Is this the turning point for the economy?

Jul 28, 2009

In this issue:
» Are food prices set to rise?
» Bill Miller's take on the economy and stockmarkets
» Bill Gates wants India to spend more on healthcare
» Tata Motors' better than expected peformance
» ...and more!!

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The monsoons may not have brought much cheer to India but the RBI did not bat an eyelid. In its macroeconomic review released yesterday, the central bank went one step further and pegged India's GDP for FY10 at 6.5% higher than the 5.7% expected in its earlier survey in March. However, inflation was expected to rise on account of various reasons such as waning base effect of last year, increase in commodity prices, delayed monsoons leading to high food prices and the impact of the expansionary monetary policy to stimulate India's economy. This propelled RBI to revise its inflation target for the end of March 2010 to about 5%, higher than the 4% projection it made during its annual policy in April. While some positive signs have emanated in the form of recovery in industrial production and corporate performance, the negative signs are still daunting. These include deficient monsoons, rebound in commodity prices, weak external demand and high fiscal deficit.

In its monetary policy today, the central bank kept the interest rates unchanged. Indeed, the possibility of rates being lowered was low as the economic situation has not worsened further than what it had in the previous year. At the same time, increasing the rates did not make sense to the RBI since there were no signs visible yet of a consistent recovery in the global and the Indian economy. Could this be the turning point for the Indian economy? One will have to wait and watch.

 Chart of the day
India Inc. has been impacted by the global financial crisis as is amply demonstrated in the chart below. The turning point was 1QFY08 as it was then that things started looking wobbly. Profit growth in particular, really took a turn for the worse as compared to sales growth. Besides lower margins at the operating level and forex losses, higher debt levels meant that interest costs considerably surged and dented net profits. But 1QFY10 has seen a significant recovery in profit growth. Does this mean that the worse for India Inc. is over?

Source: RBI, Equitymaster Research
* Given that 1QFY10 announcements are still in process,
results of only 255 companies have been considered

In a country where around 60% of the population depends upon agriculture as a source of livelihood, the below normal monsoons this year is an ominous sign of things to come. As reported in a leading business daily, because India's monsoons have been short by 19% of their seasonal normal between June and July, there has been a significant decline in the area under foodgrain cultivation. What is more, if this trend persists, the Indian population could be pinched hard in the form of rising food prices. Further, farmers are coping by shifting to cash crops, which require less water. The trend of rising food prices is being amply reflected in the consumer price index (CPI) which gives greater weightage to food prices. This index averaged nearly 9% at the end of May even when the wholesale price index (WPI) languished in the negative. Given that rural consumption is becoming an important part of India Inc.'s growth story, any adverse impact on account of bad monsoons could impact their plans. Moreover, from a longer term perspective, the government needs to do more in terms of enhancing irrigation techniques so that the dependence on monsoons and the probability of droughts is significantly reduced.

Bill Miller, the US money manager who managed the rare feat of beating S&P 500 for fifteen years in a row before the financial crisis took its toll on his performance as well, has released his latest quarterly commentary. It provides some very interesting insights.

First things first, Miller firmly belongs to the bull camp and believes that extreme risk aversion is over and absent some exogenous events and dramatic policy errors it is very unlikely to return. However, he goes on to add that one should watch out for risks to the economy and stock markets emanating from three major sources viz. rising interest rates, a sharp rise in commodity prices (especially oil) and policy errors.

On interest rates, Miller has observed that a sharp rise beyond a certain level will endanger housing recovery and hence, undermine the economic recovery. Besides, a sustained advance in oil prices from here into the high US$ 70s or low US$ 80s could threaten the recovery as well. On the last point, the policy errors, Miller has opined that the troika of Summers, Bernanke and Geithner have done a splendid job and asking Bernanke for a second stint at the US Fed would indeed inject a lot of confidence into the economy.

All in all, Miller believes that the above mentioned risks have low probabilities attached to them and do not presently pose a threat to the economy or to a continued rise in the market. We concur with his concluding remarks, "Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low. That's where we are now." Indeed!

Despite the government laying stress on healthcare every year, sadly, the development on this front leaves a lot to be desired. What is more, Microsoft founder Bill Gates has urged India to drastically increase health spending to eliminate the most persisting diseases plaguing its people. This involves improving the healthcare infrastructure and the accessibility of medicines to all sections of the society. Public sector healthcare expenditure accounts for nearly 1% of GDP. This is the lowest in the world and ahead of only five countries namely, Burundi, Myanmar, Pakistan, Sudan and Cambodia (Source: CRISIL).

Besides this, public health management is saddled with a host of problems, which include resource crunch, political interference, inflexibility and other bureaucratic roadblocks. As a result, the focus has been increasingly shifting towards private healthcare, which has made considerable strides in enhancing India's healthcare system. Thus, the government needs to take concrete and major steps in actually overhauling the healthcare system in the country. After all, how can the country progress if its people are not fit enough to contribute to its growth?

China has a massive amount of foreign currency reserves - US$ 2.1 trillion to be precise. But with that number increasing at a rapid pace, it is has been desperately scouting for other opportunities beyond US treasuries to invest these reserves in. US treasuries used to be China's preferred option until recently, when the dollar's status as the world currency has come to be questioned and hyper inflation is almost sure to engulf the US over the long term.

Many around the world have so far been curious as to what the dragon nation will pick as an alternative investment. The Chinese prime minister Wen Jiabao provided a clue recently when he said that China will use some of its currency reserves to accelerate Chinese companies' expansion overseas. Though he hasn't yet specified what amount of the reserves would be used for this purpose, don't be surprised if Chinese companies start making some big ticket international acquisitions in the near future!

It is believed that the demand for commercial vehicles (CVs) is a crucial indicator of economic recovery and hence, quarterly results of India's largest CV manufacturer Tata Motors, which were announced yesterday, assumed great significance not only from the company's but also the economy's point of view. And it did not disappoint on both the fronts. Domestic economy seems to have put the worst behind it as M&HCV segment's decline was restricted to 36% YoY as opposed to a decline in the region of 60% in the previous two quarters. What more, even the LCV segmented improved its performance and posted a robust growth of 20% YoY during the quarter. Tata Motors' own performance came in better than expectations. While topline growth came in at a negative 8%, thanks to a strong jump in operating margins and lower forex losses, bottomline growth came in at an impressive 58% YoY. Although the management has indicated that maintaining the same level of operating margins will be a challenge, it did sound positive on the volume growth front what with various new launches in the pipeline.

Volatility reigned on the bourses today due to alternate bouts of buying and selling and the BSE-Sensex was trading marginally lower at the time of writing. While gains were seen in the metal and auto indices, losses were seen in the banking and software indices. On the global front, while key Asian indices closed firm, European indices are witnessing a mixed trend currently.

 Today's investing mantra
"An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business" - Warren Buffett.

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5 Responses to "Is this the turning point for the economy?"

Osborne Dias

Jul 30, 2009

Out of 514 cr. net profit, 318 cr. is a one-time income on sale of shares. Why is everybody so ga-ga about the Tata Motors result? Actual quarterly profit is about 196 cr compared to more than 300 odd cr last year.


SundaraVaradan S

Jul 28, 2009

It is a pleasure to see sustained maintenance of Breadth & Depth of the 5 Minutes wrap-up AND it is concise!
I positively appreciate your contribution.



Jul 28, 2009

Good article. Just a few comments. India Inc's quarterly performance suggests that the increase in profits has come about because of cost-cutting and other belt-tightening measures rather than an increase in Net sales--infact net sales is still going downhill. So the much awaited economy recovery is still far away.
Also Tata Motors results --"better than expected"? -- perhaps that's why the company has thought it prudent to appoint 2 advisors to look into the JLR operations.
It's fine to be optimistic, but one should'nt go overboard, I feel.



Jul 28, 2009

I am surprised that you find Tata Motors performance 'better than expectation'. The results announced are high on accounting jugglery and low on corporate governance. While the company's press release gloats about improved margins, it quitely buries below the carpet that of the Rs. 500 cr odd profit, Rs 318 cr is by selling shares of Tisco !! Treatment of forex losses have been changed. An apples to apples comparison shows a decline in profits by 60% instead of a 58% jump.

And yet again the management has chosen not to club JLR results (as that would mean huge losses). Are they accounting practises so poor that they can't calculate the state of affairs at JLR even after 30 days ??? Or is to dress up accounts as the company goes for a GDR ?



Jul 28, 2009

good aticles

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