Love thy neighbour - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Love thy neighbour 

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In this issue:
» India's trade agreement with neighbours
» Logistics on the fast track
» Will L N Mittal be struck by a strike?
» Inflation declines to 12.4%
» ..and more!

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 00:00    Easier to cooperate with neighbors than the WTO?
So it seems with India, which has successfully concluded negotiations on a free trade agreement (FTA) for goods with the 10-member Association of Southeast Asian Nations (Asean) in Singapore. This trade pact is expected to rake in US$ 12 bn by 2010 between the participating nations and paves the path for duty free imports of a slew of goods like capital goods, electronics, textiles and the like. Some of the salient features of the pact include zero tariffs for 4,000 goods out of the 5,000 traded, with these tariffs being phased out over a period of 6 years. At the same time there will be partial reduction in tariffs on highly sensitive farm products namely tea, coffee and palm oil.

This agreement is touted to create an open market for 1.7 bn people with a combined GDP of US$ 2.4 trillion. Having said that, India did not have its way with respect to all issues and had to accede to demands of other nations such as Indonesia and Malaysia. One of the issues was the partial reduction in tariffs on sensitive farm products wherein the government expressed some reservations citing possible adverse impact of implementing this move. All in all, the fact that the talks were successful was a positive sign in stark contrast to the Doha round of WTO talks, which continues to be in limbo.

 00:41    More investment = More jobs
As per a report by the Associated Chambers of Commerce and Industry of India (Assocham), corporate India has announced investment plans to the tune of Rs 10.5 trillion. This will in turn create nearly 164,000 direct jobs by 2012. Majority of these jobs are likely to come from the textiles, IT, real estate and financial services sectors. The report mentions that corporate capital expenditure will nullify the effects of any slowdown and in fact indicates the distinctly positive attitude that the captains of Indian industry hold about India.

 00:57    Will L N Mittal be struck by a strike?
World's largest steel maker ArcelorMittal employs more than 320,000 workers in more than 60 countries including around 18,000 workers in the US. 14,000 of these US workers are members of the United Steelworkers (USW) union. These union members have voted to give the union the authority to call a strike against ArcelorMittal, if necessary. This is a critical development as the USW has been in negotiations with the company over the current labour contract, which is set to expire on Monday. The union has said that there is a lack of progress in the talks over company's contribution towards retirement health care, a trust fund for health care, employee incentives, a profit sharing program as well as capital expenditure towards aging facilities. USW wants the terms to be akin to the one settled with another steel giant, the United States Steel Corporation. While the union now has the option to call for a strike if they think necessary, the company says it fully intends to reach a satisfactory agreement. It may be noted that a strike across the US would be one of the largest seen in the steel industry in years.

We hope the steel industry in the US does not tread the same path its auto industry took. Labour unions secured massive retirement and health benefits from the auto industry over the years, eventually breaking the back of the giants. Charlie Munger has observed how 'deprival super-reaction', the tendency to secure as much territory that a person perceives as his own, causes labour unions to secure deals which make the companies unviable and leads to unemployment in the long run.

  • Also read - Steel Industry: Key Growth Drivers

     01:46    Kalpana Morparia moves to JP Morgan India....
    Kalpana Morparia, vice-chairperson for insurance, securities and asset management and the chief strategy and communications officer at ICICI bank decided to end her 33-year old association with ICICI and will join JP Morgan bank to head its Indian operations. She started her career in the legal department of ICICI, the erstwhile development finance institution and climbed up to become a director on the company's board in 2001. She continued as whole time director and joint managing director with the bank till 2007. She was supposed to head ICICI bank's holding company that has not taken off so far. The holding company, which was to have the asset management company and the insurance ventures under its ambit, ran into trouble with the Foreign Investment Promotion Board (FIPB) and the RBI not giving the go ahead. JP Morgan has been growing at close to 50% in India during the past couple of years and has a banking licence in India. Besides last year the MNC forayed into the domestic asset management business.

     02:17    Logistics on the fast track
    As retailing margins get thinner, companies in the Indian retailing sector are trying to adopt global models of efficient logistical support to save costs and sustain growth. This is particularly imminent due to the fact that as a result of the under-developed logistics infrastructure, the logistics cost of the Indian economy is over 13% of GDP, compared to less than 10% of GDP in almost the entire Western Europe and North America. However, the same is set to change. According to a recent study by global consulting firm Ernst & Young, India's logistics market currently pegged at US$ 40bn, is expected to grow at 15 to 20% per annum over the next 5 years. The study derives the sector's potential from the fact that only 25% of the total logistics business is currently outsourced while the rest is handled by companies in-house. This leaves ample scope for the strong growth of dedicated logistics firms. Among other factors that point to the sector's strong growth potential is over 7.5% GDP growth that will continue to push the demand for goods and services, mega expansion plans of retail majors in India, substantial growth in domestic and international freight operations and increasing consumption proliferating to tier-II and tier-III cities.

    In consonance with the growth potential of the logistics sector, the quantum of PE funds raised for the sector too is on the upswing. As per Four-S Services, overall private equity and venture capital funds in excess of US$ 2 bn are ready to be invested in India's maritime infrastructure and logistics, as the country strengthens its cargo handling facilities to meet rising demand for import and export. Major funds such as Kishore Biyani's Future Capital and ICICI Venture have launched dedicated funds for investing in logistics. Future Capital's logistics fund worth US$ 700-1,000 m will be used to set up warehouses across India and ICICI Venture's US$ 3 bn fund is setting aside money for acquiring stakes in mid-sized logistics companies. While the size of investments has grown from US$ 219 m in 2007 from US$ 223 m in 2008, the average deal size has grown nearly 40% in the last 12 months.

     03:21    Inflation declines to 12.4%
    The Wholesale Price Index (WPI) based inflation declined to 12.4% for the week ended August 22, lower than 12.63% registered in the previous week. The decline can be attributed to lower prices of some minerals and fuels.

  • Also read - Inflation numbers last week

     03:28    India to lose the crown...
    ...albeit temporarily. We are referring to GDP growth rate where Russia is likely to takeover from India, the mantle of the second fastest growing nation in the world. As per Bloomberg, Asia's third largest economy's growth is likely to slow down to 7%, just a shade lower than Russia's expected 7.1% growth rate. However, this is just an assumption and the reality might turn out to be different. What is not debatable though is the fact that India is indeed slowing down as its central bank seeks to rein in inflation that has touched multi-year highs. In the process though, the country will have to sacrifice some of its growth. The effects are already being felt with the industrial side of the economy witnessing a slowdown currently. Analysts expect the slowdown to last no more than 2-3 quarters as the inflation is likely to subside considerably by then. In the meanwhile, the country's economy grew at its slowest pace since 2004 during 1QFY09. It expanded 7.9% as against a growth rate of 8.8% achieved during the first quarter last year.

  • Also read - Our interview with Dr. Rafiq Dossani

     04:00    Bharti joins the IPTV bandwagon...
    With the Union Cabinet clearing the policy framework for Internet Protocol TV (IPTV) and making changes to the downlinking guidelines for television channels last week, Bharti Airtel is all set to rollout the Internet Protocol Television (IPTV) along with the direct-to-home (DTH) services. The government has now given the go-ahead to broadcasters to share their channels with IPTV providers as well. Earlier, only cable and DTH players were allowed to do so. The company is currently examining different options internally for simultaneous launch or in phases. The two services will have differential pricing, with DTH targeted at the mass market and IPTV for broadband (high-speed internet) users. Further, while IPTV will be first launched in Delhi, DTH will be rolled out on a much larger scale. Bharti Airtel has 2.5 m customers across India. The new services would give the company an opportunity to cross-sell and deepen its relationship with existing customers using local loop or broadband or both. The growth prospects for Bharti Airtel are strong considering that India will have around a million IPTV users and 23 m DTH users by 2011. However, execution risks and competition from existing players like TataSky, Dish TV, Sun Direct and Reliance Communications is a worry.

  • Also read - Good news for the TV viewers

     04:36    In the meanwhile....
    Key Asian markets closed strong today. The gainers' list was led by India (up 3.6%) and Malaysia (up 2.8%). Indian markets maintained a steady upward flight through out the day and ended with substantial gains. Overall, gains in Asia were led by some better than estimated earnings reported for the June quarter. This overcame concerns of rise in oil prices, thereby leading to today's strong gains in Asian equities. European markets are also trading strong currently. The benchmark BSE-Sensex ended the week with gains of 1. 14 % , while the NSE-Nifty closed with gains of .75 %.

     04:55    Today's investing mantra
    "The best way to think about investments is to be in a room with no one else and just think...if that doesn't work, nothing else will." - Warren Buffett.
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