Mom knows best - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Mom knows best 

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In this issue:
» Is it back to mom for mediation?
» World's largest bank
» India is eyeing the sun...
» Good news for the TV viewers
» ...and more!

00:00 Is it back to mom for mediation?
It has been going on for months and there seemed to be no end in sight. At stake are billions of dollars and India's energy security. We are talking about the gas supply dispute between the Ambani brothers, one of the most keenly watched corporate battles in recent times. In what could be first signs of a possible ceasefire, lawyers representing the younger Ambani have told the court that their client is ready to meet the elder Ambani, but at the same time wants their mother to act as a mediator. It is worth adding that it was their mother who was instrumental in dividing the vast Ambani empire between the two brothers in 2005 when they had expressed their inability to work with each other. Although, the lawyers representing the elder Ambani did not sound too excited about the offer, the changing political equations at the centre might make them reconsider their move. The much hyped dispute is over the price at which the gas should be supplied by RIL, the company controlled by the elder brother to RNRL, the company which is now under the ownership of Anil. With crude prices hitting the roof in recent times, the senior camp is of the view that the tariffs agreed upon previously should indeed be revised while the younger brother is in no mood to oblige. Given the precarious state of the country's power supply, the sooner the battle is resolved, the better it would be for its economy.

0:50 ICBC proves its might
At a time when some of the best banks globally have fallen victim to the subprime crisis, Chinese banks, like their Indian counterparts, are relatively immune to the global turmoil because of not having significant investments abroad. The country's financial system is largely government owned (including the biggest banks) and the complex credit instruments that have caused the crisis in the developed economies do not exist in China. What further highlights Chinese banks in the global financial arena are their asset book sizes that are comparable to that of the largest banks in the world. This is evident from the fact that the biggest bank in China, Industrial and Commercial Bank of China (ICBC) grew its profits by 57% YoY in 1HCY08, on the back of higher fee income and widening government-set net interest margins, to become the largest first-half profit declaring bank in the world. It may be noted that ICBC is now the world's biggest bank in terms of market capitalisation (raised US$ 22 bn in the world's largest IPO in 2006), three years after receiving a US$ 15 bn government bailout. It currently has 16,476 branches nationwide and 112 branches outside China, with a total of 170 m customers.

ICBC's net interest margin (NIM) of 3.0% (2.8% in 2007) and return on assets of 1.4% can be compared to the best banks globally and are in line with that of most large Indian banks. ICBC had declared US$ 1.9 bn in US subprime-related assets in 1QCY08 and had set aside US$ 702 m in provisions. China's sustained GDP growth of more than 10% has helped ICBC more than double its profits since 2005. This is particularly because the bank has tripled the share of profit coming from overseas.

  • Also read - Banks' pecking order

    1:47 India is eyeing the sun... power generation, that is! Given the dismal state of power infrastructure in India, alternative means of generating power is beginning to catch on. Solar power is one such area that has begun to generate interest. The latest development in this regard is the plans unveiled by the Indian arm of the Singapore based Environ Energy of setting up a Rs 55 bn integrated solar complex in West Bengal. This is touted as the largest integrated solar complex in the world and India's first polysilicon solar project. This plant will generate 250 MW of power annually in India; the government's vision being that India generates 5,000 MW of solar power by the Eleventh Plan!

    India's frequent power shortages are well known. As per the recent report of Central Electricity Authority (CEA), India's peak electricity shortage may widen to 18.1% in FY09 from 16.6% in FY08, as demand will outstrip supply in the world's second-fastest growing and second-most populous nation. It is also well known that the government consistently has not been able to meet the ambitious targets that it has set with respect to augmenting power capacity in the country. Hence, while tapping energy from the sun seems to be a step in the right direction, there remains a question mark over the government's ability to actually meet the targets of power generation that it has set for the Eleventh Plan.

    Estimated annual potential for renewable energy in India
    Sources/Systems Potential
    Biogas Plants (Nos) 12 m
    Improved Chulhas (Nos) 120 m
    Biomass 19,500 MW
    Solar Energy 20 MW/
    Wind Energy 20,000 MW
    Small Hydro power 10,000 MW
    Ocean Thermal Energy 50,000 MW
    Urban and Industrial Wastes 1,700 MW
    Source: Government of India fact sheet on non-conventional energy.

    2:33 Good news for the TV viewers...
    The Union Cabinet has cleared the policy framework for Internet Protocol TV (IPTV) and also made changes to the downlinking guidelines for television channels. This paves the way for the commercial roll out of IPTV services by telecom companies, cable TV operators and internet service providers. IPTV is a new method of delivering and viewing television programmes using an IP network and high-speed broadband technology. The customers can now have a wider choice about the platform they want to use for viewing TV channels. Other competing platforms include direct-to-home (DTH) and conditional access systems (CAS) offered by cable TV operators. Under the existing downlinking norms, broadcasters could only offer their channels for cable and direct-to-home platforms. With the norms being amended, broadcasters will be able to share their channels with the IPTV platforms too. The rapid development in telecom technologies, enormous capabilities of the IP platform and increasing digitalisation of broadcasting is driving services like IPTV. With this clearance, while telecom companies like Bharti Airtel and Reliance Communications will stand to gain, Dish TV and Tata Sky will witness more competition.

  • Also read - Media: Weaving a complex web

    3:23 Crude oil price rises again...

    Crude oil price climbed up to US$ 122 yesterday on account of a weak dollar and concerns over the global supply situation. Price rose around US$ 6 yesterday, the largest single day jump in last three months. The sudden surge can be attributed mainly to two reasons. First, the fall of the dollar against the euro and yen. As crude oil is traded in dollars around the world, a falling dollar makes crude cheaper for countries other than the US. As a result, these countries tend to buy more crude oil when the dollar falls. Secondly, the rising tensions between Russia and the West over Georgia and the missile-shield agreement between the US and Poland has invoked fears that there might be a disruption in oil supply from Russia, which is a major supplier after OPEC.

    3:50 Move over BPO, here comes ESO!
    The Indian technology industry is eyeing the next big opportunity in the offshore outsourcing space - Engineering Services Outsourcing or ESO. A recent note from the rating agency, Crisil defined ESO as 'work that encompasses outsourcing of engineering services largely involved with operations linked to the pre-manufacturing stage (designing, prototyping etc.) and analysing data points for process improvement'. According to the Indian IT body, Nasscom, the worldwide spend on engineering services is US$ 750 bn per year, out of which US$ 10 to 15 bn is offshored. India gets a mere US$ 500 to 600 m worth of ESO work per year. However, by the year 2020, the worldwide spend on engineering services is expected to touch US$ 1 trillion (US$ 1,000 bn) and ESO will be US$ 150 to 225 bn. Of this, Indian IT companies are expected to have a US$ 40 bn opportunity.

    As a matter of fact, ESO generates attractive billing rates and margins for IT companies but unlike pure play IT services and BPO, it is far more complex and requires deep domain expertise. As such, getting over the talent crunch will be the key for companies to succeed in this market. Currently, IT biggies like TCS, Infosys, Wipro and Satyam are involved in some parts of the ESO work for global aviation, automobile, industrial equipment and other companies.

  • Also read - BPO industry: Opportunities abound

    4:34 In the meanwhile...
    After opening on a choppy note following weak cues from Asian markets and increase in crude oil prices, the key benchmark Indian indices remained range bound in the mid-morning trade. However, they surged in the afternoon session as buying activity was witnessed across the index heavyweights. The indices finally ended the day well above the dotted line. The overall market breadth was, however, negative with losers outnumbering gainers by a ratio of 1.1 to 1 on the NSE. As regards global markets, while the Asian indices closed mixed, the European indices are witnessing a positive trend currently.

    04:54 Today's investing mantra
    "You have to segregate businesses you can understand and reasonably predict from those you don't understand and can't reasonably predict. An example is chewing gum versus software." - Warren Buffett
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