Finally, India beats China...
(Aug 4, 2008)
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In this issue:
» Sneak peek into India Inc.'s June quarter results
» India's 3G spectrum policy announced
» Policymakers want windfall tax imposed
» India outperforms China in the PE race
» ...and more!
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The Indian Department of Telecommunications (DoT) released guidelines for the auction and allotment of 3G (third generation) spectrum last Friday. While this may sound reformist for the sector as a whole given that 3G has the capability to make communication even faster (in fact, almost 30 times faster than the currently used 2G services), there are several big questions that operators will face once they commercially launch such services. The minimum price for a pan-India 3G license has been set at US$ 470 m (Rs 20 bn), almost double the US$ 250 m minimum price recommended by TRAI (Telecom Regulatory Authority of India).
||India goes live with 3G
Secondly the policy, in giving preference to state-owned service providers - MTNL and BSNL - indicates that only two private operators, alongside these PSUs, will get licenses for New Delhi and Mumbai because of the shortage of spectrum there. In the country's remaining telecom circles, while five operators will be permitted initially, including a state carrier, the count could rise to up to 10 later.
The fact that there are only two open slots for private operators in Delhi and Mumbai, there is a great likelihood that aggressive bids will push up costs for service providers (and ultimately the consumers). It is important to consider that almost 90% of India's 285 m mobile subscribers are prepaid customers, i.e., with relatively low-volume usage. How much of these will turn out to use high cost 3G services is questionable.
Also read - DoT's policy paper on 3G spectrum allocation
...in the UK, that is. As reported in a leading business daily, policymakers in the UK are considering a one-time tax on energy companies. This comes after record oil prices have boosted profits at energy majors like BP Plc. Incidentally, this has also been the view of India's ONGC, which has advocated such a levy on Indian companies (like Reliance Industries) benefiting from the surge in crude prices.
||Policymakers mull windfall tax
ONGC has in fact suggested to the government that the subsidy sharing mechanism needs to be scrapped as the company itself shares the burden of compensating state-owned refiners (BPCL, HPCL, IOC) for losses caused by selling petroleum products at less than cost. The government's new supporter, Samajwadi Party, has incidentally proposed a windfall tax of up to 50% on refiners such as Reliance, for reasons well-known!
Indian stockmarkets closed in the red today, with the benchmark BSE-30 index dropping by almost 80 points. This followed weak trading in other key Asian markets earlier today. While China closed with 2% losses, Hong Kong closed 1.5% down. The rupee declined on the back of rising oil prices (oil is globally traded in US dollars so a rising demand for the former boosts demand for the latter), currently trading at 42.4 (down 0.2%).
||In the meanwhile...
Stocks in Europe are also trading weak, weighed in by losses in financial firms led by HSBC, which announced that first half profits declined 29% after it set aside cash for bad loans. Gold is trading at US$ 906.1 an ounce, down US$ 3.6 over its last Friday levels.
News just came in that the younger Ambani brother, through Reliance Capital, is planning to raise US$ 1 bn overseas for a private equity fund (apart from the one where it uses its own money!). As reported on the Bloomberg, the company plans to invest US$ 75 m to US$ 100 m in sectors like logistics, pharma, retail and media.
As a matter of fact, private equity investments in India grew by 3.2% in the first six months of this year to almost US$ 6.8 bn. This is higher than what China received (US$ 5.8 bn) during this period. Now, that's like beating the dragon in its own game...of attracting investments in hordes.
The April to June quarter result season has just passed us by, though some results are still trickling in. Overall, the performance of India Inc. has been fair to say the least. The combined results of almost 450 companies from our universe indicates that while sales have grown by 37% YoY, net profit growth has come in at a lower 11% YoY. Growth on the profit level has been the lowest in the past two years. Let us take a sneak peek into the quarter's performance of two prominent sectors - banking and auto. We shall follow up on other sectors during the remaining part of this week.
||Peek into India Inc.'s June quarter performance|
Banking: The shortage of funds available for lending and higher cost of the same made the first quarter of FY09 a rather difficult one for banks to operate in. To add to this, the possibility of slippages made banks all the more wary of growing their balance sheet size. The government did not make things any easier for the public sector banks as they wriggled with the farm loan waivers at a time when the provisions for wage hikes and AS15 (pension) were already burning a hole in their P&L. Slower growth, treasury losses, lower margins, rising defaults, you name it and it affected the performance of several players in the sector.
It forced aggressive players like ICICI Bank to bite the dust and grow slower than PSU behemoths. Banks that are known to sustain net interest margins way above the industry average also had some compromises to make in this quarter. Having said that, the overall delinquency levels in the sector pretty much convinced us about the fact that the Indian banking sector is yet far from succumbing to the global subprime woes.
Auto: As if rampant cost pressures and higher interest expenses were not enough, auto companies had one more demon to contend with during 1QFY09. We are referring to the 'mark to market' losses that most of the auto companies, particularly in the four-wheeler space had to endure and which eventually contributed in a big way to their lackluster performance. 1QFY09 results of these companies were a lesson in how commoditised and highly capital intensive industries can come under pressure in an inflationary and high interest rate environment.
To top it off, almost all the companies are going through a huge expansion phase that has not only dried up the cash they generated in the previous boom, but has also forced them to raise cash from outside. This has inflicted damage in the form of spiraling interest costs as well as forex losses on their foreign currency borrowings. Fortunately for these players, their balance sheet remains strong enough to withstand any near term pressures although we don't rule out earnings volatility.
Two-wheeler players on the other hand have seen their fortunes turn around from the painful days of FY08 where volumes had taken a beating and margins had come under pressure. These companies have started FY09 on a good note with a couple of them even expanding their operating margins. What has also helped is the fact that since these companies are not as capital intensive as their four-wheeler counterparts, the need for outside funds is minimal and hence the turmoil in financial markets has largely eluded them. Thus, while it was a tough quarter for the four wheeler players, two-wheeler players have done well to rise above the tough environment. On the topline front though, none of the companies would have any reason to complain as barring some segments, it remained robust on the back of steady volume growth and price hikes.
Bloomberg reports of a serious shortage of coal in India, which is impacting power plants based on the fuel (over 53% of India's power generation capacity). In fact, India's power companies have not been able to meet generation targets because of declining coal supplies from local mines. Supply has fallen short of demand by as much as 14.6% during the quarter ended June 30 2008. Coal companies produced less than 100 m tonnes (MT) during the period, which is almost 8% lower than last year's April-June quarter production.
Also read - Coal's powering the world
||India requires more of pollution causing coal...
In order to bring down the cost for consumers as also as an environment friendly measure, the Indian government is mulling asking oil refiners to sell fuels blended 20% with ethanol by 2017. Indian oil companies have been selling fuels mixed with 5% of ethanol since October 2007, which the government wants to increase to 10% by October this year. Way to go...green!
||...and more of environment friendly ethanol
"The investor should wait for periods of depressed business and market levels to buy representative common stocks, since he is unlikely to be able to acquire them at other times except at prices that the future may cause him to regret." - Benjamin Graham
||Today's investing mantra
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