerns over the beleaguered government-owned mortgage financers Freddie Mac and Fannie Mae subsided. Without counting yesterday's gains, Fannie Mae's stock has plunged 77% so far this year and Freddie Mac has fallen 80%. Together, these firms back or own around US$ 5 trillion worth of housing debt or about the half the US mortgage market. Banking stocks such as JP Morgan and Morgan Stanley and investment banking firm Lehman Brothers also showed some strength. In the meanwhile, crude oil prices showed some signs of softening in the earlier sessions as they came off the highs of US$ 147 a barrel and further aided investor sentiments in the US markets.

    Financial stocks in the Indian markets have already started picking up cues from their US counterparts and have registered some strong gains today. This is despite the fact that their results declared so far have not really thrown up any surprises! So, does this mean that a two-day rally can suggest a trend?

    Single day gains suggesting trends?
    US markets 17th July'08 Indian markets 18th July'08
    Freddie Mac 22.0% ICICI Bank 11.9%
    Fannie Mae 18.2% Yes Bank 9.1%
    JP Morgan 13.5% HDFC 9.4%
    Lehman Brothers 13.5% HDFC Bank 7.9%
    Morgan Stanley 9.3% Union Bank 6.8%
    Source: CNN Money and Equitymaster

    01:39 Indians need to worry about crude, coal and...human resource?
    The government recently sanctioned funds (Rs 61 bn) for 8 new IITs (Indian Institutes of Technology) to be set up in the states of Bihar, Andhra Pradesh, Rajasthan, Orissa, Gujarat, Punjab, Himachal Pradesh and Madhya Pradesh. With the creation of these new IITs, high quality technical education will become accessible to bright students as barely 2% of about 0.3 m students, who appear in the Joint Entrance Examination every year, manage to get admissions. This move certainly suggests that the government has woken up to the fact that an Indian needs to be not just literate but also employable and compete with the best globally.

    Even as the rest of the world wakes up to the fact that India's population is getting younger and as numerous as China's (particularly with her 'demographic dividend'), we are not sure whether these large numbers are also capable of performing the tasks that are required of them to push the growth rate up. Even though close to 99% of Indians get enrolled into schools, the 2001 census revealed that the drop out rate at the primary level itself was 29%. Finally, a whopping 62% of all children drop out of schools before matriculation.

    Thus, India has a working population with 36% of the workers who are literate but without skills. By emphasizing on literacy rather than vocational training, the Indian education system has managed to produce millions who are literate but not necessarily skilled in a particular art. Only 17% of the two million graduates that passed out of Indian Universities in 2003 received technical or professional training. But this scenario seems to be in a flux as can be seen by the enrolment numbers for higher education. They grew annually by 2.5% in the decade up to 2000, but have shot up to an annual growth of 6.2% in the five years since.

    There are many corporate initiatives across the country that try to address this problem. Some of them are doing an excellent job. Unfortunately, the efforts being talked about-by the government, the private sector, the public sector and non-governmental organisations-only tinker at the edges because they lack scale or proper delivery channels. ICICI Bank has tied up with Manipal Universal Learning, which is a finishing school for the probationary officers at the bank. Lower down the skills ladder, Asian Paints has set up a training institute for house painters. And virtually everyone is aware of Infosys Technology's campus in Mysore, which is a bold statement to highlight the importance the company pays to training. But these are just drops in the ocean-India needs at least 100 such initiatives.

    03:05 ...and yet the US complains about outsourcing!
    Amid the row in the US over outsourcing, a study has found that several Indian corporate heavyweights such as the Essar Group, HCL Technologies, Tata Group, Mahindra & Mahindra and Wipro have generated over 30,000 jobs for US citizens in recent years. As per FICCI, the Tata Group alone employs 19,000 Americans and has invested over US$ 3 bn (Rs 130 bn), besides operating 16 businesses in US. Indian employers and their American workers contribute billions of dollars to the federal, state and local treasuries by way of wages, corporate taxes, payroll taxes and income taxes.

    About 12 Indian companies, including Essel-Propack, ITC Kitchens of India, Ranbaxy Laboratories, Satyam and Wockhardt Hospitals are making a sizeable impact on the US economy. To put things in perspective, with a presence in nearly a dozen states like Arizona, Colorado, Florida, Missouri, New York and Texas, Essar's American operations generated more than US$ 110 m in revenues last year and has employed about 7,200 people till now, which would increase to 8,500 by next year.

    With Indian corporates offering sufficient employment opportunities to the US citizens and contributing to the economy, the US' arguments against outsourcing need some rethinking.

  • Also read - Scope in software outsourcing

    03:39 In the meanwhile...
    Indian markets closed nearly 4% higher today, following the trend in Chinese and Hong Kong markets. While stocks in China also closed 3% higher, marginal gains were seen in the Hang Seng. Key European indices are trading in the green currently. As mentioned earlier, gains in the Indian indices have been particularly driven by the financial stocks and movement of financial stocks in the US along with their results announcements over the next few day hold the key to the market movement in the near term.

    04.02 OPEC's cartelisation
    The leaders of OPEC (Organization of Petroleum Exporting Countries) have a long list of culprits for high oil prices - the falling dollar, US-Iran tensions and shady speculators. The OPEC consistently claims that supply is not a problem and that there is plenty of oil to meet demand. But last year, as the prices of oil nearly doubled, OPEC was actually cutting production. The cartel produced 1.5% less last year despite adding two countries, Angola and Ecuador, to its ranks. That cutback at a time of growing demand helped drive prices up.

    To get the full context of OPEC's cut, we need to go back to late 2006, when the oil prices were at very different levels. The price of oil was falling fast, from a high of US$ 78 a barrel in August to below US$ 60 a barrel by October 2006. Hedge funds were reportedly piling into the market and driving the price lower and the OPEC probably had flashbacks to the mid-1980s oil-price collapse. The cartel decided it was time to act. In October 2006, OPEC voted to drop production by 1.2 m barrels per day. That may have been the last time OPEC had lost control of the oil market. By mid-January, oil bottomed at US$ 51 per barrel and then began its extraordinary rise. Now we're flirting with oil at US$ 150 a barrel. At times as these, the cartel claims to not be able to increase production sufficiently despite availability of resources.

    OPEC: Supplying demand?
    Joined Share of OPEC
    Jun-08 OPEC oil production
    Saudi Arabia 1969 29.0%
    Iran 1960 11.9%
    UAE 1967 8.1%
    Kuwait 1960 8.1%
    Iraq 1960 7.6%
    Venezuela 1960 7.2%
    Angola 2007 5.9%
    Nigeria 1971 5.8%
    Libya 1962 5.3%
    Algeria 1969 4.4%
    Qatar 1961 2.7%
    Indonesia 1962 2.6%
    Ecuador 2007 1.6%
    Source: CNN Money

    04.32 Supply chain stopping Walmart...
    As per Walmart, India is a nation of retailers. It has 12 m kirana (grocery) stores, which, on a per capita basis, despite the huge population of India, is, the highest in the world. These kirana stores traditionally buy from wholesale markets, and some of them are also serviced directly by manufacturers. In fact, India has one of the most evolved distribution systems by big companies. Companies like Unilever and ITC, for instance, service just close to a million of those 12 million kirana stores directly, which basically means that 90% of these stores actually have to go to wholesale markets to buy products.

  • Also read - A look at the key verticals of retailing

    04.52 Today's investing mantra
    "As far as I am concerned, the stock market doesn't exist. It is only there as a reference to see if anybody is offering to do anything foolish." - Warren Buffett
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