Made in India & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Made in India & more... 

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In this issue:
» Illusions about China
» Oil at US$ 124 a barrel in 2009
» Innovative cost cutting
» SAIL trebles revamp cost in 4 years
» and more...

00:00 China created illusion of its 'low cost' image...
Once the epicenter of low-cost manufacturing, China is becoming an increasingly expensive place to do business, thanks to a series of sweeping mandates introduced to pacify discontented Chinese citizens and global critics. This month's Olympics will stage the closing ceremony of a 10 -year party, during which local Chinese manufacturers cashed in by churning out mass production of consumables at the world's cheapest rates. However now, aware that the world is watching, China has intensified its efforts to clean up its domestic affairs by enacting stricter environmental and labour controls, increasing its land and commodity prices, and slashing the export-tax rebates that helped create the country's giant trade surplus.

Although environmentalists, economists and labor watchdogs have praised China's initiatives as critical steps in the right direction for both China and the global economy, the same may sound the alarm bells for the 'Made in China' emblem. Further, coupled with the falling dollar and the rising yuan, these initiatives have put the pinch on many small US outsourcers that are struggling to keep up with China's rapid changes. Thus while the world gets rid of its illusion of China being the least cost destination, there are ample scopes for 'Made in India' (goods and not just services) to gain significance in global outsourcing.

00:40 ...and also one at the Beijing Olympics!
Near 4 bn television viewers of the Beijing Olympics' opening ceremony may have not been able to believe their own eyes when they watched the spectacular display of fireworks on their television sets. However, not all of it was real. The games' organizers have admitted a series of illusions, including a pre-taped fireworks segment and lip-syncing during the opening ceremony besides the use of cheerleaders to fill empty stadium seats. Beijing Organizing Committee for the Games (BOCOG) vice-president has confirmed to Beijing Times newspaper that the committee supplied tape of the 'footprint' fireworks during the live opening extravaganza. The 55-second sequence was digitally recreated as it was impossible to film the same from a helicopter.

01:02 Bankers and government welcome reforms
The exit of the Left Front from the Centre seems to suggest more than meets the eye. This is particularly true in the case of the banking and financial sector. And we have several instances to support this contention. The past five years have witnessed the RBI suggesting roadmaps galore for bringing the Indian banking sector on a comparable platform to its global counterparts. However, most of the reforms were stalled for want of the government's nod. It is only now that we can see progress on several quarters.
  • Private bank promoters keen on cashing it out: As the RBI's 2009 roadmap of inviting foreign investment in Indian private sector banks draws nearer, bank promoters are getting more hopeful on cashing it out, even if partially. While there are signs of growth tapering and margins shrinking for most banking companies, bankers are adopting a cautious and patient approach. This is in view of the fact that they need to keep the fundamentals intact to lure foreign buyers. The CEO of a leading private sector bank has been quoted in a business daily opining that by 2010, there will be more clarity on permitting significant foreign investment in Indian private banks. The bank considers that the apt time to invite a strategic partnership and will look at partially offloading some promoter stake.

  • Government also doing it, but subtly: The SUUTI (Special Undertaking of UTI - a quasi government body) offloading 21% stake in Axis Bank was just the beginning. The Indian government has quietly set the ball rolling for banking sector reforms by seeking bankers' views on reducing its stake in public sector banks. Under the law, government stake in these banks, which account for about 70% of the industry, cannot come down below 51%. The Narasimham Committee had in 1998 recommended bringing down the government's stake to 33%. Since then, the issue has been discussed and debated at various forums but successive coalition governments have not been able to move ahead with the proposal. According to the IBA estimate, banks collectively need fresh capital worth Rs 1.5 trillion in the next few years to support their credit growth and comply with Basel II.

Government stake in select PSU banks (%)
Central Bank 80.2
Bank of Maharashtra 76.8
Canara Bank 73.2
Bank of India 64.5
State Bank of India 59.4
Punjab National Bank 57.8
Corporation Bank 57.2
Union Bank of India 55.4
Bank of Baroda 53.8
IDBI 52.7
Oriental Bank of Commerce 51.0
  • Also read - Reforms can do it

    02:16 In the meanwhile...
    The Prime Minister's Economic Advisory Council's predictions of 'serious fiscal risks' has served as a wake up call for the government that is taking solace from stable inflation and lower oil prices. Markets however have drawn cues from the lower industrial growth numbers and have shown a weak trend over the past two sessions. The benchmark BSE-Sensex closed the national holiday-shortened week with losses of 2%. While most other Asian markets have also closed lower, the European indices have started on a positive note today.

    Far fetched from the targeted double-digit figure, India's revered GDP growth number is expected to inch closer to 7% as against the earlier projected range of 8% to 8.5% for FY09. In its economic outlook for FY09, the Economic Advisory Council has projected a lower GDP growth rate of 7.7% in FY09. The council has also attributed the cause of the same to a tight monetary stance to bring down inflation to the range of 8% to 9% by early 2010. What is worrying is the fact that the panel has cited the government's inability to meet the fiscal deficit targets due to adverse global economic environment, widening current account deficit and subsidy bills as key concerns. It has added that the risks were arising from growing off-budget liabilities that are currently 5% of GDP.

    02:41 Oil to hover at US$ 124 per barrel in 2009
    Oil prices may have risen 4 times in the last 4 years (6 times in the last 2 decades), but it is unlikely to cause much agony in the near term. In its August short-term energy outlook, the Energy Information Administration (EIA) has projected crude prices to average US$ 124 a barrel in 2009. This is lower from the organisation's projection of US$ 133 a barrel a month back. Oil prices have tumbled as demand for petroleum products has slowed in the US and is beginning to show signs of softness worldwide. It must be noted that crude prices have fallen by about US$ 31 per barrel or 21%, from their peak price of US$ 147 per barrel in July 2008. The EIA report reflects a changing expectation of global oil demand. While total world oil consumption is still expected to decrease next year by about 460,000 barrels a day, slower overall consumption, combined with planned increases in production by the OPEC (Organization of the Petroleum Exporting Countries) has raised the prospect for a drop in demand for crude.

    03:17 Cost cutting's the mantra
    While cutting costs might not sound a new idea, what is novel is the fact that companies across sectors are taking this more seriously and tapping on new methods to reduce costs and save margins. Automakers had already started switching to cheaper alternative materials and energy-efficient equipment to save raw material and power costs. But now, they are also looking at alternative menus to cut down canteen subsidies; asking employees to leave factory on time. Companies are using bigger trucks, smaller packages to reduce logistics costs. A large automaker has decided not to use external trainers but use some of its own employees to train others.

    Indian retailers, with wafer thin margins, are looking at ways to trim expenses and protect their profits. One of the country's largest retailer has begun integrating the management, marketing, HR and IT departments of its units into one. The company says this one step will help it save around Rs 1.7 bn a year. This essentially means the company will have a common HR team, IT team and one management for all its business units. Further, companies are also planning to prune advertising budgets and cut packaging costs.

    Real estate companies that have been one of the worst hit in the slowdown are asking the construction workers to work extra time. Some others are using ready-made construction parts to save on expenses.

    03:46 Darkness may prevail
    Indian power companies are expected to delay billions of dollars of investment plans because the depressed global economy is making it hard for them to raise the necessary financing. Near term investment plans in the power sector totaling US$ 10 bn including US$ 4 bn in equity and the remainder in debt are facing delays, meaning that India could fall well short of an ambitious plan to add about 75,000 megawatts (MW) to its existing power-generating capacity of 145,000 MW by the end of 2012. Morgan Stanley in its Global Economic Forum (GEF) has stated that in FY08, fund-raising by the Indian corporate sector for capital expenditure rose to a new high of 14.3% of GDP or US$ 168 bn. With the tough global credit environment and high domestic interest rates, power companies and other investors in India's infrastructure sector are being forced to scale back their endeavours. Morgan Stanley's GEF has further predicted that investment to GDP ratio would fall to 35.6% in FY09 and 32% in FY10 from 37% in FY08.

  • Also read - India's power woes

    04:08 India has more millionaires than China or Brazil
    The 12th annual World Wealth Report released by Merrill Lynch and Cap Gemini has brought some reasons to cheer about the India economy after a series of recent negative news of slowdown in economic growth and rising inflation. As per the report, India is leading the list of high net worth individuals (HNI) population growth at 22.7% YoY driven by stock market capitalization growth of 118% YoY. While China recorded higher growth in market capitalization and real GDP than India, its higher population base led to lower per capita gains. It followed second with 20.3% growth in the HNI population, while Brazil featuring third at 19.3%. The number of HNIs in the world has increased by 6% in 2007 to 10.1 m. Further, the report suggests that global HNI wealth will grow to US$ 59 trillion by 2012, advancing at a rate of 7.7% per year. The report also reinstated the belief that while the GDP growth rates may come down, India along with China and Brazil will continue to play pivotal roles in the global economy led by strong fundamentals, large domestic market and rising income levels.

  • Also read - Who's making the most of India's economic growth?

    04:23 Commodity prices to drop by 5.2% in 2009
    The IMF foresees an average drop of 5.2% in non-fuel commodity prices in 2009, after an estimated average gain of 14.6% in 2008, according to its latest World Economic Outlook update. While the Fund's forecasting track record is far from earning the reputation of being 'impeccable', the same sounds closer to reality given the sprint in commodity prices in the past couple of years. To put things in context, such a drop would come after several years of repeated, double-digit growth in prices of commodities across the board.

  • Also read - Jim Rogers' views on commodities

    04:36 SAIL trebles revamp cost in 4 years
    The amount of capital expenditure planned by state steel major SAIL has multiplied by almost 3 times since it was first envisaged. What started out as Rs 350 bn modernisation programme from 15 m tonnes (MT) of steel per annum to 25 MT, has now swollen into a Rs 900 bn one. The company cites its dependence on overseas suppliers as the main reason why the plans have gone awry. There is a global boom in the demand for steel, which has led to a world-wide expansion in steel capacity and which in turn has led to a boom in the demand for steel-making equipment. Interestingly, this manifold increase in capex plans has not gone unnoticed. The Central Vigilance Commission, a central monitoring body, has begun questioning the steel ministry officials. While the investigation is still in its early stages, it believes the company is over-quoting cost components substantially.

    04:54 Today's investing mantra
    "Time is the friend of the wonderful company, the enemy of the mediocre." - Warren Buffett.

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