India's own Harry Potter & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India's own Harry Potter & more... 

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In this issue:
» Jim Rogers v/s Goldman Sachs
» New-found realism in retail
» Opportunity in poor infrastructure
» Catastrophe hits northern India
» US spends, India gains
» And more...

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00:00 Jim Rogers v/s Goldman Sachs
On this side of the 21st century, Goldman Sachs' biggest contribution to the financial lexicon is perhaps the word, BRIC, an acronym for Brazil, Russia, India and China. The world's leading investment banker came out with a report sometime in 2003, making a bold prediction that the economies of these four nations combined would overtake that of the G6 nations in less than forty years. Needless to say, the prediction was based on some broad assumptions. What they failed to foresee is maybe, the huge run up in commodity prices and its resultant impact of splitting the term, BRIC, virtually into two halves, BR and IC.

Nowhere this is more evident than the stock markets where each half is moving in the opposite direction. Sample this. At the start of 2008, Indian and Chinese stock markets, combined, were almost thrice in value as the combined value of shares traded in Brazil and Russia. Since then, the gap has narrowed by an astonishing 50%. The reasons are not difficult to find. With crude prices and other commodities breaking multi year highs, resource rich nations like Brazil and Russia have earned big bounties from exports. At the other end of the spectrum, resource dependent nations of India and China have had to bear the brunt by way of rising inflation and hence, slowing growth. Infact, several analysts have already started aligning each half's fortunes to the behaviour of crude prices. If crude prices stay high, stay invested in BR and if they fall below a certain threshold than move your money to IC. Indeed, for Goldman Sachs' predictions to come true, commodity prices have to soften and grow at a steady rate. However, commodities expert, Jim Rogers believes commodities are not done yet and we still have a long bull run ahead of us. We would skip the tough job of taking sides here and rather watch the future unfold from the sidelines.

  • Also read - India is on sale

    01:05 New-found realism
    "I was an eternal optimist; now I have become a realist" says Mr. Kishore Biyani, the founder of one of India's largest retailing company - Pantaloon Retail. The retailing sector that was until a few months back shirking off concerns over economic slowdown, inflation and rising operating costs has finally, in Mr Biyani's own words, acknowledged the 'miscalculations'. While global players like Wal-Mart have deferred their plans of opening shops in India until 2009, the homegrown players themselves have scaled down some of their expansion plans.

    However, surprisingly the Index of Industrial Production (IIP) growth that has nearly halved to 5.2% in FY08 as compared to last year, showed that consumer durables, the mainstay of the retail sector, grew by 8.5% YoY (9% YoY in FY07). Nonetheless, the retail sector that currently clocks US$ 350 bn in sales a year - a figure that was expected to double in the next seven years - has some rethinking to do to improve dwindling margins. Mr. Biyani opines rising input prices have driven up construction costs of shopping malls by as much as 40% in last two years. In an interview to the The Financial Times, Mr. Biyani has expressed concerns over the steep property prices in Delhi and Mumbai that are among the highest in Asia, despite poor infrastructure and uneven quality of properties.

    It is therefore no surprise that the smaller retail players are tying up with global giants like Wal-Mart and Tesco to cash in on their experience and well-knit supply chains. However, for the same to be replicated here will require a lot of careful planning.

  • Also read - Retailing: Upsides from here?

    01:32 Is poor Indian infrastructure an opportunity for high returns?
    The government of India estimates that nearly US$ 500 bn will be required to spruce up its infrastructure by 2012. The Macquarie Group of Australia, JPMorgan, Goldman Sachs and Deutsche Bank are keen to participate in the opportunity as they gear up to bring foreign investors' money into India's infrastructure projects. Morgan Stanley is also in the fray. In fact, the bank plans to invest up to US$1 bn of its global infrastructure fund in countries like India. In addition, Morgan Stanley now has a dedicated India team in addition to the fund's existing teams in the United States, Britain, Hong Kong and China. It feels the success of public-private partnership projects in the country has created a conducive environment for investments, especially in the transport, energy and telecommunications sectors. With interest rates in India at a seven-year high and stock markets falling, Morgan Stanley is likely to find it easier to negotiate deals with rational valuations.

  • Also read - Looking back, thinking forward

    01:56 In the meanwhile...
    As worries over financial markets refuse to abate and threat of another hurricane causing oil prices to rally loom large over global markets, Indian indices remained in a subdued mood throughout the session today. The geo-political issues in the domestic region are also not letting the markets breathe easy. Although not significantly, the Indian indices treaded in the red but managed to outperformed some of its Asian peers that have also not managed to recover any of the losses today. The benchmark BSE-Sensex closed the day with losses of nearly 1.7%. Amongst the other Asian markets that have also closed lower, the Hang Seng (down 2.3%) was the biggest loser. The European markets have opened on a negative note.

    Oil prices inched closer to US$ 120 barrel yesterday as tropical storm Gustav approached the Gulf of Mexico. Meanwhile the political indecision over the Tata Motors' plant in West Bengal, tensions in Jammu& Kashmir and floods in the northern states have kept the government far from acting on the reform measures.

    02:18 Catastrophe hits Northern India
    Floods continue to wreak havoc in northern India, especially Bihar, which experienced its worst natural calamity in three decades. The death toll from this year's monsoon has already climbed past 800. Further, about 1.2 m people have been marooned and about 2 m more people are affected in Bihar, where the Kosi river has burst its banks breaching the safety embankments and submerging all roads leading to the region. According to reports, the current inundation is so massive that it has totally altered the habitation pattern of decades, if not centuries, with the floodwaters surging through relatively safe villages, farmlands, fields, buildings and other infrastructure. Other major rivers like Ganga and Bagmati are also reported to be flowing above the danger mark, giving sleepless nights to people. Meanwhile, the government has sanctioned Rs 10 bn worth of relief to the flood hit population. With India's poor disaster management abilities, one can only hope for the Rain Gods to have some mercy.

    02:37 Bankruptcy filings surge 29% in 12 months
    The woes of US citizens as well as companies seem to be far from over. The financial website of CNN reports that bankruptcy filings have gone up 29% in the past 12 months and are expected to touch 1.2 m this year, as problems in the housing market have reverberated throughout the economy. The US has two types of bankruptcy filings. While the Chapter 7 bankruptcy is designed to give individual debtors a fresh start by discharging many of their debts, Chapter 11 is meant for assisting struggling corporates to get rid of their liabilities. While the former has risen by 36% in the past 12 months, the latter rose more than 30% YoY. Having said that, the Federal Reserve, which already has its hands full in trying to bail out the largest mortgage finance companies Freddie Mac and Fannie Mae, may have some rethinking to do about its fiscal problems if the bankruptcy rates continue to remain steep.

    03:01 Some relief for Indian textile companies...
    In the past few months, amidst poor sales volumes, falling realisations and wrong calls on their forward contracts, Indian textile companies were also bearing the brunt of steep cotton and power costs, which have risen by nearly 40% YoY. Despite being the second-largest producer of cotton in the world, Indian companies have to pay a higher price to compete with the global demand. However, the global slowdown had in some ways been a boon to them as lower global demand coupled with sufficient rainfall and improved yields are expected to drive the prices lower.

    The Cotton Corporation of India, the country's biggest buyer of the fiber, projects that production of cotton may be more than 31.5 m bales in the current harvest year (China is expected to produce 35.5 m bales). U.K.-based Cotlook has projected the world production of cotton to touch 24 m tons, 78,000 tons higher than expected, as rains improved prospects of higher yield in India.

    ...while those in Brazil see red
    Brazil, a member nation of BRIC countries that is also one of the fastest growing developing nation and relies heavily on its cheap exports due to the lower cost of labour, is discontented with the US' unfair and partial policies. Brazil plans to ask the World Trade Organization (WTO) to impose punitive sanctions worth billions of dollars against the US for handing out illegal cotton subsidies. The country has asked the WTO for approval to impose up to US$ 4 bn in annual sanctions against American goods and services as it accused the US of offering cotton subsidies which give US cotton farmers an unfair advantage when exporting billions of dollars worth of the crop worldwide.

    Brazil (the fifth largest producer of cotton) and several West African cotton-producing countries have long claimed their farmers suffer because of the payments to US cotton growers that ensure artificially high production and export levels, hurting Brazilian and African producers. The Brazilian government claims the US retained its place as the world's third-largest cotton grower and biggest exporter by paying out US$ 12.5 bn in government subsidies to American farmers between FY99 and FY03.

    03:48 US spends, India gains
    Americans these days are a harried lot. House prices are slumping, crude prices are firm, inflation is rearing its ugly head, all of which is keeping them on their toes. And, amidst all this, the US government has to contend with rising healthcare costs. Consider this. Around 16% of Americans are not insured and will shell out US$ 30 bn out of pocket on medical care this year. Besides this, the government will pay about 75% of an additional US$ 56 bn in health costs (i.e. US$ 42 bn) for the uninsured with the rest being covered by private physicians, community groups and hospitals. Infact, the cost of extending coverage to the uninsured through private and public insurance would add 5% to America's national health spending.

    In such a scenario, generics players including Indian pharma companies will stand to benefit immensely as the US government looks to keep its healthcare costs under control. The US spends around 15% of its GDP on healthcare and the government is under pressure to reduce healthcare costs. As a result, the use of generics has received a tremendous boost. Further, since the government is also pressurizing innovator companies to tone down their R&D expenditure, the latter is increasingly looking towards outsourcing manufacturing and some clinical trial work to low cost destinations in India. Hence despite intense competition and price erosion, the generics industry in the US is poised for a relatively faster growth than the overall pharma industry growth with volumes being the key to bolster revenues.

  • Also read - Outlook on Indian pharma sector

    04:13 India to have its own Harry Potter?
    Times Group Entertainment-owned Mirchi Movies produces 12-15 feature films a year, mainly in Hindi. One of its forthcoming releases Hari Puttar: A Comedy of Terrors - has raised a lot of dust. The film that has a title which is almost homophonic to J.K Rowling's world renowned series Harry Potter, has a script more closely related to the 1990 film Home Alone than to the exploits of J.K. Rowling's young magician Harry Potter. However, the producer of Harry Potter series of movies, Time Warner Inc.'s Warner Brothers has sued the Indian movie company for infringing copyrights relating to its Harry Potter film series. So much for creativity!

    04:29 Reddy, please carry on...
    Dr. YV Reddy, the man who bravely went against the wishes of the government as well as dismissed the views of the Federal Reserve to help Indian banks remain immune to the global credit crisis, is now set to bid adieu. However, the Financial Chronicle reports that given the current unstable nature of the economy and steep inflation control targets over the next few months, the government may ask the RBI Governor to continue in the role for another year.

    Another reason why the government may not relieve Dr. Reddy, who is scheduled to complete his five-year term in September is because the government may not want to risk a change at the central bank as it prepares for general elections next year.

  • Also read - Inflation at 2000000%!

    04:55 Today's investing mantra
    "In the business world, the rearview mirror is always clearer than the windshield." - Warren Buffett.
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