Another engine stutters
(Aug 5, 2008)
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In this issue:
» The Chinese juggernaut is slowing
» US mortgage woes continue
» Healthcare yet to make its mark on the poor
» A peek at the energy and pharma results this quarter
» ...and more!
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After a scorching pace of growth, Asia's largest economy China is likely to find itself struggle to sustain this momentum. The dazzling growth in the Chinese economy in the past few years and the Olympics, which is being hosted in the country had bolstered demand for various metals and oil and was the chief catalyst in spurring the rally in commodities. But the ills afflicting economies across the world seem to be sapping the strength of this Asian behemoth as well.
||The dragon is slowing down?
The signs are evident. Exports are growing at a snail's pace as a direct result of the slowdown in the US and Europe and appreciation of the yuan against the dollar. New orders from factories are plunging, the housing market is weakening and inflation in the meanwhile is steadily moving northwards. Fierce snowstorms during the early part of the year, the earthquake and resultant floods have only compounded its woes. The Chinese economy had been growing at a rate of 11% a year in the past and economists have now forecasted growth to taper off to around 9%-10% in the coming year or even downwards. Given that the developed world is already heading into a recession, a slowdown in China could further cast a pall of gloom on global growth. Metal prices for instance are already showing signs of cooling off. To put things into perspective, as per reports on Bloomberg, China's home-appliances makers, the world's largest exporters, are cutting purchases of copper as exports of air conditioners and fridges slow.
Inflation does not seem to be sparing India either with the figure being just a hair's breadth away from the 12% mark. As a result, the RBI effected a hike in the CRR as well as the repo rate to 9% each to rein in inflation. More important is the expected growth in the country's GDP going forward. The Indian economy had been logging in robust growth rates of 9% and above in the past three years. This made the country attractive for many investors to pour money into and hugely contributed to the surge in the Indian stockmarkets. The tide seems to have turned now.
||And what about the Indian economy?
Given the high level of inflation and the increase in interest rates, replicating this kind growth in the coming year is likely to be a Herculean task. Indeed, the RBI itself has revised the GDP growth estimate for FY09 from the range of 8%-8.5% to just 8%. And the Indian stockmarkets have been on a downward spiral following the weakness in the global markets and the impending slowdown therein. Soaring oil prices have further played spoilsport. The Economist states that despite the recent easing of crude prices globally, India still faces a crude import bill of US$ 120 bn this fiscal as compared to US$ 69 bn the year before. The oil and fertilizer subsidies, together with the farm loan waivers and the huge pay hikes to government employees is expected to put heavy burden on public finances. The Indian rupee, which had appreciated sharply against the dollar last year is already beginning to feel the heat and has depreciated considerably this year after some cracks have begun to appear in the Indian economy.
Given that the UPA has managed to survive and hold on to its seat of power, it has become all the more imperative to undertake some much needed reforms especially in the financial sector. And of course, investments in infrastructure, education and healthcare cannot be ignored with the key focus being on execution. However, given the not so enthusing trends on this front witnessed in the past, this may be easier said than done.
Also read - Monetary policy: RBI doesn't give up
We are talking about the US mortgage defaults here. While the limelight has been on bad loans made to borrowers with poor credit profile, it seems that those with better credit profiles are now having problems paying their dues. With the US economy showing increasing signs of sinking into severe slowdown, the International Herald Tribune states that the percentage of mortgages in arrears in the category of loans a level above subprime have risen to 12% in April 2008 from a year earlier.
||Even the better ones are feeling the heat
As the prices of houses are heading southwards, the monthly bills are increasing rapidly and with the banks now adopting a much stricter stance with respect to lending, it is becoming tough to either sell or refinance their homes. The problems for the financial sector seem to be never ending too.
After Citigroup, Freddie Mac, Fannie Mae, Bear Stearns and Merrill Lynch, the latest financial institution in this lineup is HSBC. The bank has reported a 29% decline in profits for the first half of this year. It has stated that the business environment continues to remain challenging and growth in emerging markets was expected to slow down. This just goes to show that the problems related to subprime are far from over and when this crisis is going to end is anybody's guess.
India's spending on healthcare is set to increase fivefold from US$ 27 bn in 2007 to US$ 126 bn in 2015. Yet as per reports in one of India's leading financial dailies, over 800 m of the country's poor will struggle to pay medical costs. In addition to this, as has been the case in the past, around 80% of the medical costs will be borne by individuals. This percentage stands at around 10% to 30% in the developed markets. Given that the government has stressed on the provision of adequate healthcare, investments in this field have been woefully inadequate. To compound problems further, the state of the public healthcare systems leaves a lot to be desired and the onus of providing quality healthcare now rests on private healthcare players.
||Healthcare yet to touch the poor|
Amongst a myriad of problems lack of the requisite IT infrastructure is one of them. While private hospitals have been investing in IT systems, most progress has been in areas such as billing, accounting and administrative systems rather than clinical information systems. While the government is planning to increase public spending on health to at least 2% to 3% of GDP over the next five years from the current 0.9%, which is a positive sign, execution of the same remains an issue. At the end of the day, the government needs to lay increased emphasis on ensuring that medicines and healthcare services are 'accessible' to the country's population at large in the longer term.
Also read - India: Towards a healthy future?
Barring India, key Asian stockmarkets closed weak, led by energy and commodity stocks as oil and metal prices continue to drop. While stocks in Hong Kong were down 3%, those in Singapore were down 1%. While the morning session witnessed the Indian indices barely managing to stay afloat, strong buying activity propelled the indices to scale higher in the afternoon session. The BSE-Sensex finally closed higher by 3%. The US markets closed in the red yesterday, following heightened pessimism among investors regarding a sharp slowdown in economic activity. Weakness in the US indices was also on the back of a sharp rise in inflation, which surged by 0.8%, the highest in almost 30 years. The European indices are currently trading firm with gains of 1-2%.
||In the meanwhile...
Oil prices are reflecting signs of economic slowdown. These declined almost US$ 4 per barrel yesterday, to touch US$ 120 on their way down. The fact that the tropical storm Edouard is likely to miss most of the offshore production facilities in the US Gulf coast was also instrumental in cooling off prices. Among metals, copper is down to its lowest in six months as global stockpiles rose to a five-month high raising concerns that demand may be slowing.
In yesterday's newsletter we had taken a sneak peek into the quarter's performance of two sectors namely banking and auto. Continuing from where we left off yesterday, today our focus is on the performance of the energy and pharma sectors in the June quarter.
||A look at energy and pharma results during the quarter
Oil & gas: The upstream segment continued to enjoy favorable conditions due to the buoyant crude prices. In fact, ONGC's operating margins (OPM) and net profit margins (NPM) improved substantially in 1QFY09 over 4QFY08. However, it subsidises a substantial portion of the under recoveries of the downstream oil marketing companies which is announced in an ad hoc manner. As a result earning visibility remains poor.
The midstream segment continued to do well because these companies earn transportation charges on volumes transmitted. They aren't directly affected by high crude prices and the high demand for gas keeps their infrastructure operating at high levels. There was no substantial change in either the operating or net margins of the midstream companies in 1QFY09. We believe, this segment of the energy sector will continue to be insulated to gyrations in commodity prices or a possible slowdown in the economy.
In the downstream segment, the public sector oil marketing companies suffered the most in 1QFY09, as crude prices spiraled upwards mounting further under recoveries on them. They were also hit by one time provision of employee benefits. The other players managed to avoid a similar fate. Castrol sells lubricants and only suffered a small decline. As a pure refiner, Chennai Petro benefited from the buoyant gross refining margins (GRMs). RIL's results were strangely subdued this quarter with it clocking GRMs lower than those of the public sector refineries. One of the possible reasons is that it holds lower inventory of crude as compared to its public sector counterparts. As crude prices spiked during the quarter, fresh contracts of crude made RIL's inputs costs higher in comparison to its peers.
Source: Equitymaster Research * 2QCY08 respectively
Pharma: Pharma companies have had a rather mixed June quarter. Most of the domestic companies have reported a good growth in topline largely led by volume growth in generics, contribution from acquisitions and exclusivity window for some products. The late entrants in the US generics markets such as Glenmark, Lupin and Cadila have reported a strong growth in sales from the US due to a considerable ramp up in product launches. The scenario on the operating margin front has been a wee bit tepid. While some like Ranbaxy, Piramal Healthcare, Cipla and Glenmark have witnessed considerable expansion in margins, others have seen their margins erode, led by rising raw material costs. Forex losses due to the depreciation of the rupee against the dollar and market-to-market losses on derivative exposure have impacted net profits of some companies as well.
MNC pharma companies in contrast have had a relatively better quarter compared to the ones in the past. Topline growth has been strong due to decent growth reported by their respective top brands. This is after excluding the impact of the sale of certain businesses. Some players such as GSK Pharma and Novartis have seen their operating margins expand led by an improved product mix.
Also read - Results scorecard
Public sector power major, NTPC is reported to be joining the renewable power bandwagon on an aggressive manner. This will however be through a joint venture. The company will primarily concentrate on wind power and mini and micro hydro-electric power. NTPC will be holding 40% stake in the joint venture. Renewable sources of energy have come up high on the agenda of global policymakers in their fight against global warming. And especially with crude price remaining at high levels and there being much hue and cry over the need to increase share of renewables in the total electricity basket, corporates are finding the sector an attractive proposition for future growth.
||India's biggest polluter wishes to go green
Interestingly, a leading business daily had recently reported that NTPC is the largest polluter among Indian power companies, as it emits almost 31% of the total carbon emissions coming out of Indian companies.
"Risk comes from not knowing what you're doing." - Warren Buffett.
||Today's investing mantra
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