Free cars to stop attrition - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Free cars to stop attrition 

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In this issue:
» Poor US housing numbers cause global jitters
» One down, six more to go for SBI
» Inflation slightly lower at 11.89%
» Is the US Congress' pursuit of US$ 80 oil a pipedream?
» ...and more!

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 00:00    Poor US housing numbers cause global jitters
The numbers for resale of homes in the US released by the National Association of Realtors turned out to be poor, declining 2.6% in June 2008 on a YoY basis. It maybe noted that resale homes make the bulk of the US housing market. The current level of home resale is the lowest in a decade and marks the third year of recession in the US home markets. A continuous run of poor home sales has led to a pileup of inventory to the tune of 18.6 m empty residential units in the last three months. This is the largest inventory of empty homes anytime in US history. Moreover, banks foreclosed 220,000 homes between April and June 2008. That's nearly triple the number from the same period in 2007.

Along with a decline in volumes, the median home prices have also plunged with June 2008 recording a decline of 6.1% on a YoY basis. Home prices in the US had peaked in July 2006 and have since declined 18%.

A lack of consumer confidence due to sluggish job markets, shrinking credit and plunging real estate prices is being sighted as the reason for the decline. In fact, the story might worsen further as Freddie Mac and Fannie Mae (they together finance 75% of new homes) are in trouble.

As a fall out of these numbers, Asian markets declined after a four-day rally.

  • Also read - Freddie and Fannie cast their nets wide

     00:49    In the meanwhile...
    Taking cues from global peers, the Indian benchmark indices opened on a negative note and the selling pressure refused to abate as the benchmark indices continued to move deeper into the red till the closing hour. The BSE-Sensex closed 3.4% below its previous close. While selling was seen across sectors, select stocks from the pharma, FMCG and commodity sectors found favour. As regards global markets, while the Asian indices closed in the red, the European indices are also trading in the negative currently.

     01:07    One down, six more to go for SBI
    India's premier bank, State Bank of India (SBI), finally got the government approval for merging its 100% subsidiary, State Bank of Saurashtra (SBS). It may be noted that the boards of both the banks had approved the proposal last year itself. The act governing SBS will now be repealed, and any reference to SBS will be removed from the act governing SBI. SBI plans to merge with itself six other associate banks and attain a larger size ahead of the entry of global players into India. Some other advantages of a larger banking entity include larger reach, greater financial and manpower resources, better risk management and efficient processes.

    It is interesting to observe how consolidation within many industries tends to wax and wane in waves due to the need for economies of scale, greater reach and regulatory requirements. There have been several rounds of consolidation in industries such as metals, automobiles and telecom. At this point in time, the pharma industry is going through a great deal of merger activity. The Indian banking industry is also likely to witness a great deal of merger activity ahead of the opening up of the sector to foreign players as per the roadmap laid down by the Reserve Bank of India.

     01:51    Cars to stop attrition
    In a bid to control the high attrition rate among its ranks, public sector oil explorer ONGC plans to provide nearly 10,000 employees with cars. These cars in the range of Rs 700,000 to Rs 800,000 will be owned by ONGC but will available to the employees at all time. This move comes soon after providing mobile handset with connections as well as laptops to all its officers. While the company will be able to claim depreciation on these assets, the employees will feel at par with their private sector counterparts in the energy sector who often earn more because of the better pay scales prevalent there.

    It may be noted that ONGC admits that attrition among the middle to senior level staff (see chart) is one of its key challenges as it is extremely difficult to replace the trained manpower that it loses to the private sector energy companies. What is interesting in this development is that it shows the changing mindset of the PSU employees, who now care for growth as against job security that used to be the most important factor earlier. It is also interesting to note that while recruitments and pay scales have contracted in many industries on the back of economy wide pressures, employees in the upstream energy sector are insulated given the record profits earned by the segment from the surging crude prices.

  • Also read - Oil & gas: Same industry, different fates

     02:38    Inflation slightly lower at 11.89%
    The inflation figures for the week ended July 12, 2008 turned out to be marginally lower at 11.89% as against 11.91% in the previous week. The main reason for the decline was lower prices of selected food items like tea and edible oil. The RBI's review of the credit policy on July 29 assumes a great deal of significance in this context. At a time when India is gearing up for several state and national elections, the government is likely to take further measures to control inflation given the impact it has on electoral sentiments. However, the relentless rise in inflation numbers during the year has been on the back of a global surge in commodity prices. Hence, experts believe that domestic factors such as monsoon as well as measures like CRR and repo rate hike will have only a limited impact in containing inflation.

  • Also read - Impact of RBI's CRR and Repo rate hike

     03.09    Is the US Congress' pursuit of US$ 80 oil a pipedream?
    Consumers and producers of crude oil have been pointing fingers for months at "speculators" for the spike in crude prices. Speculators are those participants who make bids for contracts to take advantage of price swings without ever intending to take physical delivery. In a bid to regulate the speculators, there are now at least 15 proposals from several US legislators. These proposals include restricting the number of oil contracts an investor can hold as well as to requirements of greater disclosure. Restricting the number of contracts will eliminate the undue influence of certain factions on price movements. Greater disclosure is likely to result in eliminating the large, untraceable transactions by individuals.

    The legislators believe that these measures will remove the element of speculation from the oil futures market and bring crude oil prices to the US$ 80 per barrel level. One reason such proposals are gaining popularity is because its an election year in the US and voters everywhere get angry about higher prices.

    As a result of this development, the number of outstanding crude oil futures on the New York Mercantile Exchange declined to its lowest levels in 17 months.

    We think creating better audit trails of market participants oil futures markets is desirable. In fact, equities markets have also benefited from the requirements of greater disclosure that have been introduced from time to time. However, legislators should be cautious in trying to dictate price bands for oil prices, as there is no reason to believe that they are somehow better at arriving at valuations. Moreover, it would amount to tinkering with free markets- one of the basic reasons for America's economic superpower status.

     04.07    Corporate results have been bittersweet so far
    The Indian IT sector has been able to grow its topline on account of higher volumes in 1QFY09. On the pricing front, although the companies did not face any pricing pressure, they witnessed delay in decision-making and awarding contracts from clients. In order to improve margins, they concentrated on better utilisation of their resources and cost containment. An 8% depreciation in the rupee against the US Dollar over the last 6 months also aided margins. While the management of IT biggies remain cautious amidst the ongoing credit crisis in the US, they see more volumes going forward as US firms are expected to cope with their cost pressures by off shoring to low cost destinations like India.

    On the other hand, there have been a few positive surprises in the results announced by some leading capital goods companies. While sales growth for most has been fairly decent (though slowing down as compared to the previous quarters), operating profitability (EBIDTA margins) have been stable to rising. While we still need to hear from several other companies on their April-June quarter performance, on the face of it, things do not look really bad as they were made out to be. Though we still need to wait and watch out for more companies announcing their quarterly results and what their managements see panning out over the next few quarters.

  • Also read - Performance across sectors in 1QFY09

     04.55    Today's investing mantra
    "We want to be right on something that will work right now, not something that might work in the future." - Warren Buffett
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