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

The poverty wildcard & more... 

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In this issue:
» Airlines to get some relief
» Medical tourism catching on
» Woes of oil marketers do not seem to end
» All is not hunky dory for Indian techies
» and more...

 00:00    Poverty in India is gradually shrinking
While the economy has been logging in 9% plus growth rates in the past three years, one very positive outcome of this impressive performance has been the reduction in poverty. While much has been said about the strong economic growth leading to a rise in the disposable incomes of the burgeoning middle class, a decline in the number of people below the poverty line certainly deserves a mention. A leading business daily reports that the percentage of population below the official poverty line fell by 1.6% between FY05 and FY06. Juxtapose this against the fact that the reduction in poverty between FY94 and FY05 stood at 0.8%, the drastic drop in FY06 stands out like a beacon in the sky. The UPA government in recent times has come under fire due to its inability so far in reining in the soaring inflation. Therefore, with elections around the corner, it must surely be considering the figures released by the Planning Commission as a silver lining in an otherwise dark cloud.

Will this trend continue? After three years of robust GDP growth, a slight slowdown now seems imminent against a backdrop of escalating inflation and high interest rates. In such a scenario, mirroring the quantum of poverty reduction in FY06 going forward may not be that easy.

  • Also read - On poverty, reforms & disparities

     00:45    Some breather for airlines?
    The airlines industry in India is in a state of turmoil. Rising crude prices have hiked up the prices of aviation turbine fuel (ATF) and are considerably hurting domestic airline companies. As a consequence, the ministry of civil aviation plans to implement some measures and provide some sort of relief to the beleaguered airline industry. These include looking for foreign airlines' investment in domestic airline companies, relaxation of the current FDI limit of 49% and removal of the five-year mandatory domestic operation clause for a carrier to become eligible to fly overseas.

    Soaring prices of ATF and the inability to pass on the hike proportionately to customers have made airline companies strapped for cash. Thus, investment by foreign airlines in domestic carriers will provide the latter the much needed funds. Rationalisation of taxes is also high on the agenda given that industry losses are expected to swell to a gargantuan Rs 100 bn.

    Globally too, airline companies have been on the receiving end due to spiraling crude oil and jet fuel prices. In fact, the Economist states that seven of America's biggest airlines reported combined losses of US$ 5.9 bn in the second quarter of this year. While oil prices have considerably come off their highs, it remains to be seen whether airlines companies will be able to move back into the positive as a result. While retreating crude prices is certainly a welcome relief, the industry is still saddled with excess capacity. The Economist states that in June 2008, global capacity rose by 5.5% while passenger traffic lagged behind at 3.8%. Whatever the case, given that the movement of oil prices is considerably volatile, both global and domestic airline companies will have to focus on pruning capacity and implement cost effective measures to become leaner and stronger.

  • Also read - High oil bad for airline companies

     01:40    Healthcare goes global
    While rising healthcare costs have spurred the usage of generic drugs, the same is also expected to accentuate medical tourism especially in developing economies including India as patients around the world look to minimise costs. As far as India is concerned, Wockhardt Hospitals states that while medical value travel contributes only 0.9% of the total hospital revenues, the same is expected to touch approximately US$ 1.4 bn and contribute more than 2.5% of the total hospital revenues by 2012.

    Having said that, most of the foreign patients are from developing countries such as Afghanistan, Pakistan, Nepal, Bangladesh and Sri Lanka as these countries lack top-quality hospitals and health professionals. In fact, patients from the US and Europe are relatively few. This could however change going forward, given that a large number of Americans are traveling abroad to get treated. For instance, the Economist states that the consultancy firm Deloitte expects the number of Americans traveling abroad for treatment to soar from 0.8 m last year to 6 m by 2010 and reach 10 m by 2012. This is likely to translate into US$ 21 bn a year to developing countries in around four years and India could also be a beneficiary of the same.

    International patients flock to India largely because of the substantial difference in the cost of high-end surgery and critical care and quicker access to medical care in India vis-a-vis some highly developed countries. To put things into perspective, an open-heart surgery that costs US$ 100,000 in the US, over US$ 40,000 in the UK and US$ 14,250 in Thailand, costs just US$ 4,400 in India.

  • Also read - India: Towards a healthy future?

     02:15    Diesel demand spooks PSU oil marketers
    Crude prices have come off by more than 20% in a spate of few weeks. But the wrinkles on the faces of executives at PSU oil marketers refuse to go away. The reason? A huge increase in the demand for diesel this fiscal. Against a projected increase of 10%-12%, consumption has risen a nerve wracking 20% and it may not be done just yet. No wonder, the prospect of falling crude prices is no music to ears for these executives as it is being more than compensated by the huge surge in demand.

    Of course, it's a different matter that had the prices not fallen, the death knell would have been sounded a lot sooner than is now being anticipated. Add to this the fact that oil bonds, the thin thread by which the fate of these companies hangs, have also not been issued on time thus leaving the companies grappling with a huge liquidity problem.

    Diesel will account for nearly 50% of the Rs 1.8 trillion under recoveries that the three PSUs will tot up this fiscal and hence, its rising demand has not gone down well. Frequent power outages in big states like Maharashtra are also to blame partly for the sudden surge in consumption as more and more diesel is finding its way in the power generators that make up for the electricity shortfall. The twists and turns in this game of political one-upmanship will indeed make Sherlock Holmes proud. Diesel prices cannot be increased because it will stoke inflation further and hurt the sentiments of the public, who in a few months from now will decide the fate of the current government. Hence, the government will have to fund the under recovery through funds which could have been otherwise used to build power plants that could have in turn curbed the excess diesel demand. Quite interesting, isn't it!

  • Also read - Impact of fuel price hike on OMCs

     03:04    Another one bites the dust...
    "Easy recommending, hard implementing" read a post in our yesterday's 'The 5 Min. Wrapup'. We were commenting on the B.K. Chaturvedi committee's recommendations for fuel price hikes and the probable difficulty (as always) in implementation of the same by the government. A leading business daily has reported today that the government is actually planning to shelve the committee's recommendations under the garb of an already rising inflation. Another 'high-powered' report is set to get a soft burial! But that's a ritual in India...isn't it?

  • Also read - Easy recommending, hard implementing

     03:17    In the meanwhile...
    Volatility continued to plague stockmarkets around the world with the key Asian indices closing lower by around 2% as worries regarding credit crunch crisis resurfaced. The contagion spread to the Indian indices as well, which fell by 1%. Gold, in the meanwhile, dipped below US$ 800 an ounce and remained vulnerable to the movements of the US dollar. Other metals also shared a similar fate. While platinum tumbled to the lowest in 11 months, palladium fell to a 32-month low.

     03:36    Troubled times for Indian techies?
    The pressure of wage inflation finally seems to be showing on Indian technology companies, if one were to go by front page news in a leading business daily. As reported, India's fourth largest software services firm, Satyam has delayed the planned wage hike to the first week of September from the usual first week of July. What is more, the company has also indicated that the raises will be smaller than last year's.

    The management has indicated that average hikes this year are expected to be about 11% to 12% for India-based employees compared to last year's 16% to 18% range. The company is also going slowly on employee addition, as it hired 651 employees in the April to June 2008 quarter, down from 2,716 in the corresponding quarter of last year.

     04:17    Succession planning redefined
    Promoters of Indian family owned businesses are known to closely hold the ownership of their companies and pass on the mantle to the following generations irrespective of management capability and entrepreneurial skills. The results of the same have been mixed as one can decipher from the fortunes of Reliance Industries, Aditya Birla Group and Ranbaxy, to name a few.

    However, south-India based Shriram Transport Finance (STFC) seems to be setting a precedent for Indian corporates to take lessons from for their succession planning. The country's largest used-truck financier with interests in brokerage, life and general insurance business, will offer profits and equity to employees who helped the group to build its different businesses. It has set up an Employees Welfare Trust that owns Shriram Capital Ltd, the holding company with 24% stake in STFC. Around 33 of 20,000 employees of STFC will initially be beneficiaries of the trust and own stakes equal to the 2.5% owned by the principal promoter Mr. Thyagarajan. The trust will expand by inducting more employees selected by a panel of experts also comprising of STFC's chairman and chief executive. Although similar to the ESOP plan, this novel idea of succession planning may help Indian corporates go a long way in sustaining the vision of their companies and executing their growth plans.

     04:47    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.

  • Also read - More lessons from Buffett
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